Companies can be classified differently depending on the type of company formation. As stated in Companies Act 1985, a company may have either of the following forms:
Public and private companies may be limited as well. For instance, the UK plc company formation or private limited company. In order to know about how to create a limited company UK and the procedure for starting a ltd company UK it should be understood that what’s actually meant by the term limited. By the term limited, the Section 1 (2) of Companies Act 1985 states that:
- In a company offering limited liability in terms of shares under the memorandum, the members have to pay any amount left to be paid on their shares.
- In a company having liability limited by guarantee under the memorandum, the members have to contribute an amount for the assets at the time of liquidation of the company.
However, these conditions are the general rules for the payment of liabilities in limited companies. Situations may arise when these rules need to be set aside and the members may be asked to pay an amount greater than the pre-decided amount of liability. This is known as “Piercing the Corporate Veil”. This article discusses certain case studies relevant to piercing the corporate veil.
Agency Relationship between Company and its Members
To create limited company UK techniques of agency may be used. The company and the shareholders may act as agent to each other as a matter of fact in exceptional situations. However, the rulings regarding the companies acting as agents explain the importance of separate legal personality and the intervention of piercing the corporate veil principle in this regard.
To demonstrate it consider the following case:
Re FG (Films) Ltd
The company wanted to get the registration done for its movie named “Monsoon” under the label of Britain as stated by the Act of Cinematograph Films (1938-1948). The company was actually financed by an American company. The American company had also signed an agreement regarding the provision of finance and other commodities that were required by the company for making the film. However, the request for registering the film as British was rebuffed by the board of Trade. The board argued that the film was actually the creation of the American company. The company counter claimed that according to the Cinematograph Films Act (1938-1948), it fulfilled the definition of maker of the film. The case was taken to the court.
Vaisey J Held:
- The shares of the company had been divided into 100 equal parts. Each part costed 1 pound. So the total capital of the company was initially 100 pounds. Out of 100 shares, 90 were owned by an American director. The rest of the 10 shares were held by a British director. The third director of the company owned none of the shares.
- No staff was employed by the company and the place of business was restricted to the area where its office was registered.
- The company seemed to have taken so little part in arranging finance and material required for making the film. The contribution was majorly done by an American company. Hence, it seems suitable to state that the company was acting as an agent to the American company. The American director of the company was also the president. An amount of almost 80000 pounds was given for financing the company under the orders of the American director.
- The idea of considering the American company and the American director as a representative to the company is merely a perverted image of the truth.
- The company was merely created to get the film registered under the British banner. And merely for having undertaken for the major expenses of the film by an American firm. The decision of the Board of Trade of not to register the company is fair and correct.
Inferences from the Case
- The case leads to a scenario of piercing the veil. In comparison to this case, a similar scenario was created in the case of Salomon. However, the House of Lords had rejected the idea of piercing the corporate veil and given a verdict in contradiction to the verdict of this case. Upon the verdict of Salomon, Kerr LJ stated in the case of JH Rayner:
- The basis that House of Lords used to overrule the verdict given by the Court of Appeal was that it rejected the idea given by the doctrine that a company could be termed as an agent by checking the extent of influence of the members on the company or also by checking whether the objective of the company behind contracting was solely to benefit the members. This basis of rejecting the doctrine forms the foundation of Modern company law.
- This conclusion is derived that to entitle a company as an agent, an existing evidence should be given. A mere inference drawn from the authority of the company or the number of shares given to any member cannot be enough to mark the company as an agent. No law prevents the company from acting as an agent to any shareholding member or any other person. In fact, law allows any such company to be formed via express rule. Take the example of the case, Rylands v Fletcher. In this case, the factory belonging to the company had blown up. Hence, the company assented to take the ownership of two of its shareholders’ land as a representative to them. The ability of a company to become an agent does not contradict the verdict given by Salomon. Rather it gives the confirmation that despite the ability of a company to become an agent, a company remains and must be treated as a separate legal personality. However, if the judge merely draws the conclusion from the extent of control a member has over the company or the shares he has, that the company is an agent, the law may become unpredictable as the judge may opt for piercing the corporate veil at his will.
- An example is the case of Smith, Stone & Knight Ltd, where the verdict given by Atkinson J was based on reasons quite similar to the case of DHN Food Distribution Ltd. It was held by Atkinson J that the parent company could claim recompense in return of the land occupied by its subsidiary on the basis that the subsidiary was an agent to it. The judgement passed by Atkinson J has remained a target of critics such as in “The Company as a Separate Legal Entity” by MA Pickering etc.
- Another inference comes from the case of tax, Firestone Tyre and Rubber Co. Ltd. The judgement passed for this case stated that the English company was acting as an agent to an American parent company by manufacturing tyres in UK and using them for the fulfilment of orders given by the American company. However, it did not prove that the parent company controlled the English company.
Trust Relationship between Trustee Company and its Members
Another relation that can be formed between the members and the company while starting a ltd company UK is based on trust instead of agency. There can be exceptional situations where a trust bond is formed between a company and its members, such that the company acts as a trustee whereas the members act as beneficiaries. Such argument of having a trust relation instead of agency relation has prevailed in lower courts of Salomon. However, even in such a relation, the corporate veil cannot be pierced unless an affirmative evidence is given to prove the existence of the relation due to trust. The next case elaborates a trust relation.
Trebanog Working Men’s Club
The incorporation of the club was done via the provisions of the Act of Industrial and Provident Societies (1893-1913). It so happened that the company used its name to buy liquor and paid the amount by drawing cheque from its account. After the purchase, the company presented the liquor to the members in return of money. However, the company was set liable to a charge for selling the liquor at the retail level without having any license. The company went to appeal in the court.
Lord Hewart CJ stated:
- Since the Licensing Act of 1872, it is agreed commonly that if a deal is made related to liquor owned as a property by all the members equally in a club, and a member lays an order for it and pays for the alcoholic liquor, the transaction will not be considered as a sale but rather as transferring a special property from all the members to the one who ordered and paid for it.
- As in the case of Graff, the member’s club was authentic. One of the rules of the club stated that the all the property of the club should be bestowed to its trustees. Field J held that the real meaning of the rule was that the property of the club belonged to the members collectively and the trustees just acted as agents to the members. Huddleston B. gave a concurring verdict. The authenticity of their verdicts could not questioned so far.
- The verdict given in Graff is sufficient to judge this case under consideration. As it becomes clear that there is no requirement for a license to sell liquor to the members of a member’s club, it becomes difficult to differentiate lawfully between the legal persons who can be entitled as holders of the property on member’s behalf. These legal persons may include agents, trustees or any company formed for this purpose as long as the liquor’s interest remains genuine. The point important to the discussion is that the holding of the property by any of these legal persons should be on behalf of the members.
Inferences from the Case
- In the case of Wurzel, there were two associations formed for the carriage of coal via lorries by the miners in return of money depending upon the mileage. One of the associations had not been incorporated and ruled by the court to be working for the carriage of personal coal of the members and hence no carriage was done in violation to the laws of license. The other one was incorporated and was convicted by the court to be an entity isolated from its members. No argument was given related to the presence of a trust relation in the court.
- In another case of Abbey, it was held by Danckwerts J that if a company was managed by trustees and all the trusts regarding education held all the shares, the piercing of corporate veil could be done by the court. The verdict does not consider the fact that it might be probable that trustees intend to auction either completely or some of their shares, annulling the verdict given by the court.
- The last case to be discussed is Re Schuppan, which was related to marital property. The verdict of the case states that if any property is taken over by the couple in a way that gives a conclusion that one of the married persons held the property on the basis of trust for the second partner, the fact that the former person was controlling the company which held the property would not hinder the court in drawing a similar conclusion.
The above case studies explains the rules and regulations regarding piercing the corporate veil and gives a clear understanding of how to create a limited company UK by using either the agency or the trust relation.