Members of a Limited Company

A limited company is an institution created to conduct business where members of a company are protected and are not personally liable neither are their assets, but owe fiduciary duties to the company unlike sole trader and a partnership.

A company is a legal separate entity with legal entity distinct from its members as was in Salomon v Salomon. [1]

It could be argued that Jack, Jill and Sofia are shareholders; separate entities from CCUK Ltd which has its own legal entity, a good illustration is the quotation of Lord Herschell in Salomon v Salomon [2] .

Jack and Chris have set up the company following the case of Twycross v Grant [3] , similar definition was also stated in Bowen J in Whaley Bridge [4] .

Jack and Chris will be classified as promoters as they have undertaken the role of forming the company with a purpose in mind, Jack and Chris will therefore owe fiduciary duties to the company.

CCUK Ltd [5] came into existence when the certificate of incorporation was issued in January 2010, as a result, the company’s articles were not yet effective when Chris contracted with schools on behalf of the company even if, the articles may prevent him from doing so in the future, therefore prior to incorporation CCUK [6] was not bound by contracts entered into in its name or on its behalf as it was simply non-existent.

The doctrine of privity also prevents rights and liabilities which have been accumulated pre-incorporation, from being conferred or imposed on a company upon its subsequent creation [7] , however since the inception of Contracts (Third Party rights) Act [8] .

Third party can enforce contract against a company before incorporation if an express term in the contract is used meaning the schools could sue CCUK [9] and as far as agency is concerned, a person cannot be an agent of a non-existent company.

Chris may avoid personal liability if CCUK [10] after incorporation enters a new contract with the schools on similar terms [11] substituting the pre-incorporation contract.

This kind of action is known as ‘novation’ and may also be inferred by the conduct of the parties [12] .

The statute may seek to protect the schools by making Chris personally liable if after incorporation CCUK fails to enter into new contract on similar terms with the schools unless specified otherwise as provided in section 51(1) 2006 Act [13] then Chris will not be liable as was in the case of Phonogram Ltd v Lane [14] if there was express exclusion in the contract.

There is also a possibility whereby the Courts could infer ‘implied novation’ if CCUK entered into new contract with the schools which would effectively transfer the liability to CCUK as was in Bagot Pneumatic Tyre Company v Clipper Pneumatic Tyre Company. [15]

As was in the case of Newborne v Sensolid [16] , it could be argued that if Chris signed the contract as if he was the company i.e. a signature appearing above the printed company name then he may not be personally liable.

Point worth noting is that Chris was one of the parties that set up the company and it appears to have conferred some authority on Chris to enter into the contract whether Chris acted beyond the authority given would be a matter for the courts to decide.

If the courts then decided otherwise there is a possibility the liability would be transferred to CCUK, if CCUK could, however prove that Chris acted ultra vires then the full liability for the contract would remain Chris.

Jack being a promoter has a fiduciary duty to the company he promoted and has a duty to disclose any profits made out of any transactions from where profits arose as was in the case of Re Lady Forrest (Murchison) Gold Mine Ltd [17] . Jack made a profit of £300,000 [18] .

If the office premises has been purchased when Jack was not a promoter there is no requirement to disclose the profit, as a fiduciary is not owed. CCUK may keep the office premises should they wish to, but they cannot recover the profit and Jack will not be liable to account to CCUK as he has made a legitimate profit as was in the case of Re Cape Breton [19] or CCUK may decide to rescind the contract as was in the case of Erlanger v New Sombrero Phosphate Co [20] .

Assuming Jack acquired the office premises during the capacity of a promoter then he cannot retained the profit as he is not a trustee and he owes a fiduciary duty unless the profits has been disclosed and the company consents to the retention, otherwise the profits made must be disclosed to the company as a promoter.

Assuming Jack did not disclose the profit to the company, Jack would be in breach of his fiduciary duty and legal action could be taken against him as was in the case of Foss v Harbottle [21] .

Jack may be liable to CCUK for the secret profit which could be voidable as was in the case of Erlanger [22] or as was in the case of Gluckstein v Barnes [23] which supports the argument that Jack may be liable to CCUK for the same or by stating he was an agent acting on behalf of CCUK.

Rescission could take place where CCUK will return the property to Jack in return for the purchase price of £500,000, or Jack could be sued for damages to the company in the law of tort for negligence as was in the case of Jacobus Marler Estates Ltd v Marler [24] .

A subsidiary is part of a company which is separate and has power to make its own decisions.

Following the principle of ‘the veil of incorporation’ [25] there are two ways where veil could be lifted, through statute [26] and by case law as was in the case of Adams [27] which lay down three requirements – single economic unit, corporate form and Agency. There is no evidence in this scenario that STC being a subsidiary of CCUK has the same nature of business contrast to the case of DHN [28] also it could not be seen in the scenario that STC is a mere facade concealing any true facts to avoid existing legal obligations as in Gilford [29] or as in Jones [30] .

There is also no evidence in the scenario to show STC is an agent of CCUK acting within its actual authority, however assuming STC is an agent then the debt of STC will bind CCUK as was in Smith, Stone, Knight v Birmingham Cannon [31] or as was in Firestone Tyre & Rubber Co. Ltd v Lewellin [32] and to ascertain such an assumption there must evidence of an express agency agreement between the two but it would be difficult to prove through their conduct.

It is arguably that a travelling arrangements company for university student is operating against the aims of organising challenges for school children meaning the direction of both companies are completely different.

Therefore it is arguably that CCUK cannot be held liable for the debt of STC in considering that a holding company cannot be made to pay for the debts of its subsidiary as was in Re Southhard’s case. [33]

It is also arguably that STC is controlled by CCUK [34] as was in DHN v Tower Hamlets [35] where it was held the subsidiary is bound ‘hand and foot’ to the parent company and they should not be treated as separate, contrasting case was Woolfson v Strathclyde Regional Council [36] the HL [37] did not accept the issues raised in the DHN Food’s decision as subsidiaries were held to actively trading companies separately.

In the light of DHN and Woolfson’s decision it is arguably that if under DHN foods, the liability falls on CCUK as it is treated as one, but if under Woolfson’s decision, the liability will fall on STC.

Assuming CCUK is unable to settle the debt which STC incurred. It may be in the interest of STC to wind up [38] on grounds that the company cannot pay its debts. [39] This can be done voluntarily or compulsory. [40] A statutory declaration must be made by the directors within five weeks [41] . If in the course of the winding up [42] , the company appears to be trading with intent to defraud creditors or any fraudulent purpose, allowing the company to trade knowing that it cannot meet all its debts may be enough evidence of dishonest intent [43] or accepting advance payments for the supply of goods where the directors knew that there was no possibility of the goods being supplied [44] the court may declare that such persons should contribute to the company’s assets as the court think fit. [45]

when applying for a registration the company’s proposed name must be included as specified in s.9(2)(a) [46] and under s.53(a)(b) [47] , a company cannot be registered by a name considered to be offensive by the SSHD, [48] as was in Att – Gen v Lindi St Claire [49] . In s.66 [50] a company cannot be registered with a name that is the same as one appearing in index of companies House or where the differences are minor.

In some cases existence of company with names which are similar can cause great confusion, in discovering the anomaly the first company registered by the name has one remedy which is to seek redress at common law in tort of law [51] when a company deceives the public by confusion with the names to commit civil wrong of passing off an injunction would be placed on the company from the moment of its incorporation [52] .

The injunction may require the company to be wound up or to change its name as was highlighted in Hendrick v Montagu [53] or as was in Tuassaud v Tuassaud. [54]

In reference to the scenario the names Zara’s Ltd and Zara are similar as was in Reckitt’s case [55] , therefore Zara can pursue legal proceedings providing she can show that she has suffered a great loss to her company and the loss suffered is a direct result of the similar names however if Zara can show that the name was registered before the commencement of the activities on which the Zara’s Ltd relies to show goodwill then the objection will not hold as specified in S.69(4) [56] but if Zara can prove that Zara’s Ltd’s aim was to obtain money from her then the objection will hold as specified in s.69(5) [57] .

Zara would be able to obtain an injunction preventing Zara’s Ltd from trading, to change the name or wound up the company as it has caused damage to her company’s reputation [58] .

S.250 [59] defines a director and at least one director is required in a private limited company, before Andrew would become a director of CCUK, he will have to satisfy Art.78 [60] , if the model article was adopted. Assuming they drafted their own article, Art.78 [61] may not apply.

The objects of a company is the purpose of its incorporation, s.31(1) [62] states that a company’s objects are unrestricted unless specifically restricted by the articles, shareholders have rights to amend the articles by way of special resolution [63] . If the objects are altered they do not come into effect until the registrar has been notified and has noted the alteration on the register [64] .

It is arguably that if CCUK did not adopt model article at the time of the incorporation, and if CCUK wishes to extend their objects in the article [65] , it will only be by way of special resolution.

As to regards to Sofia, she has breached CCUK’s constitution, therefore s.33(1) [66] is applicable, meaning she will have to offer her shares to the remaining directors at undervalue price as was in Hickman v Kent [67] , however if Sofia offered her shares to remaining directors and they refused to buy them, they will be forced to buy the shares as was in Rayfield v Hands [68] .

Assuming this clause is not entrench in the articles, it could be entrenched by way of special resolution [69] and 21 days notice of intention with a 75 % majority vote as was in Brown [70] or in Dafen Tinplate Co Ltd v LIanley Steel [71] will be needed.

Any discrimination between the majority and minority shareholders would be sufficient to cause a resolution to fail the bonafide test [72] as was in Clemens. [73]

In relying on Sidebottom [74] ’s case, the articles can be changed, and both Jack and Jill could give notice to Sofia, instructing her to transfer her shares to specified persons [75] .

Many of the legal issues encompassing CCUK originates from the articles of association [76] .The articles deal with such matters as appointment, powers of directors, general meetings of the company, voting rights of members, transfer of shares and dividends [77] .

S.21(1) [78] provides that subject to any terms for entrenchment the members by way of special resolution can amend their articles which requires 75% majority of contracting parties against the wishes of the minor.

Furthermore, amendment of articles must exercise the votes of members to be bonafide [79] for the benefit for the benefit of the company as a whole. In Allen v Gold Reefs [80] the alterations to the articles were valid and for the benefit of the company.

A meeting is a gathering of members of a company in order to discuss the company’s affairs. According to s.301 [81] all members should be given proper notice of a meeting and of the special resolution to be validly passed.

If the company’s articles do not state otherwise then 14 days in notice is required. Further the notice according to s.283 (6) [82] the notice must state the content of the resolution and specify intention propose resolution as special resolution as was in Re Moorgate’s case [83] and according to 311(1) [84] the time, date and place of the meeting must be notified, the meeting appears to be intentional as it is arranged at a time Sofia will be away. Failure to give notice to Sofia invalidates the proceedings of the meetings as was in Musselwhite’s case [85] .

I would therefore advise both Jack and Jill that the meeting that was held in the absence of Sofia might not be valid unless it is held in a proper manner, and should no notice be issued; any decisions taken within that meeting would be void as was in Young v Ladies Imperial Club [86] and Sofia can challenge the legality of the meeting by way of Injunction as was in Cannon’s case [87] .

Further to Salomon’s principle mentioned previously regarding corporate separate entity of a company which illustrates that a company should be formed alongside the requirements of CA [88] and that all members of an incorporated company are separate from the company.

Directors may not be regarded as an employee of a company if they have a controlling interest in the shares of a company as applied in Buchan v SSHD [89] . However a director will be regarded as an employee if a written contract of employment is present.

In Lee v Lee’s Air Farming [90] it was held a controlling shareholder was an employee as there was an employment contract in force and the claim for compensation succeeded as the veil of incorporation was in place, the employee was separate from the company.

Therefore it can be concluded that if Chris is one of the CCUK’s directors, his wife cannot make a claim against the company in respect of his death. However, under the principle of Lee [91] , Chris is employed as a contract negotiator an employee of CCUK, Chris’s widow can make a potential claim against CCUK and be successful as he is seen as a separate individual from CCUK.

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