Corporate group structure

Introduction

There is no compact and universal definition of the company. On the other hand, a company can be described for legal purposes as an independent person having an existence separate from that of the human beings who own, manage and serve. The company neither stops existing with the change of the members or managers nor dies with the death of the formers of the company. It is this concept which allows limited liability for shareholders as the debts belong to the legal entity of the company and not to the shareholders in that company.

At the same time the courts have to maintain a watchful eye on any misuse of the corporate form. Lifting the veil refers to the possibility of looking behind the company‘s separate personality to make the members liable, as an exception to the rule that they are normally shielded by the corporate shell.

“The question specifically asks that there is no merit in imposing a more integrated regime on groups of companies which would take away flexibility and strike at the limited liability basis of the company”. It also asks that there is “no evidence of abuse of corporate status by parent companies”. In order to assess the validity of the statement, we need to critically analysis the concept of corporate group structure. In this essay we will firstly define the company and its functions. Secondly we assess the concept of the limited liability which is the essential characteristic of the company; thirdly we explain the corporate personality and corporate group structure and the concept of the veil lifting. In order to discuss the abuse of the corporate status there is a need to define the parent and subsidiary companies, discuss the special relationship of parent to its subsidiary and any potential liability of a parent for the acts of the subsidiary.

The institution of limited liability for companies has typically been regarded as one of the most important innovations of the late industrial revolution period. This view was appropriately expressed by Professor N.M. Butler, who stated: "The limited liability corporation is the greatest single discovery of modern times... Even steam and electricity are less important than the limited liability company". Commentators generally consider that limited liability has been proved a vital instrument in the attainment of economic growth. However, recent analysis of the limited liability principle has questioned its potential.

Company

Definition

The company can be defined as the legal recognition by the state of a connected group of individuals who pool together their capital to pursue some commonly agreed aim. The formation of a company is governed by the Companies Act 2006 (CA 2006), ss 715.

Background

Functions

The company is regarded as a wealth creation vehicle in the modern world. The company has the following functions:

Limited Liability Theory Of The Company

Exceptions To Limited Liability

Essential Characteristics Of Incorporation

Separate Legal Entity

When a company is incorporated it is treated as a separate legal entity distinct from its promoters, directors, members, and employees; and hence the concept of the corporate veil, separating those parties from the corporate body, has arisen. John P. Lowry has expresses that the principle of “corporate personality” has long been regarded as a corner stone of English law. In Salomon v. Salomon & Co. Lt., Lord Macnaghten expressed the principle in the following unequivocal terms:

“The company is at law a different person altogether from the subscribers to the memorandum; and though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or the trustee for them”.

Organs Of Control

The two main organs of the company are as follow:

Board Of Directors

Board of Directors is a key organ of the company. Directors usually define and execute the general policy of the company. They sometimes referred to as the mind of the company and the body through which the company acts. The directors can delegate its powers or its part to other directors or any members and authorizes them to act in order to pursue the objectives of the company. In doing so, the directors ultimately retain the responsibility for monitoring the delegated powers. This is, therefore, pro-active delegation is which directors owe a duty to act with due care, skill and diligence.

Shareholders

The second and the principal organ of the company is Annual General Meeting (AGM) in which all the shareholders or members who have right to vote are included. The shareholders could be a natural or legal person who has invested in the company and in return has taken shares. They also have right to vote and participate in the affairs of the company.

Corporate Personality:

Separate Legal Entity

The company is regarded as a separate legal entity which is separate from the persons who formed it. The company can be formed under s 7 of Companies Act 2006 (CA 2006).

Individual Company

Group Of Companies

  1. Lifting The Corporate Veil:

Common Law Situation

Modern Law Situation

Courts Struggle In Lifting The Veil

  1. Corporate Group Structure:

Parent Company

Subsidiary Companies

Abuse Of Corporate Structure By The Parent

  1. Limited Liability And Veil Lifting:

Criminal Liability I-E Corporate Manslaughter

Veil Will Not Be Lifted In The Interest Of Justice

  1. Abuse Of Corporate Status:

  2. Liability Of Parents For The Acts Of The Subsidiaries:

  3. Problems In Imposing Integrated Reginme On Group Of Companies:

It Would Take Away Flexibility.

In order to critically evaluate the concept of the corporate group structure we have to answer the following questions:

a) The concept of corporate personality;

b) The key effects of corporate legal personality in relation to liability;

c) The difficulties the courts face when having to decide whether to maintain or disregard the veil of incorporation;

d) The situations where legislation will allow the veil of incorporation to be lifted;

e) The complexity posed by group structures.

Self-Test Questions

1. What do we mean by ‗separate legal personality‘?

2. Will the death of a shareholder cause the dissolution of a company?

3. What is meant by perpetual succession?

4. What is the most important consequence of incorporation for a company?

5. What is the veil of incorporation?

6. Describe the situations where legislation will allow the veil of incorporation to be lifted?

7. Explain the main categories of veil lifting applied by the courts?

8. Explain the difference between section 213 and 214 of the Insolvency Act 1986?

9. What is a ‗group entity‘?

10. What was decided in Adams V Cape Industries plc?

Bibliography

Mayson, French and Ryan, Company Law, Chapter 5 pages 118-153

Dignam and Lowry, Company Law, Chapter 2 pages 14-51

Davies, Chapter 8, 9

Sealy, Cases and Materials on Company Law, Chapter 2, pages 31-95

Articles

Ottolenghi, S. [1990] ‗From peeping behind the corporate veil to ignoring it completely‘, MLR 338

Gallagher and Ziegler ‗Lifting the Corporate Veil in the Pursuit of Justice‘ (1990) JBL 292

Rixon, F.G. [1986] ‗Lifting the veil between holding and subsidiary companies‘, 102 LQR 415

Samuels, A, ‗Lifting the veil‘, [1964] JBL 107

Png ` Lifting the Veil of Incorporation: Creasey V Breachwood Motors: A Right Decision with the Wrong Reasons‘ [1999] Co Law 122

Rixon, ‗Lifting the veil between holding and subsidiary companies‘ (1986) 102 LQR 415

Tham C ‗Piercing the corporate veil: searching for the appropriate choice of law rules‘, [2007]

LMCLQ 22

Muchlinski, P.T.` Holding multinationals to account: recent developments in English litigation and the Company Law Review ‗, [ 2002] Co Law 168

Case Law

Corporate Personality

Salomon v Salomon and Co. [1897] AC 22(HOL)

Broderip v Salomon [1895] 2 Ch 323

The Consequence Of Separate Personality

Macaura v Northern Assurance Co [1925] AC 619-members have no interest in the company‘s property

Re Lewis‘s will trusts [1985]1 WLR 102

Lee v Lee‘s Air farming [1961] AC 12A company may contract with its members

Acatos and Hutcheson plc v Watson [1995] 1 BCLC 218

Re Noel Redman Holdings Pty Ltd [1967] Qdr 561a company survives the death of its members

Foss V Harbottle [1843} 67 ER 189 -members of company cannot sue on its behalf

Veil Lifting By The Courts

 Sham or pretence; evading enforcement of existing rights

Gilford Motor Company v Horne [1933] Ch 935

Jones v Lipman [1962] 1 WLR 832

Trustor AB V Smallbone

Re A Company [1985] 1BCC 99421 Façade

Re Bugle Press [1961] Ch 270

Continental Tyre and Rubber Co (Great Britain) Ltd V Daimler Co Ltd [1916] 2 AC 307

Means to perpetuate fraud

Re Darby, ex p Brougham [1911] 1KB 95

Aveling Barford Ltd V Perion Ltd [1989} BCLC 626 Agency relationship

RE FG Films Ltd [1953] 1 WLR 483

Smith v Stone and Knight Ltd v Secretary of State for transport [1994] 2 All ER 116

Group companies

DHN v Tower Hamlets London Borough Council [1976] 3 All ER 642

Woolfson V Strathclyde

Adams v Cape Industries plc [1991]1 All ER 929

Creasey V Breachwood Motors Ltd [1992] BCC 638

Ord v Belhaven Pubs Ltd [1998] BCC 486

Yukong Lines Ltd of Korea v Rendsburg Investments Corporation (No 2) [1998] BCC 870; [1998] 4 All ER 82

Ratiu V Conway [2006] 1 ALL ER 571

Samengo Turner V J& H Marsh & McLennan (Services) Ltd [2007] 2 All ER (Comm) 813

Beckett Investment Management Group Ltd V Hall [2007] EWCA Civ 613

Raja V Van Hoogsstraten [2007] The Times August 23 Corporate veil lifting in tort cases

Lubbe and Others V Cape Industries plc [2000]1 Lloyd‘s Rep 139

Connelly V RTZ Corp Plc ( No 2) [ 1997] 4 All ER 335

Williams V National Life Health Foods Ltd [1998] 2 All ER 577

Legislative Intervention

Section 213 - 215 Insolvency Acts 1986

Re Patrick and Lyons Ltd [1993]

Re Produce Marketing Consortium Ltd

Re Todd Ltd [1990] BCLC 454

Section 399 CA 2006

Section 409 CA 2006