2014
All Important Cases
on Company Law
Mohammad Faysal Saleh Al Mahdi
University of Dhaka
[DEDICATED TO ALL BANGLADESHI LAW TEACHERS
AND STUDENTS]
mTH
Company Promotion
R v Kyslant 1931
Company issued shares and in the prospectus implied that it had paid a regular
dividend out of current earnings. In fact the dividend, had for some years been
paid out of reserves.
HELD : Duty to disclose as the facts must be complete enough to avoid giving a
misleading impression.
Promotion / Directors
Derry v Peek 1889
Derry and others set up a company to operate trams in Plymouth. The prospectus
setting out the details if the company said that a licence was required to operate
the trams but that the issuing of the licence was a formality. As it turned out they
were wrong and a licence application was refused.
HELD : Not fraudulent misrepresentation as the directors believed what they said.
Since the Misrepresentation Act 1967 such a statement would be considered as
negligent misrepresentation.
Ramsgate Victoria Hotel v Montefiore 1866
M applied for shares in the hotel company. He heard nothing and then after 5
months he received a letter of acceptance. By this time he had decided that he
did not want the shares.
HELD : The lapse of time was so great that the offer to buy the shares had lapsed.
Boston Deep Sea Fishing Co v Ansell 1888
Ansell was a managing director who obtained commissions from clients to whom
he had given company contracts. His employer found out and dismissed him. They
also sued to recover the lost commissions.
HELD : The dismissal was justified and Ansell was required to pay the commissions
he had received over to his employer.
Legal Personality
Salomon v Salomon 1897
S transferred to his own company the business of making boots and shoes. The
company bought the business for ™39,000 and issued shares and a debenture for
£10,000 secured by a floating charge on the assets. The business became
insolvent and the trade creditors argued that the company and Salomon were one
and the same. As a consequence, they claimed, his debenture was void since a
man cannot be a creditor of himself.
HELD : It is possible for the sole owner of a company to assert rights against it as a
secured creditor, because the company is a separate legal person distinct from its
members.
Macaura v Northern Assurance Co 1925
M was a landowner who sold timber from his estate to a company of which he
was the sole owner. he insured the timber that lay on his land in his own name as
the person insured under the policies issued by the insurance company. A few
weeks later the timber was destroyed by fire. M claimed on the insurance policy.
Northern Assurance claimed that the timber belonged to the company and as a
consequence it was not properly insured.
HELD : The timber belonged to the company and not to M. As a result his claim
failed as he did not have an insurable interest in the property.
LEE V LEE’s AIR FARMING LTD (1960)
L was a director and owned the bulk of the shares in a company engaged in aerial
crop-spraying. L appointed himself as the only pilot of the company
at a salary arranged by himself.
Subsequently, L was killed while crop-spraying and his widow claimed workers
compensation from the company as employer of her husband.
Question under the relevant Act was whether the relationship of employer and
employee could exist between L and the company.
HELD: Yes they were separate legal persons, thus even though L owned most of
the shares, he could still be an employee of the company. Thus his widow was
entitled to compensation.
Pre Incorporation Contracts
Kelner v Baxter 1886
Baxter and two others agreed on behalf of a company yet to be formed to
purchase trade stock for its business. Later the company was formed and
accepted and used the trade stock, but failed to pay for the stock.
HELD: The Company was not liable as it could not ratify a pre incorporation
contract with retrospective effect to a date before the company existed. Baxter
and friends were therefore unable to recover their money.
Company Name
Penrose v Martyr 1858
In this case a company secretary accepted a bill of exchange drawn on a limited
company. The name of the company was as written but the company secretary
omitted the words "limited"
HELD : The company secretary was held to be personally liable
Objects Clause /doctrine of ultra vires
Introductions Ltd v National Provincial Bank Ltd 1968
The main object of the company was to provide accommodation for overseas
students. The objects clause included an express right to borrow money and a
declaration that each part of the objects clause was a main object. The company
changed its business to pig breeding and received a bank loan. When the business
became insolvent the liquidator claimed that the bank loan was ultra vires and
void.
HELD: The loan was ultra vires as the power to borrow money must be
subordinate to the main objects of the business. As a result the loan was
irrecoverable.
Ashbury Railway & Iron Co v Riche 1875
The objects were to make and sell railway carriages. The directors made an ultra
vires contract to build a railway.
HELD: Contract could not be valid even if it were subsequently approved by the
shareholders in general meeting.
Attorney-General -v- Great Eastern Railway Co; HL 1880
An Act of Parliament authorized a company to construct a railway. Two other
companies combined and contracted with the first to supply rolling stock. An
injunction was brought to try to restrain this, saying that such a contract was not
explicitly provided for in any of the Acts incorporating the companies.
HELD: The contract was not ultra vires, but was warranted by the Acts. Powers
conferred by statute are taken to include, by implication, a right to take any steps
which are reasonably necessary to achieve the statutory purpose: “whatever may
fairly be regarded as incidental to, or consequential upon, those things which the
Legislature has authorized, ought not (unless expressly prohibited) to be held, by
judicial construction, to be ultra vires.”
Re Cycling Touring Club (1907)
The Company’s business was to promote, assist and protect the cyclists on the
public roads. The Company by altering the object clause desired to include among
the persons to be assisted all tourists including motorists.
HELD: 1) The Club not allowed undertaking protection of motorists, as cyclists had
to be protected against motorists.
2) It was impossible to combine two businesses as one of the objects of the
company was to cyclists against motorists.
Ewing v Buttercup Margarine Co Ltd 1917
Ewing who traded under the name Buttercup Diary Company sued to restrain a
newly registered company called Buttercup Margarine Company Ltd from using
the name on the grounds that the general public might reasonably believe that
there was a link between the two businesses.
HELD: Ewing was successful.
John Wilkes (Footwear) Ltd v Lee International (Footwear) 1985
Lee International ordered several pairs of moccasins from Wilkes. The order was
placed on an old form that gave the company's former name. The order was
signed by one director.
HELD :The other director was not liable, in person; for the debt as he had not
authorised the making of the order.
Anglo Overseas Agencies ltd v Green 1961
This case is important for the view of Salmon J on the main objects rule of
construction. "Where a memorandum of association expresses the objects of a
company in a series of paragraphs and one paragraph. or the first two or three
paragraphs appear to embody the main objective of the company, all the other
paragraphs are treated as merely ancillary to this main objective.
Note : This main objective doctrine can be excluded by an appropriate provision
in the memorandum. See: Cotman v Brougham 1918
Cotman v Brougham 1918
The objects clause contained no fewer than 30 sub clauses that permitted the
rubber company to carry on almost any business. The memorandum stated that
every sub clause should be regarded as a substantive clause in its own right. The
company underwrote and was allotted shares in an oil company. When the oil
company was wound up the rubber company was placed on the list of
contributories.
HELD: The rubber company was held liable as the underwriting was held to be
intra vires the rubber company.
Re German Date Coffee Co 1882
The objects of the company were specific in that it was to make coffee from dates
using a German patent. The patent was never granted and coffee was made with
a Swedish patent. the company was solvent and the majority of shareholders
wanted it to continue. However two shareholders petitioned for a winding up on
the grounds that its objects had failed.
HELD: The substratum had failed as it was impossible to carry out the objects for
which the company was formed.
Re Kitson & Co 1946
The company objects were to carry out the business of general engineering and
inter alia to acquire a specified existing business. The existing business was
acquired and later sold.The company intended remaining in the general
engineering business and acquiring another business. Some shareholders
petitioned for a winding up order on the grounds that the substratum had gone ie
as in German Date.
HELD: The company was not wound up as the main object was to be an
engineering business. Note in German Date a main object was to acquire and to
work a particular patent.
Re Jon Beauforte (London) Ltd 1953
The company was authorised by its memorandum to carry on the business of
costumers and gownmakers. The company then started the business of making
veneered panels. This was ultra vires. Builders built the factory, coke suppliers
sold the company coke. The coke company knew from the correspondence that
the company was engaged in veneer production. They therefore were under
constructive notice of the contents of the memorandum.
HELD: They were unable to sue for the price of the coal as the transaction was
ultra vires
Bell Houses Ltd v City Wall Properties Ltd 1966
In this case the first object was to carry on the business of builders and
developers. Further into the object clause said " to carry on any other trade or
business whatsoever". The company entered into an agreement with another
company and in return for a fee agreed to introduce the other company to some
Swiss bankers. The other company refused to pay the introduction fee on the
grounds that the contract was outside of the objects clause.
HELD: The act of introduction was held to be within the objects clause and was
intra vires and not ultra vires.
Rolled Steel Products Holdings Ltd v British Steel Co 1985
RSP had two directors one of whom owed a substantial sum to a subsidiary of BS
through a company he owned. RSP entered into a guarantee to BS for the debt of
the company owned by one of the RSP directors. The objects clause of RSP stated
that it had the power of making a guarantee. At the board meeting at which the
guarantee was given the director concerned did not declare his personal interest
in it. BS received a copy of the board minutes
and should have realised that the decision to guarantee the debt was invalid.
HELD : The decision to give the guarantee was invalid.
Power and Objects problems
Evans v Brunner Mond & Co Ltd 1921
The chemical company made a donation for scientific education and research.
Evans claimed that the donation was ultra vires and void.
HELD: The donation was held to be intra vires as the purpose was incidental to
the main clause which was to "do all such business and things as may be
incidental or conducive to the above objects, or an of them"
Simmonds v Heffer 1983
A general donation by the League Against Cruel Sports Ltd to the Labour Party
(because of its commitment to animal welfare).
HELD: The donation was ultra vires as the money was in the form of a general
donation and could be used for any purpose. Note : A second donation to the
Labour Party to be used for the promotion of animal welfare was held to be intra
vires.
Relations between member and company
Hickman v Kent or Romney Marsh Sheep Breeders Assocn 1915
The articles provided that disputes between members and the association be
resolved by arbitration. Hickman brought an action against the company in the
courts.
HELD: The association was entitled to have the action stayed as the articles
constituted a contract between Hickman and the association in respect of their
rights as members.
Wood v Odessa Waterworks Co 1889
The company declared a dividend and passed a resolution to pay it by giving their
shareholders debenture bonds bearing interest. The articles provided that the
company declare a dividend to be "paid in cash"
HELD: The words meant paid in cash and in consequence a shareholder could
restrain the company from acting ultra vires.
Share Transactions
Scott v Brown Doering McNab & Co 1892
In this case the firm of solicitors Slaughter and May sought to recover money from
the stockbrokers, but were told, along with their client Mr Scott that it was an
indictable offence and illegal contract, to agree to purchase shares in the Steam
Loop Company in an attempt to create a false market in their shares.
HELD : The act of keeping up the shares was held to be a fictitious premium and
consequently illegal conduct.
Greenhalgh v Aderne Cinemas Ltd 1951
The articles stated that shares could not be transferred to a non member as long
as any other member was prepared to purchase them.
Articles were changed to allow the free transfer of shares to non members, as
long as an ordinary resolution was passed approving the transfer.
HELD : Such an alteration was valid as it was to the general good of the company.
Sidebotham v Kershaw, Lease & Co 1920
Proposed alteration of the company articles would permit the directors to
expropriate the shares of any member who carried out a competing business.
HELD ; Valid as it was for the company’s good.
Allen v Gold Reefs of West Africa Ltd 1900
Articles gave the company a lien on partly paid shares, in respect of all debts and
liabilities of the company.
A member dies with unpaid calls due on the shares. Articles were altered so as to
give the company lien on the fully paid shares.
HELD : Alteration valid as it was for the genuine protection of the company.
Veil of Incorporation
Gilford Motor Co Ltd v Horne 1933
Horne left the Gilford Motor Company in order to set up his own business. When
he left he agreed that he would not solicit any of his former employer’s
customers. As a way around this restriction he set up a company.
HELD: Horne was prevented by an Injunction from soliciting the clients of his
former employer. His company was also subject to the injunction as the Judge
went behind the veil of incorporation and ruled that the company and Horne
were one and the same.
Protection of a minority
Foss v Harbottle 1843
Foss was a shareholder in a company formed to buy land for use as a pleasure
park. Foss alleged that the defendants had defrauded the company. Foss and
others in the minority attempted to sue the defendants
HELD : Since the members of the company had not been consulted and since it
was possible that the company in membership could resolve to allow the
defendants to retain their alleged profit, the court would not permit the minority
to proceed with their action.
Duty of auditor to company
Saudi Banque v Clarke Pixey & Another 28 July 1989 Ch Div
Although it was foreseeable that banks, when considering whether to continue or
grant loan facilities to a company, might rely on the companies audited accounts,
the auditors did not owe a duty of care because the relationship between the
banks and auditors was not sufficient to create a duty of care.
Lifting the Veil Between a Holding Company and Its Subsidiaries
ADAMS v CAPE INDUSTRIES (1990)
CAPE was a UK-registered corporation involved in asbestos mining operations in
South Africa. The international marketing function was carried out through a
number of subsidiaries, one of which was CPC which was registered and carried
on business in the USA. A court judgement was given against CPC and the
claimant sought to enforce it against Cape by arguing that the veil between CPC
and Cape should be lifted accordingly.
HELD: There were no special circumstances to indicate that CPC was a mere
façade for CAPE. There was no indication of any “agency” situation as CPC
was an independent company under the control of the chief executive.
Furthermore, the “economic reality” argument accepted in the case of DHN FOOD
DISTRIBUTORS would not be extended to cover this particular case. Effectively,
the holding company (CAPE) could not be liable for its subsidiary’s (CPC)
debts under the circumstances.
Lifting the veil
GILFORD MOTOR COMPANY LTD v HORNE(1933)
An employee agreed not to solicit customers from his employer once he ceased to
be employed by him. Despite this, the employee formed a company and solicited
these customers after he left his employers.
HELD: The company was a mere sham (merely a front) and could not be used to
avoid the employee’s contractual obligation not to solicit customers.
DAIMLER v CONTINENTAL TYRE & RUBBER CO (1916)
A company incorporated in the UK was owed money. When it sued the creditor
for the debt, the creditor argued that it would not repay the amount owed as this
would be tantamount to “trading with the enemy” which was prohibited by law at
the time. The company argued that it was not an “enemy” company as it was
incorporated in the U K.
HELD: Control (shareholding) of the company was in “enemy” hands because
lifting the veil revealed only one British shareholder whilst the majority members
were German. Thus, the debtor was under no obligation to repay the debt. (The
veil was lifted to effectively give the company the same nationality as its
members).
JONES v LIPMAN (1962)
X had entered into a contract with Y for the sale of X’s land. X then changed his
mind and in order to avoid the contract he formed a company to which he
conveyed his land (arguing that as he was now no longer the owner, he could not
comply with the contract).
HELD: The company was a mere façade or front for X, so Y was entitled to specific
performance to give him ownership of the land.