Company law and shareholders

Company Formation

Memorandum And Articles Of Association

Notion Of Separate Juridical Personality

Main features of Company Law:

  1. The minimum number of shareholders is 2

  2. a company must have a capital divided into shares

  3. It must have a memorandum and articles of association

  4. For a company to come into existence the company must be registered at the registrar of the companies.

  5. A company has a separate juridical personality

  6. Limited liability notion which is the limited liability of the shareholders

  7. To disclose a lot of information about themselves, there are strict disclosure requirements

  8. The applicable legislation on company law is very lengthy and can be very complex

  9. It is relatively easy to transfer the shareholders' interest in the company to somebody else and this ease of transferability is also regarded as an attractive feature of company law

What Vehicles Are Used To Carry Out Business?

The people who carry out trade are traders. Trade takes place through different forms of vehicles. Trading can take place by means of a natural person. In practice however, very little trading takes place by individuals, the vast majority of transactions take place through one or other vehicles recognised by the law; example: government organisations, partnerships, limited liability companies... The overwhelming majority of transactions take place by Limited liability companies or companies for short. The question is but why is it that in Malta so many transactions take place through companies and so many traders are companies. The reason is because of the notion of limited liability. This is because if a trader becomes bankrupt he will be protected by this notion since he only loses his share of the company and he personally will not be found liable. A company is a separate person from the trader with its own commitments and property present and future. As a rule the shareholder will not be liable for the liabilities of the companies itself. This is a general rule.

  1. A Company Must Have 2 Shareholders

That is the general rule but it is subject to an exception. Historically because a company must be regarded as a partnership when the original legislation was enacted the law required a company to at least have two shareholders. It was realised by traders and advisors that this rule was outdated as the practical reality didn't turn out in this way. As time went by the legislators realised that this type of set up wasn't practical. Later on legislation was passed to allow single member company - there are certain requirements to be satisfied. The law recognises the separate juridical person independently of how many shareholders there are.

What happens when a 2 person company is reduced to a single member, does it cease to exist. If a company which is set up with 2 or more shareholders then it will have a 6 month period within which a second member can be re-introduced into the company. If this 6 month period passes then there will be consequences. In the case of a public company there is no limit to the number of shareholders.

  1. Idea Of The Share Capital

Every company must have a share capital divided into shares. For the company to be formed there must be shares. The members must hold shares in the company. Usually the nominal value for every share is 1 euro. The shareholder pays into the company an amount equivalent to the shares. Issued share capital is subscribed into nominal and preference shares. In a private company it says that the issued share capital must be the equivalent of the euro equivalent of Lm500 or 1200 euro. The law does not require the shares to be fully paid up. The law requires 20% to be paid up. The amount paid up depends on the agreement that was decided on the formation of the share capital. The minimum is 1200 shares. Fundamentally what happens to a shareholder who has paid only 20% of the share and not the full hundred percent of the share? What happens to the share continues to be a liability to the share holder.

There is another notion in our law of the authorised capital. This is that amount of capital which can be issued at some stage in the future by the company. The issued share capital comes within the authorised capital. The authorised capital must be either equivalent to the issued share capital or more then the issued share capital. Only the issued share capital is reflected in a payment made to the company. The unissued shares within the authorised capital go out to nobody and no one has any liabilities or rights on them.

Lecture 2

2 individuals getting together and setting up business to operate a stationary and it is decided to be a joint venture. The two go to an advisor and the advisor would usually advise individuals to set up a limited liability company through which they will then exercise the business. The main reason for this is for the principle of limited liability of the shareholders. One question the advisor would ask would be how much money is to be put into the business (e.g. 40,000 and 60,000 respectively). It is possible that the advisor will aid them to set up the company where one shareholder (x) will have 60000 shares at one euro each and the other y will have 40000 shares of the same value.

The advisor will first distinguish between the authorised capital (the maximum amount of capitol that the company may eventually issue). In this case it would be 100,000 euro.

If there is an authorised share capital of 300,000 divided into 300,000 shares of euro each

Issued share capital 100,000 divided into 100,000 shares of a euro. This is coming from the money from X (60000) and of Y (40000).

The authorised is the maximum capital that can be issued by a company from time to time as long as the authorised capital remains what it is. If the company is set up in this format in the future the company may issue the remaining shares that have not been issued.

When a share is issued it may not be fully paid up. The capital may be divided therefore into paid up and unpaid capital.

Shares can be of different types: the typical distinction is between ordinary shares and preference shares. The ordinary shares may be divided into different groups themselves then because what they are called is not important. The most important thing is the definition of the respective rights and obligations which attach to the shares and to include these in the memorandum of the association.

The basic rights of the shareholders

  1. To vote at general meetings - this is the meeting of the members. When the meeting takes place there will be items to discuss and to vote upon. It is the shareholders who vote on the resolutions being discussed. Generally each share carries with it 1 vote.

  2. The right to receive dividends from the company. If the company has made a profit and there are sufficient profits available for distribution then these will be distributed by way of dividend. This is made payable to the shareholders usually on a yearly basis.

  3. If the company is put into liquidation, at the end of the liquidation process if the company has paid off all its creditors, the shareholders will have a right to a repayment of the amount of capital that they would have contributed to the company plus possibly a share of any surplus profits that will remain after everybody has been paid.

This generally applies to the ordinary shares of a company. Sometimes the company also issues preference shares. These form part of the capital of the company as much as the ordinary shares but they are given certain preferential rights over the ordinary shareholders. These rights have to be defined in the memorandum of the association of a company.

The rights of the preferential shares are linked up with the rights of the voting and also with the dividends. It could also be that the preference shares have 2 votes per share. But usually the preference shareholders do not have a right to vote. They are called preference shares because of the preference given when it comes to dividends. These rights in relation to dividends depend upon what is state in the memorandum of association.

Shares are sometimes divided into different costs. This is to give the shareholders specific rights with regard to the appointment of directors. In this case, why is it desirable to classify shares as such? The shareholder who holds the majority of the shares is entitled to appoint the whole board of directors.

Memorandum And Article Of Association

A memorandum is a document that needs to be signed by the original shareholders and although visually it looks like one document it is two documents together. The first is the memorandum and the second is the articles of association. These are also referred to as the constitution of the company. The basic distinction between them is that the memorandum has to contain ad validitatem a number of clauses that are identified in the law. For example, the share capital clause, the objects of the company and the name of the company. The memorandum by law requires these details written down. The other characteristic is that the memorandum contains clauses that are of interest not only to the shareholders but to the outside world.

The articles of association contain clauses that regulate the internal management of the company. They do not interest third parties but regulate how the company operates at board level and at general level.

The companies Act in so far as the Memorandum is concerned identifies a number of clauses or a number of provisions that need to be included in the memorandum of association. The companies act doesn't say much except that every company must have a set of articles of association. What the law does say however is in relation to the articles of association is to actually recommend a draft set of articles of association that can be adopted by the shareholders to the company. This is unusual as the articles of association is a contractual document. It is the agreement of the shareholders. And because of this you do not usually find specimens being set up by the law in a contractual context. The companies act gives you a specimen of an ‘articles of association'. The shareholders can do one of three things:

  1. To simply adopt completely the specimen which is recommended by the law

  2. To discard altogether the articles set out in the first schedule and to create your own tailor made articles of association

  3. A hybrid: where you draw up your own articles of association but you make clear reference to the provisions in the first schedule of the companies act and amend and alter the first schedule as the case may be.

The memorandum and articles are a form of contract certainly to the shareholders and arguably between the shareholders and the company and it is a set of documents that needs to be signed by the original shareholders of the company.

What the law does here is identify a number of provisions or clauses that have to be included in the memorandum.

The first clause is the Name clause. The law requires the memorandum to state the name of the company. Every company has to have a name in practice it is the individual name of the company that identifies the company as a separate legal person. Every company will also have a particular registration number. This is given to it by the registrar when the company is formed. Obviously each company has a number that is different from the registration numbers of other companies. The same goes for the name of the company, no two companies can have the same name and as far as possible the registrar tries to avoid allowing companies with names which are too similar to each other. The name of the company may change, however the registration number may not change. The name may change slightly or it can be a totally different name. There are a number of rules that one would look at like the registrar of companies has a right to refuse a company its name if it deems that the name is offensive to the public or if it is too similar to another company's name. At law, the name of a company has to end with specific words or abbreviations. Here one must distinguish between private and public companies. The vast majority in Malta are private companies. If a company ends with ltd or limited at the end then it is a private company. If it is a public company then the company should end with the abbreviations plc or public limited company.

There is also the registered office clause. Every company must have a registered office. The registered office is mentioned in the memorandum of association. The registered office of a company has to be somewhere in Malta but this does not mean that the company must carry on business in Malta. However if it is registered in Malta, there must be a physical representation of the company in Malta. This would be to receive any goods and information such as judicial letters at a physical identifiable address. It is not possible to have as a registered office, a P.O. box.

Another clause is the status of a company clause. This is to see whether the status is either of a public or a private one. There has to be a clause in the memorandum saying whether it is a public or private company. This clause is really not essential at all since the name clause itself requires the end bit which shows that it is a public or private company.

The next clause is the objects clause. Every company is obliged to identify what the object of the company going to be. Or what the activity of the company is going to be. It doesn't mean that if the company is going to do hotel business then the objects are going to only mention hotel business. The objects could also have other ideas even though it has no current plans to carry out those activities.

The clauses can be changed after a week or after ten years there is no restrictions. So if the company is set up with one objects clause and then they decide to change their objects later they then need to change their memorandum. Although our law requires the objects can be mentioned, the objects can be mentioned in pretty wide terms. What cannot be done is to say in the objects clause is that the company is being set up to carry on trade in general.

There is a distinction between the objects of a company and the powers of a company. The powers of a company are those activities ancillary to the carrying out to the object of a company that are necessary to be carried out from time to time in connection with the business of a company. In practice however almost all memorandum of association will identify quite a long list of these powers. Strictly speaking the company cannot carry out activities that go beyond its objects. If it does so, the company will be acting ultra vires. The repercussion could be that if the directors enter into a line of business that does not fall within the objects then the company can say that it is not bound by these activities. The law is not however so straightforward.

Next, there is the share capital clause. The share capital clause must identify the authorised capital of the company and also the issued share capital of the company. The authorised share capital clause will list the amount of money and how many shares it is divided into. The issued capital clause must also state the extent to which the shares have been paid up. It is also necessary to identify who the subscribers to the memorandum of association are and the number of shares taken up by each of the subscribers. Thus the share capital clause is linked with the subscribers clause.

This is where the subscribers clause comes in. The subscribers are called so as they subscribe to the memorandum of association and as evidence that they have subscribed to the memorandum and articles of association, they have to sign both documents.

The management clause is the clause which requires the memorandum of association to identify the number of directors that the company would have and the names, addresses and id card numbers or passport numbers of the first directors of the company. A company is managed by the directors not by the shareholders. The whole concept of a company is that the shareholders invest their capitol into the company, appoint directors to manage the company and hold them responsible for their dealings. Then the shareholders would go to an AGM and would be informed by the directors on the performance of the company. When one speaks of the number of directors, that number need not necessarily be a fixed number, but it could be stated as a range. In other words the clause could read; the company shall be managed by a board of not less than three but not more than six directors. It is generally not advisable to choose just one number. There is no maximum number of directors. There is, in a sense, a minimum. Here there must be a distinction between public and private companies. In the case of private companies there may be a minimum of 1 director. In the case of a public company the minimum number of directors is 2.

The individual shareholder need not be a director. A shareholder or director may be a company, similarly a board of directors may be composed of 4 directors, 3 individuals and 1 could be a company. In such a case it would be called a corporate director. In the case of a corporate director you give the name together with the registered office and the registration number if it is a Maltese company. If it is not a local company the location where the company is registered is given as well as the company's office address.

A company being an artificial person cannot itself appear in court, or in contracts. There is thus in company law the notion of judicial representation of a company. In other words a company must appoint or refer to somebody who will have the judicial representation of a company, in other words the right to represent the company in judicial acts. Similarly a company must have an individual or individuals who will have the right to represent to the company all contractual documents. The memorandum of association must define the manner in which the representation of the company is to be exercised and it does so in the representation clause mentioned. It must also identify the first person or persons vested in such representation.

The Company Secretary Clause

Under the law as it stands today every company must have what is called a company secretary? A company secretary has certain functions under the company's act. The company secretary is a person appointed by a board and the company secretary has a variety of functions which primarily relate to the meetings and to filing certain returns and notifications to the registrar of companies. The company secretary is expected to attend to the general meeting and is expected to take minutes of the meetings, to circulate relevant documentation, to include in the notices the agenda for these meetings, to ensure that who is supposed to receive the documentation receives such documentation and to circulate the minutes. There is a whole list of events that need to be notified to the registrar of companies.

The Duration Clause

Another clause that is sometimes inserted in the memorandum of association is the duration clause. An important principle is involved here. When a company is set up if one mentions nothing in the memorandum of association, then the company will continue in existence for an indefinite period of time. There need not be no end - an infinite lifetime. .It is also however possible to include a clause in the memorandum of association which establishes a predetermined period of time for the lifetime of the company. It is not common practice to include a duration clause and if you do not include a duration clause then the company will have an indefinite lifetime. Even though a company may be formed for an indefinite duration, it does not mean that the company will exist forever as there may be situations where the company may be put into liquidation and in that case after a period of time during which the assets and liabilities of a company are liquidated, the company will then be struck off the register and it will then seize to exist.

Limitation Of Liability Clause

The liability of the shareholder is limited to the amount remaining unpaid of the shares held by them. A shareholder is limited in his responsibility to the company only to the extent if the shares are not fully paid up. If the shares are fully paid up he has no more liabilities to the company. If they are not fully paid up he has the liability (potentially) to remain the remaining percentage. This clause need not be added to the memorandum as the principle is a fundamental of company law.

The Articles Of Association

This is a document that is primarily intended to regulate the internal affairs of a company (the way a company is run - issue of shares, how the meetings are held, powers of the directors etc).There will usually be a set of clauses regulating shares in a company. Some clauses will regulate how a company issues shares to the existing shareholders or to the public at large. One typical clause that you would find in a company is that whenever the company is going to issue shares the company must offer them to the shareholders offering them the shares pro-rata to be added to those which they already have. The articles will usually also regulate what happens if one of the shareholders does not take up the offers of shares that are put to him. If the other shareholders are not interested in acquiring additional shares, the company may offer them to 3rd parties.

Another set of clauses regulates shares in respect of share transfer.

There would also be a set of clauses which regulates meetings - there are two types of meetings

  • General meetings - meetings of the shareholders

  • Board of directors meetings - meetings of the board of directors

The articles would regulate matters such as time needed to convene meetings, quorums and so on. Anything relating to how meetings are convened and held are usually detailed in the articles of association.

There are other types of clauses such as the clauses regarding the managing director. A managing director is a person appointed by the directors from amongst themselves, and the function of the managing director is to handle the day to day business of the company in the interest of the company. Whilst the board of directors as a board may meet once a month or once every three months, the exercise of the director's function cannot be exercised only when such meetings are convened.

The companies act gives us a model set of articles of association. These are found in the 1st schedule of the companies act. It is possible for the articles to incorporate by reference in schedule one of the companies act. In practice what is done is that the shareholders agree on a new set of articles to the exclusion of the specimen articles in schedule one of the companies act. What the shareholders do is to draw up a set of articles for themselves. Many of the articles in such an ad hoc set of articles of association will be copied from the standard articles which are found in the companies act.

The articles of association like the memorandum of association have to be signed by the subscribers.

The Notion Of The Registration Of A Company.

In order for a company to become a separate legal person, it must be registered with the registrar of companies. In order to register a company there is a straightforward process. What you essentially need is to draw up a set of memorandum and articles of association, agreed and signed by the shareholders. Once you have the document the initial paid up issued share capital of the company must be deposited in a bank account.

Lecture 5 is about directors. Particular decisions about the company. In the vast majority of companies the directors have the vast majority of powers. Difference between board of directors and general meeting. Separate Juridical Personality whether private or public the company is endowed with a separate juridical personality.

The notion of limited liability which had mentioned quite briefly and im going to expand on it right now. To begin with when we talk of LLC we have a little bit of a misnomer. Because the limited liability is not of the company but it is that of the shareholders.

The main features of companies (need to be looked up)

Who Has The Authority To Take A Particular Decision On Behalf Of The Company?

The general principle is that the board of directors of a company has the authority to exercise all the powers of eth company except those powers which either by law or by the memorandum and articles of the company need to be exercised by the company in general meetings. The powers of the company are vested in the board of directors. They have all the powers of the company except those powers which by law (company's act) or by the memorandum and articles have to be exercised by the general meeting (shareholders) So in determining the answer as to who has the power to exercise a particular function, 1st one has to see what one is talking about. Then one needs to check whether the law says anything about this particular function, whether the memorandum and articles say anything and if both do not say that that function has to be exercised by the general meeting then that function has to e be exercised by the board of directors. The memorandum of a company may well identify a number of decisions which may require shareholder approval. In practice the number of functions that are separately identified by the memorandum and articles are very limited. Typically these are the appointment of directors, the declaration of dividends.

Given that the memorandum and articles of association is a contractual document it has to be examined in order to determine who has such power.

In practice, in the vast majority of companies the directors have very wide ranging powers. In fact usually in these vats majority of companies, the powers of the general meeting are limited to those which are mentioned in the companies act. Usually the directors will be empowered to exercise any power of the company except those that the law specifically gives to the general meeting. Usually the memorandum and articles of association does not fetter the wide powers that the directors exercise.

The board of directors is almost always empowered by the articles of association to delegate its powers and usually the board of directors will delegate its powers to a managing director or through a chief executives or a general manager. They will than take decisions on behalf of the company as they have been empowered by the board of directors to do so.

In reality when issues regarding who has the power to take decisions on behalf of the company, very often the answer is the directors, however it should not be assumed that they always have such authority

The Notion Of Separate Juridical Personality

The fundamental principle here is that a company whether private or public, is endowed with separate juridical personality. It has a juridical personality as the law gives the company a legal personality of its own, but it is the law that gives the company its own personality. The legal personality is separate, meaning that it is different from that of the shareholders. In theory the principle of separate personality is different. Any identity that has a separate personality is at law like any other person. The practical implications to this are; that a company because it constitutes a legal person has rights which can be considered its own and obligations which can be considered its own; it is subject to rights which are its own and not of the shareholders or anybody else. It is subject to obligations which are its own liabilities and obligations and not the liabilities and obligations of its shareholders of any other person. Another repercussion of separate personality is that a company can sue and be sued in its own name. This links up with another notion which is in a sense related to it. This is the notion of limited liability.

The Notion Of Limited Liability

When we talk of limited liability of a company it is a misnomer as it is not the company which has limited liability but it is the liability of the shareholders which is limited. The liability of the shareholders is limited to the amount left unpaid of the shares held by them.

Why Is Limited Liability Elevated To Such A High Level?

The aura surrounding limited liability is indeed justified. If you look back over time, especially in the developed jurisdictions like the US and GB much of the huge business undertakings that took place over all these decades would not have been possible had the notion of limited liability not existed. The very large project including the building of railways, canals, roads etc became possible because people in the relevant countries were able to invest part of their savings in the large organisations that were to undertake these projects so that the collection of savings that were invested by what turned out into millions of people were turned into these funds. Why is it that millions of investors parted with their savings to fund these projects, the reason was limited liability? People realised that if they invested a part of their savings in projects and those projects failed, the most that the investing family includes would be the amount actually invested. This realisation spread quickly amongst families at large and you had millions families investing. Once that idea of limited liability was introduced the authorities extended limited liability not just to large operations but also to the smaller organisations, the family run companies etc. This also had the effect of promoting trading and trading opportunities. There is no doubt that a lot of people who invest in companies would probably not invest if there is a risk of unlimited liability. If people in Malta were not to invest through the limited liability company notion trading and business in Malta would also slow down considerably. This is briefly why the notion of limited liability assumes such an important concept in the economy of a country. The notion of limited liability has its own drawbacks and could give rise to unfairness vis-à-vis people who deal with companies. It is true that if you had to compare somebody whose trading without limited liability, with a person who is trading with limited liability, the risk of a creditor not recovering what is due to him would be greater in the case of limited liability company than it is un the case with a trader who does not have limited liability.

We need to look at the position of creditors vis a vis companies from another perspective in the notion of limited liability as when creditors deal with a company, as a rule there should be in a position to determine whether a company that they are dealing with is financially viable enough to be able to pay that creditor and other creditors. On a yearly basis a company is obliged to draw up a profit and loss account and a balance sheet which form the financial statements of the company. The company is then obliged to file a copy of the financial statements with the registrar of companies. The registrar of companies publishes the financial statements on the website. These are thus available to the public and by examining the financial statements of a company one should be capable whether the aforementioned company is financially sound or not.

It is not really that easy for a creditor to be able to determine the financial position of a company. To begin with not every person dealing with a company has the financial expertise or the financial trading to be able to read and interpret the accounts of a company. The reality is that very few people are able to read and interpret financial statements and those people that are capable to do so account for certainly much less than 1% of the population. However every creditor can engage a financial advisor.

Apart from this most transactions take place within a very short timeframe. When an individual transacts a deal, it is unlikely that the individual would have spent days discussing the deal, most transactions are carried out there and then and obviously it is not practicable to check the financial situation of a company.

If the company is financially sound all the creditors will have to be paid in the ordinary course of business. What happens if the company becomes insolvent or becomes bankrupt and the assets are insufficient to pay the liabilities? It is clear that all creditors are not to be paid in full. Our law enables certain types of creditors to have a prior right over the other creditors to be paid in the case of an insolvency of the debtor.

There is evidently a privilege which the law has granted to a limited liability company. The privilege in a sense comes at a cost. A company is, unlike most other forms of traders, obliged to make quite wide disclosures about it and its business. So the privilege of limited liability comes at the cost of extra disclosure requirements. These primarily take the form of the financial statements each company is obliged to draw up and file with the registrar of companies.

2 November 2009

The final feature of companies is that: it is relatively easy to transfer the shareholders' interests in the company to someone else, which is regarded as one of the attractive features of company law.

The transfer of one's interest in a company is easier than the transfer of one's interest in a business. Every business and company has assets and liabilities, which could take various forms. These could include immovables and debtors as assets and creditors as liabilities. An asset can be transferred easily between the owner of the asset and the proposed transferee. This also includes debtors - as the transferee would be entitled to claim against a specific debtor if the asset is transferred. This is referred to as an assignment of debt. When it comes to liabilities, the legal position is different because these cannot be transferred to another person, unless there is what is known as novation, i.e. a tri-partite agreement where the creditor gives his consent to the transfer. Hence, a person cannot shift the burden which he has onto somebody else without the creditor accepting this position.

To transfer a business, there must be a transfer between the assets and the liabilities. As stated before, vis-a-vis the assets, there aren't any particular problems, although they must have a fixed price and certain formalities may have to be followed, such as doing a public deed, if the assets involve immovables (such as property). However, for the transfer of liabilities, onewill not only have to identify who the various creditors are, but there must also be their consent given regarding the transfer. Hence, the scenario of the transfer of a business (involving a sole trader) is very difficult to complete.

In the case of a company, if someone would want to buy the business, all that would be needed is a share transfer between the two parties. Once the transfer of the shares has occurred, it is the company that continues to own the assets and be responsible for the liabilities that it has; without the need to see whatever assets and liabilities there are.

The Formation Of Companies

Although it is relatively straightforward to set up a company, the procedure for the registration of a company is not always as straightforward. Indeed, the registration process can take different periods of time. All that is essentially needed to set up a company is the drawing up of a memorandum and articles of association getting it signed by the original shareholders. Then the original amount of shares must be deposited in a bank account, everything is taken to the Registrar of Companies and everything would be registered.

There is the assumption that the shareholders don't know much about companies and what they entail. Hence, a lawyer needs to explain about the memorandum and articles of association and what they are about. However, there are other features that need to be explained, and the repercussions that follow all feature of a company. An example of this would be how the directors of a company are appointed - while the general rule is that the shareholder with 50% + 1 appoints all the directors, there could also be another approach. Hence, when there are clients, there is the need to point out such matters to them.

One must also inform clients that if a company has a small share capital, it doesn't mean hat if the business goes bankrupt, they have no liability vis-a-vis the company.

For instance, if two shareholders take out a bank loan in order to raise capital, then the bank may ask for property as a form of guarantee against that loan taken out. Shareholders must also be told that they might have liabilities against creditors, albeit in a very limited form. If the directors operate a company in such a way that the interests of the creditors are prejudicing, then there could also be potential liability in those cases (Article 315 and Article 316 of the Companies Act).

The first document that a lawyer would need to work on is the memorandum and the articles of association. One must keep in mind that it is both the memorandum and the articles of association that need to be signed by the shareholders. This is stated because often, the memorandum and the articles of association are stapled as one document and clients make the mistake of signing only at the end where there would be of the articles of association hence skipping the other place where they must sign in the middle of the stapled documents (at the end of the memorandum). When you identify the shareholders that are going to sign, if the person that is going to sign is an individual Maltese person, then there is no issue in his signature at all. You will need his name, i.d. number and address under the signature and that is the end of the story. However if the person signing is a LLC then you will need to identify the name of the company plus the registration number of the company together with its registered office and then you have to identify the person who is going to sign on behalf of the company (on behalf of the shareholder), you have to identify his name and then you have to identify if that person is authorised to sign on behalf of the shareholder.

What If The Individual Is Not A Maltese Resident?

If the individual is an EU citizen then you do not really need to pass on any additional information to the registrar of companies but you as the lawyer need to be satisfied as to the identity of the individual. If the client is a foreign company then you need to have evidence that that foreign company exists and if it is registered in an EU country then the evidence would usually be a certificate of good standard. If the citizen is non-EU or if the company shareholder is also outside the EU then the likelihood would be that you would need what we call an bank reference.

If the shareholder himself signs the memorandum and articles of association then you need nothing else. But if the individual shareholder or even a company appoints an attorney under the power of attorney to sign the memorandum and articles to sign on his behalf then you would need to produce to the registrar of companies, a copy of the relevant power of attorney.

3rd November

The bank deposit slip is that document that usually shows the registrar that the company has received the funds. It is however not the only way that shows that the company has received the funds. The registrar also accepts a declaration by an accountant or a lawyer that the transaction has been done. The normal practice is for the initial share capital to be deposited in a local bank. But what if the company is a company that is not going to have any operations in Malta? Why should the relevant bank account be opened in Malta and the initial share capital be deposited in that account? Thus the registrar also accepts that the money in respect of the issued share capital can be deposited abroad in a foreign bank as long as the bank is one of repute and the bank makes it clear that it is holding the funds in an account in the name of the company being formed.

So far we have talked about the initial shared capital being paid in cash. The reality is that the shared capital whether initial shared capital or subsequent share capital need not be paid in cash but it could be paid in kind. The consideration in respect of the issued shares can be in cash or in kind.

‘In kind' means an item of property (tangible or intangible) which is capable of economic assessment; an asset which one can put a real value to.

You need two things for this. You need a document proving a transfer of the owner of the property into the ownership of the company. This may be a private writing or a notarial deed. There is then something slightly more complicated. This is an article 73 report. This refers to article 73 of the companies act. This requires a valuation of the item of property that is going to be transferred. The valuation must be made by an expert independent of the company. This is usually an auditor qualified as such. But this is not always the case as some items cannot always be valued by the auditor. In this case you would need a more specialised expert. But why is there the need of this expert valuation? This is because the registrar needs to be satisfied that the amount paid in respect of those shares is capable of a clear assessment. If the property is worth more is does not make any difference to the company as it is worth more than shares issued and thus third parties are not prejudiced.

To form a company all you need are the memorandum, articles, deposit slip and registration. However that does not mean that a company can immediately start to operate lawfully in every case. Some companies can operate without any licences but there are certain sectors in business but that demand of a company, a licence in order to be able to operate. And the mere registration of the company will not entitle it to commence operations simply because of registration. With every situation you can set up the company, leave it dormant until the licence is obtained and then begin operating when the licence is obtained. In certain cases if the company does not obtain a particular licence it will not be allowed to operate in any other case.

When all the documents are obtained they must be taken to the registrar of companies. The registrar then has some highly trained personnel to verify the documents and make sure they are in line with the requirements of the companies act and any policies that are practiced by the registrar. If everything is in order then the company will be registered. Usually a company is registered on the same day that the documents are taken for registration or possibly the following day. If a document is not in order then the registrar will get in touch with the people responsible for company and will explain the problem. Again this is usually a quick process but it may sometimes be delayed especially if there are for example foreign shareholders.

What Happens When A Company Is Registered?

The legal effect is that once registered a company assumes a juridical personality of its own separate from that of its members. In other words it becomes a legal person with all the consequences that is brought with it. From the day of registration the company can also commence business. Usualy the day of registration is the same day that the company commences business. However you can have a situation when the memorandum and articles of association may have a clause that say that the business will commence at a certain date.

Another important consequence of the registration of a company is that once a company is issued and a certificate of incorporation is given out then the law assumes (a juris et de jure presumption) that all the formalities and conditions necessary for the registration of a company have been fulfilled. And all requirements for the registration of a company have been satisfied. In other words once a company has been registered then nobody can question the validity of its incorporation. This is important because if this rule wasn't there it would have been possible to somehow contest the validity of a registration of a company. An example of this would be when a company would be set up by 3 shareholders. One of whom would be set up in Italy. If it transpires that the Italian company had not been itself registered when the Maltese company had been registered, then there would arguably be a case for the validity of the maltese company on the basis of the general principles of law.

The Memorandum And Articles Of Association

This is essentially a contractual document. It is a form of contract between the original members of the company. They are agreeing to set up a company, they are agreeing the terms and conditions and they sign both the memorandum and articles. But although the memorandum and articles can be regarded a contractual document, it is not the typical form of a contract. This is so because to begin with the memorandum and articles perform other functions then merely regulating the contractual rights and obligations of the parties involved. It also serves as a public document and also regulates the obligations of persons other than the contractual parties involved. There may be the obligations of the directors for example.

Another fundamental difference is that in a normal contract, any alteration to the contract will obviously require the consent of the contracting parties. In the case of the memorandum and articles of association the law allows the changes to the latter to be made by an extra-ordinary resolution of the shareholders. And the normal definition of this is a resolution passed by at least 51% of the holders of the total nominal value of the shares. If there are rights which belong to certain classes of shares there is the need for a specified majority of those classes affected by those proposed shares.

Should the agreement between the shareholders be exclusively contained in the memorandum and articles of association or do the shareholders enter into what is often called a shareholders' agreement? It has become reasonably common for the shareholders to also enter into a shareholders' agreement. The two documents don't easily always live side by side. This is so because it is possible for there to be some type of conflict between the clauses found in the two documents. Example you may find the clause regulating the transfer of shares in both documents. If there is a difference in the wording or if there are different provisions a difficulty may arise which should be the prevailing text. Here difficulties of interpretation come in. Some argue that the articles of association is the document recognised by law and thus should prevail. Others would argue that if the shareholders' agreement came later, because both documents are contractual, you have to give greater strength to the subsequent document as it more accurately reflects the agreement between the parties.

Lecture 9

The first clause in the memorandum of association is the name clause. Every company must have a name which identifies it as a separate person. Admittedly a company is also given a registration number and the registration number is given upon the incorporation of the company. The name of the company may change but the registration number cannot change. Teh change of the name involves an alteration to the memorandum of association and practically every alteration to the memorandum of association and articles of association needs to be done by means of an extraordinary resolution of the company in the general meeting. It has been known in practice that you may want to file an action against a company that you have in mind. At one stage the company may have changed its name and then you go to file an action against a name and you might sue the wrong company. Both in contracts and in judicial proceedings you need to be careful that you know which company you are contracting with and you know which company you are filing proceedings against.

There are a number of limitations when naming a company. Firstly, you can choose any name for the company. The name is chosen by the promoters who set up the company. These are usually the first shareholders.

The first rule is that the name of a company must end with the word limited or its abbreviation LTD in the case of a private company. If on the other hand the company is to be registered as a public company then the name of the company must end with the abbreviation plc or with the full words Public Limited Company. Whereas in a private company some companies end with ltd or the full word limited in public companies in practice they always end in plc. A company which is originally registered as a private company can at any stage convert into a public company and equally this can happen in reverse too if a number of conditions are satisfied. Whenever there is a change there must be a change in the name.

A SICAV is an investment company with variable share capital. The INVCO is an investment company with fixed share capital. If the company is to be formed as a SICAV then the name of the company must include the word SICAV or the words investment company with variable share capital and can end with either ltd or plc as it can be both a private and public company. INVCO on the other hand can only be a public company.

Unless the company is going to operate as a trustee, a nominee of a fiduciary then the name cannot include the words trustee, nominee or fiduciary or any variation thereof. If the company ig going to operate as one of these, that company will need a licence from the Malta Financial Services authority and in that case the company can use those words in its name. Also a company cannot form its name in order to suggest that the company is in partnership with the government.

The registrar shall refuse to register a company by name that is identical to or so similar to the name of another company as to give rise, in the opinion of the registrar to possible confusion. Clearly the idea of the law is to avoid the public at large confusing one company with another. What if the proposed name similar to another company is the name of a company within the same group? Should the name cause confusion? This should not cause confusion. One may also refer to Article 32 of the Commercial Code. This says that no person shall use a name, mark or distinctive device being used by something else or capable of creating confusion. The point is that really the two provisions apply in parallel.

The registrar also has the right to refuse a name that is offensive or otherwise undesirable. In theory one can contest the discretion of the registrar, they can try persuade the registrar and if that doesn't work they can start a court action but in reality a new name is chosen. In the run up to the registration of the company one can reserve the name of the company. Once a name is reserved then it belongs to the person who registered it for three months. If the company is not registered by that time then the name ceases to be reserved.

The Nature Of The Company Clause

The memorandum of association must include a clause which says what the nature of the company is. It will either say that it is a private company or that the company is a public company. The truth is that although it is helpful to include this phrase, it was not really necessary. This is because the rules regulating the name of the company distinguish between ltd. And plc. So the name of the company itself will indicate the nature of the company and thus you would not need this extra clause. However what is the importance of indicating whether the company is private or public? In reality it shouldn't make any difference. When one compares a private company and a public company one may get the impression that a public company makes more money and is more likely to honour its obligations but the reality is that it makes no difference at all to the financial position of the company whether it is a private company or a public company.

The Registered Office Clause

The memorandum of association must specify the registered office of the company. To begin with, the registered office must be in Malta. There is no way that the registrar will accept the registered office of a Maltese company in another jurisdiction. The point is that the registered office of the company does not in any way mean that the operations of the company must be carried on from the registered office. Also an address must be given that is identifiable by street, street number and town. Also a P.O. Box cannot be given as a registered office.

What are the uses of a registered office? The companies act identifies a few areas which are linked with the registered office. Every company is obliged to keep a register of members which contains the names and addresses of shareholders and the number of shares held by the shareholders. The register of members must be kept at the registered office. The register of debentures (a form of loan) has to be kept at the registered office. Similarly, the financial records of the company, as a rule, need to be kept at the registered office. There are some exceptions to this. Finally the registered office is also the place where the minutes of the general meetings should be kept. The minutes of the directors need not be kept at the general office and may be kept somewhere else. The registered office need not be the place where general meetings are held or where board meetings are held. Sometimes such meetings may be held here but very often they are not.

Objects Clause

All that the companies act says is that it must state the object of the companies. There are two other rules one that the company can be formed for any lawful purpose and the company cannot be formed for just trade in general. Every company is formed by the original shareholder with a particular purpose in mind for the company. The purpose needs to be specifically stated. It does not mean that the object has to be one single object. It is possible to include in the objects clause two or more objects and indeed these objects identified need not be related to each other. The company does not need to actually carry out all the objects which it sets out in its memorandum of association. The company may indeed remain dormant and thus not set out to do any of the objects stated in the memorandum. Sometimes the reason for this is that although it was set up with the aim of going in that business but for some reason (maybe lack of finances) it does not go into that business. It could also be a shelf company where it would be a very basic company and the idea would be to have a company ready to transfer to a client. In practice it is not a good idea to go for off-the-shelf companies and in recent years this practice has dwindled down.

Another comment to be made about the objects clause is that the law says that a company may be formed for any lawful purpose. This is found in the provisions in the companies act. Before the companies act, in the Commercial Partnerships Ordinance, the position used to be different. In the latter, a company had to be formed for the exercise of one or more acts of trade. When the companies act was passed it was now possible to register a company for any lawful purpose. The truth is that in some cases, it will be more appropriate to use some other form of entity then a company. Example in the case of a charitable institution it would be wiser to use the concept of a foundation rather then a company nonetheless it is still possible. This does not mean that you can state the objects of a company to be any lawful purpose. You cannot also include a clause that the object of the company is to carry on trade in general.

There is an approach which says that the law should not require the objects clause to specify because if the shareholders wanted to give the power to the company to carry out any form of business then why should the law deny them from doing this?

Maltese law does not however enable shareholders with such a wide ranging form of objects. So what can shareholders who do want to give that wide power to the directors do? They can draft the objects clause, in as wide ranging a manner as possible so the lawyer will draft an objects clause which theoretically could go up to 3, 4, 5, 10 pages. There was a time in the UK where they had a rule similar to ours where lawyers were drafting objects clauses which were extremely long. In England they realised that this doesn't make sense and in 1989 the UK parliament passed an amendment introducing the notion of a general commercial company. This was defined as a company whose object was to carry on broadly any business or commercial activity. In England since 1989 it has been possible to draft the objects clause in a simple way. Our law has not followed suit but one might argue that it should be changed to conform with the English amendment.

In practice however this hasn't caused any problems since objects clauses can still be drafted very wide and in Maltese law it is not that difficult to alter the memorandum and articles of association. So if the shareholders want to enter into a new line of business then they would recommend to the shareholders that the objects clause should be amended to include another/other objects.

The distinction between objects and powers: Simply put the object of a company is the business, activity or trade for which the company is set up.

The powers of the company are those extraordinary things that a company may need to do to carry out the purpose of the company.

Many lawyers and accountants feel the need to identify these powers specifically in the objects clause. So most objects clauses will include one or two clauses at the beginning which would state the purpose of the business and then there would be 15, 20 sometimes 30 other clauses that are effectively the powers that the company needs to have to carry out the business. One does not need to identify these powers on a specific individual basis. It should be implied that the company has all those powers which will be necessary to carry out its principle purposes. What one can do alternatively is to include a little clause to say that the company shall have all powers and rights that are necessary or ancillary in the carrying out of the fore-said objects. Sometimes however one has to include certain limitation that are inherent in the particular sector the company would operate in. If the company concerned is going to operate as an insurance company, you cannot have 2 conflicting clauses saying that you would like to operate as several other things. This is due to needed permits and licences. There is no way that a licence will be given to an insurance company if the objects clause includes things which are unrelated to a financial background.

The memorandum of association must state the amount of share capital with which the company proposes to be registered, the division thereof into shares of a fixed amount, the number of shares taken by each subscriber and the amount paid up in respect of those shares and if the shares are divided into classes, the rights attaching to those classes of shares.

The company acts says that if there are different classes, the rights attaching to those different classes need to be stated in the memorandum. Those rights strictly speaking should be included on a memorandum of association. Very often these rights are not included in the memorandum but they are included in the articles of association. It is an irregularity but the registry of companies do not usually object to this.

Under our law there is a minimum share capital requirement. Where the minimum authorised capital is Lm500 (or its equivalent in Euro) then all of the authorised must be issued. If however the authorised capital is above Lm500 only, Lm500 needs to be issued. The companies act also says that you must also indicate the amount paid up in respect of each share. The amount paid up that the relevant holder has paid on the nominal value of the share. Here the distinction between a fully paid share and a partly paid share is brought out. When it comes to the minimum part that has to be paid u[ in respect of each share, in respect of a private company, the minimum amount that has to be paid up is 20% of each share. In the case of a public company the minimum amount payable is 25% in respect of each share.

Certain types of companies will require a larger share capital. If the company is going to operate as an insurance company or as a bank there are different requirements found in banking and insurance legislation. This applies to very few specific sectors primarily in the financial services industry. Simply because the law allows companies to be registered with a very tiny share capital, this does not mean that the share holders ought to have that mind at rest as they satisfied the minimum requirements. Every company needs relatively substantial financing. The question is how does one raise the additional financing that is required by a company. There are a variety of ways a company acquires such finances such as loans from the shareholders, issuing of more shares. A typical way is bank financing. The bank will insist that the guarantees are not only backed up by personal guarantees but also by hypothecs belonging to the shareholders and so on.

The share capital is not necessarily an indication of the financial strength of the company. Sometimes it is, but sometimes it isn't. You could have a company with a share capital of 1200 euro. And that company may well be financially very sound maybe because sometime after it was registered through some means of financing generated a profit from year to year, some reinvested and some distributed to shareholders and after a few years the company may actually be very strong financially with substantial assets. On the contrary you can have a company with paid up share capital of 5 million euro and in fact is worth zero. It may have run into financial difficulties and with each year making successive losses. You can only know how financially strong a company is by auditing its financial accounts and examining its audited financial status.

16th November 2009

Subscribers' Clause

By the subscribers' clause it means that the memorandum has to include, name, surname, residence and id card number or passport number of the subscriber. The subscribers are the original shareholders of a company. They are the ones who subscribed to (signed up to) the memorandum and articles of association. The first shareholders and subscribers are terms that are used interchangeably. Later shareholders are referred to simply as subscribers. Sometimes they may still be referred to as subscribers if they are new subscribers who have taken up new shares in the company. Certainly those who become shareholders by acquiring shares from other shareholders cannot be said to be subscribing to shares but as long as the term is understood in its correct context this is allowable.

Subscribers have to sign the memorandum and the articles of association. Both documents need to be signed. As far as the name is concerned, if it is the name of a company then this must be put down together with the registration number. The address, in the case of an individual has to be a full residential address. As far as the ID card or passport number is concerned this requirement results not from the main provisions of company law but it results from article 4 (a general provision) that says that where you have to mention the name and address of a person you also have to add an identification number of that person.

Management clause: there is a provision which says that the memorandum of association must state the number of directors and the name and address of the first directors. It is called the management clause because in practice it is the directors who have the responsibility of the management.

The law says that you have to specify the number of directors but does not state whether there is a maximum number of directors however there is this rule that when you state the number of directors you have two options. You can either state a fixed number (3 or 5) or else you can include a range (the number of directors shall be not less then 3 and not more then 7) In the case of puclic companies there is a minimum number of directors which is 2. In the case of private companies it is 1. In practise there is a specific range depending on the specific characteristics of the company.

In the case of a private company all that the memorandum needs to do is to identify who the directors are and give the details mentioned (name, address...) and there is nothing else apart from this. In the case of a public company there is an additional requirement. Each one of the directors must either signify his consent in writing to act as a director and such consent needs to form part of the documents registered together with the memorandum. Or else, instead of the director himself signing his acceptance, somebody authorised by him in writing can signify his consent on his behalf.

Why should the law require such consent? Can a person be appointed as a director of a private company without his consent? The clear answer is that nobody can be appointed as a director unless that director accepts the appointment. If it results that somebody has been appointed without his consent what that person ought to do is write to the registrar making it a point that he did not give his consent.

The board of directors has in principl the full management of the company. And the board of directors can exercise virtually all the powers of the company except those, provided by the law or the memorandu, and articles, which are vested in the general meeting.

The Representation Clause

The law requires the memorandum of association to identify the manner in which the representation of the company is to be vested and exercised. A distinction is sometimes drawn between contractual and judicial representation. The contractual representation refers to those persons authorised to represent the company on contractual documents. The judicial representation refers to the power or authority of a person to represent the company in judicial proceedings. Typically the memorandum of association would appoint 1 or 2 directors to represent the company on contracts and typically 1 director to represent the company in judicial representation. But here we are again talking of an agreement so the clause could be varied and changed as necessary. So it is also common to find a provision which will say that the contractual representation is vested in any one director or any person chosen by the board of directors. The same applies with judicial representation. This distinction that exists between contractual and judicial is not actually a distinction which the companies act makes or any other part of the law, but it has come down from decade to decade and one can eliminate the distinction between the contractual and judicial representation by merely referring to the legal representation or even just the representation of the company.

The Company Secretary Clause

A company, since 1995, must have a company secretary and the memorandum of association must identify the name, the address and again the ID card or passport number of the company secretary. The company secretary is not to be understood in the usual sense but this person has very specific functions in relation to the company. Sometimes the company is so large that you may need a full-time company secretary or even a secretarial department. The company secretary usually exercises his functions a few hours every month. The memorandum outlines the secretary's functions. As a broad distinction, there are quite a number of matters that relate to meetings and there are some additional functions. As far as meetings, before the meeting what the secretary does is:

  1. Help the chairman draw up the agenda for the meeting.

  2. Prepare notices for the meeting and send them up.

  3. Locate any documents that need to be circulated

  4. Make arrangements for the venue of the meetin

During the meeting the secretary should be familiar with the procedural rules set out in the law and the articles of association especially in tegard to the conduct of the meetings. If the meeting concerned is a board of directors meeting and there is a tie in votes, the question that should be determined by the company secretary is what should happen when there is a tie. In this case the secretary may find that the chairman has a second or casting vote according to the memorandum of association.

After the meeting the secretary must draw up the minutes of the meeting and circulate them. Another function would be to make sure that any resolutions passed at the meetings must be registered with the registrar of companies if so required. No alteration to the memorandum and articles of association is effective unless the relative resolution is formally registered at the registrar of companies.

The law does not set out any particular qualifications for the secretary but it leaves it up to the directors to choose somebody who has the necessary experience and expertise to fulfil the functions of a company secretary.

It does not make any difference whether the company secretary is Maltese or Foreign. Although the vast majority of companies have just one company secretary but it is also possible to have more then 1. The idea here is to ensure that if one of the secretaries is unavailable the other secretary may fill in.

The Duration Clause

A company once registered will have an indefinite existence until at one stage or another it is put into liquidation. But it may be that the company is never put into liquidation and will continue to exist indefinitely. This will subsist if no provision is put in the memorandum of association regarding the duration of a company. The law allows the subscribers to include a duration clause in the memorandum of association limiting the duration of the company. The truth is that very few companies are registered with a similar duration clause. Nearly all don't have a duration clause, but the law allows it. It is difficult nowadays to anticipate situations where it would make sense to include such a clause. When duration clauses were a relatively new thing, such a clause would normally be included.

Limited Liability Clause

The liability of the shareholders is limited to the amount if any remaining unpaid on the shares held by them is usually the wording used by this clause. This clause need not be included in the memorandum because the law actually sets out that rule in article 69 of the Companies Act.

Articles Of Association

The articles of association are those regulations that are essentially intended to regulate the internal affairs of a company. The companies act does not identify any particular clauses that need to be included in the articles of association unlike witht he memorandum of association.

What if a clause that should be included in the memorandum of association is instead included in the articles and vice versa? In the former case there will be a big problem. If a clause is included in the articles by mistake the registrar will refuse to register the company until you have included the relevant provision in the memorandum. If a clause that should be included in the memorandum is included both in the memorandum and in the articles there is no nullity. When a clause that is typically included in the articles is placed in the memorandum of association you will have no problem.

In the case of the articles of association the companies act provides a specimen set of articles both for a public company and also for a private company. The articles for a public company are found in part 1 of the first schedule of the companies act and part 2 includes those for a private company. However part 1 must still be referred to here. The memorandum and articles are essentially a contractual form of document. The articles are more so. It is quite unusual for the law to recommend a specimen contractual format. In practically no part of the law do you get the law laying down a specimen contract. Why the law does this in the case od a company but not in any other context is perhaps due to the fact that the law has always in company legislation tried to promote an element of uniformity. The articles of association themselves are quite complex and if the law were to leave it entirely to the promoters to draw them up, the likelihood is that the uniformity which we have today would have been lost. The recommendation made by the law in providing a specimen set of articles has ensured uniformity but the specimen is only a recommendation.

In reality when the promoters draft the memorandum and articles have three options available:

  1. To adopt the complete specimen included in schedule 1. This is done by stating such.

  2. To draw up their own articles of association totally excluding the provisions in the first schedule. In other words, they would draw up an ad hoc set of articles of association and expressly exclude the provisions of the first schedule. They do so by stating that the regulations of the company shall be the regulations written and the provisions of the first schedule of the companies act are excluded in their entirety. In practice whenever this is done, much of the ad hoc articles are actually taken from the very wording that one will find in the first schedule anyway

  3. It is a hybrid between the first two options. Here, reference is made to the articles made in the first schedule and then say that the provisions of the first schedule in the companies act shall apply to the companies concerned except in so far as they are varied expressly or impliedly by the provisions of the articles of association. The rest of the articles will contain quite a number of provisions that are either entirely ad hoc or else they adapt the wording in the schedule to the particular circumstances.

Typically Included Provisions

These usually include the transfer of shares, meetings, board meetings, managing director, dividends, capitalisation, notices and other such provisions

Shares

We know that a company is originally registered with a share capital which must be identified and described in the memorandum of association. What the articles of association would typically regulate would be who shares should be offered to when they are issued. Typically the articles of association will provide that the issue of shares must be in the first place be offered to the existing shareholders of a company, pro-rata amongst themselves in proportion to the respective shareholding held by the shareholders. The articles usually go on to say that if a shareholder does not take up his allotment then such shares should be offered to the other shareholders, perhaps pro-rata, or the articles could say that the shares will be made available to third parties.

The Transfer And The Transmission Of Shares

Typically, in Malta, there will be pre-emption provisions. You could have a class of shares owned by more than 1 shareholder. The articles usually provide that if a shareholder wants to transfer his shares he must firs offer them to the other shareholders within his classe. If those shares are not acquired by the other shareholders in his class he will then be obliged to offer them to other shareholders of other classes pro-rate their holdings and if they do not accept them then they may be offered to third parties. What is critical is to ensure what procedure is contemplated by the articles and that such procedure is followed.

There are provisions regulating the general meeting. One of them relates to the issue of notices, who is entitled to attend the general meeting? What is the procedure to appoint a representative by proxy? When must the proxy be delivered to the company and how is the voting to be conducted? All these will be regulated by the articles of the association. There will also be the distinction between ordinary and extraordinary resolutions and their definitions.

There may also be provisions relating to what happens if there is a tie in a vote. Typically, one will find a provision which will grant the chairman, a second or a casting vote.

Pretty much the same set of provisions will be included in relation to directors meetings. When one mentions the general meeting and the directors one should mention that there will be provisions directing the respective powers of the general meeting and the directors. Directors generally have all the powers of the company except those powers which are either by law or by the articles vested in the general meeting.

There will also be provisions regarding the managing director. These would determine powers, remuneration etc.

The Separate Juridical Personality Of Companies

There is no doubt that a limited liability company is vested with a separate juridical personality. This means that a company is a legal person separate from the members that constitute it. We say separate personality because the law expressly says so. Indeed in the companies act there is a provisions (article 4) that a company is a person that is separate from the persons that constitute it. The concept is an old already present in the Commercial Partnerships Ordinance. The separate personality that is accorded to companies today is also accorded to the other forms of commercial partnerships which are regulated by the companies act and previously by the CPO. Also, foundations, corporations are separate legal persons.

When does juridical personality for a company start and when does it end?

It starts at the time when the company is registered or incorporated. (the two terms mean the same)

There may come a point in time when the company is put into dissolution or put into liquidation. Dissolution will take place at a particular point in time or in other words on a day. There are a number of causes of dissolution but typically a company is dissolved when the shareholders pass an extraordinary resolution putting the company into liquidation. The resolution of the shareholders is done on a given day, which day is that of dissolution. There will be a given time during which the liquidation is carried out and it is the liquidator which carries out this process. During this process the company will wind down its commercial activites and the liquidator will collect the assets and pay off the liabilities of the company. If there is a surplus of assets over liabilities then that surplus will be distributed to the shareholders. If the liabilities are more then the assets then certain creditors will not be paid in full or paid at all. Once the liquidation process is complete then the liquidator sends a notice to the registrar and this notice is published in the newspapers and the company is struck off the register. When the company is struck off this is when it ceases to exist. The company continues to retain its existence even during the liquidation process. This principle is expressly state in the companies act in article 4. Previously under the CPO the principle wasn't set otu but it was acknowledged in judgments like in DR Leslie Grech vs The registrar of companies which held that a company ceases to exist when it is struck off the register.

You have to keep in mind the consequences of separate juridical personality?

There are two consequences that can be described generally:

  1. A company because it is a separate person from tis members has rights that belong to it but not to its members and is subject to obligations that are its obligations and not the obligations of its shareholders. E.g. if a company lends money to a 3rd party and the 3rd party has not repaid that amount to the company, it is the company which has the right to claim that amount. The shareholders cannot themselves claim the amount. Similarly if the company has incurred an obligation (for example borrowing money) the bank cannot consider the shareholders to be liable unless the shareholders guaranteed the borrowing of the money and thus the company is liable.

  2. A company therefore may sue in its own name and can be sued in its own name. So if a bank has lent money to the company, the action instituted by the bank will be against the company itself, not against the shareholders (unless the shareholders guaranteed the borrowing of the money). Finally if the company is a trader and that 3rd party doesn't pay, it will be the company itself that will act as the plaintiff and it will do so in its own name and not in the name of the shareholders because it is the creditor not the shareholders.

Lecture 13 - 23rd November 2009

Judgments

Salamon Vs. Salamon And Co. (1897 House Of Lords)

There was an individual who, for a number of years, had carried on business as a successful merchant dealing in leather products, leather and other such goods. The business was successful and in 1892 Mr. Salamon decided to do something which wasn't popular which was to convert his business into a limited liability company. At the time there was already in force in Britain a bit of company legislation called the companies act of 1862. This act had created the possibility of setting up companies. The way Mr. Salamon went about converting his business into a limited liability company was to set up a company called Salamon and Co. with 7 shareholders. These were him, his wife and his 5 children and each person took just one share in the company. The 1862 act provided that it was possible to set up this company and the minimum number of members had to be 7. When Mr. Salamon had the company incorporated at that point in time the business still belonged to him. He converted it by transferring his business to the company. Both in Maltese and English law a transfer of this nature must be done in consideration of something. In this case the consideration was of three components:

  1. An issue of 20,000 shares of £1 each.

  2. The company issued a debenture (a document that acknowledged an indebtedness of money) of £10000

  3. £9000 paid in cash - all to Mr. Salamon

Thus Mr. Salamon owned 20,001 shares in the company. He also held the debenture in his hands and 9000 pounds cash. Unfortunately some time after the setting up the company went into financial difficulties and for a short period went bankrupt. So the company was put into liquidation, a receiver was appointed and the liquidator realised that there weren't sufficient assets to pay off all the creditors. Thus he initiated proceedings against Mr. Salamon claiming that the business really belonged to Mr. Salamon and not the company. Secondly he said that Mr. Salamon used the company as his agent and thirdly that because he was the principle and the company as the agent then he had to indemnify the agent for any loss that the company as the agent was suffering.

The first court and the court of appeal held Mr. Salamon personally liable to indemnify the company. The argument was that the company had been formed against the true intent of the companies act of 1862. Besides that they held that the company was merely a sham or an alias and it was simply the agent or the trustee of Mr. Salamon. The business according to the courts really belonged to Mr. Salamon and not the company, that the company was the agent of Mr. Salamon and thus he was obliged to indemnify the company as his agent. They considered this company to e a mere sham.

An appeal was lodged before the House of Lords and here the judgment was reversed. The House had a close look at the provisions of the 1862 companies act and it concluded that all that the companies act required for a company to be formed was 7 persons, each taking at least 1 share each in the company, drawing up the memorandum and articles of association and registering the company. The act didn't impose any additional requirements apparently implied by the inferior courts. It did not require that the company should have an independent will from the other shareholders. Since the company was lawfully formed to constituted a person separate to the shareholders and it therefore was a company itself and not as decided by the courts below, an agent of Mr. Salamon. Therefore it was made clear that the business belonged to the company itself and thus the judgment was reversed.

the court also said that the shareholders and directors cannot be held liable for the transactions entered into in the company's name. It is only where fraud or unlawful conduct is carried out that one can impose personal liability. The house of lords made it clear in this case that there was no fraud or unlawful conduct and held that he was not obliged to indemnify the company even though he was effectively the only owner of the company.

The judgment created quite a commentary but at long last, after a few decades of debate, the validity of the one man company was finally recognised in the judgment of the House of Lords.

On the face of it the arrangement that was validated by the House of Lords was inherently unfair. Why did commentators consider the arrangement to be unfair? One of the reasons is that with the possibility of setting up such a company the investor could limit his liability to a considerable extent by incorporating a company.

Under English law, a debenture creates a charge over the property belonging to the company. Under Maltese law, a similar notion to this is that of the hypothec, and this gives the creditor to the debenture a prior ranking right over the other creditorsof the company. Creditors are divided into secured creditors and unsecured creditors. Secured creditors are those with a lawful cause of creditors. There are then different types of secured creditors. The privileged creditors will rank higher than the hypothec creditors.

Therefore technically Mr. Salamon had a priority as a privileged creditor of the company.

In Malta there is a parallel situation. When investing in a company an investor may put in a 100% capital investment. Like that if the company goes bankrupt he will not get any money bank. However he may also invest by way of a loan to the company itself. In this case the investor becomes a debtor of the company in that he is owed a percentage (or all) of his investment. Like this even if the company becomes bankrupt the investor can claim the money from the company's assets. However if he is not a privileged creditor then he may not get 100% of the loan back. But at least he is able to retrieve part of his investment. There is also the option that the loan is secured by means of a hypothec which will give the creditor (the investor) a pretty high creditor ranking. In this case, should the company hit bankruptcy, the investor will be able to retrieve 100% of his loan.

There are those who criticise the consequence of the judgment because of the unfairness to creditors but there are also those who say that since giving a loan as investment is a matter of public record and third parties can easily find out what the financial position of the company is and whether the shareholders have used any techniques to the detriment of the creditors.

This information can be found out but it is not that simple. Accounts have to be published on a yearly basis but sometimes they may be published late or not at all. Interpreting the accounts may also be difficult and legal aid would be required. Many creditors may also not be in a practicable position to find out the financial situation of the company. This is in the sense that there may be no chance considering the resources it would take to uncover this information.

Lecture 14 - 24th November 2009

Macaura Vs. Northern Assurance Company Ltd.

Macaura owned a timber estate. At one stage he transferred the ownership of the timber on the estate to a company called Canadian Sawmills Co. Ltd. In return, he was issued with 42,000 shares of a nominal value of £1 each. Apart from that Macaura was a creditor of Canadian Sawmills Ltd. for around £19,000. At one stage after the transaction Macaura insured the timber in his own name. Some time after all the transactions took place the timber was destroyed by fire. Macaura asked the insurance company to pay him for the value of the timber which had been destroyed by the fire. In the normal course if the property is properly insured the insurance company would investigate and pay the policy holder. But one must keep in mind that at least in this type of insurance (property) their needs to be, on the part of the insured, what is called an insurable interest. In insurance law there is a principle of insurable interest. A number of policies require the insured to have an insurable interest in the property he is ensuring. Were it otherwise, then people may start insuring property that does not belong to them and in which they have no interest and insurance would become a game of chance. Interest is often an ownership interest but it need not be a direct ownership interest.

When Macaura discovered that the timber had been destroyed he made a claim against the insurance company. If one had to look at the scenario from a layman's point of view one would say that since he owned the company that owned the timber then he had direct interest. But the house of lords emphasised that for the person to have insurable interest he must be the owner of the property, or he holds the property by some trust or deposit. But there must be a direct link beteen the policy holder and the property insured. The house of lords did nto find this link as the timber belonged to the company, which is a separate person to Macaura. The HOL went on to note that he did not have any charge over the property and that he did not hold the property in his physical possession in a way that made him liable for the timber. The fact that he was also the main creditor of the company did not make any difference as in this way his interest was in the company and not the timber. What may have guided the House of Lords was quite a strong suspicion that Mr. Macaura had set the timber alight himself in order to claim insurance benefits.

Lee Vs. Lee's Air Farming Co. Ltd.

Mr. Lee had set up a company which was called lee's air farming Ltd. he was the sole owner and was also both its governing director and chief pilot. He was chief pilot as what the company did was to own an aeroplane that sprayed fertiliser and pesticide over farms. During one of the several trips he had done the pilot lost control, the plane crashed and lee died. His wife made a claim under New Zealand legislation called the workman's compensation act. In these terms the heirs of a worker could claim compensation as long as it was shown that the individual who died was a worker. The Court of appeal of new Zealand held that lee's wife could not make a claim as lee could not be considered as a worker. Very simply the court of appeal recognised that a company is a separate juridical person to the shareholders and directors but the court said that although in the normal case a company could enter into a contract with its shareholder and even with its director, in this particular case lee was not an ordinary shareholder or an ordinary director but he was the governing director. Therefore it was not possible for one person to be both the governing director and also the worker.

For there to be a contract there must be two sides. The court found it difficult to say that lee should be regarded as a worker as there must be a contract between him as a worker and the company. And the court asked how Lee could be the worker and governing director at the same time.

On appeal to the Privy Council a different approach was taken. It said that there can be no doubt that the company is a separate legal person. It also noted that it had been accepted for a long time that a company could enter into a contract with its shareholders and directors. But there was also no doubt that lee did perform a role as a pilot and significantly received a salary as the company's pilot. Therefore there was no doubt that lee was functioning as what one would expect a normal worker to function as. And the Privy Council had to then reconcile the difficulty of having one person acting both as the governing director and also as the employee. They explained that if one keeps in mind that the company was a separate person and if one keeps in mind that when lee was acting as governing director he was really representing the company then there is no contradiction s when he acted as both director and employee you then have two persons. On this basis the council came to the conclusion that lee was indeed a worker and his heirs were entitled to compensation.

The Lifting Of The Corporate Veil

Separate personality is referred to as having a shield or veil that separates the company from the shareholders and directors. But the law does recognise certain exceptions to this principle of separate juridical personality. And when one or more of these exceptions are implemented one uses the phrase that the corporate veil has been pierced or lifted.

Even though a company is a separate person to the shareholders and there is a veil of incorporation that separated the company from the shareholders this does not mean that as a rule the shareholders are completely hidden from view. Thus it does not mean that their identities are not known.

There are a number of exceptions where in reality there really is an exception to the principle of separate juridical personality. Where there is this exception the legislation or the courts will look through the veil of the corporation to usually impose liability o the shareholders, possibly the directors or to somehow alter the normal consequences of separate juridical personality.

An important distinction must be made between the statutory inroads and the judicial inroads to the principle of separate personality. When we say inroads we talk of exceptions. These inroads to juridical personality are the basis of the lifting of the corporate veil.

Statutory Inroads

Every company should have at least two shareholders. It is true that in certain situations the law allows a single member company to be formed. But in the normal course a company must have at least 2 shareholders. What happens if for some reason the number of members falls below 2? What happens is an exception to the principle of separate personality as long as the requirements are met.

As long as that scenario continues for not more than 6 months there is no repercussion whatsoever. If however the number of members remains below 2 for more than 6 months then you come to the first possible repercussion which is that the company may be dissolved and be put into liquidation. An application may be made in court (article 214) by anyone who is interested to dissolve the company. But the court is obliged if such a case comes before it to allow the company a period of one month within which the default can be rectified, by reintroducing a second shareholder. Simply because a company has ended up with a single shareholder and simply because judicial action ahs been taken does not necessarily mean that the company will be dissolved.

The law goes on to say that if a company ends up with less than two members then any person who is the sole shareholder of the company will become personally and jointly and severally liable with the company for all the debts contracted by the company from the point in time that the company ceased to have 2 shareholders. There is a real risk that if a person ends up as the sole shareholder he will become liable for any obligations undertaken by the company once the first six months are over. The person must know that he actually was the sole shareholder as it is theoretically possible that he might not be aware of this.

30/11/09

Wrongful And Fraudulent Trading

Wrongful trading did not exist in our provisions until the Companies Act 1995. Our companies act 1995 borrowed heavily from the UK provisions. The position in the UK is very briefly the following. In the 1920s it contained a provision on fraudulent trading however only in the 1980s a provision on wrongful trading was included in English Law with the Insolvency Act of 1986. Over the decades that the fraudulent trading position was on the statute book, very few cases were prosecuted for fraudulent trading and it was therefore recommended by a committee that a provision should be inserted inthe statute book to remedy as it were the deficiencies that there were in the fraudulent trading provisions. When the Maltese legislator in the 1990s started drafting the Companies Act, the drafters had a very close look at the statutory provisions in English law and thought it would be a good idea to introduce in Maltese law provisions that were closely modelled on the English provisions on the fraudulent and wrongful trading provisions.

The Fraudulent Trading Position

The wording of article 315 is roughly as follows:

If in the course of the winding up of a company it appears that the business of the company has been carried on with the intent of defrauding creditors of the company or creditors of any other person or for any fraudulent purpose then the court may if it thinks it proper to do so on the application of the official receiver or the liquidator or a creditor or a member hold any person who participates in the fraud to be personally liable without any limitation of liability for all or any of the debts or other obligations of the company as the court may direct.

It is important to keep in mind that this provision gives rise not only to a civil remedy but also to a criminal sanction, in other words fraudulent trading is not just a civil wrong but also gives rise to a criminal offence. The standard of proof required to show that there is fraud would be higher than that required for other allegations as article 315 constitutes a criminal offence and the standard of proof required for criminal offences is higher than that of civil obligations.

  1. The entity involved must be a company

  2. There must be a company that is in the course of winding up - it must be already dissolved. If fraud is committed and the company does not go into liquidation, then the remedy of fraudulent trading cannot be used. It does not however mean that the fraud must be committed during the liquidation process. It could be committed and usually is committed during the normal cause of the company's existence.

Article 315: Any Person Who Has Committed A Fraud.

In other words the persons potentially liable are not just the directors or managers of the company but potentially even persons who have assisted in the fraud being committed. The likelihood is that it would be the directors or the managers of the company but not necessarily the case.

Another important point is that the way that the wording is drafted is so wide that the fraud need not be committed against the company itself but it could be committed against the creditors of the company or indeed against any other person.

Who can bring about an action for fraudulent trading?

  1. Liquidator

  2. Creditor

  3. Member

The court has a discretion whether to impose liability. The law gives a disctretion. If the court does exercise such discretion, then there are some important features to keep in mind.

  • Liability is imposed purposely without any limitation of liability - the defendant will have to pay whatever the court says that he has to pay

  • The defendant is liable for the debts and liabilities of the company. He is notionally, not only liable for the damage that he has committed by his fraudulent actions but he is liable for any liabilities of the company.

There is a wide ranging liability for 2 reasons:

  • The law may want to be punitive in its effect

  • It may be difficult for the court to actually identify the persons who suffer as a result of the fraud and therefore the court is being given the discretion to impose liability on the wrongdoer.

The difficulty that the UK courts had experiences as it were bringing to justice directors and managers who involved themselves in fraudulent activity meant that the provisions on fraudulent trading in English law were pretty much a dead letter. In the 80s a committee called the core committee was appointed to review the whole of insolvency law and one of the areas which was looked at in quite some detail was the fraudulent trading provision. Certain reckless activity which did not involve fraud but still caused damage were not covered by the law. What the court committee suggested was that a new remedy, the wrongful trading remedy, be introduced in the law where certain reckless activity which did not involve fraud would be covered by personal liability. In the insolvency act of 1986 (UK) a wrongful trading provision was included. A decade later a provision was included in our Maltese law.

The constituent elements of wrongful trading:

  • There must be a company

  • The company must also be dissolved (it must be in a state of liquidation)

  • The company must be insolvent - if the company is not insolvent, the wrongful trading provision does not apply.

In fraudulent trading the requirement that a company is insolvent is not a requirement and thus it can occur when a company is solvent.

Another very important difference is that wile the fraudulent provision will punish and will hold responsible any person, whether manager, director or 3rd party, in the case of wrongful trading the person who is liable under the provision must be a director or a shadow director - if it is just a manager, employee, or 3rd party no liability can attach.

In what circumstances can a director be liable for wrongful trading?

There are 2 requirements:

  1. The director know or ought to have known that the company could not avoid going into insolvent liquidation - for there to be wrongful trading there must be a director who before the company goes into liquidation, knew that a company was heading towards liquidation in a context of insolvency or ought to have known that a company was going through insolvent liquidation.

  2. This first requirement alone will not bring liability on the director cause then it must be shown that the director concerned failed to take every reasonable step to minimise the potential loss to the creditors. In other words it doesn't mean that every director of every company that goes into insolvent liquidation is going to be held liable under the wrongful trading provisions. The court will need to look at all the facts of the case in order to determine that the director not only knew that the company was going into liquidation and that he had failed to what was necessary to minimise the damages to the creditors

Simply because the directors took wrong decisions and failed to keep up with the competition or failed to produce products that would be sold, are not instance which will attach liability to the directors but if the directors realise that a company is heading towards insolvency did not do what was necessary, from that stage onwards they would start exposing themselves to the risk of liability.

Whereas in the case of fraudulent trading the law says that the wrongdoer is personally bound of the liabilities of the company, in wrongful trading, the director will have to contribute to the assets of the company.

The law talks of the standards that a director has to be judged by, and the law sets out two standards what is called an objective standard and a subjective standard. The objective standard is that you have to check the behaviour of the director against the skill knowledge and experience against a normal director performing functions in a similar type of company. You also have to judge subjectively, that is, you have to look at his own knowledge skill and experience. This dual test gives rise to a difficulty, because the law says that you have to judge the individual director by both standards.

The difficulty is this. Imagine that the objective standard is relatively high but the subjective standard is relatively low for that director.

What is a shadow director? It is a person in accordance with whose instructions the directors of a company are accustomed to act.

1/12/09

So far it is evident to us that each company is a person separate from its shareholders, the same principal continues to hold good even if a company has as a shareholder another company, indeed even if the shareholder owns all the shares in the second company. They are still two separate legal entities.

At law there is no doubt that within each company within a group of companies is a separate juridical person. As a rule the corporate group itself does not constitute a separate person. It is not an additional person in its own right. If one therefore had to apply the principle of separate juridical personality to each company within the group there would be a number of repercussions. Two of them would relate to audited accounts and taxation.

In relation to audited accounts each one would have to prepare separate audited accounts. In relation to taxation you would have to see each company as a separate profit or loss centre independently of the other companies with the group. This is so only if each company is considered as a separate person. But the law considers that where there is a corporate group there is in relation to both audited accounts and taxation an alteration to the normal consequences of separate juridical personality.

Audited Accounts

In the case of audited accounts there is the notion of consolidated or group accounts. Certain sections of the companies act require that where a company is a parent company then it has to prepare a consolidated or group account. The general idea is that the parent company will have to consolidate within its own accounts the accounts of its various shareholders. The reason for this is that if one has to have a look at consolidated accounts rather than individual ones will get a clearer picture of te financial position of the group as a whole. This is useful both to investors and also to creditors, especially of the holding company. This idea of consolidated accounts can be regarded as an exception to the principle of separate juridical personality and an illustration of the lifting of the corporate veil.

Taxation

If one had to consider each company as a separate person to the other even for tax purposes, what could happen? What could happen could be this: Companies making a loss will not be taxed and separate companies making a profit are taxed even if had they been taken together it would have been a cumulative loss and they would not have been taxed. Tax law in the case of corporate groups makes an exception to the principle of separate personality because there is the notion of surrender of losses within the group so this loss can be offset against profits of any other companies within the group so that tax would be on the net amount.

Judicial Inroads To Separate Juridical Personality

These are the types of cases the courts have developed as an exception to separate juridical personality. Auditors have tried to categorise these and would refer to such situations as taxation, trusts etc. Here we will look at agency and fraud (improper conduct). Fraud or improper conduct is more commonly found.

Agency In The Context Of The Lifting Of The Corporate Veil

Agency arises when one person acts for and on behalf of another person. The agent is acting on behalf of the principal. Our law actually uses the term agency with the notion of mandate. In contract when a person acts on behalf of another person it is that same person who is contractually bound. Companies are separate persons to shareholder, and they act in their own name and on the own behalf by means of a director. The same notion also arises even if the shareholder is a holding company, as companies transact business on their own behalf. It is however possible for the subsidiary to act as an agent of the holding company, but for it to be regarded as an agent, the circumstances must clearly point to its acting as an agent. One cannot infer a principal-agency relationship simply because there is a holding-subsidiary relationship.

There is however a case as decided by the court that illustrates difficulties in this area.

Smith, Stone and Knight Ltd. Vs Birmingham Corporation

Here the plaintiff company acquired a particular business which was incorporated in a company which became a subsidiary of Smith, Stone and Knight. The subsidiary carried on its business from a particular premises. And the Birmingham Local Council expropriated the premises. A claim was made by Smith, Stone and Knight for compensation arising out of the expropriation of the premises. The defendant company argued that the proper plaintiff ought not to have been Smith, Stone and Knight but it ought to have been the subsidiary. If one had to consider, the two companies as separate persons and if one had to consider that the business was actually carried out by the subsidiary in its own name then the claim really should have been made by the subsidiary. But the courts said that the case had been rightly instituted. The court observed that the capital came from the holding company and that the profits were regarded to belong to the holding company and that decisions were being taken by the holding company. The court therefore concluded that the subsidiary was not really acting in its own name but it was acting as the agent or the holding company. Therefore it was the holding company that really owned the business and was entitled to claim compensation.

Fraud or Improper Conduct

Here there is quite an element of consistency amongst judgments. The court will not countenance any use or abuse of the principle of separate juridical personality in order to perpetrate a fraud or to condone what the courts view as improper conduct.

Gilford Motor Company Vs Horne CA UK 1993

In this case there were two defendants Mr Horne and a company called J.M Horne and company ltd. Mr Horne was originally a managing director of the plaintiff company (Gilford). Included within his contract of service with the plaintiff company there was a clause which said that if his contract of service with the company is terminated then for a period of time he was prohibited from soliciting customers of the company. In the event what happened was that he left the company and set up his own business and also started approaching customers of Gilford. He took legal advice and was told that he should set up a company (mentioned) and that company was set up with his wife and employee as the shareholders and directors. And that company proceeddd to solicit customers of Gilford Company Ltd. Gilford Motor Company Ltd realised and filed injunction proceedings against both Horne and the company. This requested that they be prohibited from approaching Gilford customers. Mr Horne argued that the clause binding him form soliciting companies was restrictive of the principle of freedom of trade and was therefore contrary to public policy and thus unenforceable. The court disagreed. The second argument of Horne was that he did not own or have any shares in the Horne company... But the court looked behind this and examined evidence including the fact that Mr Horne's wife was not in any way actually involved in the business. Again the employee was not involved in the business. Other evidence was also tendered that when they did business with the company the person who was managing the company was actually Mr Horne. Thus the courts found in favour of Gilford Company and allowed the injunctions. Therefore the court considered Horne and the company as a single person.

Dr Jose Herrera Nominee Vs Tancred Tabone Noe (CA 1992)

At one stage there were two companies. One of them was Forestals Appliances LTD and the other Forestals Ltd. Both these companies were owned by two groups of families, the German and Tabone Families. For reasons that aren't evident from the judgment itself decided to split the business up and one family to take one side and the other taking the other side. The agreement was the following in Forestals Appliance Ltd the German family would transfer their shares to the Tabone Family through Salvu. R Tabone (Successors) Ltd. In Forestals Ltd the inverse happened where Tabone transferred its shares to German. The end result being as FA Ltd ended up in Tabone and F Ltd ended up in German. Part of the contract included an obligation on both sides (families) not to engage employees from the other side for a certain period. After some time after this transaction was completed the Tabone family set up a subsidiary known as Floorcare Services Ltd and this proceeded to engage an employee from the German side. German instituted judicial proceedings by Forestals Ltd against Salvu R Tabone Ltd and Floorcare Services Ltd. The claim by the plaintiffs was that there was a breach of the agreement and a liability to pay a penalty mentioned int he agreement of the breach. The arguments raised by the defendants were that Salvu R Tabone ltd said that it did not breach the contractual conditions as it did not engage any employee from Forestals. If at all it was a separate company which did this. The second defendant argued that it was not a party to the original contract and therefore said that it cannot be held liable because only contracting parties can be held liable for breach of contract. In the first court the arguments by the defendants were accepted but on Appeal it rejected these arguments completely. COA rules a pretty simple argument it did not even refer to English judgments but took a more incisive route. The COA referred to article 993 of the Civil Code which is the provision inter aria says that contracts have to be performed in good faith and that contracts are binding not only to the matters stated there in but also to law and custom in regard to such agreements.