COMPANY LAW
SUMMARY
LAWSKOOL PTY LTD
COMPANY LAW SUMMARY
TABLE OF CONTENTS
INTRODUCTION ....................................................................................................................... 9
Forms of Legal Association .................................................................................................... 9
Administrative and Legislative Structure of New Zealand Company Law............................... 9
SEPARATE LEGAL ENTITY.....................................................................................................10
CORPORATE CONSTITUTION................................................................................................16
CORPORATE GOVERNANCE AND DECISION-MAKING........................................................19
Definition ...............................................................................................................................19
The Formal Legal Model........................................................................................................19
CORPORATE FINANCE: DEBT CAPITAL................................................................................25
Security Interest ....................................................................................................................27
CORPORATE FINANCE: SHARE CAPITAL.............................................................................29
Ordinary shares.....................................................................................................................29
Preference shares .................................................................................................................29
Redeemable Shares..............................................................................................................30
Employee shares...................................................................................................................30
Partly Paid Shares.................................................................................................................30
Bonus shares ........................................................................................................................30
CORPORATE FINANCE: DIVIDENDS AND FUNDRAISING....................................................33
Source of dividend payments ................................................................................................33
Limitations .............................................................................................................................34
Payment of dividends ............................................................................................................34
Fundraising Provisions ..........................................................................................................35
CORPORATE FINANCE: CONTROL .......................................................................................37
CORPORATE CONTRACTING ................................................................................................40
Corporate Capacity:...............................................................................................................40
Policy Problems.....................................................................................................................40
Agency: .................................................................................................................................41
MEMBERS’ RIGHTS AND REMEDIES.....................................................................................51
The Common Law Position:...................................................................................................51
Statutory Remedies for Shareholders: ...................................................................................51
The Statutory Derivative Action: ............................................................................................56
Injunctions: ............................................................................................................................57
DIRECTORS’ DUTIES ..............................................................................................................58
Appointment of Directors .......................................................................................................58
Definition of Director ..............................................................................................................58
S 126(1)(a): De Jure and De Facto Directors.........................................................................60
S 126(1)(b)(i) and s 126(1)(b)(ii): Shadow Directors ..............................................................60
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S 126(1)(b)(i) and s 126(1)(b)(ii): Appointers of Nominee Directors .......................................62
S 126(1)(b)(iii): Person with Managerial Powers....................................................................62
S 126(1)(c): Delegate Directors .............................................................................................62
S 126(1)(d): Ultimate Controller .............................................................................................63
SS 126(2) and 126(3): Shareholder Director .........................................................................63
S 126(4): Professional Advisers and Receivers not Directors ................................................63
General Duties of Director .....................................................................................................63
Duties owed to the Company.................................................................................................64
Director’s duty not to act for an improper purpose .................................................................64
Duty to act in good faith and in best interests of company .....................................................65
Disclosure of Interests ...........................................................................................................66
Abuse of Corporate Opportunity ............................................................................................67
The Common Law Duty of Care, Diligence and Skill..............................................................68
Statutory Duties of Care – The Business Judgment Rule ......................................................69
Reckless Trading...................................................................................................................69
Duty in relation to Obligations................................................................................................70
Breach of Duty.......................................................................................................................70
INSOLVENCY, CORPORATE RESCUES & WINDING UP.......................................................71
Key Terms:............................................................................................................................71
Receivership:.........................................................................................................................71
Voluntary Administration:.......................................................................................................72
Liquidation.............................................................................................................................74
Termination and Completion of Liquidation ...............................................................................79
SOURCES CONSULTED .........................................................................................................80
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Cases
Attorney General v Equiticorp Industries Group Ltd (in stat man) [1996] 1 NZLR 528 ...............11
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame [1906] 2 Ch 34 ...................19
AWA Ltd v Daniels (1992) 7 ACSR 759 ....................................................................................67
Baden, Delvaux and Lecuit v Societe General pour Favoriser le Developpement du Commerce
[1983] BCLC 325...................................................................................................................47
Bank of New Zealand v Fiberi Pty Ltd (1992) 8 ACSR 790 .......................................................46
Beach Petroleum v Johnson (1993) 115 ALR 411.....................................................................47
Bendall v Marshall (2005) 5 NZCLC 263,772 ............................................................................65
Beuker v Block Canada (2000) SKQB 584................................................................................46
Birchfield Developments Ltd v Kent Prier Real Estate Ltd (1999) 8 NZCLC 261,889 ................32
Buzzle Operations v Apple Computers Australia (2011) 277 ALR 189 ......................................60
Celthene Pty Ltd v WKJ Hauliers Pty Ltd [1981] 1 NSWLR 606 ................................................43
Clark v Libra Developments Ltd [2007] 2 NZLR 709 .................................................................59
Coleman v Myers [1977] 2 NZLR 225 .......................................................................................63
Cook v Deeks [1916] 1 AC 554 .................................................................................................66
Cornes v Kawerau Hotel (1994) Ltd (1999) 8 NZCLC 261,815..................................................53
Crabtree Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd [1975] 7
ALR 527 ................................................................................................................................43
Cumbrian Newspapers v Cumberland & Westmorland Herald Newspaper [1986] BCLC 286 ...35
Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30 ............................................................17
Development Finance v McSherry Export Kilns Ltd (in liq) (1987) 3 NZCLC 99,998 .................13
Dunning v Chabro Holdings Ltd (2007) 10 NZCLC 264,213 ......................................................53
Elders Pastoral v Gibbs [1988] 1 NZLR 596..............................................................................13
Eley v Positive Government Life Assurance Co (1876) LR 1 Ex 88...........................................14
Equiticorp Industries Group Ltd (in stat man) v Attorney-General (No. 47) [1998] 2 NZLR 481 .47
Fatupaito v Bates [2001] 3 NZLR 386 .................................................................................61, 62
Fisher v Isbey (1999) 13 PRNZ 182 ..........................................................................................74
Flett v J H Flett Ltd (1999) 8 NZCLC 261,893 ...........................................................................53
Foss v Harbottle (1843) 67 ER 189 ...........................................................................................50
Fraser v NRMA [1995] FCA 1042.............................................................................................21
Freeman v Lockyer v Buckhurst Park Properties (Mangal) Pty Ltd [1964] 2 QB 480 .................42
Frykberg v Heaven (2002) 9 NZCLC 262,966 ...........................................................................55
G & M Cook Ltd (in liq) v Savoy Restaurant Ltd (1982) 1 NZCLC 98,059..................................74
Gamble v Hoffman (1997) 24 ACSR 369 ..................................................................................67
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Gilford Motor Co v Horne [1933] 1Ch 935 .................................................................................11
Greenhalgh v Aderne Cinemas [1946] 1 All ER 512............................................................36, 63
Handevel Pty Ltd v Comptroller of Stamps (Vic) [1985] HCA 73 ...............................................23
Hannes v MJH Pty Ltd (1992) 7 ACSR 8...................................................................................54
Hely-Hutchinson v Brayhead Ltd (1968) 1 Q.B. 549 ..................................................................41
Holden v Architectural Finishes Ltd (1996) 7 NZCLC 260,976 ..................................................65
Howard Smith v Ampol Petroleum Ltd [1974] AC 821 ...............................................................63
International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co (1958) 100
CLR 644 ................................................................................................................................40
Jenkins v Enterprise Gold Mines NL (1992) 6 ACSR 539..........................................................54
Jermyn St Turkish Baths Ltd [1971] 3 All ER 184......................................................................51
JJ International Ltd v Streetsmart (2005) 9 NZCLC 263,784 .....................................................56
John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 ........................................................19
Jones v Lipman [1962] 1 WLR 832 ...........................................................................................11
Jordan v Chemical Specialities Ltd (1999) 8 NZCLC 261,839 ...................................................54
Keighly Maxted & Co v Durant [1901[ Ac 240 ...........................................................................43
Krtolica v Westpac Banking Corporation [2008] NZCCLR 24 ....................................................60
Kuwait Asia Bank v National Mutual Life Nominees Ltd [1990] 3 NZLR 513..............................60
Latimer Holdings Ltd v SEA Holdings [2005] 2 NZLR 328.........................................................52
Le Meilleur Pty Ltd (subject to Deed of Company Arrangement); Le Meilleur Pty Ltd (subject to
Deed of Company Arrangement) & Ors v Jin Heung Mutual Savings Bank Co Ltd & Anor
[2011] NSWSC 1115 .............................................................................................................72
Lee v Lee’s Air Farming Ltd [1961] AC 12.................................................................................10
Levin Meats Ltd v Perfect Packaging Ltd (2011) 10 NZCLC 264,950........................................45
Lim v Ward McCulloch Solicitors Nominees Ltd (1999) 8 NZCLC 261,922................................46
Macaura v Northern Assurance Co Ltd [1925] AC 619..............................................................10
MacFarlane v Barlow (1997) 8 NZCLC 261,470........................................................................65
Mason v Lewis [2006] 3 NZLR 225 ...........................................................................................68
Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 ........39
Mills v Mills (1938) 60 CLR 150...........................................................................................63, 65
New Zealand Maintenance Team Ltd v Taigel (1991) 5 NZCLC 67,397....................................13
Nicholson v Permakraft [1985] 1 NZLR 242 ..................................................................63, 64, 65
Niord P/L v Adelaide Petroleum N/L (1990) 2 ACSR 347 ..........................................................51
Norman v ANZ National Bank Ltd [2012] NZCA 356 .................................................................45
Northside Developments Pty Ltd v Register-General (1990) 170 CLR 146 ...............................40
North-West Transportation v Beatty (1887) 12 AC 589 .............................................................50
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Official Assignee v 15 Insoll Avenue Ltd [2001] 2 NZLR 492.....................................................11
Pacifica Shipping v Anderson (1985) 2 NZCLC 99,306 .............................................................67
Paganini v Official Assignee 22/3/99, CA 308/98 ......................................................................74
Panorama Developments v Fidelis Furnishing Fabrics (1971) 2 QB 711...................................42
Percival v Wright [1902] 2 Ch 421.............................................................................................63
Peters v Birnie [2010] NZAR 494 ..............................................................................................55
Presley v Callplus Ltd [2008] NZCCLR 37.................................................................................56
Queensland Mines v Hudson (1978) 52 ALJR 399 (PC) ...........................................................67
Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147 .................42
Re Bagot Well Pastoral Co Pty Ltd (1992) 9 ACSR 129............................................................54
Re City Equitable Fire Insurance Co [1925] 1 Ch 407 ...............................................................67
Re Federated Fashions (NZ) Ltd (1981) 1 NZCLC 95,011 ........................................................53
Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 ..........................................................................59
Re Securitibank Ltd (No. 2) [1978] 2 NZLR 136 ........................................................................12
Re Smith and Fawcett Ltd [1942] Ch 304..................................................................................63
Re Tasbian Ltd (No 3) [1992] BCC 358.....................................................................................62
Re Tivoli Freeholds [1972] VR 445............................................................................................52
Re Universal Management Ltd (1981) 1 NZCLC 95,026 ...........................................................31
Re Wait Investments Ltd (in liq) [1997] 3 NZLR 96....................................................................69
Re Waitikiri Links Ltd (1989) 4 NZCLC 64,922..........................................................................53
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL) ...............................................................67
Royal British Bank v Turquand (1856) 6E. & B. 327; 119 E.R. 886 ...........................................39
RPB Solutions Ltd v Avoca Holdings Ltd [2010] 2 NZLR 857 ....................................................51
Re Portuguese Mines (1890) 45 Ch. D. 16................................................................................43
Russell v Northern Bank Development [1992] 3 All ER 161 ......................................................16
Salomon v Salomon & Co Ltd (1897) AC 22 .........................................................................9, 10
Schubert v Schubert [2001] 1 NZLR 76.....................................................................................10
Scottish Co-op Wholesale Society v Meyer [1959] AC 324 .......................................................52
Scottish Cooperative Wholesale Society v Meyer [1959] AC 324..............................................51
Shell (Petroleum Mining) Co Ltd v Todd Petroleum Mining Co Ltd 16/2/06, MacKenzie J, HC
Wellington CIV-2004-485-2233..............................................................................................15
Smith, Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116...........................................11
Sojourner v Robb [2006] 3 NZLR 808 .......................................................................................65
Sojourner v Robb [2008] 1 NZLR 751 .................................................................................63, 64
Struthers v Oppenheimer NZ Ltd [1994] MCLR 156 ..................................................................54
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Taylor v Todd [2004] 3 NZLR 76 ...............................................................................................12
Thorrington v McCann (1998) 8 NZCLC 261,584 ......................................................................65
Torrice v Hayhow HC Auckland CIV-2003-485-1995, 14 May 2004 ..........................................55
Traveller v Lower (2004) 9 NZCLC 263,570..............................................................................68
Trevor Ivory Ltd v Anderson [1992] 2 NZLR 515 .......................................................................10
Tweedie v Packsys Ltd (2005) 9 NZCLC 263,845...............................................................55, 65
Vercauteren v B-Guided Media Ltd [2011] NZCCLR 9 ..............................................................65
Vrij v Boyle [1995] 3 NZLR 763 .................................................................................................55
Vujnovich v Vujnovich (1988) 4 NZCLC 64,474.........................................................................53
Wayde v NSW Rugby League Ltd (1985) 180 CLR 459............................................................53
WEL Energy Group v Hawkins [2001] 3 NZLR 374 ...................................................................19
Westpac Securities Ltd v Kensington [1994] 2 NZLR 555 ...................................................20, 39
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285....................................................51, 64
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INTRODUCTION
Forms of Legal Association
There are a number of categories of legal structures:
Sole Trader;
Partnership (Partnership Act 1908);
Limited Liability Partnership (Limited Partnerships Act 2008);
Unincorporated Society;
Incorporated Society (Incorporated Societies Act 1908);
Co-operative Companies (Co-operative Companies Act 1996);
Trusts (including the Trustee Companies Act 1967); and
A Company: (a company can be either privately owned or publicly listed)
Administrative and Legislative Structure of New Zealand Company
Law
New Zealand companies are regulated under the Companies Act 1993 (referred to as the Act).
Company law is regulated by:
1. Legislation: The Companies Act 1993 is the main piece of legislation for companies in New
Zealand. There is legislation, however, dealing with discrete topics in company law such as the
Takeovers Act 1993, Financial Reporting Act 1993; Corporations (Investigations and
Management) Act 1989; Financial Markets Authority Act 2011; Securities Act 1978; Securities
Markets Act 1988; and the Receiverships Act 1993.
2. Administration: Importantly, company law is regulated by the Companies Office and the
Financial Markets Authority. The Companies Office administers the Companies Register. The
Register of Companies records basic information about every company available online in an
electronic register which is publically available which in turn builds confidence in businesses by
governing the relationships between shareholders, directors and creditors. The Financial
Market Authority is to promote and facilitate the development of fair, efficient, and transparent
financial markets. The Authority monitors compliance with, investigates and enforces financial
markets legislation. This includes investigating the activities of financial market participants and
other interested person involved in the market. The Authority also reviews the law and practices
relating to financial markets as well as working with other relevant regulatory agencies.
3. Court jurisdiction: the courts interpret Companies Act 1993 and associated legislation.
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SEPARATE LEGAL ENTITY
Under the Companies Act 1993, a company must have:
A name which has been reserved by the Registrar of Companies (ss 10 and 20);
At least one share, shareholder and director (s 10); and
A registered office and address for service (ss 186 and 192)
Once a person who properly completes the application for the registration of a company, a
Registrar must register the application and issue a certificate of incorporation (s 13).
Classifying Companies
A company can be privately owned or publicly owned. A privately owned company has a great
deal of flexibility in the way that it operates. A publicly owned company, however, that wishes to
be publicly listed needs to comply with the NZX (New Zealand Exchange) Listing Rules. The
Listing Rules dictate how a company is to conduct the financial and disclosure aspects of its
business. The key difference is that publicly owned companies have more onerous obligations
of disclosure to prospective and current shareholders.
Separate Legal Entity and Legal Capacity
Section 15 of the Companies Act 1993 provides that a company is a legal entity in its own right
separate from its shareholders and continues in existence until it is removed from the New
Zealand register. Section 16 states that a company has full legal capacity to carry on or
undertake any business or activity, do any act, or enter into any transaction. Section 30 of the
Interpretation Act 1999 provides that “person” includes a corporation sole, a body corporate,
and an unincorporated body. In practice, this means that a company as a legal person may
bring actions in the courts and have actions brought against it.
This basic doctrine provides that because a company is a separate legal entity, its members are
not liable for any debts incurred by the company (in excess of the amounts paid up on the
shares held by the member in the company’s capital). This essentially means that a company’s
creditors cannot recover the company’s liabilities from the shareholders. By contrast, a sole
trader or a person trading in a partnership will ordinarily be personally liable for business debts.
The doctrine is codified in s 97(1) of the Companies Act 1993 which provides that “Except
where the constitution of a company provides that the liability of the shareholders of the
company is unlimited, a shareholder is not liable for an obligation of the company by reason
only of being a shareholder” and was first espoused in English Common Law: Salomon v
Salomon & Co Ltd (1897) AC 22.
Limited liability is the number one reason for the incorporation of a company. A policy
justification of limited liability of companies is that it decreases the need for shareholders to
monitor actions of management or other shareholders, encourages investment diversification
and promotes economic efficiency. Another justification for the incorporation of companies
generally is for taxation purposes to share income amongst members of a family because a
company can easily transfer its shares unlike other business structures where the process of
transfer is more complex. The nature of shares, in addition, means that there are different
classes of shares. Other business structures may need to be better organized and limited
liability creates credibility in the market. Lastly, a company unlike a trust continues in existence
until the company is removed from the Companies Register.
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The major disadvantage of incorporation is cost and the onerous ongoing obligations of the
company. This includes annual reports, financial statements, and the appointment of auditors.
The activities of the company are also subject to publicity through the Companies Office
website. Additionally, minority shareholders may be subject to the tyranny of the majority.
Salomon v Salomon & Co Ltd (1897) AC 22
Facts: S sold his own successful business to a limited liability company which he incorporated
and appointed himself managing director. The sale price which was rather optimistic was paid
with the issue of shares, cash and a debenture. Salomon owned almost all of the shares but his
wife and five children each had a share. When the company was liquidated after the business
failed, the liquidator claimed that the company was a sham because the company was an agent
of Salomon and that Salomon should be fully liable for the company’s debts. This was because
as a debenture holder, Salomon was entitled to preference above other unsecured creditors.
This case establishes the fact that legal personality is recognized even where one shareholder
effectively controls the company.
Lee v Lee’s Air Farming Ltd [1961] AC 12
Facts: Mr Lee incorporated a company which had two shareholders, Mr Lee and his solicitor. Mr
Lee was the sole director. Mr Lee entered into a contract of service with “Lee’s Air Farming Ltd”.
While out flying for “Lee’s Air Farming Ltd”, the plane crashes and Mr Lee is killed. The question
for the court was whether Mr Lee was a “worker” under the Workers’ Compensation Act 1922
and whether Mrs Lee could thereby recover compensation for the death of Mr Lee.
Held: Mr Lee could act in different capacities as employee and director independent from the
company itself. Lord Morris found that “one person may function in dual capacities” so that the
company and Mr Lee as an employee were separate legal entities so as to permit contractual
relations between them. This meant that Mrs Lee was entitled to the worker’s compensation.
Trevor Ivory Ltd v Anderson [1992] 2 NZLR 515
Facts: Mr Ivory trading through a limited liability company (Trevor Ivory Ltd) advised a client to
spray a crop of berries with a certain chemical to get rid of weeds. The chemical killed the crop
of berries as well. The question for the court was whether Mr Ivory could be personally liable in
the tort of negligence because Trevor Ivory Ltd was insolvent.
Held: A limited liability company and its shareholders are separate. As Mr Ivory had identified
himself as trading through the limited liability company only that company could be liable.
Schubert v Schubert [2001] 1 NZLR 76
Facts: A husband and wife live in a property that is owned by a company in which the husband
held all but one share. The question for the court was whether the house was the matrimonial
home for the purposes of the Matrimonial Property Act 1976.
Held: The house was owned by a company. The husband and the company were separate legal
identities and although the husband owned the shares in the company that owned the
matrimonial home, the husband did not beneficially own the matrimonial home.
Macaura v Northern Assurance Co Ltd [1925] AC 619
Facts: Macaura assigned the right to timber on his land to a company which Macaura duly
received shares in. Subsequently, the company owed money to Macaura. The trees burnt to the
ground and Macaura sought to enforce an insurance policy taken out in his own name.
Held: Macaura could not claim under the insurance policy because the insurance policy was in
his name and not the company which had been assigned the right to timber on his land. As a
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shareholder and creditor, Macaura did not have an insurable interest in the timber.
However, there are common law exceptions to the general rule that companies have a separate
legal identity independent of individual owners and managers. This is known as lifting or
piercing the corporate veil.
In Attorney General v Equiticorp Industries Group Ltd (in stat man) [1996] 1 NZLR 528 at 541,
McKay J stated:
The phrase ‘to life the corporate veil’ is a description of the process by which in certain
situations the Courts can look behind the coporate façade and identify the real nature of a
transaction and the reality of the relationships created. It is not a principle. It describes the
process, but provides no guidance as to when it can be used. If the apparent transactions are a
sham, the Court must look behind them to ascertain the true position.
Avoidance of Legal Obligation and Fraud
Gilford Motor Co v Horne [1933] 1Ch 935:
H is contractually obligated by a restrictive covenant not to solicit customers from his employer,
GM Motor Co.
H resigns after 3 years, incorporates his own Company and has the company enter K with
customers of GM Motor Co.
GM Motor Co brought an action against H for breach of contract. The Court held against H, who
cannot use the separate legal personality doctrine to avoid legal obligations.
Jones v Lipman [1962] 1 WLR 832:
L enter K to sell house to J. Before completion of transaction L sold house to Co incorporated by
him; L invented Co to prevent specific performance of transferring house to J.
The Court held against L.
Official Assignee v 15 Insoll Avenue Ltd [2001] 2 NZLR 492
Facts: Mr Russell was bankrupt. He set up a company using false names and appointed
directors who knew nothing about the operation of the company. The Official Assignee who was
appointed on Mr Russell’s bankruptcy claimed that he was entitled to the company’s assets.
Held: The company was a sham or facade and the alter ego of Mr Russell with the intention of
defrauding creditors. The company was manipulated and operated in a manner inconsistent
with being a independent legal entity and the Official Assignee could recover from the company.
The court would have imposed a constructive trust in equity instead of lifting the corporate veil.
Agency
A company may be an agent of its shareholders or the actions of its controllers in certain
circumstances. If an agency relationship exists there can be a visiting of company obligations
down to the shareholders or controllers. Of course, the whole practice of incorporating a
company to carry on a business is that the business will be the companies business and not the
business of the shareholders or controllers and the finding of an agency will be rare.
Smith, Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116
Facts: A parent company owned some land and a subsidiary company operated on this land.
Birmingham Corporation compulsorily acquired the premises over which the subsidiary had a
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lease. The Birmingham Corporation was only statutorily obliged to pay the subsidiary for
business interruption but not to those on a short term lease.
Held: As the subsidiary company effectively acted as an agent for the parent company, the
parent company was entitled to compensation for the value of the land and the business
interruption of the subsidiary company from Birmingham Corporation. Atkinson J held that six
factors should be balanced:
(1) Were the profits of the subsidiary those of the parent company?
(2) Were the persons conducting the business of the subsidiary appointed by the parent
company?
(3) Was the parent company the “head and brains” of the trading venture?
(4) Did the parent company govern the venture?
(5) Were the profits made by the subsidiary company as a result of the skill and direction of the
parent company?
(6) Was the parent company in effective and constant control of the subsidiary?
Corporate Groups :
In Re Securitibank Ltd (No. 2) [1978] 2 NZLR 136, a group of companies had deliberately been
set up with independent companies with different identities to ensure that the Moneylenders Act
1908 was not breached. It was held there was no reason to pierce the corporate veil and ignore
the separate personality of companies. People were entitled to organize their affairs in a way
which keeps them outside of legislation by the use of a separate legal entity.
The relationship between parent (holding) companies and their subsidiaries is now also
governed by s 5 of the Companies Act 1993. The definition of a holding company and
subsidiary are very specific and the separate identity doctrine will only be disregarded in
extremely rare circumstances. However, if definitional hurdles are not met and a statutory claim
therefore fails, this does not preclude a common law claim in the alternative (which may be
successful despite the outcome of the statutory claim).
Pre-Incorporation Contracts :
Section 182 of the Act explains that a “pre-incorporation contract” is a contract purporting to be
made by a company before its incorporation or a contract made by a person on behalf of a
company before and in contemplation of its incorporation. Such contracts may be ratified within
a reasonable timeframe once the company is registered and are treated as valid and
enforceable if the prescribed method of ratification in the Act is followed.
Taylor v Todd [2004] 3 NZLR 76
Facts: A farm was to be bought by Mr Lai, a Malaysian buyer. Due to an overseas buyer being
involved, the Overseas Investment Commission required consent. Mr Lai wanted his company
yet to be formed, Dycom, to purchase the farm. The vendors wanted to sell to another
purchaser at a higher price because of difficulties with the specified consent needed.
Held: Dycom was incorporated for a different purpose than to hold the land in question. In fact,
when the agreement for sale and purchase of the farm was signed there had been no clear
decision that Dycom would purchase the farm. A pre-incorporation contract must be made on
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behalf of a specified company in full contempalation of that company’s incorporation.
In circumstances where the pre-incorporation contract is not ratified or the company is not
registered, the promoter can be made personally liable to pay damages to each other party to
the pre-incorporation contract, under ss 183 or 185. Section 183 means that there is an implied
warranty on behalf of the promoter that the company will ratify the contract within a specified
period in the contract or within a reasonable time after incorporation. Section 185 provides that
in proceedings against a company for the breach of a ratified pre-incorporation contract, the
Court in its discretion may order relief against the promoter who made the contract.
Section 184 allows a party to a pre-incorporation contract that has not been ratified by the
company power to apply to the Court for an order validating the contract, an order directing the
return of property or any other relief that the court considers just and equitable.
New Zealand Maintenance Team Ltd v Taigel (1991) 5 NZCLC 67,397.
Facts: A person owned a pie shop and wanted to set up a similar shop in Wellington with
another company yet to be incorporated. He contacted Maintenance Team to undertake
maintenance work. Maintenance Team were not getting paid for the work and sued Taigel
personally for breach of contract. Taigel argued the newly formed Pieland Ltd was liable as
Pieland Ltd was liable for the rental of the property where the work was being conducted.
Held: There had been no formal act of ratification by Pieland Ltd of the contract by Taigel. As
there had been no effective act of ratification, Taigel was made personally liable.
Development Finance v McSherry Export Kilns Ltd (in liq) (1987) 3 NZCLC 99,998
Facts: A new company was to be formed to expand an existing company and a loan was made
over the newly formed company to be secured by a first debenture. The company was
registered one day after the debenture had been signed and so the debenture was made with a
company that did not exist at the time the contract was made.
Held: The act of registration was insufficient to amount to an act of ratification. There had to be
some clear adoptive acts which amounted to ratification. This act of ratification of a preincorporation contract needed to be clearly identified as amounting to an act of ratification so
that there is full knowledge of all the essential facts that relate to the particular transaction.
Elders Pastoral v Gibbs [1988] 1 NZLR 596
Facts: The question for the court was whether a debt was owed by a company or the promoter
was personally liable for the debt that had been created in a pre-incorporation contract.
Held: A possible argument could be made that the implied warranty for personal liability had
been excluded. Evidence was led that a phone conversation meant that the company name had
been used rather than a personal name which could have negated personal liability.
♠♠♠♠
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