Company LawLecture 3Deirdre Mc Gowan deirdre.mcgowan@nuim.ieChapter 2 Thuillier; Chapter 4 (4.024 -4.079 Courtney)

Separate Legal Personality• Every natural person has a legal personality• If you incorporate a company – it will have a separate legal

personality -• This is a fundamental principle of company law and what makes

companies so useful for running a business.• Upon incorporation a company becomes a separate legal entity

distinct from its members. Thus it acquires rights, obligations and duties which are different and distinct from those of its members. Assets debts and obligations all belong to the company and not to the members

• Company is a ‘meta-physical person’ – no physical manifestation. Capable of acting only through others. Corporate dealings can only be carried out by human intervention – it is this aspect of corporate dealing that most company law is concerned with

Quigley Meats Ltd v Hurley [2011] IEHC 192• Quigleys Meats Limited owned a butcher’s shop in Cork. It was

operated by Mr Quigley and his three sons.• It supplied a lot of meat to restaurants and hotels.• The defendants, John & Margaret Hurley had a bar and

restaurant called “An Seanachie.”• The Quigleys usually dealt with the chef in any given

restaurant. In this case Margaret Hurley was in charge of the day to day running of the pub, so although the Quigleys started out dealing with the chef they came to deal with Margaret personally, delivering meat three times a week.

• Every month an invoice would issue at the beginning of the month and the Hurleys were expected to pay by the end of the month.

Quigley Meats• The Hurleys became bad at paying their bills and the Quigleys

would regularly call on Margaret trying to get paid and making arrangements for payment.

• The Quigleys thought they were dealing with the Hurleys personally but payments were always made by cheque drawn on an account in the name of ‘The Seanachie Cottages Limited’

• The Quigleys instructed their solicitor to pursue the Hurleys for unpaid amounts. The solicitor carried out a search in the CRO – found the company – The Seanachie Cottages Limited and suggested that it should be the defendant in any court proceedings.

• But a number of other factors suggested that the bar and restaurant was not operated by the company…

Quigley Meats• The Quigleys at all times dealt with Margaret Hurley

personally, the licence to the premises was in John Hurley’s name and the principle object of The Seanachie Cottages Limited was ‘to develop land and build townhouses.’

• The plaintiff decided to issue proceedings in the circuit court against John and Margaret Hurley trading as Seanachie Restaurant and obtained judgment for over €26,000.

• The Hurleys appealed, arguing that the debt was the company’s and not theirs personally.

• Mr Justice Peart in the High Court agreed. The payment of the account by cheques drawn on the company account was he held, determinative of the issue. The plaintiff knew, or ought to have known that they were dealing with a limited liability company.

Quigley Meats• It was of course open to the plaintiff to pursue the company for

the debt, but by this stage it had gone into liquidation and had no assets with which to discharge the debt.

• In order to protect their position the plaintiff should have investigated who they were dealing with from the beginning and if they were not happy to deal with a limited liability company either not supply it with goods or seek a personal guarantee from the individuals involved.

• This case illustrates the practical difficulties created by the creation of the fictional identity that is a company. A company cannot enter into contracts by itself – it has no physical existence – someone must act on its behalf – care must therefore be taken in business to determine who exactly one is dealing with, the physical person or the physical person on behalf of a limited liability company.

Limited v unlimited liability• Why is it important to know who you are dealing with?• Because companies can have limited liability – if a company has

no assets you cannot get any money from it• People cannot have limited liability – they are fully liable for their

debts which can be enforced against all of their assets

Salomon v Salomon & Co Limited• [1897] AC 2.• The Donohue v Stevenson of Company Law• FACTS• Aron Salomon had a large business manufacturing footwear and he owned

a number of warehouses in London. • In 1892 Mr Salomon set about restructuring his business which he had run

for a number of years as a sole trader. His principle motivation was that his sons wanted to participate in the business.

• He sold his business to the newly incorporated Salomon & Co Limited for the sum of £38,782. The company was to pay him 20,000 fully paid up £1 shares and £8,782 in cash. The balance took the form of a loan from Salomon to the company which was secured by a floating charge over all the company’s assets.

• Members of Salomon’s family received one share each (a total of 6) – held as nominees of Salomon – effectively a one man company.

• Salomon was principle shareholder and creditor of company.

Salomon v Salomon & Co Limited• The debentures held by Salomon were later mortgaged by

Salomon to Edmund Broderip as a security for a loan.• Unfortunately the business went downhill due to a general

recession and industrial unrest. In October 1898, an order was made for the winding-up of the company, at which date the company’s liabilities exceeded its assets by £7,773. If the debenture holder was paid, the unsecured creditors would get nothing.

• The liquidator promoting the interests of the unsecured creditors argued that the floating charge was invalid on the grounds of fraud.

• The High court, and the Court of Appeal ordered that Salomon should pay the creditors personally saying that the ‘pretended sale to the company was an utter fiction’

Salomon v Salomon & Co Limited• The Court of Appeal was overturned by the House of Lords who

pointed out that (per Lord McNaughten)• The company is at law a different person altogether from the

subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or a trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. That is, I think, the declared intention of the Act.

• Although Mr Salomon was a director and shareholder of the company that did not make him liable for the company’s debts.

• Further because he was also a secured creditor of the company he was entitled, similarly to any other secured creditor, to be repaid his debt in priority to unsecured creditors.

Salomon v Salomon & Co Limited• The principle in Salomon is known as the veil of incorporation.

The law will not go behind the separate personality of the company to get at members – except in some exceptional circumstance that we will talk about later.

• The sole trader can limit his liability to the amount which he has invested in the company and can protect this investment by subscribing for secured debentures, rather than shares, so as to rank in priority to subsequent debenture holders, unsecured creditors and other shareholders.

Roundabout Ltd v Beirne & Ors• [1959] IR 423.• A limited company, Marian Park Inns Limited, operated a pub.

Most of the staff of the pub joined a trade union at the same time. The controllers of the company were unwilling to employ unionised staff and the company closed the pub and dismissed all the staff.

• The union legally picketed the pub• The controllers of the company then set up a new company,

Roundabout Limited, and leased the pub from the Marian Park Inns Limited to it. Three non-union barmen were appointed directors of the new company. The new company could not be classed as an employer because all of the staff were directors therefore it could not be subject to a trade dispute

Roundabout Ltd v Beirne & Ors• Roundabout then sought an injunction restraining the strikers

from picketing the premises. Dixon J granted the injunction in the High Court stating:• The new company is in law a distinct entity, as is the old company.

Each company is what is known as a legal person. I have to regard the two companies as distinct in the same way as I would regard two distinct individuals. I must, therefore, proceed on the basis that a new and different person is now in occupation of the premises and carrying on a business there’

Tunstall v Steigman• [1962] 2 QB 593.• Florence Steigman owned a butchers shop and the shop next

door. Harriet Tunstall rented the next door shop. When Tunstall’s three year lease was coming to an end, Steigman told her that it wasn’t going to be renewed. Tunstall applied to the county court for a new lease (as she was entitled to do under landlord and tenant law) and Steigman opposed the application, saying that she wanted to extend the butcher’s shop into the next door premises.

• The relevant landlord and tenant law provided that a landlord could refuse to grant a new lease on the basis that he intended carrying out his business in it.

• But Steigman operated her business through a limited liability company – she owned the property personally!

Tunstall v Steigman• The Court of Appeal held that Steigman could not say, as

required by the Act, that she intended to carry out her business from the premises, because she was not intending to do business there, the company was.

• The landlord was Steigman personally and as she carried out her butchers business through a company she was not free to say that she – the same person who owned the property – was expanding her business.

DPP v Rosberry Construction Limited• Unreported Court of Criminal Appeal, 6th February 2003• The defendant was a limited liability construction company

which operated a site building houses in Newbridge. A worker was killed on the site whilst digging a trench . Both the company and one of its directors were prosecuted for failing to prepare a safety statement.

• They were both fined in the Circuit Court.• The company sought leave to appeal the severity of the fines.

One argument made was that as the director and the company were essentially the same thing two separate fines could not be imposed. Ie the failure to prepare the safety statement was the failure of one of them only – not both.

DPP v Rosberry Construction Limited• Hardiman J held that this was entirely wrong because it failed to

recognise that the two were separate legal entities• If someone sued Mr McIntyre in respect of the liabilities of the company,

one can assume Mr. McIntyre or his lawyers would be quick to point out that these are two completely different entities. He has drawn down the veil of incorporation, the effect of which is to render him, except in restricted circumstances under the Companies Act, safe from liability for the companies debts.

• Is this a little unconvincing? Can a company have criminal intent?• In Ireland corporations are generally liable for criminal acts only under

regulatory statutes that specifically provide for it. Legislation in Rosberry specifically provided for double liability.

• In England, Wales & NI – Corporate Manslaughter and Corporate Homicide Act 2007 – ‘corporate manslaughter’ is committed where the way in which a corporation’s activities are managed or organised causes death, or amounts to a gross breach of duty by the organisation to the deceased.

Directors as employees• In a lot of small companies the work which the company performs

is carried out by a director or a shareholder and often by someone who is both a director and a shareholder. The question can then arise as to whether a contract of employment exists between the company and the director/shareholder worker.

• Lee v Lee’s Air Farming Ltd [1961] AC 12• Mr lee was a pilot and had a crop spraying business which he

operated through a limited liability company. He owned all the shares and was the controlling director. He was also employed by the company as a pilot. He was killed whilst flying on company business. His wife sought compensation under NZ Workman’s Compensation Act as the widow of a ‘worker.’

• The case made it all the way to the House of Lords (NZ had dominion status at the time)

Lee v Lee’s Air Farming Ltd

• A ‘worker’ was defined as ‘any person who has entered into or works under a contract of service…with an employer.. .whether remunerated by wages salary or otherwise’

• The insurance company argued that as Mr Lee was the controlling shareholder and governing director of the company he couldn’t be an employee.

• The House of Lords held that the pilot was in a contractual relationship with the company, which was a separate legal entity. Even though his duality of roles could lead Lee, as governing director, giving orders to himself as employee.

Lee v Lee’s Air Farming Ltd• Lord Morris• The work that was being done was being done at the request of

farmers whose contractual rights and obligations were with the company alone. It cannot be suggested that that when engaging in the activities above referred to [spraying crops] the deceased was discharging his duties as a governing director

• Would the decision have been different if he was killed carrying out more ‘directorial’ tasks?

• How is a company to get anything done unless an actual person does it? What then is a company’s legal relationship with all these people who do things for it? Principle Q of company Law.

Secretary of State for Trade & Industry v Bottrill• [2000] 2 BCLC 448.• Bottrill was the only shareholder in a company called

Magnatech Limited. There was one other director and two other people who were specifically employees.

• It was intended that the American company that supplied Magnatech Limited would eventually take 80% of the shares in the company but before this happened Magnatech became insolvent and Mr Bottrill was made redundant.

• The company was unable to pay outstanding wages and redundancy payments.

• Mr Bottrill applied to the Department of Trade and Industry for redundancy pay but they argued that because he was a director and the sole shareholder of the company it had been within his control to stop the company dismissing him.

Secretary of State for Trade & Industry v Bottrill• Therefore he was outside the class of ‘employee’ entitled to

have their redundancy payment paid by the state.• He took his case to an industrial tribunal – it was defended by

the department all the way to the Court of appeal.• Lord Woolf MR• Mr Bottrill’s status as a sole shareholder was only temporary and

any control which he had of the company was only theoretical. The actual control was held by the American group. The industrial tribunal laid stress on the fact that Mc Bottrill had paid National Insurance Contributions and tax as if he was an employee, was entitled to sick pay, worked fixed hours and had a contract with Magnatech that was described as a contract of employment.

Next Lecture• Disregarding Separate Legal Personality• Chapter 5 Courtney, Chapter 3 Thuillier.• Tutorial question – on Moodle Wednesday.