CORPORATE AND BUSINESS LAW

(GLOBAL VERSION)
 LECTURE 9:

Corporations and legal personality

© Professional School of International Accountancy and Finance.

 LIABILITY

 A sole trader owns and runs a business. They contribute

capital to start the enterprise, run it with or without
employees, and earn the profits or stand the losses of the
venture.
 Sole traders are found mainly in the retail trades (local
newsagents), small scale service industries (plumbers),
and small manufacturing and craft industries. An
accountant may operate as a sole trader.
 If the business gets into debt, a sole trader's personal
wealth (for example, private house) might be lost if the
debts are called in, as they are the same legal entity.

© Professional School of International Accountancy and Finance.

 LIABILITY

 Corporate personality is a common law principle

that grants a company a legal identity, separate from
the members who comprise it.
 It follows that the property of a company belongs to
that company, debts of the company must be satisfied
from the assets of that company, and the company has
perpetual succession until wound up.

© Professional School of International Accountancy and Finance.

 LIABILITY

 The key reason why the company is a popular form of

business association is that the liability of its members to
contribute to the debts of the entity is significantly
limited.
 For many people, this benefit outweighs the
disadvantage of the formality surrounding companies,
and encourages them not to trade as sole traders or
(unlimited) partnerships.

© Professional School of International Accountancy and Finance.

 LIABILITY

 A company is a separate legal entity from its owners

(corporate personality) (Saloman v Saloman and Co
Ltd 1897).
 The company is liable without limit for its debts.
 Members have limited liability for the company's debts.
 Members have to pay any money still owed from
purchasing their shares or under a guarantee.

© Professional School of International Accountancy and Finance.

LIABILITY

© Professional School of International Accountancy and Finance.

TYPES OF COMPANY 1

© Professional School of International Accountancy and Finance.

 TYPES OF COMPANY 2

 A public company is a company whose constitution

states that it is public and that it has complied with the
registration procedures for such a company.
 A private company is a company which has not been
registered as a public company under the Companies
Act.
 The major practical distinction between a private and
public company is that the former may not offer its
securities to the public.

© Professional School of International Accountancy and Finance.

 TYPES OF COMPANY 3

 Before it can trade a company originally incorporated as a

public company must have a trading certificate issued by
the Registrar. The conditions for this are:
– The name of the company identifies it as a public
company by ending with the words 'public limited
company' or 'plc' or their Welsh equivalents, 'ccc', for a
Welsh company.
– The constitution of the company states 'the company is
a public company' or words to that effect.
– The allotted share capital of the company is at least the
authorised minimum which is £50,000.
– It is a company limited by shares.

© Professional School of International Accountancy and Finance.

 TYPES OF COMPANY 4

 A private company is the residual category and so does

not need to satisfy any special conditions.
 They are generally small enterprises in which some if
not all shareholders are also directors and vice versa.
 Ownership and management are combined in the same
individuals.

© Professional School of International Accountancy and Finance.

 TYPES OF COMPANY 5

Quoted companies
 Public companies may seek a listing on a public
exchange.
 This option is not open to private companies, who are
not allowed to offer their shares for sale to the public.
 Listed companies are sometimes referred to as quoted
companies (because their shares are quoted publicly).

© Professional School of International Accountancy and Finance.

 TYPES OF COMPANY 6

Small companies
 Small companies benefit from the small companies
regime's reduced legal requirements in terms of filing
accounts with the Registrar and obtaining an audit.
 The definitions of a small company for the purposes of
accounting and auditing are almost identical.
 In accounting terms, a company is small if it meets two
of the following applicable criteria:
(a) Balance sheet total of not more than £5.1million
(b) Turnover of not more than £10.2 million
(c) 50 employees or fewer on average

© Professional School of International Accountancy and Finance.

 TYPES OF COMPANY 7

Multinational companies
 The vast majority of companies will simply operate in
one country.
 However, some of the larger companies in the world will
operate in more than one country. Such companies are
multinational.
 A multinational company is a company that produces
and markets its products in more than one country.

© Professional School of International Accountancy and Finance.

MULTINATIONAL COMPANIES

© Professional School of International Accountancy and Finance.

TYPES OF COMPANY

© Professional School of International Accountancy and Finance.

 VEIL OF INCORPORATION 1

 Because a company has separate legal personality

from the people who own or run it (the members/
shareholders/directors), people can look at a company
and not know who or what owns or runs it.
 The fact that members are 'hidden' in this way is
sometimes referred to as the 'veil of incorporation'.
 Literally, the members are 'veiled' from view.

© Professional School of International Accountancy and Finance.

 VEIL OF INCORPORATION 2

The veil can be lifted by statute to enforce the law:

 Trading without a trading certificate
 Fraudulent and wrongful trading
 Disqualified directors
 Abuse of company names

© Professional School of International Accountancy and Finance.

 VEIL OF INCORPORATION 3

The veil can be also lifted under case law:

 To prevent evasion of legal obligations, liability,
taxation
 For reasons of public interest
 Where there is a quasi-partnership
 Group to be treated as a single economic entity
because of statutory provision
 Corporate structure being used as a façade/sham

© Professional School of International Accountancy and Finance.

 VEIL OF INCORPORATION 4

 The examples of lifting the veil include examples of

where, if they have broken the law, directors can be
made personally liable for a company's debts.
 This is very rare.
 If those directors are also members, then limited liability
does not apply.
 This is the only time that limited liability is overridden
and that the member becomes personally liable for the
company's debts due to their actions as a director.

© Professional School of International Accountancy and Finance.

VEIL OF INCORPORATION

© Professional School of International Accountancy and Finance.

 DISTINCTION BETWEEN
COMPANIES AND PARTNERSHIPS
Companies
 Separate legal entity to owners
 Members' liability usually limited
 Any number of members (> one)
 Perpetual succession
 Transferable shares
 At least one director (two for public company)
 Written constitution
 File accounts with Registrar
 Security of floating charge over assets
 Strict rules over repayment of capital

© Professional School of International Accountancy and Finance.

 DISTINCTION BETWEEN
COMPANIES AND PARTNERSHIPS
Partnerships
 No existence beyond members
 Partners' liability usually unlimited
 May be limited to 20 partners (at least two)
 Dissolves when a partner leaves
 Interest cannot be assigned
 Assets owned jointly
 All partners can participate in management
 Written partnership agreement may be in place
 No requirement to file accounts
 May not create a floating charge over assets
 Partners may withdraw capital easily
© Professional School of International Accountancy and Finance.
DISTINCTION BETWEEN
COMPANIES AND PARTNERSHIPS

© Professional School of International Accountancy and Finance.

 LECTURE EXAMPLE 9.1

 Alex and Barry own equal shares in their private limited

company. On formation they both invested £10,000
each. The company has become insolvent owing
creditors £700,000. Discuss how much Alex and Barry
will be required to pay the creditors?

© Professional School of International Accountancy and Finance.

 LECTURE EXAMPLE 9.1

 Under the concept of separate legal identity Alex and

Barry will not be required to pay anymore to creditors.
Their liability is capped at their original investment of
£10,000. However, the company's assets will be realised
ie sold and used to pay the creditors.

© Professional School of International Accountancy and Finance.

 LECTURE EXAMPLE 9.2

What type of company would you recommend in the

following scenarios?
(a) Alan would like to form a company, by advertising the
offer of shares.
(b) Bob would like to form a company with his two
brothers to manufacture widgets.

© Professional School of International Accountancy and Finance.

 LECTURE EXAMPLE 9.2

What type of company would you recommend in the

following scenarios?
(a) Alan would like to form a company, by advertising the
offer of shares.
(b) Bob would like to form a company with his two
brothers to manufacture widgets.

© Professional School of International Accountancy and Finance.

 LECTURE EXAMPLE 9.2

What type of company would you recommend in the

following scenarios?
(c) Chris would like to form a company to manufacture
toys, however, he does not want his employees, friends
or family to know how well the company is doing.
(d) David is a founder member of a local charity. The
charity would like to set up a shop which can be used to
sell locally made goods. Any profits made by the shop
will be ploughed back into the charity. The bank is
happy to lend £100,000 to get the shop started, but have
asked for some security.

© Professional School of International Accountancy and Finance.

 LECTURE EXAMPLE 9.2
(a) Alan: Public company limited by shares. As shares are
to be offered to the public, provided other conditions
are met.
(b) Bob: Private company limited by shares. Generally
family run companies.
(c) Chris: Private company with unlimited liability. No
need to file accounts. Chris will be fully liable for the
company’s debts.
(d) David: Private company limited by guarantee. David
could ask other members to provide guarantees in the
event the company is wound-up.

© Professional School of International Accountancy and Finance.

 SALOMON V SALOMON AND
CO

 S transferred his business as a sole trader into a

company legally incorporated with the correct number
of shareholders. Sale of assets to the company meant S
was owed money by S and Co, which was secured by a
debenture. On subsequent liquidation this took priority
over unsecured trade creditors who argued it was invalid
as the creditor – S – and the debtor – S and Co – were
technically one and the same. It was held that this was
incorrect. The company, being validly constituted, was a
separate legal entity to S and the debt was upheld.

© Professional School of International Accountancy and Finance.

 GILFORD MOTOR CO V
HORNE

H was a car salesman, and left G. His contract stated that

he wasn't allowed to sell to G's customers for a period after
leaving. H set up a company which then approached his
former customers; H argued that firstly his company was
approaching the customers, not him; and secondly, if thee
was wrongdoing, his company was liable and not him. The
courts held that the company was sham, and granted an
injunction against his company as well as him

© Professional School of International Accountancy and Finance.

 DAIMLER CO LTD V
CONTINENTAL TYRE
 C sued D for debts owing. C was a UK company;
however all shareholders but one were German. D
argued that they should not pay the debt to German
individuals to prevent money going towards Germany's
war effort. The court held that C was German.

© Professional School of International Accountancy and Finance.

 EBRAHIMI V WESTBORNE
GALLERIES
 E and friend N set up a gallery in Holland Park. Initially it
was a partnership and then N suggested setting up a Ltd Co.
to attain limited liability. Shares were allocated on a 50/50
basis with equal management rights.
 N then introduced his son to the company, effectively
reducing E's shares to 49%. N and his son passed an
ordinary resolution sacking E as a director and then paid
bonuses to the directors and declared nil dividend. E
applied to court for just and equitable winding up. It was
held that the company was in legal effect a partnership
based on a relationship of mutual trust and confidence
which had clearly broken down. The court wound the
company up.

© Professional School of International Accountancy and Finance.

 DHN FOOD DISTRIBUTORS V
TOWER HAMLETS LBC

 Veil was lifted to recognise that subsidiaries of a

company which were in occupation of premises which
were the subject of a CPO were one and the same as the
holding company. As a result the money could be paid to
the holding company because the group of companies
was viewed as 'one economic entity'.
 This case was subsequently held to be applicable only in
specific circumstances. The general rule is the one
followed in Adams v Cape Industries.

© Professional School of International Accountancy and Finance.

 ADAMS V CAPE INDUSTRIES

 Cape, an English company, was head of a group

including wholly owned subsidiaries.
 In the United States claimants had been awarded
damages for asbestosis against a marketing company
NAAC, a subsidiary of Cape.
 The Court of Appeal held that the judgement could not
be enforced against Cape, as the subsidiary was to be
treated as a 'separate legal entity with all the rights and
liabilities which would normally attach to separate legal
entities...'

© Professional School of International Accountancy and Finance.

 SPECIMEN PAPER

 Which of the following business forms does the use of

the abbreviation 'Ltd' after the name of a business
indicate?
A A limited partnership
B A limited liability partnership
C A private limited company (1 mark)

© Professional School of International Accountancy and Finance.

 SPECIMEN PAPER
C. Ltd indicates that a business is a private limited
company

© Professional School of International Accountancy and Finance.

 SPECIMEN PAPER

 Which of the following is indicated by the abbreviation

'Ltd' at the end of a company's name?
A The shares are not transferable
B The shares may not be offered to the public
C The shares are freely transferable on the stock
exchange (1 mark)

© Professional School of International Accountancy and Finance.

 SPECIMEN PAPER

B. Ltd indicates a private limited company. This

company's shares may not be offered to the public.

© Professional School of International Accountancy and Finance.

 SPECIMEN PAPER

Ho subscribed for some partly paid-up shares in Io Co. The

company has not been successful and Ho has been told that
when Io Co is liquidated, he will have to pay the amount
remaining unpaid on his shares. However, he is not sure to
whom such payment should be made.
 In limited liability companies, shareholders are liable to
which party for any unpaid capital?
A Creditors
B The directors
C The company
D The liquidator (2 marks)

© Professional School of International Accountancy and Finance.

 SPECIMEN PAPER
C. Shareholders are liable to the company for any unpaid
capital.

© Professional School of International Accountancy and Finance.

END OF THE LECTURE