Company Law
Tutorial 2
Cases:
Salomon v Salomon & Co [1897] AC 22
Sweeney v. Duggan [1991] 2 IR 274
Shinkwin v Quin-Con Ltd & Quinlan [2001] 1 IR 514
Articles to read
“Laying Siege to the Corporate Veil”, by Caroline Bergin-Cross, 2013, IBR.
‘A Companies Separate Legal Personality, lifting the corporate veil”, by Margarette Gallagher,
2005, vol 23 ILT 167.
“Disregarding the Separate Legal Personality of a Subsidiary Company, where the justice of
the case, requires”, by Fergus A. Bolster and Gerard Scanlon and O’Brien, 1999 vol 17 ILT
22.
SEPARATE LEGAL ENTITY
Salomen v Salomen
Principle that a company is separate and distinct from its owners was emphatically endorsed
here. Set down foundations of modern company law.
Facts
Mr. Salomon owned a boot manufacture and leather business which was small but profit able.
His sons worked in the business and pressed him to give them a stake. He incorporated a newly
formed company, made his family directors and give them nominal shareholdings in the
company. He duly transferred the business for approx. £39,000 to the company and took the
purchase price in fully paid up shares. The consideration for this was made up of:
(i)
20,000 fully paid up share of £1 in the company;
(ii)
A cash payment of approx. £9,000;
(iii)
A loan (debenture) from Mr. Salomon to the Company of £10,000 secured by a
floating charge.
The company fell upon hard times and went into liquidation. The net question was whether
Mr. Salomon’s secured debt of £10,000 should be paid by the company in priority to the debts
amounting to circa £7,500 owing to the company’s unsecured creditors. The liquidator argued
that the unsecured creditors should have priority, saying that the incorporation of the business
by Mr. Salomon was a mere scheme to enable him to carry on business in the name of the
company with limited liability, contrart to the true intention and meaning of the Companies
Act. It was argued this scheme would enable him to obtain priority over other creditors.
Court of Appeal agreed with the liquidator.
However, the House of Lords made it clear that a company, once incorporated was distinct
from its members, and inorder for it to be incorporated need only comply with requirements
under Companies Acts.
Lord McNaulton stated that ‘the company is at law a different person altogether from the
subscribers in the memorandum.’
Ergo, once incorporated, the company was distinct from its members, the companies acts did
not permit an inquiry into the motive of the person setting up the company. Furthermore, the
Companies Acts did not stipulate that there should be a degree of independence between the
shareholders and company.
Principle in Salomon applied in wide range of case in England and Ireland, Its implications
mean that the court will not go behind the separate personality of the company to get at a
member. Ironically developed exceptions to Salomon – piercing the corporate veil (a) statutory
authority; (b) single economic entity; (iii) agency; (iv) misuse of the corporate veil.
Modifications / Exceptions to the Rule in Salomon
Piercing the Corporate Veil
A number of exceptions to the general principle in Salomon, that the owners of a company
will be treated as distinct from the company itself – piercing the corporate veil. It is manifest
throughout these exceptions that the common thread for lifting the veil is to avoid a
demonstrable injustice from occurring. There are many circumstances where the veil can be
lifted.
Statutory Authority
Legislation has been enacted over the years which seeks to apportion liability on the
company, its members and directors, who through their actions, are seen to be abusing the
system of limited liability, and are personally liable for certain activities.
Agency
There are a series of cases where the courts have been prepared to infer the existence of agency
between a company and its owner/subsidiary, particularly where the owner/subsidiary is itself
another company.
The main case illustrating this is point Smith Stone & Knight v Birmingham Corporation,1
herein a holding company was the owner of property in which one of its subsidiaries was
carrying on business. When this property was compulsorily acquired by the local corporation,
the holding company was held to be entitled to compensation for disturbance to the business
which arose from the need to relocate. Atkinson J took the view that the subsidiary was carrying
on business as the agent of the holding company. He listed the following factors, all based on
the control over day-to-day operations, to be taken into account:
(i)
Are the profits of the subsidiary treated as the profits of the parent?
(ii)
Were the persons conducting the business of the subsidiary appointed by the parent?
(iii)
Was the parent the ‘head and brains’ of the trading venture?
(iv)
Did the parent govern the adventure?
(v)
Were the subsidiary company’s profits made by the skill and direction of the parent?
(vi)
Was the parent in effective and constant control of the subsidiary?
High Court have reaffirmed the existence of the agency principle by Laffoy J in Fyffes v DCC.2
In this case DCC plc had bought shares in Fyffes which it passed on to its subsidiary, Lotus
Green. DCC”s chief executive, Mr. Flavin, also sat on the board of Fyffes. Lotus Green sold
the shares in February 2000 at an unprecedented high price. It was alleged that when these
were sold, James Flavin, was in possession of inside information in relation to Fyffes. Under
Part V of the Companies Act 1990 a company could not sell shares if one of its directors was
in possession of price sensitive information in respect of those shares. Whilst Mr. Flavin was
1
2
[1939] 4 All ER 116
Unreported, High Court, Laffoy J., 21 December 2005.
a director of DCC, he was not an official director of Lotus Green. One of the issues which arose
was whether Lotus Green owned and sold the shares as agent of DCC. If it did, then in law it
would be as if DCC had sold the shares itself. If DCC owned and sold the shares itself, it would
be liable because Mr. Flavin was a director of DCC.
Laffoy J reviewed the law whereby a company might be deemed the agent of another and
distilled the following principles. First, as a matter of law Lotus Green may be regarded as
having acted as the agent of DCC in relation to the holding and disposal of the shares in Fyffes,
if to do otherwise would lead to an injustice. However, she adopted the proviso that a subsidiary
would, however, only be deemed an agent of its parent where such an inference was factually
justified. She rejected the argument that only evidence of an express agency agreement between
the parties will suffice. Rather agency will be determined by reference to all the facts, including
the nature of the parent’s interest in the shares of the subsidiary and the relationship between
both. She said the views of the human agents in the company was not in any way determinative
of the situation.
On the facts of this case she did not find that Lotus Green was an agent of DCC as regards the
holding and disposal of the shares and in the acquiring of the profit from their sale. Whilst
Lotus Green held the shares, it held them independently from DCC. It did not hold them as
agent for DCC.
Misuse of the Corporate form
Here separate legal personally is pierced where the statutory privilege is being used for
fraudulent purpose.3 An example of this is evident in Re Bugle Press.
Single Economic Entity
Example where courts will hold a collection or group of companies to be, for the purpose of a
particular legal aim, a single entity. These cases generally centre on the principal that the
companies in question are closely related, act in tandem and that justice of the case so requires
them to be treated as one.
3
See also Re: Shrinkpak Limited (20 December 1989, High Court, unreported) and Trustor AB
v Smllbone (No.3) [20013 All ER 987.
DHN Food Distributors v Tomer Hamlet LBC4 is the seminal case in this regard.
Herein the Plaintiff owned 2 subsidiaries, (1st owned the business, 2nd, the licencee, owned the
property), one ran the property of the group, and other ran the business of the group, holding
the property as licencee. Co.Co. serve CPO on licencee, if found not be a single economic
entity only get negligible sum as licencee not hold business element.
Court held was a single economic entity.
Denning LJ stated that courts had a general tendency to look at the economic identity of the
whole group and that this particularly applied when the holding company held all the shares in
the subsidiary and can control it. The parent should not be deprived of compensation due to a
technical point when it was justly payable, and so the companies in question would be treated
as one.
Recent Re-Affirmation of Single Economic Entity in Fyffes v DCC
Laffoy J reaffirmed its applicability in DCC v Fyffes. As stated above one of the defences
made out by DCC was that Lotus Green was not in possession of the price sensitive
information because Mr. Flavin was not its director. One of the other arguments made by the
plaintiffs was that DCC and Lotus Green could be a single economic entity. In this way,
although Mr. Flavin was not a director of Lotus Green, he could be deemed a director of the
‘group.’ Laffoy J set out the relevant principles that could be applied in relation to single
economic entity
4
[1976] 3 All ER 462