5/8/2011 Company Law I Lecture3:Nature and Types of Companies 1 Comparison among Sold Traders,Partnerships and Companies Key Aspects Proprietors Partnerships Companies Nature in Law and Economics Sense Governing Law Key Players Relationship among Key Players Key Economic (Legal) Problem Timeline(formation, operation,wind-up,etc) 2
5/8/2011 1 Company Law I Lecture3: Nature and Types of Companies 1 Comparison among Sold Traders, Partnerships and Companies Key Aspects Proprietors Partnerships Companies Nature in Law and Economics Sense Governing Law Key Players Relationship among Key Players Key Economic (Legal) Problem Timeline (formation, operation, wind-up, etc) 2
5/8/2011 Comparison between partnerships and companies Why do you choose to establish companies instead of partnerships? Advantages(disadvantages)of companies over other business vehicles (i.e.,sole trader,and partnership): 3 Companies ·Sources of law: Companies Ordinance(Cap 32). Common law:principles of common law and equity are applicable. 2
5/8/2011 2 Comparison between partnerships and companies • Why do you choose to establish companies instead of partnerships? • Advantages (disadvantages) of companies over other business vehicles (i.e., sole trader, and partnership): 3 Companies • Sources of law: Companies Ordinance (Cap 32). Common law: principles of common law and equity are applicable. 4
5/8/2011 Companies Meaning of“company'" Commercial/general usage of the term s 2 of the Companies Ordinance (Cap 32) 5 Establishment- incorporation by registration Incorporated by one or more persons signing the memorandum of association and complying with registration requirements under the Companies Ordinance:s 4(1). Registration and issue of certificate of incorporation: see ss14A,15,16. Note amendments made by Companies (Amendment) Ordinance 2004 Sch2 (incorporation form etc),effective 11July2008. Company has a name:see ss20-22C. Use of shelf companies. 6 3
5/8/2011 3 Companies •Meaning of “company” Commercial/general usage of the term s 2 of the Companies Ordinance (Cap 32) 5 Establishment – incorporation by registration • Incorporated by one or more persons signing the memorandum of association and complying with registration requirements under the Companies Ordinance: s 4(1). • Registration and issue of certificate of incorporation: see ss14A, 15, 16. Note amendments made by Companies (Amendment) Ordinance 2004 Sch2 (incorporation form etc), effective 11 July 2008. • Company has a name: see ss20-22C. • Use of shelf companies. 6
5/8/2011 Basic company structure ·The owners of the company are the shareholders Shareholders (members). Directors ·Directors manage or oversee the management of the Managers company. Corporate Personality Doctrine Effect of registration:company exists as a body corporate (s 16(2)). The company is a legal entity different and distinct from its members(separate entity principle). Even if one shareholder has all shares. 8 4
5/8/2011 4 Basic company structure • The owners of the company are the shareholders (members). • Directors manage or oversee the management of the company. 7 Corporate Personality Doctrine • Effect of registration: company exists as a body corporate (s 16(2)). • The company is a legal entity different and distinct from its members (separate entity principle). • Even if one shareholder has all shares. 8
5/8/2011 Salomon v Salomon Co Ltd [1897]AC 22 (House of Lords) Salomon was a sole proprietor of his shoemaker business. Business was later incorporated. 7 subscribers:S and his family members. Assets of business transferred to co.In return,S received cash shares secured debentures. Debentures reissued to Broderip,who provided a further loan to co. Co was liquidated and Broderip was repaid (but not in full). Unsecured trade creditors were unpaid. Issue:could the liquidator pursue S to satisfy claims of the other creditors? Key Issues Court of Appeal House of Lords (Broderipv Salomon) (Salomonv Salomon) Overview (judicial position) a consensus view of the time a radical departure Purpose(true intention and meaning)of CA 1862 Nature of Salomon Co Ltd (the whole transaction) Nature of incorporation(fraud)? Independence of directors The relationship between members (characteristics of these members defined in CA?) (Source of)Salomon's liability How to interpret CA 1862?(what is the proper interpretative approach?) How to protect creditor?Legislative or judicial approach? How to apply company law? 10 5
5/8/2011 5 Salomon v Salomon & Co Ltd [1897] AC 22 (House of Lords) • Salomon was a sole proprietor of his shoemaker business. • Business was later incorporated. • 7 subscribers: S and his family members. • Assets of business transferred to co. In return, S received cash + shares + secured debentures. • Debentures reissued to Broderip, who provided a further loan to co. • Co was liquidated and Broderip was repaid (but not in full). • Unsecured trade creditors were unpaid. • Issue: could the liquidator pursue S to satisfy claims of the other creditors? 9 10 Key Issues Court of Appeal (Broderipv Salomon) House of Lords (Salomonv Salomon) Overview (judicial position) a consensus view of the time a radical departure Purpose (true intention and meaning) of CA 1862 Nature of Salomon Co Ltd (the whole transaction) Nature of incorporation (fraud)? Independence of directors The relationship between members (characteristics of these members defined in CA?) (Source of) Salomon’s liability How to interpret CA 1862? (what is the proper interpretative approach?) How to protect creditor? Legislative or judicial approach? How to apply company law?
5/8/2011 Salomon v Salomon Co Ltd Questions: What was the outcome of the case? What outcome do you think would be just? What's the stark difference of opinion between the House of Lords and the Court of Appeal in Salomon? Was Lord Macnaghten fair to say that unscured creditors "have only themselves to blame for their misfortures"? Is Salomon a "calamitous decision"?[O Kahn-Freund (1944)7 MLR 54] 11 Salomon v Salomon Co Ltd Questions: Consider what could have been the legislature's intention in requiring a minimum of 7 members? Between the Court of Appeal and the House of Lords,which is trying to be more faithful to the purpose or the spirit of the CA 1862?Should judges be concerned with legislative purpose? Which is more sympathetic (or whose approach is more helpful)to creditors? 6
5/8/2011 6 Salomon v Salomon & Co Ltd Questions: What was the outcome of the case? What outcome do you think would be just? What’s the stark difference of opinion between the House of Lords and the Court of Appeal in Salomon? Was Lord Macnaghten fair to say that unscured creditors “have only themselves to blame for their misfortures”? Is Salomon a “calamitous decision”? [O Kahn-Freund (1944) 7 MLR 54] 11 Salomon v Salomon & Co Ltd Questions: Consider what could have been the legislature’s intention in requiring a minimum of 7 members? Between the Court of Appeal and the House of Lords, which is trying to be more faithful to the purpose or the spirit of the CA 1862? Should judges be concerned with legislative purpose? Which is more sympathetic (or whose approach is more helpful) to creditors? 12
5/8/2011 Salomon v Salomon Co Ltd Questions: After the House of Lords decision is it possible to question the real existence of a company or to hold its shareholders liable for a company's debts? Will the answer be different if the creditors who lost money were not business creditors but individuals who had been seriously injured by the serious life-threatening illness caused by the chemicals used in the boost- production? Do you agree with Lord Halsbury's assertion that the Court of Appeal went beyond the ambit of their role as judges by'inserting into [an]Act of Parliament limitations which are not to be found there'? Do you agree with Lord Halsbury when he says that 'the learned judges appear to me not to have been absolutely certain in their own minds whether to treat the company as a real thing or not'? 13 Macaura v Northern Assurance Co [1925]AC 619 (House of Lords) M owned a timber estate and sold it to Irish Canadian Sawmills Ltd in consideration of the allotment to him of 42,000 fully paid f1 shares. M was also an unsecured creditor of the sawmill co for an amount of ￡19,000. M insured timber on the land in his own name after the sale,covering the timber against fire. Forest on the land burned. M claimed insurance proceeds. Court held:M not entitled to claim. ·Why not? ·Lord Sumner: 14 >
5/8/2011 7 Salomon v Salomon & Co Ltd Questions: After the House of Lords decision is it possible to question the real existence of a company or to hold its shareholders liable for a company’s debts? Will the answer be different if the creditors who lost money were not business creditors but individuals who had been seriously injured by the serious life-threatening illness caused by the chemicals used in the boostproduction? Do you agree with Lord Halsbury’s assertion that the Court of Appeal went beyond the ambit of their role as judges by ‘inserting into [an] Act of Parliament limitations which are not to be found there’? Do you agree with Lord Halsbury when he says that ‘the learned judges appear to me not to have been absolutely certain in their own minds whether to treat the company as a real thing or not’? 13 Macaura v Northern Assurance Co [1925] AC 619 (House of Lords) • M owned a timber estate and sold it to Irish Canadian Sawmills Ltd in consideration of the allotment to him of 42,000 fully paid £1 shares. • M was also an unsecured creditor of the sawmill co for an amount of £19,000. • M insured timber on the land in his own name after the sale, covering the timber against fire. • Forest on the land burned. • M claimed insurance proceeds. • Court held: M not entitled to claim. • Why not? • Lord Sumner: 14
5/8/2011 Macaura v Northern Assurance Co Insurance law principle:insured must have insurable interest in the property insured. Company law principle(separate legal entity): M,as shareholder,did not have any proprietary interest in the timber (and hence no insurable interest) not as a creditor either Co owned the timber Contract law principle:co did not enter into any insurance contract. 15 Lee v Lee's Air Farming Ltd [1961]AC 12 (Privy Council) Lee owned 2,999 of 3,000 shares in C0. ·Sole director of co. Salaried employee of co. Killed while flying for work. Could Lee's widow claim compensation under the New Zealand Workers'Compensation Act? Held:yes.Lee was an employee of the co (a separate entity). 16 8
5/8/2011 8 Macaura v Northern Assurance Co • Insurance law principle: insured must have insurable interest in the property insured. • Company law principle (separate legal entity): M, as shareholder, did not have any proprietary interest in the timber (and hence no insurable interest) not as a creditor either Co owned the timber • Contract law principle: co did not enter into any insurance contract. 15 Lee v Lee’s Air Farming Ltd [1961] AC 12 (Privy Council) • Lee owned 2,999 of 3,000 shares in co. • Sole director of co. • Salaried employee of co. • Killed while flying for work. • Could Lee’s widow claim compensation under the New Zealand Workers’ Compensation Act? • Held: yes. Lee was an employee of the co (a separate entity). 16
5/8/2011 Lee v Lee's Air Farming Ltd Lee acting for and in relation to co in various capacities PC:there is a valid service contract between Lee and co What is the similarity between 么 Salomon and Lee? Established doctrine:a company is a person in law 17 Separate entity and limited liability ·Two doctrines -Relationship between the two Reasons for the concept of separate entity Reasons for allowing limited liability 18 9
5/8/2011 9 Lee v Lee’s Air Farming Ltd • Lee acting for and in relation to co in various capacities • PC: there is a valid service contract between Lee and co • What is the similarity between Salomon and Lee? • Established doctrine: a company is a person in law 17 Separate entity and limited liability • Two doctrines - Relationship between the two • Reasons for the concept of separate entity • Reasons for allowing limited liability 18
5/8/2011 Powers of a company s SA:same capacity,rights,powers and privileges as a natural person. s 16(2):perpetual succession-existence not affected by death,incapacity or bankruptcy of members. s 17:hold land in its own name. Sue (and be sued)in its own name. Enter into contracts and commercial transactions in own name. 19 Liabilities of a company Company is itself liable on contracts. Company can commit torts (where acts of its directors/employees are attributed to the company). Company can commit certain crimes(again based on attribution of acts of directors/employees). 10
5/8/2011 10 Powers of a company • s SA: same capacity, rights, powers and privileges as a natural person. • s 16(2): perpetual succession - existence not affected by death, incapacity or bankruptcy of members. • s 17: hold land in its own name. • Sue (and be sued) in its own name. • Enter into contracts and commercial transactions in own name. 19 Liabilities of a company • Company is itself liable on contracts. • Company can commit torts (where acts of its directors/employees are attributed to the company). • Company can commit certain crimes (again based on attribution of acts of directors/employees). 20