Acct 200 Week 2 Individual Assignment
LAW 200
Assignment
Sept, 8th 2013
Prepared By
Zeeshan Rahman
ID # 093 0194 530
Prepared For
Shaheen Ahmed (SHD)
Section 10
Introduction
Company Defined
According to Lord Justice Lindley, “By a company is meant association of many person who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.” (Mitra & Sen, 1956, p. 554)
A corporation under Company law or corporate law is specifically referred to as a "legal person"- as a subject of rights and duties that is …show more content…
capable of owning real property, entering into contracts, and having the ability to sue and be sued in its own name. In other words, a corporation is a juristic person that in most instances is legally treated as a person, and empowered with the attributes to own its own property, execute contracts, as well as ability to sue and be sued.
Under the eye of law, anything that is capable of rights and duties is a person and thus has a personality. Persons can be of two types under the eye of law.
1. Natural person – who are normal human beings
2. Artificial persons – are those created for the purpose of laws known as corporations or companies.
However, a company can be a public or private company and could have limited or unlimited liability. A company can be limited by shares or guarantees.
Company Limited by Shares
In company limited by shares, the personal liability of a member is limited to the face value of the share or amount unpaid on the share, whichever is lower.
Company Limited by Guarantee
In these companies, the personal liability is limited by a pre-decided nominal amount. The guaranteed amount is fixed by the members and specified in the memorandum of association, which they respectively undertake to pay, in the event of the winding up of the company. The guaranteed amount can be called upon by the company only at the time of winding up, if the liabilities exceed its assets.
Unlimited Company
In this case the liability of the shareholder is unlimited, as in partnership firms. Its members are liable to contribute to the debts of the company in proportion of their respective interests.
Nature of Corporate Company
After a company registers or incorporates; the incorporated company finds two legal effects.
1. It creates a legal person
2. That legal person has perpetual succession.
Under Section 24 (2) of the Companies Act – 1994, when a Company is registered is becomes a corporate large entity distinct from its member. So a company is an independent corporate existence; as soon as it is registered it becomes an individual with all legal rights, duties and liabilities. It is the foremost feature of a company.
Directors
Every company runs by a person not by himself. The person that mainly runs the company is called the directors. According to section90 (1), every public company must have at least three directors and every private company shall have at least two directors.
It is a well-established principle that directors are the agents of the company. Where the directors contact in the name of the company and on behalf of the company, it is the company which is liable on it, not the directors personality as in Ferguson vs. Wilson- 1866, “ The company has no person; it can act only through directors, merely the ordinary case of principal and agent.”
Directors are always considered to be trustees of the property or assets of the company, which comes to their hand and which is actually under their control. They are to make good of moneys which they misapplied as if they were trustees. Again in the case of exercising their powers, they are bound to act like a trustee for the benefit of the company only.
Shareholders are the actual owner of the company. But when a company is formed and registered in the stock exchange under the company Act- 1994 it becomes a separate legal entity or personality. They everything (ownership and liabilities) goes under the name of the company. No one is liable for any kind of act done by the company. It is totally different entity. On the other hand directors are in the duty of managing the corporation. These directors may be form the shareholders or they can be employed as well. We can say the directors as employee of the corporation. They cannot be treated as agent or trustee of the company.
SALOMON V SALOMON & CO [1897]
In this case, Salomon was a shoe manufacturer.
He incorporated a company named Salomon and Co. Ltd. He took over the entire business of a running concern. Salomon and the seven subscribers to the memorandum were he and his family members. Salomon and his two sons were the Directors of the Company. The business of the company was transferred for £30000. Salomon took 20000 share of £1 each and debentures worth 10000 in …show more content…
consideration.
The company went into liquidations, within a year.
On winding up, the unsecured creditors contended that the company was not having independent existence as Salomon was the Managing Director of the company and the entire company was merely a sham. Their contention was that the limited firm was only a guise to conceal the real identity of the persons who own. However, it was held that Salomon and Co. Ltd. fulfilled all the requirements of the legislature. Further, it was held that the company cannot be equated with the members comprising it. The company was not the agent of Salomon. It was therefore, treated as a company, distinct and independent corporation. The trial judge made the declaration in favor of the company. Salomon then filed an appeal at the Court of Appeal. The Court of Appeal agreed with the trial judges and dismissed the appeal. Salomon appealed to the house of lord and then the order was ultimately reserved in order of Salomon.
Verdict court of Appeal
The Court of Appeal also ruled against Mr. Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability. When question arose about whether the debenture holders or the other creditors got higher priority on the assets, the decision was against the debenture
holders.
Verdict of the Lords
The House of Lords unanimously changed this decision, rejecting the arguments from agency and fraud. Lord McNaughton finally concluded that the company is a separate individual from its subscribers to the memorandum and although the business remains same as before, the company is not in law the agent or trustees of the subscribers.
Importance/Significance in Company Law
The rule in the Salomon case that upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders has continued till these days to be the law in the western country courts, or common law jurisdictions. The case is of particular significance in company law thus:
Firstly, it established the canon that when a company acts, it does so in its own name and right, and not merely as an alias or agent of its owners.
Secondly, it established the important doctrine that shareholders under common law are not liable the company 's debts beyond their initial capital investment, and have no proprietary interest in the property of the company. "The company…is a distinct person from its shareholders. The shareholders are not liable to creditors for the debts of the company. The shareholders do not own the property of the company…”
MACAURA V NORTHERN ASSURANCE LTD (1925)
The case of Macaura v. Northern Assurance Co. (1925) AC 619 seems to have served as vivid illustration of the impact of separate personality and limited liability. Mr. Macaura owned an estate and some timber. He agreed to sell all the timber on the estate in return for the entire issued share capital of Irish Canadian Saw Mills Ltd. The timber, which amounted to almost the entire assets of the company, was then stored on the estate. On 6th February 1922 Macaura insured the timber in his own name. Two weeks later a fire destroyed all the timber on the estate. Mr. Macaura tried to claim under the insurance.
The Insurance Company refused to pay arguing that he had no insurable interest in the timber as the timer belonged to the company. Allegations of fraud were also made against Mr. Macaura but never proven. Eventually in 1925 the issue arrived before the House of Lords who found that the timber belonged to the company and not to Mr. Macaura. Even though he owned all the shares in the company, Mr. Macaura had no insurable interest in the property of it. Just as, corporate personality not only facilitates limited liability by making the debts belong to the corporation but also it means that the company’s asset belongs to it and not to the shareholders.
Therefore the House of Lords identified the following points:
The House of Lords found that:
The timber belonged to the company and not Mr. Macaura.
Mr. Macaura, even though he owned all the shares in the company, had no insurable interest in the property of the company.
Just as corporate personality facilitates limited liability by having the debts belong to the corporation and not the members, it also means that the company‟s assets belong to it and not to the shareholders.
The insurers were not liable. Only Macaura‟s Company, as owner of the timber had the requisite insurable interest in it. Only the company and not Macaura could insure its property against loss or damage. Shareholders have no legal or equitable interest in their company’s property.
LEE vs. LEE’S AIR FARMING LTD (1961)
Lee who was a pilot, who used to conduct an aerial top-dressing business, formed a company to conduct the business. Lee holds 2999 shares of the 3000 shares in the company. The remaining one share was taken by his solicitor as nominee for Lee. Under the articles of association, Lee was governing director with very wide powers. Workers‟ compensation insurance was taken out, naming Lee as an employee. Lee was killed when his aero plane crashed while engaged in aerial top-dressing. His widow made a claim for payment under the Workers’ Compensation Act 1922. Her claim was initially rejected on the ground that as Lee had full control of his company he could not be a "worker" within the meaning of the Act.
The Privy Council found that:
The company and Mr. Lee were distinct legal entities and therefore capable of entering into legal relations with one another.
Mr. Lee and the company had entered into a contractual relationship for him to be employed as the chief pilot of the company.
He could in his role of Governing Director give himself orders as chief pilot. It was therefore a master and servant relationship and as such he fitted the definition of „worker‟ under the Act. The widow was therefore finally entitled to compensation.
Although Lee‟s case is undoubtedly correct as a ruling in company law and in particular as the authority for the proposition slated above, however the question whether a person should be regarded as an "employee" of a company which he can control as a director or major shareholder may not always be clear-cut-for instance, in the context of the legislation relating to redundancy payments, the court may not consider that such a person is to be treated as an "employee" entitled to compensation for unfair or wrongful dismissal.
The Cases For Lifting the Veil
There are some cases which show the adverse effects caused due to presence of the veil of incorporation. In such circumstances it is better to lift the veil of incorporation. For instance, in the case of Re Bugle Ltd. [1961] case it is seen that a the company is able to illegally buy shares of another company by a takeover bid according to ss428-430 provisions when there is a veil of incorporation exists between the company and its members.
Also in the case of Jones v Lipman [1962] case it is seen that the defendant tried to use corporate personality to escape some legal obligations. In another case of RE H and Ors [1996], the court of appeal had decided to lift the veil of incorporation when it found that the three defendants of the company tried to evade excise duty of £100M as they owned and controlled 2 companies which they used for their fraudulent activities.
Therefore we can conclude saying that Subsequent to the decision (which has been followed), English law on this subject is accepted to be that the court may only lift the corporate veil in the following circumstances:
1. When the court is construing a statute, contract or other document;
2. When the court is satisfied that the company is a "mere facade" concealing the true facts; or
3. When it can be established that the company is an authorized agent of its controller or its members (corporate or human).
The court cannot lift the corporate veil merely because it considers that justice requires it. Nor can it have regard to the economic reality, and regard a group of companies as a single entity.
KEY ELEMENTS & FINDINGS
From these cases, I found that,
1. Company is not an agent of the shareholders. A company is generally considered to be a new legal entity separate from its shareholders. Shareholders or directors under common law are not liable the company 's debts beyond their initial capital investment, and have no proprietary interest in the property of the company. Company as a legal person has its own debts and its own assets. (Salomon V Salomon Case)
2. Shareholders have no legal or equitable interest in their company‟s property.
3. Company is legal person, so it can engage in contractual relationship, even with the owners. The shareholders can become manger or creditor of the company.
4. The company can even employ its owner/shareholders.
Conclusion
All the findings from cases, study materials highlight the fact that, a Company is regarded as a legal entity in its own right and, as such its members have limited liability for its debts and obligations. It has the right to own property in its own name. Company can sue its debtors and can be sued by its creditors. However a trustee is, in law, the owner of the trust property and deals with it as principal, while a director is not the owner of the funds which he has to apply. Rather, the company owns the fund and the property which are merely under the control of directors. Along with that the corporations had board of directors in whom where vested every power, faculty, or function which belonged to the bodies they represented. So there is no option for the law of agency, and directors become the agent of the company. So I can say that a company at law is distinct from its members. Directors of a company are neither agents nor trustees of a company. (2200 WORDS)
Bibliography
Sen, A. K., & Mitra, J. K. (1956). Commercial law and industrial law. Mukherjee, S. (Ed.). Kolkata, India: The World Press Pvt. Ltd.
Zahir, M. (2005). Company and securities law. Dhaka: The University Press Limited.
Dhar, N. (2000). Company law and partnership. Dhaka: Remisi Publishers.
Salomon v A Salomon & Co Ltd - Wikipedia, the free encyclopedia. (n.d.).
Wikipedia, the free encyclopedia. Retrieved September 7, 2013, from http://en.wikipedia.org/wiki/Salomon_v_A_Salomon_%26_Co_Ltd.html
LEE V LEE’S AIR FARMING LTD (1961). (n.d.). rulesinthecity. Retrieved September 7, 2013, from http://rulesinthecity.blogspot.com/2010/04/lee-v-lees-air-farming-ltd.html
Macaura v Northern Assurance Co Ltd - Wikipedia, the free encyclopedia. (n.d.).
Wikipedia, the free encyclopedia. Retrieved September 7, 2013, from http://en.wikipedia.org/wiki/Macaura_v_Northern_Assurance_Co_Ltd.html
Assignment
Sept, 8th 2013
Prepared By
Zeeshan Rahman
ID # 093 0194 530
Prepared For
Shaheen Ahmed (SHD)
Section 10
Introduction
Company Defined
According to Lord Justice Lindley, “By a company is meant association of many person who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.” (Mitra & Sen, 1956, p. 554)
A corporation under Company law or corporate law is specifically referred to as a "legal person"- as a subject of rights and duties that is …show more content…
capable of owning real property, entering into contracts, and having the ability to sue and be sued in its own name. In other words, a corporation is a juristic person that in most instances is legally treated as a person, and empowered with the attributes to own its own property, execute contracts, as well as ability to sue and be sued.
Under the eye of law, anything that is capable of rights and duties is a person and thus has a personality. Persons can be of two types under the eye of law.
1. Natural person – who are normal human beings
2. Artificial persons – are those created for the purpose of laws known as corporations or companies.
However, a company can be a public or private company and could have limited or unlimited liability. A company can be limited by shares or guarantees.
Company Limited by Shares
In company limited by shares, the personal liability of a member is limited to the face value of the share or amount unpaid on the share, whichever is lower.
Company Limited by Guarantee
In these companies, the personal liability is limited by a pre-decided nominal amount. The guaranteed amount is fixed by the members and specified in the memorandum of association, which they respectively undertake to pay, in the event of the winding up of the company. The guaranteed amount can be called upon by the company only at the time of winding up, if the liabilities exceed its assets.
Unlimited Company
In this case the liability of the shareholder is unlimited, as in partnership firms. Its members are liable to contribute to the debts of the company in proportion of their respective interests.
Nature of Corporate Company
After a company registers or incorporates; the incorporated company finds two legal effects.
1. It creates a legal person
2. That legal person has perpetual succession.
Under Section 24 (2) of the Companies Act – 1994, when a Company is registered is becomes a corporate large entity distinct from its member. So a company is an independent corporate existence; as soon as it is registered it becomes an individual with all legal rights, duties and liabilities. It is the foremost feature of a company.
Directors
Every company runs by a person not by himself. The person that mainly runs the company is called the directors. According to section90 (1), every public company must have at least three directors and every private company shall have at least two directors.
It is a well-established principle that directors are the agents of the company. Where the directors contact in the name of the company and on behalf of the company, it is the company which is liable on it, not the directors personality as in Ferguson vs. Wilson- 1866, “ The company has no person; it can act only through directors, merely the ordinary case of principal and agent.”
Directors are always considered to be trustees of the property or assets of the company, which comes to their hand and which is actually under their control. They are to make good of moneys which they misapplied as if they were trustees. Again in the case of exercising their powers, they are bound to act like a trustee for the benefit of the company only.
Shareholders are the actual owner of the company. But when a company is formed and registered in the stock exchange under the company Act- 1994 it becomes a separate legal entity or personality. They everything (ownership and liabilities) goes under the name of the company. No one is liable for any kind of act done by the company. It is totally different entity. On the other hand directors are in the duty of managing the corporation. These directors may be form the shareholders or they can be employed as well. We can say the directors as employee of the corporation. They cannot be treated as agent or trustee of the company.
SALOMON V SALOMON & CO [1897]
In this case, Salomon was a shoe manufacturer.
He incorporated a company named Salomon and Co. Ltd. He took over the entire business of a running concern. Salomon and the seven subscribers to the memorandum were he and his family members. Salomon and his two sons were the Directors of the Company. The business of the company was transferred for £30000. Salomon took 20000 share of £1 each and debentures worth 10000 in …show more content…
consideration.
The company went into liquidations, within a year.
On winding up, the unsecured creditors contended that the company was not having independent existence as Salomon was the Managing Director of the company and the entire company was merely a sham. Their contention was that the limited firm was only a guise to conceal the real identity of the persons who own. However, it was held that Salomon and Co. Ltd. fulfilled all the requirements of the legislature. Further, it was held that the company cannot be equated with the members comprising it. The company was not the agent of Salomon. It was therefore, treated as a company, distinct and independent corporation. The trial judge made the declaration in favor of the company. Salomon then filed an appeal at the Court of Appeal. The Court of Appeal agreed with the trial judges and dismissed the appeal. Salomon appealed to the house of lord and then the order was ultimately reserved in order of Salomon.
Verdict court of Appeal
The Court of Appeal also ruled against Mr. Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability. When question arose about whether the debenture holders or the other creditors got higher priority on the assets, the decision was against the debenture
holders.
Verdict of the Lords
The House of Lords unanimously changed this decision, rejecting the arguments from agency and fraud. Lord McNaughton finally concluded that the company is a separate individual from its subscribers to the memorandum and although the business remains same as before, the company is not in law the agent or trustees of the subscribers.
Importance/Significance in Company Law
The rule in the Salomon case that upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders has continued till these days to be the law in the western country courts, or common law jurisdictions. The case is of particular significance in company law thus:
Firstly, it established the canon that when a company acts, it does so in its own name and right, and not merely as an alias or agent of its owners.
Secondly, it established the important doctrine that shareholders under common law are not liable the company 's debts beyond their initial capital investment, and have no proprietary interest in the property of the company. "The company…is a distinct person from its shareholders. The shareholders are not liable to creditors for the debts of the company. The shareholders do not own the property of the company…”
MACAURA V NORTHERN ASSURANCE LTD (1925)
The case of Macaura v. Northern Assurance Co. (1925) AC 619 seems to have served as vivid illustration of the impact of separate personality and limited liability. Mr. Macaura owned an estate and some timber. He agreed to sell all the timber on the estate in return for the entire issued share capital of Irish Canadian Saw Mills Ltd. The timber, which amounted to almost the entire assets of the company, was then stored on the estate. On 6th February 1922 Macaura insured the timber in his own name. Two weeks later a fire destroyed all the timber on the estate. Mr. Macaura tried to claim under the insurance.
The Insurance Company refused to pay arguing that he had no insurable interest in the timber as the timer belonged to the company. Allegations of fraud were also made against Mr. Macaura but never proven. Eventually in 1925 the issue arrived before the House of Lords who found that the timber belonged to the company and not to Mr. Macaura. Even though he owned all the shares in the company, Mr. Macaura had no insurable interest in the property of it. Just as, corporate personality not only facilitates limited liability by making the debts belong to the corporation but also it means that the company’s asset belongs to it and not to the shareholders.
Therefore the House of Lords identified the following points:
The House of Lords found that:
The timber belonged to the company and not Mr. Macaura.
Mr. Macaura, even though he owned all the shares in the company, had no insurable interest in the property of the company.
Just as corporate personality facilitates limited liability by having the debts belong to the corporation and not the members, it also means that the company‟s assets belong to it and not to the shareholders.
The insurers were not liable. Only Macaura‟s Company, as owner of the timber had the requisite insurable interest in it. Only the company and not Macaura could insure its property against loss or damage. Shareholders have no legal or equitable interest in their company’s property.
LEE vs. LEE’S AIR FARMING LTD (1961)
Lee who was a pilot, who used to conduct an aerial top-dressing business, formed a company to conduct the business. Lee holds 2999 shares of the 3000 shares in the company. The remaining one share was taken by his solicitor as nominee for Lee. Under the articles of association, Lee was governing director with very wide powers. Workers‟ compensation insurance was taken out, naming Lee as an employee. Lee was killed when his aero plane crashed while engaged in aerial top-dressing. His widow made a claim for payment under the Workers’ Compensation Act 1922. Her claim was initially rejected on the ground that as Lee had full control of his company he could not be a "worker" within the meaning of the Act.
The Privy Council found that:
The company and Mr. Lee were distinct legal entities and therefore capable of entering into legal relations with one another.
Mr. Lee and the company had entered into a contractual relationship for him to be employed as the chief pilot of the company.
He could in his role of Governing Director give himself orders as chief pilot. It was therefore a master and servant relationship and as such he fitted the definition of „worker‟ under the Act. The widow was therefore finally entitled to compensation.
Although Lee‟s case is undoubtedly correct as a ruling in company law and in particular as the authority for the proposition slated above, however the question whether a person should be regarded as an "employee" of a company which he can control as a director or major shareholder may not always be clear-cut-for instance, in the context of the legislation relating to redundancy payments, the court may not consider that such a person is to be treated as an "employee" entitled to compensation for unfair or wrongful dismissal.
The Cases For Lifting the Veil
There are some cases which show the adverse effects caused due to presence of the veil of incorporation. In such circumstances it is better to lift the veil of incorporation. For instance, in the case of Re Bugle Ltd. [1961] case it is seen that a the company is able to illegally buy shares of another company by a takeover bid according to ss428-430 provisions when there is a veil of incorporation exists between the company and its members.
Also in the case of Jones v Lipman [1962] case it is seen that the defendant tried to use corporate personality to escape some legal obligations. In another case of RE H and Ors [1996], the court of appeal had decided to lift the veil of incorporation when it found that the three defendants of the company tried to evade excise duty of £100M as they owned and controlled 2 companies which they used for their fraudulent activities.
Therefore we can conclude saying that Subsequent to the decision (which has been followed), English law on this subject is accepted to be that the court may only lift the corporate veil in the following circumstances:
1. When the court is construing a statute, contract or other document;
2. When the court is satisfied that the company is a "mere facade" concealing the true facts; or
3. When it can be established that the company is an authorized agent of its controller or its members (corporate or human).
The court cannot lift the corporate veil merely because it considers that justice requires it. Nor can it have regard to the economic reality, and regard a group of companies as a single entity.
KEY ELEMENTS & FINDINGS
From these cases, I found that,
1. Company is not an agent of the shareholders. A company is generally considered to be a new legal entity separate from its shareholders. Shareholders or directors under common law are not liable the company 's debts beyond their initial capital investment, and have no proprietary interest in the property of the company. Company as a legal person has its own debts and its own assets. (Salomon V Salomon Case)
2. Shareholders have no legal or equitable interest in their company‟s property.
3. Company is legal person, so it can engage in contractual relationship, even with the owners. The shareholders can become manger or creditor of the company.
4. The company can even employ its owner/shareholders.
Conclusion
All the findings from cases, study materials highlight the fact that, a Company is regarded as a legal entity in its own right and, as such its members have limited liability for its debts and obligations. It has the right to own property in its own name. Company can sue its debtors and can be sued by its creditors. However a trustee is, in law, the owner of the trust property and deals with it as principal, while a director is not the owner of the funds which he has to apply. Rather, the company owns the fund and the property which are merely under the control of directors. Along with that the corporations had board of directors in whom where vested every power, faculty, or function which belonged to the bodies they represented. So there is no option for the law of agency, and directors become the agent of the company. So I can say that a company at law is distinct from its members. Directors of a company are neither agents nor trustees of a company. (2200 WORDS)
Bibliography
Sen, A. K., & Mitra, J. K. (1956). Commercial law and industrial law. Mukherjee, S. (Ed.). Kolkata, India: The World Press Pvt. Ltd.
Zahir, M. (2005). Company and securities law. Dhaka: The University Press Limited.
Dhar, N. (2000). Company law and partnership. Dhaka: Remisi Publishers.
Salomon v A Salomon & Co Ltd - Wikipedia, the free encyclopedia. (n.d.).
Wikipedia, the free encyclopedia. Retrieved September 7, 2013, from http://en.wikipedia.org/wiki/Salomon_v_A_Salomon_%26_Co_Ltd.html
LEE V LEE’S AIR FARMING LTD (1961). (n.d.). rulesinthecity. Retrieved September 7, 2013, from http://rulesinthecity.blogspot.com/2010/04/lee-v-lees-air-farming-ltd.html
Macaura v Northern Assurance Co Ltd - Wikipedia, the free encyclopedia. (n.d.).
Wikipedia, the free encyclopedia. Retrieved September 7, 2013, from http://en.wikipedia.org/wiki/Macaura_v_Northern_Assurance_Co_Ltd.html