http://www.scribd.com/doc/40905120/3-0-Consequences-of-Incorporation Company Law 3.

0 Consequences of Incorporation8 Daniel Jin Yee Tan

3.0 Consequences of Incorporation 3.1

Separate Legal Personality The company and its members are separate entities or persons in the eyes of the law. Limited Liability The company is liable for its own debts. The shareholders are not liable for the debts and liabilities of the company and cannot be sued by the companys creditors. A shareholder can be a debtor or creditor of the company and can sue or be sued by the company. (a) Salomon v A Salomon & Co Ltd (1897) Aaron Salomon carried on a sole trading business as a leather merchant. His sons wanted to be partners, thus in 1892, Salomon formed a limited company with 20,007 shares, of which he held 20,001 shares with his wife and five children each holding one share. He then sold the business to his newly-formed company for 39,000, paid in 10,000 worth of debentures, 20,000 in 1 shares and 9,000 cash. He also paid off all the creditors of the sole trading business in full. As such, he was the majority shareholder as well as a secured debenture that had a charge over all the companys assets. The company then went into financial difficulties and Salomon sold his debentures to one Edmund Broderip for 5,000. The company failed and upon liquidation, there was not enough money to pay Broderip and as such, Broderip challenged the validity of the transaction to convert the business into a company and sought to make Salomon personally liable for the companys debts, alleging that the company was but a sham, an agent for Salomon. The Court of Appeal held that Salomon was liable to indemnify the company against its trading debts, and he appealed to the House of Lords. The Lords unanimously reversed that decision and held that the company was validly formed according to

the Joint Stock Companies Act 1844, thus limiting Salomons personal liability as he was held to be only an agent of the company, not the company his agent. The company is at law a different person altogether from the subscribers and though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers, as members liable in any shape or form, except to the extent and in the manner provided by the Act. Lord Macnagten The creditor has notice that he is dealing with the company, the liability of members of which is limited and the register of shareholders informs him how the shares are held and that they are substantially in the hands of one person if this be the fact. The creditors in the present case gave credit to and contracted with a limited company. Lord Herschell Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon. If it was not, there was no person and no thing to be an agent at all and it is impossible to say at the same time that there is a company and there is not. Lord Halsbury The case only goes to show that a company formed in compliance with the regulations of theCo m p an ies Acts is in law, a separate person and not per se the agent or trustee of its controller. (b) Lee v Lees Air Farming (1961) Lee incorporated a company, Lees Air Farming Limited, which has a nominal capital of 3,000, divided into 3,000 of 1 each, with Lee holding 2,999 shares and a solicitor holding the single remaining share. Lee Company Law 3.0 Consequences of Incorporation9 Daniel Jin Yee Tan was also employed as the chief pilot of the company as stated in the companys articles of association. As such, he was the vast majority shareholder, sole governing director as well as an employee of the company. He was later killed in a plane crash while operating the company plane, leaving behind a widow and four children.

The company had been paying an insurance policy which the widow sought to claim as the widow of a worker. The New Zealand Court of Appeal held that he was not an employee pursuant to theWor ker s Compensation Act 1922 and so no compensation was payable. The Privy Council however held that Lee and the company were distinct legal entities and was contractually the chief pilot of the company. As such, he was held to be a worker and his widow was entitled to insurance compensation. Note:The goals of limiting liability are: (a) Facilitating enterprise and encouraging investments and economic activity. (b) Reduces monitoring on managers. (c) Promotes liquidity and efficient operation of the securities market. (d) Permits investors to acquire shares in multiple companies. Company Property A company owns its own property the shareholders have no direct right to this or any share of it. A person who no longer wishes to be a member of the company is only entitled to whatever price he can get for his shares. A shareholder has no legal interest in the companys property and thus cannot insure it against theft, damage, etc. Macaura v Northern Assurance Co Ltd (1925) Macaura, owner of the Killymoon estate agreed to sell all the timber on the estate to the Irish Canadian Saw Mills Ltd in exchange for the entire issued share capital of the company, to be held by himself and his nominees. The timber, which constituted approximately all the assets of the company was stored on the estate, with a policy insuring the timber taken out in the name of Macaura. A fire then destroyed all the timber and Macaura sought to claim under the policy. The insurance company contended that he had no insurable interest as the timber belonged to the company and not to Macaura himself. The House of Lords found for the insurance company, stating that the timber belonged to the company and although Macaura owned all the shares in the company, he had no insurable interest in the companys property. Contractual Capacity

A company has full contractual capacity and only the company can enforce its contracts. Companies may also be liable in negligence shareholders cannot be made liable for the negligence of the company, unless he was also personally negligent. Crimes A company can be convicted of a crime, regardless of whether its directors are also convicted. There are however, some limitations to this rule, which include: (a) It has been held that a company cannot be convicted of a crime which requires the physical act of driving a vehicle. Richmond-on-Thames Borough Council v Pinn & Wheeler Ltd (1989) (b) A company cannot be convicted of any crime for which the only available sentence is imprisonment. There are particular problems with crimes which require mens rea (a guilty mind) most common law crimes require mens rea, while many statutory offences involve strict criminal liability. In order to convict companies of common law crimes, courts may regard the mens rea of those individuals who control the company to be the mens rea of the company. However, the courts have been very restrictive in their use of this approach:

Company Law 3.0 Consequences of Incorporation10 Daniel Jin Yee Tan (a) Tesco Supermarkets Ltd v Nattrass (1971) Tesco Supermarkets was offering a discount on flash packs of Radiant washing powder, advertised on posters in its stores. Once they ran out of the lower priced stock, they replaced it with the regularly priced ones, and the manager had failed to take down the posters. One Mr. Coane was charged the higher price and complained to the Inspector of Weights and Measures. Tesco Supermarkets was charged under Section 11(2) Trade Descriptions Act 1968 for falsely advertising the price of washing powder, and in its defence, Tesco Supermarkets argued that the manager had taken all reasonable precautions and all due diligence, and that the conduct of the manager could not attach liability to the corporation.

The House of Lords accepted this defence and held that the managers conduct was not attributable to that of the corporation. There was no delegation of the duty of taking precautions and exercising diligence. There was no such delegation to the manager of a particular store. He did not function as the directing mind or will of the company. His duties as the manager of one store did not involve managing the company. He was one who was being directed. Lord Morris ...shop managers in a business such as that conducted by the Appellants... cannot properly be regarded as part of the Appellants directing mind and will... Viscount Dilhorne Note: Section 1(1) Corporate Manslaughter and Corporate Homicide Act 2007sta t es: An organisation to which this section applies is guilty of an offence if the way in which its activities are managed or organized (a) causes a persons death, and (b) amounts to a gross breach of a relevant duty of care owed by the organisation to the deceased. Section 1(6) states An organisation that is guilty of corporate manslaughter or corporate homicide is liable on conviction on indictment to a fine. Sections 9 and 10 give the Courts power to make both remedial and publicity orders. (b) R v P&O European Ferries (Dover) Ltd (1991) The ferry company along with five of its managers was indicted for manslaughter after a ferry services ran by them caused the loss of 192 lives when a ferry capsized in 1987. The judge held that the indictment was valid, saying Where a corporation through the controlling mind of one of its agents does an act which fulfills the prerequisite of the crime of manslaughter, it is properly indictable for the crime of manslaughter. (c) R v Kite and OLL Ltd (1994) OLL Ltd was a company specialised in organising outdoor activities. On a canoeing trip organized by OLL Ltd, four 6th year students drowned after their group drifted off to sea and their canoes became swamped. Evidence showed that the company did not employ qualified instructors and had given no training to them. The company was accordingly convicted of manslaughter and was fined 60,000. The Managing

Director, Peter Kite, who had total control of the company was sentenced to 3 years imprisonment. OLL Ltd was the first company in English law to be convicted of corporate manslaughter, but it should be noted that the company was very small and Peter Kite was one of only two directors, making it relatively easy for the Prosecution to show that he was the controlling mind behind the company. (d) Transco plc v Her Majestys Advocate (No 1) (2004) An explosion in Larkhall resulted in the death of a family of four, and the complete destruction of their house. Following investigation by the police and the Health and Safety Executive, Transco plc, a corporate body responsible for gas distribution, was charged with culpable homicide.