Topic 1: Company Formation, Pre-Incorporation
Contracts, Characteristics of a Company, Lifting the
Veil of Incorporation // Sections 10 to 16, 20 to 25, 182 to 185,
301.
Companies Act 1993 is divided into Parts 1 to 22.
•
Important parts include:
•
Part 1: Preliminary (definitions)
•
Part 2: Incorporation and its consequences
•
Part 3: Capacity, powers and validity of actions
•
Part 5: Company constitution
•
Part 6: Shares
•
Part 7: Shareholders’ rights and obligations
•
Part 8: Directors’ powers and duties
Section 10: A must for all companies:
- Name, Shares, Shareholders, Directors.
Section 11: One person can apply for a company.
Section 12: Application procedure and lodgment- all done
online now.
Section 13: Company will be registered once it has received a
certification of incorporation and satisfy the CLA.
Section 14: Tells us more about the certificate.
Section 15: Separate legal personality.
Section 16: Company is in full power and capacity.
Section 20: Name to be reserved.
Section 21: Name of company if liability of shareholders limited.
The name of a company must end in “Limited” if the shareholders
liability is limited.
Section 22: Application for reservation of name.
Section 23: Change of name
Section 24: Direction to change name
Section 25: Use of Company Name
Section 96: Simply defines what a shareholder is.
Section 97 (2) (a): Limited liability section, which simply says a
shareholders liability, is limited.
CONSTITUTION:
Structure: Company only mandatory and presumptive provisions
govern Company. Include s 26, 28, 32, 59, 76, 106, 117. If it deals
shareholder rights then Thomas v Thomas and s 174.
Thomas v Thomas: The court may then make any order it thinks it
sees fit, as it is just and equitable to do so.
Lifting of the corporate veil: At common law: Courts tend to lift the
corporate veil and attribute liability to directors when there in the
circumstances below: In the case of AG v Equiticorp Industries
Group Ltd the CA said “The phrase to lift the corporate veil is a
description of the process by which in certain situations the courts
can look behind the corporate façade and identify the real nature of
the transaction and the reality of the relationship created. It is not a
principle. It describes the process but provides no guidance as to
when it can be used.”
Pre-Incorporation of a Contract
182 (1): Defines the preincorporation contract. Briefly put it is a
contract made on behalf of the company- before the company is
incorporated.
182 (2): Says a pre-incorporated contract may be ratified.
182 (3): If ratified then it is enforceable against the company.
183: Warranty (warranty in law is promise)
183(1)(a): Promise being made, that the company would be
incorporated.
183(1)(b): that when the company is incorporated it would ratify the
contract
183 (2): person making promises can be sued if they do not fulfill the
promises.
184: Tells us about failure to ratify. If the company does not raitfy
then an application can be made for an order of ratification. Or an
application ca be made to return property given to the company.
Ratification? : Have a resolution for directors or shareholders. Or the
mere fact the company is carrying out its normal duties.
185: Pre-incportation contract breaches. Damages can be soughted.
Summary.
It is appropriate to summarise the law with regard to pre-incorporation
contracts as has been established by the Companies Act 1993:
a)
The definition of a pre-incorporation contract is
important. It is a contract made by a company before its incorporation
or made by a person on behalf of a company before and in
contemplation of its incorporation. It requires that there must be a
definite prospective company in the mind of that person when the
pre-incorporation contract is entered into.
b)
When a person negotiates a pre-incorporation
contract there are implied warranties both with regard to the
incorporation of the contract and the ratification of the preincorporation contract after incorporation.
c)
The liabilities of a person for breach of warranty are
serious and can be to the same extent as for a contractual breach if
the pre-incorporation contract had been ratified.
d)
A pre-incorporation contract may be ratified within the
time period specified in the contract or otherwise within a reasonable
period of time. What amounts to a reasonable period of time needs to
be considered objectively and based upon the circumstances of the
case.
e)
A court has the jurisdiction to validate the contract or
make other orders which it considers to be appropriate in the
circumstances (s 184). While the principle of validation has received
some judicial attention, this principle requires a considerable amount
of judicial development.
The overall equitable jurisdiction given to the court under s 185
requires more detailed consideration by the courts
Caselaw:
Salomon v Salomon [1897]
Thus its assets were running short of its liabilities b $11,000. The
unsecured creditors claimed a priority over the debenture holder on
the ground that company and Saloman were one and the same
person and the company was a mere agent in the eyes of law. But
the House of Lords held that the existence of a company is quite
independent and distinct from its members and that the assets of the
company must be utilized in payment of the debentures first in priority
to unsecured creditors. The court held that though virtually Saloman
was the holder of all the shares in the company, he was also the
secured creditor and was entitled to repayment in priority to the
unsecured creditors.
Body Corporate 202254 v Taylor [2009]
If a director or an employee is found to have made a
misrepresentation, even if it is in the course of their employment, they
can be personally liable. It is important to note that the decision does
not allow for a director to be found vicariously liable for the actions of
his or her company. Instead, directors and employees will only face
claims if their own actions are at fault. An employee who is merely a
conduit for a representation made by their employer will not face
liability.
Lee v Lee’s Air Farming Ltd [1961]
Mr. Lee owned 2,999 of the company’s 3,000 shares
-He also was the company’s governing director whereby he had
appointed himself as the only pilot of the company at a salary
arranged by him. In March 1956, Mr. Lee was killed while piloting an
aircraft.The appellant want to claim Compensation from the company
as the employer of her husband under the New Zealand Workers’
Compensation Act 1922 for the course if her husband's
employment. The issue for determination was whether there existed
the relationship of employer and employee between the company
and Mr. Lee. The court held in favour of appellant and she was
entitled to compensation. Following the grounds of the decision in
Salomon’s case, the company in the sense required by the Act 1922
employed Mr. Lee. Court held that Lee was a separate person from
the company he formed, and compensation was due to the widow.
Thus, the rule of corporate personality enabled Lee to be the master
and servant at the same time.
Trevor Ivory v Anderson [1992]]
This case dealt with the liability for negligent piece of advice
from a one-man company. The Court of Appeal said Trevor
Ivory was not liable even though the company was liable
because, in giving the advice, Trevor Ivory was acting as the
mouthpiece of the company and had not assumed personal
liability.
NZ Maintenance Team Ltd v Taigel
Facts: A person owned a shop, and wanted to set another one
up in Wellington with another company yet to be incorporated.
He contacted Maintentance Tea to undetake maintentance
work. MT were not getting paid for the work and sued Taigel
personally for beach of contract. Taigel argued the newly
formed Pieland Ltd was liable as it 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 effectve act
of ratification, Taigel was made personally liable. Promoter is
personally liable if company does not ratify contract or
company is not formed, Act of registration is not ratification.
Here the court held that the act of registration did not itself
amount to ratification. The court considered two steps which
needed to be undertaken. The first being the registration of the
company and the second being the act of ratification which is
undertaken through conduct which could clearly be identified as
amounting to an act of ratification. In this case the company
failed to ratify the contract therefore personal liability fell on
Taigel.
Ratification has to be a positive act: DFC NZ v McSherry
Export Kilns Ltd: Act of registration is not ratification, held that
for there to be an act of ratification there has to be some clear
positive act which amounted to ratification. In this case the
courts held that because a loan was secured before a company
had been incorporated was not a valid act of ratification as the
company had not been formed at the time of ratification.
Validation by court: s 184(1): A party to a pre-incorporation
contract that has not been ratified by the company after its
incorporation may apply to the court for an order: (a) directing
the company to return property, whether real or personal,
acquired under the contract to that party; or: (b)for any other
relief in favour of that party relating to that property; or
(c)validating the contract whether in whole or in part. If this is of
the opinion by the court that this is just and equitable.
Liability for Ratification: In a situation where liability for
mirsrepresentation occurs for failure to commit to the contract
through ratification liability cannot rest with the company but the
agent negotiating the contract. In the case of Kelner v Baxter
1866 where courts held “where a contract is signed by one who
professes to be signing as agent but who has no principal
existing at the time and the contract would be altogether
inoperative unless binding upon the person who signed it, he is
bound thereby; and a stranger cannot by a subsequent
ratification relieve him from that responsibility.”
Breach of a pre-incorporation contract s 185 - If a preincorporated contract is breached which has been ratified by
the company then the court can order payment of damages or
other relief as the court considers just and equitable, in addition
to or in substitution for any order which may be made against
the company, against a person by whom the contract was
made
Topic 2: Company Constitutions, Shareholder
Agreements // Sections 16 to 19, 26 to 34.
Constitution is:- Set of Companies rules.
Rules governing a company:- Shareholders and Directors
Section 26 A company may, but need not, adopt a constitution:
Section 27 If company has a constitution, it is governed by the
CA subject to any changes to the default rules.
Section 28 If no constitution, the company is governed by the
CA including default rules.
Section 30 provides for the contents of a constitution.
Section 31 provides for the effect of the constitution
Section 31(1) If a provision in the constitution contradicts the
CA- the Companies Act will override
Ordinary Resolution s105
Special Resolution (75% majority) s106
Section 31)(1).In a situation where the constitution contradicts
the CA, the Act will override
Types of provisions in a company constitution:
Mandatory provisions- May not be changed or negated
Presumptive provisions- Apply unless changed or negated
Optional provisions- Apply only if adopted by the company
(a) Mandatory provisionsMandatory provisions- for example, solvency test provisions:
Section 2- definition of distributions:
Section 4(1),52,53,56,59,76 and 77 ! 52, 53, 56 is just
examples of distributions4(1) Meaning of solvency test
(1) For the purposes of this Act, a company satisfies the
solvency test if—(a) the company is able to pay its debts as
they become due in the normal course of business; and
(b) the value of the company's assets is greater than the value
of its liabilities, including contingent liabilities.
! A company cannot make distribution before it has satisfied
that afterwards the distribution the solvency test will be met.
(b) Presumptive provisions- for example :
Limited liability- s 97(2) (a)
Alteration of rights- s36(2)
Types of shares- s 37
Transferability of shares-s39
Authorisations for directors to act in a certain way-s131(2),
131(3) and 131(4)
Legal effect of the Constitution:
! Section 31(1) provides that constitution has no effect where
it is inconsistent with CA
! Section 31(2) provides that, subject to CA,
Constitution is binding as between –
(a) The company and each shareholder; and
(b) Each shareholder.
Hickman v Kent [1915]
H applied for membership of company (sheep breeders
association) and was duly elected
Article 49: any disputes between the company and its members
shall be referred to arbitration
H sued company for refusing to register his sheep
- HELD: Articles of association constitute a contract between
company and its members in respect of their ordinary rights as
members.
Eley v Positive Government Security Life Assurance (1876)
Eley agreed with promoter that he would meet the expenses of
setting up a company on the basis that he would be appointed
as its permanent solicitor
Eley inserted a clause in the articles of association to that effect
- He sued the company for breach of contract when it ceased
his employment
HELD:
! Articles did not confer any rights on outsiders – it only has
legal effect as between company and members in that
capacity.
Foss v Harbottle (1843)
Two shareholders sued directors for breaching articles of
association as well as their duties to company
Directors controlled company
HELD:: Individual members cannot take action (on behalf of
company) to enforce constitution where breach is a procedural
irregularity which can be ratified by an ordinary resolution of
members in general meeting
Company is the proper plaintiff.
Not an infringement of individual shareholder’s personal rights
! Shareholders do not have the right to represent company,
they do not have the locus standi, only Directors.
Shareholders / agreements- intro points:
S 96- defines a shareholder
S97 (2) (a)- provides for limited liability of a shareholder- a
shareholder’s liability is limited up to the unpaid up share
capital
S155 (1)- shareholders appoint directors
S156- shareholders remove directors
! Read s126 (defines the directors) and s128 (directors have
the power to manage).
Shareholders decision making:
Shareholders make decisions through two resolutions:
The ordinary resolution – s 105(1) and s 105(2)
The special resolution- s106(1)- special resolution is defined in
s2
! Shareholder agreements: (binding only shareholders in their
capacity as shareholders) (they can agree on things like
employment)
- Why have a shareholder agreement?
Private contractual document
- Avoids “capacity as shareholder” limitation rule.
- Legal effect: of shareholder agreements
Russell v Northern Banking:
Company had authorised share capital of £1,000 divided into
1,000 shares of £1 each
- Shareholder agreement between 4 members and company
stated that no further share capital shall be created or issued
without written consent of parties to agreement
• Board of directors wanted to raise more capital by issuing new
shares
• HELD:
• Company cannot fetter its statutory power to increase its share
capital
• Members may lawfully agree to exercise voting rights in
accordance with shareholders agreement.
• Shareholder Agreements A constitution only binds
shareholders in their capacity as shareholders; a shareholder
agreement may regulate matters affecting shareholders, in
other capacities. Examples commonly included in shareholder
agreements in this category are restraint of trade or noncompetition clauses affecting shareholders.Care must be taken
not to infringe the rules relating to fettering of directors’
discretionary powers other than as permitted by ss131(2)-(4). The starting point is the proposition that a director as a”donee
of fiduciary powers” is obliged to exercise his discretions in
what he believes to be the interests of the company and the
discharge of this obligation usually neccessitates that he
retains his discretions “unfettered” in any way by anterior
contracts or undertakings. However the courts in the below
cases have held that the above rule is very restricting and that
directors should be able to enter into agreements which will
commercially beneficial.
•
Fulham Football Club v Cabra Estates [1992] As directors are
bound to act for the company, their decision-making authority cannot be
limited to accommodate another’s interests. Hence directors cannot agree
to exercise their discretion in a particular manner. Any contract or resolution
purporting to so fetter a director’s discretion will be ineffective. Directors
can get into any contracts as long as they think it is in the best interests of
the company.
•
Automatic Self Cleansing v Cunninghame Where the
companies articles of association expressly states that directors have the
power to manage and control the company then simple majority shareholders
passing an ordinary resolution because they feel the directors are not acting in
the nest interests of the company cannot stop the directors from doing
anything to the company as the constitution states directors have the power to
do this, and unless it is a special resolution then shareholders cant stop
directors.
Topic 3: Corporate Transactions and Liability.
ULTRA VIRES
! Prior to 1 July 1994 – Those who did remove the objects clause from
their memorandum, or who registered without one after 1 Jan 1984 had full
capacity – ultra vires did not apply.
Ashbury Railway v Riche (1875)
Company (AR) entered into a contract with R to build a railway line in Belgium
•
Objects of company stated in Memorandum of Association
(constitution)
•
Issue was whether the company had capacity to enter into the
contract as it was outside its objects
•
HELD: Doctrine of ultra vires applied – contract was void ab
initio
Shareholders cannot ratify contract either.
What has since happened, substantially the ultra vires has been
overhauled by statute, s17, and s17(1) is important. s17(1): It turns it around
but not substantially and not totally, reverses the ultra vires rule. So in fact a
NZ company can act outside its scope, and that action is valid. However we
still have s164.
•
And s16(1)- Company may restrict its activities- some
companies may decide not restrict activities the UV will not apply, and if
company uses CA as its constitution the UV will not apply. So many
companies can act without worrying about UV rule. Even if companies restrict
activity, s17(1) kicks in also.
•
S164: Injunctions.
•
Briefly put, injunction is a restraining order.
- If company is about the act UV- get an injunction from Court to stop
•
Remedy: Injunctions have to be done ASAP before the
company acts or else no one gives a shit.
•
S19: Constructive notice; according to this, there is no
requirement for constructive notice at all- what does this mean? Before
outsider deals with the company they are assumed to have knowledge of what
the company can and cannot do. Current situation though, is no requirement
and no duty on the person who is dealing with the company to have any
knowledge.
Under common law – doctrine of ultra vires - see Ashbury Railway v Riche
•
In 1983, ultra vires doctrine abolished by statute
•
No act of a company is invalid merely because company did
not have capacity, right or power to do the act: s 17(1) CA
Legal effect of s 17(1) together with s 16(1) is to validate ultra vires
transactions.
! What that means is that, although the company’s action is valid even if it
breaches a constiuational restriction on capacity imposed under s16(2) and
that outside parties are therefore not affected by a company’s exceeding
capactiy, the shareholders and directors are still able to enforce the restriction
through the remedies provided by Part 9 of the Act.
AGENCY
Section 180(1) sets out the methods by which a contract may be entered into
by a company:
Who has authority to act for company?
A person has authority to act for a company
if she or he has:
–
–
Actual authority
•
Express, or
•
Implied
Apparent authority
… UNLESS third party has or ought to have knowledge of lack of
authority or compliance,
because of their position or
relationship with the
company …
• Section 18(1)(a) is similar in effect to common law indoor
management rule
18(2) this would apply where there are circumstances involving fraud.
Section 18(2) proviso:
See Freeman & Lockyer v Buckhurst [1964]
• F&L sued B for fees in respect of work done for the company
at the instructions of K, one of the directors of B
• B argued that company was not liable as K did not have
authority to act on B’s behalf
• Evidence that K acted as if he was Managing Director of B
(with B’s knowledge) even though he was not appointed as such
• HELD: K did not have actual authority but he had apparent
(ostensible, apparent) authority to act on B’s behalf
• The contract was of a kind which a Managing Director would
be authorised to enter
• B was therefore liable to pay F&L as K was acting as B’s
agent
!
In this case, this company was pinned down- the
Company did not stop the guy’s action, so it was binding.
!
Is it fair to impose liability on a company if person is
pretending to acting on behalf? YES! As soon as they knew that the
person was doing so, they should have notified the world.
s 18 reinstates agency principles as well as protects those dealing
with a company from not only lack of authority of its agents but also
lack of capacity or breach of the constitution or act itself. ACTUAL
AUTHORITY - Freeman & Lockyer v Buckhurst
What is apparent authority?
Apparent authority: Someone acting as if they are appointed into that
position and the company condones this behaviour.
!
Apparent or ostensible authority may arise even
where Principal (P) has NOT agreed that Agent (A) can act on P’s
behalf
!
Three (3) requirements at common law (Freeman &
Lockyer):
!
(1) a “holding out” or representation (can be words or
conduct);
!
(2) by someone with actual authority (that A had
authority); and
!
reliance (third party must be “induced” by
representation to enter
!
contract)
!
Representation operates as an estoppel preventing P
from arguing that contract is not binding on P
• Section 18(1) still applies even if a person mentioned in paragraphs
(b) to (e) acts fraudulently or forges a document that appears to have
been signed on behalf of the company UNLESS third party has actual
knowledge of fraud or forgery
SIMILAR TO INDOOR MANAGEMENT RULE
IF a third party has knowledge as of circumstances then they cannot
enforce the contract - Equiticorp Industries Group Ltd v AttorneyGeneral (No 47) [1998] 2 NZLR 481 – Five categories of knowledge
that a third party may acquire are 1. Actual knowledge 2. Wilfully
shutting one’s eye to the obvious 3.wilfully and recklessly failing to
make such enquiries as an honest and reasonable person would
make 4. Knowledge of circumstances which would indicate the facts
to an honest and reasonable person 5. Knowledge of circumstances
which would put an honest an reasonable person on inquiry. Also
Smellie J noted that that the phrase in s 18 c “position with or relation
to” is not limited to the inside relationship with the company but did
require an on-going relationship with the company. What the person
ought to know is determined by his or her position with, or
relationship to, the company.
• Indoor management rule
– a third party can assume that:
• there have been no procedural defects in the appointment of
directors
• board meetings have been properly called and held
• any board or general meeting approval required under constitution or
default rules of CA has been obtained
Royal British Bank v Turquand (1856)
Deed of settlement company
• Company clause gave directors authority to borrow subject to a
resolution passed at general meeting
• Two directors signed a bond on behalf of company with RBB even
though no authorisation was obtained
• HELD:
• Doctrine of constructive notice did not prevent RBB from assuming
that company had complied with its own internal governance rules i.e.
resolution passed.
ss16(1), ss16(2), s18, s135. s194, s300, s301, s373, s374
Enforcing defective contracts
• Where a company denies it is bound by a contract due to
some lack of authority or defect in procedures – s18(1)
• Overlap between common law agency principles and section
18 CA
• Section 18 assumptions are a form of statutory estoppel
protecting third parties dealing with company.
s19: There was a presumption in CL, that someone should about the
company as a third party. That is now changed. You are not required
to have any knowledge.
S18: (Important section): You cannot use s17 as your out; you
have to follow the obligations of the constitution (?).
!
It is also codifying the estoppel cases.
!
S(1) applies even if the person acts fraudulently.
!
Signature is a forgery; it still does not make
difference.
!
Document made on behalf of the company which is
forgery the company cannot say it is not our.
! Section 1(a-e) won’t apply unless you work with
the company or deal with the company on a daily basis.
“Knowledge”- reasonable person test. However with test,
who at the end of the day is reasonable??
!
Constructive knowledge, willful blindness argument.
! Section 18; Big section on Company Liability:
Enforcing defective contracts
Subject to proviso, s 18(1) provides that a company may NOT
assert rights against a third party dealing with the company
that.
UNLESS Third party had knowledge or ought to have known.
• - s18 This section covers whole range of arguments. Going from
implied and expressed authority. It is much broader and will cover
- If outsider dealing with the company and knows for a fact that they
are NOT a director of the company specifically, but she holds herself
as the director, the person cannot get away with that.
• Section 18(1) proviso:
DOCTRINE OF IDENTIFICATION:
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915]
Owner of steamship was found liable under the Merchant Shipping
Act 1894 for loss of ship’s cargo when it was destroyed by fire during
its voyage from Russia to Holland
•
Ship owner would not be liable if the loss of cargo occurred
without his “actual fault or privity”
•
Owner of cargo sued ship owner to recover damages for the
loss of cargo
•
HELD:
•
Loss of cargo was due to unseaworthiness of the ship
•
As MD, Mr Lennard was the “directing mind and will” of the
ship owning company
•
His action was the very action of the company itself.
•
Doctrine of identification
•
Who was actually liable?
- In Identification, you look at the board of directors.
- If we can’t find that directing mind, then say that based on
the directing mind- the company will be liable.
Judge:
A corporation is an abstraction. It has no mind of its own any
more than it has a body of its own; its active and directing will
must consequently be sought in the person of somebody who
for some purposes may be called an agent, but who is really
the directing mind and will of the corporation, the very ego
and centre of the personality of the corporation.
•
What is the problem with the identification principle?
- A company cannot be liable for the low level companies.
The scope of liability is narrow in this. Big area of liability for
which the company is NOT liable. If a low level employee
does something- the company will not be liable.
Tesco Supermarkets v Nattrass [1972] –Identification
principle
Tesco (limited company) owned a chain of supermarkets
stores
•
One of its stores offered washing powder for sale at a higher
price than was advertised in breach of Trade Descriptions Act
1968
•
Store manager’s failure to supervise staff led to contravention
•
Strict liability offence subject to defence if Tesco had taken all
reasonable precautions and exercised due diligence and