Anglo-American Business Law
Chapter 4 The company form
夏秀渊
Company
law
Formation
Capital
Management
Insolvency
Chapter 4 The company form
Learning Objectives:
To learn some knowledge about legal personality
and to learn some knowledge about the different
regulations to different types of companies.
Topic list
 1. Distinction between sole traders,
partnerships and companies
 2. Limited liability of members
 3. Types of company
 4. Effect of legal personality
 5. Ignoring separate personality---lifting the veil of the company
Piercing the corporate veil
 Sole trdder
Salomon v. Salomon & Co Ltd.
Facts: Mr. Salomon was a prosperous
leather merchant, who decided to
convert his business into limited
company. He incorporated Salomon & Co
Limited, with himself, his wife and his
five children as directors. The company
purchased the business and S&C Ltd
had to pay for the business:
20001—Mr. S
£20,007
share capital
£38,782
£10,000
debentures
£8,782
cash
6—other shareholders
secured
-- Mr. S
unsecured
-- other creditors
 The company ran into financial
difficulties, and the debenture
holders appointed a receiver. The
receiver sold off all of the company's
assets, which were sufficient to pay
off the debenture holders, but
nothing was left for the unsecured
creditors.
 Imagine whether S would be awarded
the assets owed by S&C Ltd ? Why?
 S was separate from S&C Ltd (veil)
 he was a secured creditor (through
the debenture)
It was the decision of the House of Lords
relating to limited liability for the members
of companies under English law.
 It established that
a
company is a separate legal entity
a
separate legal entity gives rise to
many of its characteristics
 the
most important of them is
limited liability for the members of
the company
1. What is company?
(1) Definition of company
It is a legal entity registered
under the Company Act 1985.
key feature: it has a legal
personality separate from its
owners and directors.
It is a formal arrangement,
surrounded by formality and
publicity.
Chief advantage: member’s liability
for the company’s debts is typically
limited.
(2) Definition of legal personality
 It is a common law principle that
grants a company a legal entity,
separate from the members who
comprise it.
 It is the veil.
(3) Consequences of separate
personality
 (a) Limited liability: limited to the
nominal value of the shares who helds.
 (b) Perpetual succession:
any change
in its membership can't change the company’s
existence and the company ceases to exist only
when it is formally wound up.
 (c) The company owns the
business property in its own right:
shareholders own shares, they do not own the
assets of the business they have invested in (Macaura
v Northern Assurance (1925)).
 (d) The company has contractual
capacity its own right and can sue
and be sued in its own name: members




are not able to bind the company.
The rule in Foss v Harbottle
Where a company suffers an injury, it is for
the company, acting through the majority of
the members, to take the appropriate
remedial action; an individual cannot raise
an action in response to a wrong suffered
by the company.
(e) Lifting the veil of incorporation
There are a number of occasions, when the
doctrine of separate personality will not be
followed.
Macaura v Northern Assurance Co
Ltd
(1925)
 Fact: M formed a company to buy his
previous timber business. However,
he forgot to transfer the insurance
from his name to his company. The
business burnt down.
 Were the insurers required to pay this
fee?
 Held: no, since it is unlawful to insure
against another person’s loss.
 Appendix: The principle of separate legal




personality was confirmed by more recent
cases, one of which follows.
Lee v Lee’s Air farming Ltd 1960
Fact: The C, Mr. Lee, who owned the
majority of the shares of an aerial cropspraying business, and was the sole
working director of the company, was
killed while piloting the aircraft.
Decision: Although he was the majority
shareholder and sole working director of
the company, he and the company were
separate legal persons.
Therefore he could also be an employee
with rights against it when killed in an
accident in the course of his employment.
2. Limited liability of
members
Ford Co. CEO Bill Ford
2004 AGM
 (1) Definition: It is a protection
offered to members of certain
types of company.
 In the event of business failure,
the members will only be asked to
contribute identical amounts to
assets of the business.
Amount
paid
Assets
100000
Liability
600000
A
30% (30000)
Full
B
50%(50000)
40000
C
20%(20000)
0
Q：Who can the creditors sue for
paying the liability? What should the
shareholders do?
 Why Xier became “white-hair girl”?
 (2) Function:
 (a) Protection for members against
creditors: the creditors cannot demand payment of
the company’s debts and debts from members of the
company.
 (b) Protection from business failure:
 The company is liable without limit for all its own debts.
(When the company is unable to pay its own debts, the
company may wind up, which will enable the creditors to be
paid from the proceeds of any assets remaining in the
company. )
 (3) Although the creditors of the
company cannot ask the members of
the company to pay the debts of the
company, there are some amounts
that members are required to pay, in
the event of a winding up.
 Members may have to pay money still owned from
purchasing their shares, or under a guarantee.
3. Types of company
Type
Characters
by shares
Private (Ltd)
limited to the
amount unpaid on
their shares
Public (Plc)
By
guarantee
limited to the amount that
they undertake to
contribute when wind up
LC
ULC
typically
charities
(a) Corporate body;
(b) Can only be a private company;
(c) Members' liability is unlimited;
(d) Benefit to member is privacy as accounts
must be prepared and audited but need not
be filed.
 (1) Fast forward:
 (a) Limited liability only to the
members, not the company.
 (b) Guarantee companies have the
advantage of not having to include the
word "limited” in the name, although it
still must appear on some business
documentation.
Guarantee Liability
 If a business fails, a small Guarantee
can protect the owners of a company
from personal loss, or even
bankruptcy.
 Unless you have given any separate
guarantee for a particular transaction
- or acted illegally - the debts are the
company's, not yours.
Appendix: Change of status
 (a) A company may change from
limited to unlimited or vice versa,
but once re-registered may not
change back again.
 (b) s.49 CA 1985: A limited company
may re-register as unlimited. (100%
majority required)
 (c) s.51 CA 1985: An unlimited
company may re-register as limited.
(special resolution)
(2) Public and Private Companies
 (a) Private Companies: Tend to be
small. They cannot issue shares to
the 'public'.
 (b) Public Companies:
 To certificate a public company, the
conditions are:
•
•
•
•
Name: end with plc (ccc)
Memorandum of association said to be so
Authorized capital: minimum £50,000
Limited company
(c) Listed Companies
 Shares are 'quoted' on the Stock
Exchange and thus can be traded on
the open market.
 Their shares must have a market
value of at least £700,000 (usually
more) before a 'listing' can be
obtained.
中石油A股上市 公司市全球第一
上市公司需及时披露金融投资和重大合同
About minimum £50,000
 Original as plc: will not be permitted
to trade until its allotted share capital
≥£50,000
 Re-register as a plc: will not be
permitted to trade until its allotted
share capital ≥£50,000 (25% paid up
and the whole of any premium)
(d) Differences between private and public companies
public companies
Private companies
directors
≥2, ≤70(age),
≥1
Rules on
loan
More stringent (including their
subsidiaries)
Capital
have minimum-issued and paid- No Minimum amount.
cannot offer its
up capital(≥￡50,000)
can offer its shares/ debentures
shares/ debentures to
to public
public
Name
Must end its name with word
plc
Must end its name with
word limited/ Ltd
Commence
ment of
business
After obtain a certificate from
the registrar
As soon as it is
incorporated
Change
of
status
public companies
Private companies
75% majority to reregister as
private
100% written consent
to re-register as
unlimited
75% majority to reregister as public
the controls over
them are relaxed
shorter
distribution of dividend
payments
the requirement to keep
accounting records
Whether can provide financial Yes
assistance for the purchase
of their own shares
may purchase their own
Yes
shares out of capital
(5)Group’s of companies
Parent
company Owens all the shares of
Subsidiary
company
Multi-national
companies
A company which produces and markets its
product in more than one country.
Commonly known examples include Coca Cola or Nike.
However, the majority of companies only operate in
one country.
4. Practice：Veil of incorporation
 (a) Once incorporated, a company
exists as a separate legal person from
its owners or members and a veil of
incorporation is said to be drawn
between them. By contrast, an unincorporated
association, such as a partnership, does not have a legal
identity separate from that of its members.
 The distinction between them was
clearly illustrated in the case of
Salomon.
 The veil of incorporation gives rise to
a number of important legal
consequences. (Limited liability, legal entity,
Transferability, contractual capacity)
In certain circumstance, the veil will
be lifted
Apply to
Individuals and
company
(members, directors,
managers…)
companies in
the same group
(holding company,
subsidiaries)
Effect
Individuals personally
liable for a company’s
debts
restrictions on individuals
may be extended to the
company
companies in the same
group will be treated as a
single commercial entity
Members of company limited by guarantee:
give a separate guarantee to a specific
transaction and has wrongful acts
 (b) In certain circumstance, the veil
will be lifted with the result either
that:
 the company will be identified
with its members or directors, or
that
 a number of companies in the
same group will be treated as a
single commercial entity.
 (c) Lifting of the veil by the courts
 The court may ignore the distinction
between a company and its members
and managers if the latter use that
distinction to evade their existing
legal obligations.
 As a result, members may be made
personally liable for a company’s
debts or restrictions on individuals
may be extended to the company.
(Gilford Motor Co. v. Horne)
 (i) Breach of public interest
(Re F G Ltd
1953)

(Re FG (Films) Ltd (1953), where the major shareholder of the company was the
president of a US company and the company was formed for sole purpose of enabling
a film qualify as a British film)
 (ii) to evade liabilities
(Re H and Others, 1996)
 (ⅲ) to evade taxation
(Unit Construction Co Ltd
v. Bullock (Inspector of Taxes))
 (ⅲ) to evade taxation (Unit Construction
Co Ltd v. Bullock (Inspector of Taxes))
 (ⅳ) Quasi-partnership: to reveal the
company as a quasi-partnership. Where the
company only has a few members, all of them are involved
in its affairs, the individuals who have operated contentedly
as a company for years fall out and one or more of them
seeks to remove the others.
 In each of these cases the veil was lifted to




identify a company with its members or
directors. It can also be raised so as to
eliminate the distinction between
companies, that is, to treat groups as a
single legal entity.
In Adams v Cape Industries 1990, the court
of Appeal suggested that the veil might be
lifted only where:
the subsidiary is acting as agent for the
holding company;
the group is to be treated as a single
economic entity;
the corporate structure is being used as a
sham to conceal the truth.
(d) Lifting of the veil by statute
 (i) Fraudulent Trading: Directors and
other officers may be become liable
personally liable for a companies
debts, if they engage in fraudulent or
wrongful trading or participate in the
management of a company in
contravention of an order under the
CDDA 1896. (This is also a criminal offence.)
 (ii) Failure to obtain a trading
certificate (plcs only).
 (ⅲ) Sole member: Public companies
must have at least 2 members. Breach
of this rule makes the remaining
member jointly and severally liable
with the company if they are aware of
the fact and the situation exists for
more than 6 months.
 (Liability is only in relation to debts
incurred after the initial 6 month
period.)
 Other examples of lifting the veil:
personal guarantees by members/
directors; preparation of group
accounts; under tax law.
 Gilford Motor Co. v. Horne
 Fact: Mr. Horne was an ex-employee of The
Gilford motor company and his employment
contract provided that he could not solicit
the customers of the company. In order to
defeat this, he incorporated a limited
company in his wife's name and solicited
the customers of the company. The
company brought an action against him.
 Held: it was clear that the main purpose of
incorporating the new company was to
perpetrate fraud. Thus the court of appeal
regarded it as a mere sham to cloak his
wrongdoings.
 Commend: The veil was lifted to prevent the
circumvention of a restraint of trade
To evade Tax
 Unit Construction Co Ltd v. Bullock
(Inspector of Taxes)
 Fact: Three companies, wholly owned by a
UK company, were registered in Kenya.
Although the company’s constitutions
required board meetings to be held in
Kenya, all 3 were in fact managed entirely
by the holding company.
 Held: The 3 companies were resident in UK
and liable to UK tax. The Kenya connection
was a sham, the question being not where
they ought to have been managed, but
where were managed.
Summary of situations in which
the veil can be lifted
To enforce law
To enforce
obligations
To expose
groups
Legal
obligations
Single
economic
ability
Wrong use of
company name
Quasipartnership
Corporate
structure a
sham
Disqualified directors
Public
interest
Liability of a sole
member for debts
Fraudulent and
wrongful trading
Practice：Partnership V Company
 There are a number of advantages
 (a) Legal entity: most important factor; a
company is a distinct legal entity separate
from its members whereas in a partnership
there is no separate legal person as distinct
from the partners. This means the assets
and liabilities of the business belong to the
company itself.
 (b) Limited liability: If the company
becomes insolvent, the shareholders are
not liable for the company’s debts, unless
they remain unpaid shares. A partner is
normally jointly and severally liable for all
the debts of the firm to the extent of his or
her personal wealth.
 (c) Perpetual succession: In the case of
companies, there is no cessation brought
about by a change in the membership, but
any change of partners in a partnership
operates as a termination of the old
partnership and the beginning of a new one.
 (d) Transferability: Subject to any
restrictions imposed by the company’s
constitution, a company member’s shares
constitute a form of property and are freely
transferable. Although a partner can assign
his interest, the assignee of it will not as a
result become a partner in a partnership.
 (e) Capital and security: A company may
find it easier to raise capital for the
expansion of the business than a
partnership since the liability of potential
investors is limited and a company can
borrow by debentures and loan stock.
Furthermore, a company can raise capital
by providing a fixed or floating charge as
security but a partnership cannot provide
security by way of a floating charge. There
are , for the benefit of shareholders, various
rules and regulations, contained in the
Companies Act and the company ' s
constitution, which are stringently applied
relating to the reduction or distribution of a
company’s capital whereas in the case of a
partnership partners may，by mutual