Company law free essay sample

FidApplying this doctrine to the case study, Alicia can be regarded as one of the promoters of Batco Ltd, since she had involved in the formation of the company and ranked as one of the three directors after the registration. It’s also noticeable that the other two directors, Adam and Robin, were former employees of Alicia. Thus, even though Alicia didn’t play an active role in the formation of the company, the connection between her and Batco before and after the registration was solid. According to Aequilas v AEFC (2011) 19T ACLC 1006, the legal consequence of a person being identified as a promoter is that such person owes stringent fiduciary duties to the company and its shareholders. They are required to act in good faith and place the company’s benefits over their own (Harris, Hargovan and Adams 2011). More specifically, in Erlanger v New Sombero Phosphate Co (1878) 3 CA 1218, the House of Lords held that promoters have the duty of fully disclosure to a board of independent directors of the material facts when they enter into contract relations with the company; Or, as stated in the in Aequilas v AEFC (2011) 19T ACLC 1006, the court also accepts an explicit disclosure made to shareholders. All partners have the right to participate in the management of the business and all partners are jointly and severally liable for the debts and obligations of the partnership. To satisfy commercial interests, separate legal personalities have been bestowed in the United States and some Commonwealth Caribbean jurisdictions with the advent of the Limited Liability Partnership Act, for example, St. Lucia. But, by and large the United Kingdom Partnership Act of the 19th century continues to represent the foundation of partnership law in the Commonwealth Caribbean. The attractiveness lies in the informality of formation. They are not required to register and there are no filing requirements. It operates as a sole proprietorship as there is a collection of sole traders who co-operate for the sake of the business. The advantage lies in the flexibility and ease of operation. See the Jamaican decision in the case of Joseph v. MCKenzie (1993) 30 JLR 305 which is instructive of the essential characteristics of a partnership. The facts involved a breakdown in the relationship between the defendant (MCKenzie) and the plaintiff (Joseph) in relation to a restaurant. This business relationship started with an oral agreement relating to profit sharing. Justice Smith found the oral agreement was binding. He noted that it is a settled principle that a partnership can be formed as a result of an agreement between the parties to carry out a business in common with a view to sharing profit or loss. â€Å"There must be a community of profit or loss and to ascertain whether or not a partnership exists the agreement must be construed as a whole. The mere fact that the parties to it claim that they are partners is not conclusive. † Co-operatives 1. A co-operative differs from other forms of businesses in that its structure reflects its aims, which are generally stated as to service its members and to benefit the society at large. This is reflected in the course of its business as well as the use of profits. 2. An essential feature of the co-operative is democratic control i. e. one member one vote. Persons elected, or appointed, in a manner agreed upon by the members conduct their affairs. The elected or appointed persons are also accountable to the members. The policy of a co-operative is laid down in the general meeting and is reflected in the bylaws of the co-operative. In contrast in a corporation control is vested in shareholders, primarily those with the largest financial interest. 3. Open membership: Membership in a co-operative society should be voluntary and available without artificial estriction and without any social, political, racial or religious discrimination to all persons who can make use of its services and are willing to accept the responsibilities of membership. 4. Surplus distribution: A co-operative society belongs to the members. The economical result therefore is that any surplus must be distributed evenly so as to avoid one member gaining at the expense of other members. When a surplus is distributed it is allocated between members on the basis of the transactions with the co-operative. 5. All co-operatives should make provision for the education of the employees, members, officers and the general public. Liability A co-operative is an un-incorporated association so that historically a person seeking an action against a common fund would in effect have to prove the liability of all the members personally, since the fund is thought to be owned by all the members for the time being. This created problems because of fluctuations in membership and the procedural burden of getting judgement against all the members personally. Legislation now permits that an association can be sued in its own name. Taff Vale Ry v. A. S. R. S. [1901] AC 426 is authority for the proposition that an un-incorporated association can be liable in Tort through a class action. Boyce v. Committee of Management Enterprise Co-operative Credit Union Ltd. (1975) 10 Barb. L. As far as corporate legislation is concerned, it has many functions: 1. It is enabling; i. e. it empowers people to attain what they could not otherwise achieve, creating a body with a distinct corporate personality. 2. It is regulatory; legislation prescribes conditions, which have to be complied with to obtain incorporation. The rules of the Companies Act must be observed to protect the shareholders, creditors and the general public. The Companies Act classifies companies in terms of their size and their method of raising capital. Public Companies †¢ The Barbados Companies Act S. 2 defines a public company as a company whose shares or debentures[1] are issued to the public. This type of company dominates important segments of our economy and it represents perhaps the biggest centre of non-governmental power. †¢ Typically the share-holding body is massive and wide spread. †¢ The company is managed by a board of directors who delegate their powers to executive director s. †¢ S. 59 of the Barbados Companies Act states that a public company must have no fewer than three directors at least two of who are not officers or employees of the company or any of it’s associates. †¢ If public companies are going to be listed on the stock exchange they must have a minimum capital requirement. No such requirement for private companies of minimum capital. Listed Companies Some companies are listed on the stock exchange. Stock exchanges were incorporated in the region in the mid 1980’s. These were created to fill a void in the financial system. It comprises designated and non-designated members who make up the board. Designated members include the Minister of Trade, Governor of the Central Bank and Minister of Finance. Companies listed on the exchange fall under the purview of Securities Legislation. Such as: Barbados Securities Act of 2002 Jamaica Securities Act of 1993 Trinidad and Tobago Securities Act of 1995[2]. The listed company must enter into a listing agreement, which imposes a number of obligations on issuing companies. They enter into obligations relating to the conduct of trading prohibiting manipulative and fraudulent practices. In order to secure a listing a company must have a trading record or history and a certain number of shares must be held by members of the public who are not associated with the directors or major shareholders. Private Companies Generally these are small family type companies[3]. According to statute in â€Å"new law[4]† jurisdictions, there must be at least one director. It is a closely-knit unit with family members often comprising the share holding body. Because of the nature of this type of company, many of the formal requirements stipulated in the Companies Act are abandoned i. e. equirements for taking minutes, the holding of meetings. This is because often Directors do not bother to hold general meetings concentrating rather on running the business. Another characteristic of Private Companies is they normally have in their constitution a pre-emptive rights c lause. It is used to ensure shareholders remain â€Å"friendly†. It is a clause, which states that no shareholder can sell shares without the approval of the board. Holding and Subsidiary Companies This is where one company is in a position of control over another by owning more than 50% of the shares in that company. This is covered by the Companies Acts: Barbados S442 Jamaica S149 Trinidad and TobagoS5. Control is an essential ingredient. The parent or holding company has the ability to control or influence the policies of the other company and they can appoint executives. Limited and Unlimited Companies Not all companies are limited by shares, if they are limited, the letters Ltd. or the word â€Å"limited† must be affixed after the corporate name. If it is a public limited company the letters PLC or the words â€Å"Public Limited Company† must also be affixed after the corporate name. Method of Incorporation In Jamaica, Belize[5] and the Bahamas[6], incorporation is achieved by filing the memorandum of association and the articles of association. The memorandum of association is the company’s principal constitutional document and it governs the relationship between the company and the outside world. The memo sets out the details of the company’s existence. For example the company name, domicile, capital structure, whether it is a private or public company and the company’s objects. The articles of association regulate the company’s internal day to day affairs. For example when meetings have to be held, the number and rights of shareholders as well as directors powers. The first subscribers for shares sign both the memorandum and the articles of association, see for example Jamaica Companies Act Arts. 3 6. The signatures must be witnessed and each subscriber must take at least one share. The number of hares taken will be entered alongside the name in the memorandum. In new law jurisdictions there are pre-printed forms which are filled out. There are actually five standard forms, these are: Notice of Directors form Request for Name Search form Registered Head Office form Certificate of Incorporation and an Affidavit The affidavit stems from articles such as S. 4 of the Barbados Companies Act, which provides that you must be over 18, you must not be bankrupt, and you must be of sound mind. These things are sworn by an attorney in an affidavit. Lecturer:Ms. Lesley Walcott Date:September 23rd, 2003. Advantages of Incorporation 1. A company has perpetual succession. Unlike partnerships and sole traders, the â€Å"business† continues despite the death (or serious illness[7]) or shareholders and directors. 2. Its assets are owned and its debts owed by the company and not its members, this is so even with one-man companies, which are permissible in some territories[8]. 3. Generally a shareholder can freely transfer his share holdings unlike a partnership where the consent of the other partners must be obtained. 4. The liability of a shareholder is limited by his shares. In Barbados all shares must be fully paid whereas in Jamaica shares might be partially paid[9]. 5. Shareholders are not bound by a fiduciary duty either to themselves or the company. 6. There are fiscal advantages of incorporation as opposed to being a sole trader, there is scope for tax avoidance (which is legal as opposed to tax evasion which is illegal. ) Where there are high profits, it is advantageous to incorporate[10]. 7. It is arguably easier for a company to raise additional finance from banks and other financial institutions through shares and debentures. 8. As a separate legal person, the company can sue or be sued in its own name. Disadvantages of Incorporation 1. National Insurance contributions are payable by both employer and employee. 2. There has been an increase in the corporate tax rate, which makes incorporation to reduce tax liability less attractive. [11] 3. There is reduced flexibility, one has to maintain minutes, records of meeting and comply with the various statutory requirements. These are quite significant with regard to public listed companies. There are additional accounting and audit requirements imposed on companies and considerable financial information should be given to the shareholders by the board of directors. Corporate Persona A company is defined by S. 2 of the Companies Act of Barbados as â€Å"A body corporate that is incorporated or continued under this act. † Section 2 of the Jamaica Companies Act defined a company as â€Å"A company formed or incorporated under this act or an existing company. † In the eyes of the law, the company is regarded as a separate distinct person apart from its shareholders. For example, see the case of A. G. v. Antigua Times Ltd. [12] where the court stated that â€Å"the term person includes the body corporate. † See also the Interpretation Acts. Section 17 in the Barbados Companies Act provides that: â€Å"A company has the capacity and subject to this act, the rights, powers and privileges of an individual. † The decision cited as establishing the legal personality of the company is the House of Lords decision in the case of Salomon v. Salomon Co. Ltd. [13] In this case Salomon carried on business as a manufacturer of leather goods, he was a sole trader. Due to an increase in profitability he was advised to incorporate, he then created a limited liability company, which purchased the business. The company thereafter started to experience financial difficulties. Salomon gave the company a loan, which was secured with company assets. The company was forced into liquidation and Salomon claimed the assets of the company, which had been used to secure his loan, the liquidator and the other creditors objected to this. The House of lords unanimously reversed the decision of Vaughan Williams LJ and held that Salomon was under no liability to the company and its creditors that his debentures were validly issued, and his security over the company’s assets were effective against the company and its other creditors. Lord MCNaghten stated in summing up a company’s personality: â€Å"The company is at law a different person all together from the subscribers to the memorandum, and though it may be that after incorporation, the business is precisely the same as it was before and the same persons are the managers and the same hands receive profits, the company is not in law the agent of the subscribers or a trustee for them. Nor are the subscribers as members liable in anyway shape or form except to the extent and in the manner provided by the act. † The House of Lords held that no matter how large a proportion of the share capital is held by a shareholder, the company’s assets, liabilities and rights were not those of it’s controlling shareholders. Application of the Doctrine The principle of the company’s separate legal personality has been consistently applied since Salomon v. Salomon Co. Ltd. [14] See for example the case of Macaura v. Northern Assoc. Co. Ltd. [15] where the House of Lords held that the assets of the corporation were not those of the shareholders. See particularly the judgments of Wrenbury and Lord Buckmaster. This case is also authority for the proposition that the shareholders do not have an insurable interest in the in the property of the corporation because they do not have a legal or equitable interest in the property. Determine the validity of the arguments used in the case of Constitution Ins. Co. of Canada v. Kosmopolous [1987] 34 DLR (4th) 208. Since a company is a legal person, separate from its shareholders, the following applies: 1. A contract of employment can be entered into by a company and its sole director and controlling shareholder. See the case of Lee v. Lee Air Farming [1961] AC 12. [16] 2. Regardless of whether the person holds all the shares in the company, the company’s business is not necessarily that persons business in the eye of the law. However, where an individual controls a number of companies whereby their existence represents a sham, the court will treat these companies as his creatures whereby the individual will be personally liable. Piercing the Corporate Veil There are instances where the courts will pierce the corporate veil and disregard its separate existence. Within traditional legal scholarship, there is no principled distinction between the two limbs i. e. instances where the principle is applied and instances where it is ignored. The courts seem unwilling to define clear guidelines, preferring rather to describe instances where the corporate veil is used as a sham or a cloak. It is difficult to rationalise the cases except under broad and rather questionable headings. These headings are: 1. Agency 2. Fraud 3. Trusts 4. Enemy 5. Statute[17] See also the United States Patriot Acts and the Helms Burton legislation. Lecturer:Ms. Lesley Walcott Date:September 25th, 2003. Fraud Equity will not allow an individual to use a company as a shield for improper conduct or fraud. In a group relationship, the claimant must attack the artificiality of the Parent subsidiary relationship. The onus lies on the claimant and a high burden of proof must be discharged. He/she must establish that the company is a sham, cloak and buffer. See Gilford Motor Co. v. Horne[18]where the court of appeal held that the plaintiff was entitled to an injunction against both the defendant and the company which, the defendant, in contravention of a contract, formed a company and solicited his former employers clients. See also the case of Jones v. Lipman[19] where a vendor of land sought to avoid specific performance by transferring the land in breach of he contract to a company he had formed for that specific purpose. The court treated the company as a sham and granted an order for specific performance. See also the case of BG Preeco Pacific Coast Ltd. [1989] DLR 30. Please note however that an unsuccessful claim of fraud renders the claimant liable for costs. Agency An examination of the cases indicates that agency is often used in conjunction with other heads, for example fraud. One should consider whether agency precedes the lifting of the veil by virtue of the courts imputing an agency relationship-using agency as a means of lifting the veil resulting in implied or constructive agency. See the decision of Smith Stone Knight Ltd. v. Birmingham Corp. [20] and note that there are two types of agency, agency as a result of capitalist control, and agency as a result of functional control. Functional control is a question of fact. The factors to be considered are: 1. Does the shareholder treat as their own the profits of the company? 2. Who appoints the persons conducting the business? 3. Who is the head and brain of the trading venture? 4. Who decides what and how much capital should be injected into the various ventures? 5. By whose skill and direction are profits made? 6. In a group subsidiary relationship who closely and directly controls the subsidiary? Group Enterprises Regional company statutes contain definitions of the holding, subsidiary and affiliated companies. These are: -JamaicaS. 149 BahamasS. 2 BarbadosSs. 440 – 443 Trinidad Tobago S. 5 On the financial implications of the holding and subsidiary relationship see the case of Acatos Hutchinson Plc Watson [1995] 1BCLC 218, which involved an arrangement whereby the company acquired another company which held shares in it. See also the decision in Ord v. Bellhave Pubs Ltd. [21] Advantages of the Holding Company 1. It is suitable as a medium for controlling modern large-scale business enterprises. 2. There is simplicity in formation, by simply acquiring a majority of the shares that carry voting powers. This does not disturb creditors or preference shareholders or any minority of ordinary shareholders and it does not interfere with the good will and reputation of an existing business. 3. The holding company may be used for the purpose of financing the operations of its subsidiaries. 4. Tax advantages may be obtained for example where a company with accumulated losses acquires a subsidiary with substantive gains, the losses may be carried forward for income tax purposes and deducted from future profits. 5. Subsidiary companies insulate each individual company from the creditors of other subsidiary companies. In this way the risk of loss to the holding company is limited to the amount of capital subscribed in the subsidiary. The mere fact of ownership of shares or capitalist control does not impose a responsibility on the holding company. Disadvantage and Abuse of the Holding Company Some of the advantages mentioned may prove to be disadvantages: 1. Holding companies tend to create monopolies and concentrate the control of big business in the hands of a few [22]. 2. Share Pyramiding; control can be acquired by investing a relatively small amount of capital in a number of subsidiary companies. Control is achieved over the whole chain by holding a majority of shares in the first company. 3. Manipulation of accounts; inter-corporate transfer and transactions may be hidden. 23] Financial statements may be obscure and cover up essential information Generally the doctrine of Salomon v. Salomon Co. Ltd. [24] can be easily abused and the corporate personality used as a veil behind which to shield conduct prejudicial to the corporations creditors. An insolvent subsidiary is generally treated, as a separate lega l entity so that it’s parent company will rarely if ever be liable for it’s debts. The application of this principle to group companies has caused hardship to the unsecured creditors of the insolvent subsidiary. See the case of Multinational Gas v. Multinational Gas Petrochemical Services Ltd. [25] where the court held that there was no agency relationship between the plaintiff and defendant company. The court further found that when the parent company sent instructions to the subsidiary company and it was carried out, the subsidiary company ratified the instructions. In the case of DHN Ltd. v. Towel Hamlet,[26] the parent company requested that the courts pierce the veil because the subsidiary company had been compulsorily acquired. It was in this case that Lord Denning devised the â€Å"Single Economic Unit† theory. He felt the courts should pierce the veil in the â€Å"interest of justice. † In Adams v. Cape Industry Plc [1990] 2 WLR 657. The subsidiary company was mining asbestos; the court however found that there was no agency relationship between the parent and subsidiary companies. The court in this case also expounded the view that there was no such thing as â€Å"in the interest of justice. In the case of Polly Peck International plc. [27] the court of appeal affirmed the principles arising from Adams v. Cape Industry Plc[28]. In the United Kingdom, there continues to be a marked unwillingness on the part of the courts to acknowledge the economic reality of groups and pierce the corporate veil. In Europe, the â€Å"single economic unit† theory receives a far more favourable response. See the Barbadian case of Debdor Co. Ltd. v. Wilkinson[29]. In this case the owner of Bresmay transferred all of Bresmay’s assets to Debdor Co. Ltd. and only maintained the employees’ contracts with Bresmay. Miss. Wilkinson was terminated and sued for wrongful dismissal. She was successful but there were no company assets to settle the debt. The owner of Debdor then provided a Debdor cheque to settle the debt. He then argued in court that he had no authority to use Debdor assets to settle a Bresmay debt. The court of appeal held that although Bresmay had employed the former employee, it was no more than a shell. William’s J expressed the view of the court when he said: â€Å"The court strongly disapproves of the use of the corporate concept as a device for treating employees unjustly†¦It is nothing more than a shell, an entity used as a tool to hold contractual arrangements made with those who are employed in the business. When successful claims re made by employees, there is no substance to satisfy them and the employees are left with feelings of injustice and frustration. † Lecturer:Ms. Lesley Walcott Date:October 9th, 2003. Promoter There is a lack of judicial definition of the word promoter in the Jamaica Companies Act see S43 44 in Barbados the Companies Act refers to an incorporator. In jurisdictions such as Jamaica and Belize there is a promoter, but in the new law jurisdictions reference is made to an Incorporator. The term incorporator and Promoter are not synonymous. Promoters are persons who conceive the idea of forming a company, they undertake its incorporation, and they provide shares and loan capital. See for example the case of Emma Silver Mining Co. v. Lewis Son[30] where Lindley LJ stated that: â€Å"as used in connection with companies the term promoter involves the idea of exertion for the purpose of getting and starting a company, or what is known as floating it. † The nearest attempt at a definition can be found in Twycross v. Grant[31] in the 19th Century where Cobourne CJ states that a promoter is: â€Å"one who undertakes to form a company with reference to a given project and to see it going and who takes the necessary steps to accomplish that purpose. † The Need for a Definition A definition is often of the utmost practical importance so as to impose liability upon a defendant/promoter. See for example Vice Chancellor Bacon’s comments in Bagnall v. Carlton. [32] The grant of a particular relief or remedy may depend solely on this issue. In Jamaica see S. 40 of the Companies Act and the third schedule to the legislation. How therefore can a company and the persons who have authorised the issue of the prospectus fulfil this duty without knowing who is the promoter? Reasons For The Lack of Definition. 1. Where a promoters conduct falls to be considered by the courts the judges simply resort to equitable remedies. Relying on the principle that secret profits are inequitable, and anyone who has made them is a promoter. 2. One school of thought insists that the term promoter is best left as a business term rather than a legal one. See for example the case of Twycross v. Grant. [33] 3. The courts have intentionally failed to set down a definition in a formal sense, because if a definition were laid down it might be possible for persons concerned in the promotion of companies to avoid its application, taking advantage of their fiduciary position without incurring the liability of promoters. 4. A comprehensive definition is impossible due to the wide range of companies promoted, from small one-man companies to the large public corporations, and given the varied activities of the person engaged in promoting the company. Suggested Test The animus factum test see the case of Bagnall v. Carlton[34] when the defendants were held to be promoters â€Å"because it was their intention and conviction to sell the prospect of the company†. There we witness the element of intention and the fulfilment of this intention as the criteria. See the case of Re Leeds Hanley Theaters of Varieties Ltd. 35] where the element of intention was also stressed by Vaughan Williams LJ he stated: â€Å"If you trace all the proceedings of the finance company as detailed in their own minutes, it seems clear that they were acting and intended to act as promoters of the company. † Similarly see the decision of Twycross v. Grant[36] where it was stated that: â€Å"The defendants acts were done with a view to the promotion of the company. † The inference from these is that a promoter is not under a liability merely because he agreed to promote the company. To be liable the person had to act. See the case of Whaley Bridge Calico Printing v. Green Smith[37] as to what constitutes an active step. There is an active step of promotion only where the vendor has negotiated the promotion with other institutions. Please note that this has not been followed by later House of Lords decisions such as Gluckstein v. Barnes[38] and Erlanger v. New Sombrero Phosphates Co. [39]. Termination of Promotion In the decision of Twycross v. Grant[40] Cobourne LJ stated that: â€Å"So long as the work of formation continues, those who carry on that work must retain the title of promoter. † There is no statutory limitation of promoters, the courts have developed a test of intention and the promotion period covers all activities designed to start the company. As a reality; 1. The term promoter is not a term of art. 2. The obligations of the promoter have been built up piecemeal by the courts. See the use of agency and trust principles, buttressed at times by legislation. 3. Where attempts have been made at judicial definitions, the definitions have not been exhaustive. 4. The matter of whether or not someone is a promoter is a question of fact. 5. The promoter is not an agent of the company as there is no principal (This is because the principal or company is not yet formed). Duties and Obligations The promoters stand in a fiduciary relationship to the company. See the case of Erlanger v. New Sombrero Phosphates Co. 41]which was the first decision to recognise the existence of a fiduciary relationship Lord Blackburn commented on the extensive, almost unlimited powers which promoters have. Lord Blackburn indicated that such powers must be checked by an objective test of reasonable use. 1. A promoter must not make any secret profit out of the promotion of the company without the company’s consent. 2. A promoter is under a duty to disclose any interest in which he may have in a venture in which he has entered into.