Business Law

Business Law read the Assignment Briefing file attached before starting the assignment please BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 1 2014/15 Faculty of Business and Law Business School BA Accounting & Finance Level 5 - Course Code 5M5Z0038 (30 Credits) Business Law Coursework Briefing 2014/15 BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 2 2014/15 Contents Page Introduction and Purpose 3 Coursework Requirement 4 Essay Structure 6 Additional Information: Format & Layout 10 Word Count 10 Referencing 11 Using Case Law 12 Marking Criteria 13 Tips for Achieving A Good Mark 13 Coursework Brief 21 BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 3 2014/15 Introduction The purpose of this briefing document is to introduce you to the coursework requirement for Business Law and to provide you with extra guidance to support you in your work. This document should be used in conjunction with the podcast available on the Business Law Moodle area. Purpose of the Coursework The coursework represents 30% of your overall unit mark. It has been designed to assess your ability to independently research an important and interesting area of company law, to critically evaluate the areas researched, and provide a well structured and reasoned essay on the subject. As well as deepening your knowledge on this vital area of law, it will stand you in excellent stead for the work covered in your Level 6 studies next year. BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 4 2014/15 Coursework Requirement The Veil of Incorporation “The doctrine laid down in Salomon v Salomon & Co Ltd [1897] AC 22 has to be watched very carefully. It has often been supposed to cast a veil on the personality of a limited company through which the courts cannot see. But that is not true. The courts can, and often do, draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind”. Lord Denning in Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners [1969] 3 All ER 442 Required: Discuss the above statement with the aid of relevant legal authorities. The topic chosen for the assignment, the “Veil of Incorporation”, is arguably one of the single most important concepts in Company Law. Your research should lead you to critically consider the practical purposes of the veil, and the instances where the law will “lift the veil”. BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 5 2014/15 Week 13 lectures will focus on this topic, however, you are strongly encouraged to independently research the topic yourself in order to gain a deeper insight and informed opinion. As detailed further below, the key to achieving a pass on this assignment is demonstrating your ability to effectively explain this area of law in your own words; higher marks will be gained for demonstrating your ability to evaluate the law and how it is or is not applied in practice. BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 6 2014/15 Essay Structure All good essays should have a beginning, a middle and an end. With this in mind, the following is an approach you may wish to follow when writing your essay. This is only a guideline, and you are free to follow whatever structure you feel is most appropriate to you. Introduction (100-200 words) Your introduction should provide a succinct summary of the issues you wish to discuss in the body of the essay. This is your roadmap to the essay and should attempt to capture the attention of the examiner. It should tell the reader where you are going and how you plan to get there. The key word above is “succinct” – being mindful of your word count, try not to go overboard in your introduction as most marks will be available for the body and conclusion of your essay. You may find it useful to write your introduction once you have completed the rest of your essay – by this point you will be clearer on the direction your essay took. BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 7 2014/15 The Body of Your Essay (1,000-1,200 words) This is where you will discuss and develop your thoughts in detail. To help you address the key areas under consideration, you should include the following points in essay: 1. What is the “veil of incorporation” and what are its consequences? - Your assignment brief refers to the landmark Salomon v Salomon case, so perhaps firstly use this to explain the veil of incorporation. - What are the other practical consequences of separate legal personality? Are there any examples of case law to illustrate the veil in operation? - What is YOUR opinion? Try to apply a critical mind set – do you agree with the outcome of the cases you find, do you think they are fair (i.e. try to demonstrate critical evaluation)? BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 8 2014/15 2. Lifting the “veil of incorporation” - The quote from Lord Denning suggests that the courts can “draw aside the veil”, and that they “often do”. What does this mean in practical terms? - What are the circumstances under which the law will lift the veil? - Can you find examples of case law to illustrate this? - In what ways do Acts of Parliament lift the veil? - Do YOU think is it right/fair that the law should be able to lift the veil in the cases you identified? - Is it correct that the courts “often do” lift the veil? Or are there only a relatively small number of instances where this has happened? Does it happen enough in your opinion? BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 9 2014/15 - Can you give topical/current examples where you think the veil should be lifted more often? By using the above structure you will demonstrate your knowledge and analysis of the subject matter, and your ability to critically evaluate the issues. An alternative is to include your critical evaluation in a separate section of your essay, where you consider the subject in the round. Either approach is fine, so long as you ensure you demonstrate both aspects – i.e. knowledge and evaluation. Conclusion (100-200 words) This should be a summary of the issues you have discussed in the body of the essay. It gives you the opportunity to neatly wrap up your thoughts and leave a positive and lasting impression on the mind of the reader. BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 10 2014/15 Additional Information Format & Layout Your essay should be word-processed and may contain a mixture of words, charts and pictures. Marks are allocated for the quality of your layout and attention to detail. This means you should pay careful regard to your spelling and grammar, and also perhaps think about splitting up your writing into sections with the use of headings and subheadings. Word Count Write no more than 1,500 (+/- 10%) of your own words. It is very important that you do use your own words; this is a very well covered subject, and therefore the temptation will be there to simply quote passages from a textbook. Please be warned that this will gain you low marks, and also runs the risk of being failed on the grounds of plagiarism. In addition to the 1,500 words, you may also support your arguments with direct quotations from various sources – subject to my point above. Any direct quotations will not be included in your word count. BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 11 2014/15 Referencing One of the purposes of the coursework is to determine your awareness of the topic under discussion and its modern application in practice. You are expected to demonstrate that you have read and consulted relevant texts and authorities on the subject. Therefore, you should support your discussion with: ? Academic authorities – i.e. textbooks and articles. - These will provide an authoritative perspective and opinion on the subject. - Try to use a variety of different sources to broaden your knowledge and demonstrate the range of your research. - Do not cite your lecturer or the lecture materials as academic authorities since they are not recognised and widely available publications. ? Judicial decisions – i.e. case law. - There are a number of standard cases on the area, such as Salomon v Salomon, but extra marks will be awarded for using additional BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 12 2014/15 cases and examples not mentioned in your lecture materials). ? Acts of Parliament – i.e. legislation - Relevant sections of applicable legislation, such as Companies Act 2006 and Insolvency Act 1988, may be cited. An essay, which is not supported with relevant authorities where these exist, is little more than a statement of your own opinion. Please follow the strict guidance about Harvard Referencing provided within the latest version of the MMU Harvard Referencing guide (currently available at http://libguides.mmu.ac.uk/refguide). Using Case Law When using case law in your essay there are lots and lots of cases you can draw upon, so be mindful of your word count. If necessary, try to provide a brief overview of the case rather than a full transcript – remember with case law the important things are: What are the key facts of the case, and what was the outcome? BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 13 2014/15 Marking Criteria There is a detailed marking criteria on page XXX, however in summary the following four factors will be taken into account in marking your essay: 1. Relevant knowledge and understanding of the subject-matter (40%) 2. Discussion, analysis and evaluation of the subject-matter (20%) 3. Use and application of source materials, including statutes, decided cases and academic texts (30%) 4. Presentation and structure (10%) Tips for Achieving a Good Mark 1. Presentation and Layout Pay close attention to your spelling and grammar – always review your work before submission. A good idea is to get someone else to read it for you as a fresh set of eyes can often spot things that you have not. Break your essay into headings and subheadings. This gives your essay a good flow, as it should signpost the reader through your discussion in a BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 14 2014/15 logical way. Using headings and subheadings also helps you to avoid over explaining or merging issues (i.e. waffle!). This is particularly important given the word count. 2. Start by explaining the law in your own words Getting started is often the hardest aspect of writing an essay. “Where on earth do I begin!?” The easiest part of your essay, and probably the best place to begin, is explaining the Veil of Incorporation per the guidance above. Make sure you cover ALL of these areas to ensure you have sufficiently addressed the question. You will have lectures in Week 13 on the veil, and the subject is covered extensively in virtually academic textbooks and commentaries on Business Law – so you should quickly be able to establish an understanding of the subject. When writing academic essays you should write principally in your own words. This means that you are expected to read and research from various appropriate sources (which you can then critique and analyse). You should then summarise and paraphrase what you have read to BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 15 2014/15 demonstrate your critical appraisal and level of understanding. Occasionally, you might decide to provide evidence of your arguments by referring to the ideas or words of another person; when you do this, you must provide the correct citation within the main body of your essay and a full reference within a reference list at the back of your essay. All citations and references must be provided in the Harvard style. Please note – The temptation will be for you to simply copy large chucks of text from various sources but you will achieve very few marks doing this, even if the quotations are referenced. You can/should refer to relevant authorities as much as possible, but this should be to support your own explanation. Below are examples of good practice and bad practice, as an illustration. BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 16 2014/15 Good Practice The case of DHN Food Distributors Ltd v Borough of Tower Hamlets (1976) provides circumstances where the courts will lift the veil to treat group companies as a single legal entity. Whilst I believe this made practical sense in the circumstances of that case, authors such as Kelly et al point out that the judgement was largely frowned upon in later decisions and does not reflect a proper application of the law (Kelly et al, 2014). Bad Practice “There is authority for treating separate companies as a single group, as in DHN Food Distributors Ltd v Borough of Tower Hamlets (1976), but later authorities have cast extreme doubt on this decision, and, although it has never been overruled, it is probably true to say that it is no longer an accurate statement of law.” (Kelly et al, 2014: p 359) 3. Show Critical Evaluation This is the thing that most students will worry about, but it should not be a major cause for concern as long as you have researched and consider the subject. BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 17 2014/15 The vast bulk of your essay involves describing the law. When describing the law try to give your own critical perspective – i.e. what do you think about the law? Do you agree or disagree with how it is applied? When marking your essay, the reader will look for certain “buzz phrases” to help identify where you have evaluated the subject matter rather than simply described it. Examples of buzz phrase include the following: - “In my opinion...” - “I agree/disagree with the judgement in this case because…” - “This is logical because…” - “This may lead to problems because…” This should give you an idea of the type of thing we are looking for. 4. Use a wide range of sources This really speaks for itself, but more marks will be awarded to essays that demonstrate a wide reading of the subject. Simply referring to your BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 18 2014/15 core text book all the way through your essay will show little evidence of research. A number of business law texts are included in your unit reading list for example, and the internet contains lots of reference materials – although be careful to only include internet sources if they are of good quality. For instance, Wikipedia is not renowned for its academic rigour or credibility and therefore is not a suitable source of reference for your essay (although it may provide some useful pointers to help with your understanding). 5. “Think outside the box” The highest marks will be awarded to those who are able to demonstrate a wider understanding and application of the law. In the context of the veil of incorporation this might include, but is not limited to, the following: - Finding current topical examples of where the veil is lifted, or perhaps circumstances where you think it should be lifted. Remember lifting the veil essentially refers to the idea of looking beyond the legal entity of a BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 19 2014/15 company to hold specific people (e.g. shareholders, directors, employees) personally responsible for their actions. Have you seen any examples of this recently in the news? 6. Seek help when you need it! You should start your coursework as soon as possible and seek help or clarification from your lecturer/tutor as early as you can. When seeking help, please ensure that you have specific questions to ask rather than simply asking for general advice on approach – as this should be provided in this document. Any good questions will be summarised into a “Frequently Asked Questions” document and hosted on Moodle. Please be aware that under no circumstances will your unit lecturer or tutors read your work and provide feedback. BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 20 2014/15 Finally I would like to wish you all good luck with your essay and I look forward to seeing the results of your hard work! Paul Hunt Lecturer, Business Law BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 21 2014/15 Assessment Brief 2014/15 Unit Title: Business Law Unit Code: 5M5Z0038 Level: 5 Unit Leader: Paul Hunt Contact Details: Email address: p.hunt@mmu.ac.uk Telephone No: 0161 247 3783 Room Number: 4.40 New Business School Due Date: 25th February 2015 Feedback Return Date: 25th March 2015 SUBMISSION INSTRUCTIONS: Electronic: Hard Copy: Undergraduate bin Moodle/Turnitin Postgraduate bin Email Other Other Other Instructions: You must submit your assignment in by BOTH hard copy (in the undergraduate bin) AND via Moodle (using the Turnitin link provided). Failure to submit using both methods may be classed as non-submission. Assignment Title: The Veil of Incorporation Unit Learning Outcomes Covered LO1 LO2 LO3 LO4 No of Elements: 1 Individual – Weighting 30% ? ? ? ? ? BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 22 2014/15 Feedback Return Information Summative Mark Written/Audio feedback Moodle/Turnitin Other: Moodle/Turnitin Other: Assignment Details The Veil of Incorporation “The doctrine laid down in Salomon v Salomon & Co Ltd [1897] AC 22 has to be watched very carefully. It has often been supposed to cast a veil on the personality of a limited company through which the courts cannot see. But that is not true. The courts can, and often do, draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind”. Lord Denning in Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners [1969] 3 All ER 442 Required: Discuss the above statement with the aid of relevant legal authorities. Further Details The purpose of this assignment is for students to independently research an area of law, and deliver an essay on the subject. The topic chosen for the assignment, the “Veil of Incorporation”, is arguably one of the single most important concepts in Company Law. I very much hope that you find the topic interesting, and that your research leads you to critically consider the practical purposes of the veil, and the instances where the law will “lift the veil”. There will be lectures on this topic in the second term, as well as some detailed guidance to support you – however you will be strongly encouraged to research the topic yourself in order to gain a deeper insight and informed opinion. ? ? BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 23 2014/15 Additional Information Your essay should be word-processed. Write no more than 1,500 (+/- 10%) of your own words. In addition to the 1,500 words, you may also support your arguments with direct quotations from various sources. You are required to use “relevant legal authorities” in your essay. Essentially this means case law, such as Salomon v Salomon, and Acts of Parliament, such as Companies Act 2006 and Insolvency Act 1988. When using case law in your essay there are lots and lots of cases you can draw upon, so be mindful of your word count. If necessary, try to provide a brief overview of the case rather than a full transcript – remember with case law the important things are: What are the key facts of the case, and what was the outcome? In order to help you cover sufficient ground in your essay, it is recommended that you cover the following areas: 1. What is the “veil of incorporation” and what are its consequences? - Explain the veil of incorporation. - What are the practical consequences of this? Are there any examples of case law to illustrate the veil in operation? - What is YOUR opinion? Try to apply a critical mind set – do you agree with the outcome of the cases you find, do you think they are fair? 2. Lifting the “veil of incorporation” - The quote from Lord Denning suggests that the courts can “draw aside the veil”, and that they “often do”. What does this mean in practice? - What are the circumstances under which the law will lift the veil? - Can you find examples of case law to illustrate this? - How do Acts of Parliament lift the veil? - Do YOU think is it right/fair that the law should be able to lift the veil? - Is it correct that the courts “often do” lift the veil? Or are there only a relatively small number of instances where this has happened? Does it happen enough? - Can you give topical/current examples where you think the veil should be lifted? The above is only an overview of the key issues to cover in your essay. Whilst a large amount of your essay will demonstrate knowledge, which is very important, higher marks are gained for the depth of your understanding and critical reasoning. Further guidance will be provided in term 2. You must follow the Harvard referencing convention throughout, and ensure that you do not plagiarise from any sources. BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 24 2014/15 The List of References are not counted within the word count. The word count includes anything within the introduction and the main body or conclusion of your essay (but excludes direct quotations used to support your arguments). Please pay attention to presentation, grammar and spelling. Remember that good academic writing is clear, precise and accurate. The assignment will count for 30% of your final mark for this unit, and therefore provides an early opportunity for you to make huge steps towards achieving a great mark for the unit. Please note You are encouraged to seek help and support whenever you need it and the unit team will be available and more than happy to assist. However, in no circumstances will any of the unit team review your work prior to submission, nor will they give you an indicative mark. Resources Please see your unit handbook for the list of core text and recommended additional reading. You may also like to look at company law websites, or access our library sources more widely. Good quality internet sources are acceptable for inclusion in your essay, however you should always consider the credibility of the sources which you access, especially online. Marking Criteria BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 25 2014/15 BA Accounting and Finance: Year Two (Level 5) Business Law Business Law Coursework Brief Page 26 2014/15 1 The University for world-class professionals Lecture 13 Company Law Corporate Personality & Lifting the Veil of Incorporation The University for world-class professionals Corporate Personality – The Veil of Incorporation KEY PRINCIPLE IN COMPANY LAW!! Reminder: A company is a separate legal entity (i.e. separate from its shareholders, directors and managers 2 The University for world-class professionals The Veil of Incorporation – Salomon v Salomon • Separate legal entity is also known as the Veil of Incorporation • Highlighted in the landmark case of Salomon v Salomon & Co Ltd (1897) – Facts: Mr Salomon incorporated his leather boots business and became majority shareholder. When the company hit financial trouble, Mr Salomon and a third party (Mr Broderip) provided secured loans to the company. When the company defaulted on interest payments to Mr Broderip, he took legal action to recover his money and the company was liquidated. Once Mr S and Mr B were repaid their loan capital, there was very little left in the company to repay their unsecured creditors (suppliers, banks etc). The University for world-class professionals Salomon v Salomon cont… – The liquidators argued this was unfair, since Mr S had walked away with £10,000. Ignoring the fact it was a company, the liquidators argued this was essentially a sole trader business in operation and therefore Mr S should be personally liable to the unsecured creditors for the company’s debts. – Held: The Court of Appeal agreed with the liquidators! But the House of Lords overturned the earlier decision, arguing that Mr Salomon, as shareholder and director, was NOT personally liable for the Company’s debts. The creditors were in a contract with the company, and the company was a separate legal entity. 3 The University for world-class professionals Salomon v Salomon the aftermath… • Imagine the consequences of this landmark judgement! – By setting up a company you, as a shareholder and/or director, become immune from legal action in relation to the company’s business dealings? – So you could set up companies, rack up lots of credit with banks and suppliers without any personal risk? • Remember sole traders and partnerships do not have this luxury! • The term “veil of incorporation” comes from the idea of “hiding behind” a company to protect yourself from creditors!! • Are there any other consequences of this separation….? The University for world-class professionals Consequences of the Veil of Incorporation 1. Limited Liability – Per Salomon v Salomon, a company is fully liable for its own debts. If a company fails, the liability of shareholders is limited to any amount still unpaid on their share capital (see Week 15 Lectures). – Basically this means that all a shareholder stands to lose is the money they invested in the company – their personal assets are not at risk. 2. A company owns its own property – Shareholders own a company, but the assets and property of the company legally belong to the company. – Macaura v Northern Life Assurance (1925) 4 The University for world-class professionals Consequences of the Veil of Incorporation - Cont… 3. A company enters into contracts in its own name and can sue and be sued in its own name – Directors act as “agents” for the company i.e. they bind the company in contract, but are not personally liable under the contract 4. A company has perpetual succession – A company will continue to exist irrespective of the fate of its shareholders. I.e. if a shareholder dies, their shares pass to someone else, but the underlying company still exists. – A company only “dies” when it is formally liquidated (see Week 19 lectures) – By contrast, if a soletrader/partner dies, the business dies too. The University for world-class professionals Consequences of the Veil of Incorporation - Cont… 5. The management of a company is separated from its ownership – Shareholders own the company. Directors manage the company. – By contrast, in sole traders and partnerships there is no separation i.e. the business owners also manage the business. 6. Where a company suffers an injury, it is the company that must take appropriate legal action – E.g. if a company is owed money, it is the company that must sue the debtor. Shareholders cannot take action personally on behalf of the company. – Foss v Harbottle (1843) – directors defrauded the company, shareholders attempted to sue the directors but were not proper claimants as the harm was committed against the company 5 The University for world-class professionals Consequences of the Veil of Incorporation - Cont… 5. A company is bound by the Companies Act 2006 – An entire body of statute exists to regulate companies, the most important one being the Companies Act 2006 (CA06) 6. A company is subject to Corporation Tax – Being a separate legal entity, a company is subject to a special and unique set of tax rules – By contrast, a soletrader or partnership just pays normal income tax on its profits. – See Level 6 elective unit Theory & Practice of Taxation for more details!! The University for world-class professionals Lifting the Veil of Incorporation • Recap: The veil of incorporation effectively means that shareholders and/or directors cannot be held personally liable for the actions and debts of a company. – But do you think that is fair? – Do you agree with the judgement in Salomon v Salomon, or do you sympathise with the Court of Appeal judgement and the unsecured creditors’ positions? – What if the legal status of companies is used to deliberately hide from justice? • Think about the recent banking crisis – did any individual get personally sued or prosecuted? Should they be? • Has anyone at Tesco been held personally liable for the recent financial irregularities? Should they be? 6 The University for world-class professionals Lifting the Veil of Incorporation • Definition: – “Lifting the veil” refers to circumstances where the law will ignore the doctrine of separate legal entity, resulting in shareholders and/or directors becoming personally liable for the company’s debts. – Imagine - if the veil had have been lifted in the Salomon case, Mr Salomon would have been ordered to pay off the company’s debts from his personal assets. • Common Law Examples x 3 • Statutory Examples x 4 The University for world-class professionals Lifting the Veil – Common Law Examples 1. Sham Companies – The veil is lifted where “special circumstances exist indicating that it is a mere façade concealing the true facts” – Woolfson Strathclyde Regional Council (1978) – In simple terms, this refers to circumstances where companies are set up undertake fraud or some other wrong doing, such as avoiding a contractual obligation…. 7 The University for world-class professionals Lifting the Veil – Common Law Examples • Gilford Motor Co Ltd v Horne (1933) Facts: Mr Horne had a contract clause with his previous employer preventing him from soliciting their customers. When he set up a new company to solicit those customers, his previous employer sued him personally for breach of contract. Held: The sole purpose of setting up the company was to avoid his contractual obligations to the claimant. It was a sham, and Mr Horne was found liable for breach. The University for world-class professionals Lifting the Veil – Common Law Examples • Jones v Lipman (1962) Facts: Mr Lipman contracted to sell some land to Mr Jones. Mr Lipman later decided not to sell the land, so to avoid an award of specific performance he transferred the land into the legal ownership of a newly formed company. Held: Despite the property now being owned by the company, the judge lifted the veil to treat Mr Lipman and the company as a single legal entity. Accordingly specific performance was awarded against Mr Lipman, and he was ordered to sell the property to Mr Jones, per their contractual agreement. The sole reason for setting up the company was to avoid his contractual obligations. 8 The University for world-class professionals Lifting the Veil – Common Law Examples 2. Groups of Companies – The veil extends to groups of companies, such that a parent company and a subsidiary are separate legal entities. E.g. a parent company is not liable for the actions/debts of its subsid. – However, in rare circumstances the veil has been lifted to treat two group companies as a single entity in the eyes of law. Parent Sub Veil of incorporation Parent Sub Single legal entity The University for world-class professionals Lifting the Veil – Common Law Examples • DHN Food Distributors v London Borough of Tower Hamlets (1976) Facts: DHN carried on business from a premises owned by its wholly owned subsidiary. The subsid had no other assets, and carried on no trading activities – it was effectively a shell company. The local council compulsorily acquired the building, but refused to pay compensation to DHN on the basis they were not the legal owners of the property. Held: The court lifted the veil to award compensation to DHN. The judge held that in the specific circumstances of this case, the subsidiary was performing no independent role to DHN and the two companies were effectively run as one – thus creating a single economic entity. This was sufficient for the judge to lift the veil. 9 The University for world-class professionals Lifting the Veil – Common Law Examples • Adams v Cape Industries (1990) Facts: Cape was a UK based company that mined asbestos. It sold the asbestos through a South Africa based subsidiary and a US subsidiary. Employees of the US subsidiary suffered injuries from handling the asbestos, and tried to sue the US company. However the US company had no assets to provide compensation, so the employees instead took action against the UK parent company. Held: The claimant was unsuccessful. The judge saw no reason to lift the veil of incorporation in these circumstances, since the US company was set up for sound commercial reasons – not to commit fraud or avoid legal obligations (as was seen in the Jones v Lipman case). The UK company could not be held liable for the actions/debts of the US subsidiary in these circumstances. The University for world-class professionals Lifting the Veil – Common Law Examples 3. Nationality – The veil of incorporation has been lifted to treat a company has having the same nationality as its shareholders. • Daimler v Continental Tyre & Rubber Co (1916) Facts: In times of war it is illegal to enter into trade with the enemy. Continental sued Daimler for debts outstanding. Both companies were UK registered, however all but 1 of Continental’s shareholders were German nationals. Held: The veil was lifted to treat Continental as German resident, the same as its shareholders. Accordingly, the judge ordered that the amount owing should not be paid, as to do so would be trading with the enemy and therefore a criminal offence. 10 The University for world-class professionals Lifting the Veil – Statutory Examples x 4 1. Companies Act 2006 – Group Accounts – The law requires a group of related companies to prepare consolidated financial statements, therefore recognising the common financial link between them and treating them as a single economic unit. 2. Companies Act 2006 – Public Companies & Trading Certificates – If a PLC does not obtain an appropriate trading certificate within 12 months of incorporation, the directors can be made personally liable for any losses suffered by a third party. The University for world-class professionals Lifting the Veil – Statutory Examples 3. Insolvency Act 1986 – Fraudulent & Wrongful Trading – Shareholders and/or directors found liable for fraudulent or wrongful trading are personally liable for the company’s debts (see Weeks 20/21) 4. Company Directors Disqualification Act 1986 – A director in breach of a disqualification order is personally liable for any debts of the company (see Week 17)