The doctrine and veil of incorporation
The company is a separate legal entity (i.e. separate from its shareholders, the part owners and its directors, the managers).
Consequences of incorporation
There are a number of consequences of being a separate legal entity:
- Limited liability. A company is fully liable for its own debts. If a company fails, the liability of the shareholders is limited to any amount still unpaid on their share capital (or any amount they have agreed to contribute if the company is limited by guarantee).
- A company enters into contracts in its own name and can sue and be sued in its own name.
- A company owns its own property.
- A company has perpetual succession, irrespective of the fate of shareholders.
- The management of a company is separated from its ownership.
- A company is subject to the requirements of the Companies Act 2006 (CA06).
- Where a company suffers an injury, it is the company itself that must take the appropriate remedial action. This is known as the rule in Foss v Harbottle.
Foss v Harbottle (1843)
Facts: Two minority shareholders initiated legal proceedings against, among others, the directors of the company. They claimed that the directors had misapplied the company's assets.
Held: The court dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue.
Lifting the veil of incorporation
The phrase 'lifting the veil of incorporation' means that in certain circumstances the courts can look through the company to the identity of the shareholders.
The usual result of lifting the veil is that the members or directors become personally liable for the company's debts.
- S399 of CA06 requires accounts to be prepared by a group of related companies, therefore recognising the common link between them.
- Under the Insolvency Act 1986 (IA 1986), members and/or directors liable for wrongful or fraudulent trading may be personally liable for losses arising as a result.
- If a public company starts to trade without first obtaining a trading certificate, the directors can be made personally liable for any loss or damage suffered by a third party: S767 CA06.
- Under the Company Directors Disqualification Act 1986, if a director who is disqualified participates in the management of a company, that director will be jointly or severally liable for the company's debts.
Case law examples
| Sham companies||The veil will be lifted only where 'special circumstances exist indicating that it is a mere facade concealing the true facts': Woolfson v Strathclyde Regional Council (1978)|
| Nationality||In times of war it is illegal to trade with the enemy. It may be possible to lift the veil of incorporation so as to impute to a company the same nationality as its members|
| Groups||Although each company within a group is a separate legal entity, there have been a number of cases where the courts have lifted the veil between a holding company and its various subsidiaries. This has generally been done in order to:|
- benefit the group by obtaining a higher compensation payment on the compulsory purchase of premises.
- benefit creditors of an insolvent company by making other companies within the group liable for its debts.
Ordinary (or general) partnerships lack the characteristics of a company in the sense that they do not have limited liability or separate legal personality. Over time the government was pressurised to recognise the needs of some partnerships (especially professional partnerships such as solicitors, accountants and auditors) to limit their liability and have separate legal personality without having to form a company. This resulted in the Limited Liability Partnerships Act 2000 (LLPs).
LLPs have similar features to private limited companies, for example, their members (i.e. not called partners) are not directly responsible for the debts of the partnership.
Incorporation document must be delivered to registrar stating name of LLP, location and address of registered office, names and addresses of members (minimum two).
Must send a declaration of compliance that LLP satisfies requirements of the Limited Liability Partnerships Act 2000.
Registrar issues a certificate of incorporation.
First members sign incorporation document. Later members join by agreement with the existing members.
Membership ceases on death, dissolution or in accordance with agreement with other members
Rights and duties are set out in membership agreement. If no agreement, governed by Limited Liability Partnership Regulations 2001
Each member acts as an agent of the LLP.
Perform the administrative and filing duties of the LLP.
Incorporation document specifies who they are.
Must be at least two designated members. If there are none, all members will be designated members.
Must end with Limited Liability Partnership, llp or LLP.
Rules on choice are the same as for companies.
|Taxation||Members are treated as if they are partners carrying on business in a partnership, i.e. they pay income tax, not corporation tax.|
|Liability for debts|
The liability of a member of an LLP to contribute to its debts is limited to his capital contribution. However, there is no requirement for a capital contribution, and any contribution made can be withdrawn at any time.
If an LLP goes into liquidation, the court can order the members to repay any drawings made in the
previous two years if it can be shown that the member knew or had reasonable grounds to believe that the LLP:
- was unable to pay its debts at the date of withdrawal, or
- would become unable to pay its debts because of the withdrawal: s214A Insolvency Act 1986 (IA 1986).
The fraudulent and wrongful trading provisions of IA 1986 apply to members of LLPs in the same way as they apply to directors of companies.
Differences between LLP and partnership
The liability of the members of an LLP is limited to the amount of capital they have agreed to contribute.
The LLP must file annual accounts and an annual report with Companies House.
LLP is an artificial legal entity with perpetual succession. It can hold property in its own right, enter into contracts in its own name, create floating charges, sue and be sued.
Company versus partnership
|Company ||General Partnership|
|Created by registration – with a written constitution.||No special formality required for creation.|
|Separate legal person, i.e. can own property, sue or be sued, and contract in own name.||Not a separate legal person – the partners own any property, are jointly liable on contracts and are liable if sued.|
|Shares are transferable. However, the articles of private companies usually restrict transfer.||Limits on transfer of shares (may require dissolution of partnership or consent of other partners to enable partners to realise their share).|
|Can create both fixed and floating charges as security for borrowing.||Can only create fixed charges as security for borrowing. More usual to have personal guarantees.|
|Managed by directors, who may or may not also be shareholders.||Managed by partners, who are also the owners of the business.|
|The company cannot usually return capital to its members (except on dissolution).||Partners may withdraw their capital.|
|The company is liable for its debts. (No personal liability for shareholders beyond any unpaid portion of the price of their shares or the amount they have agreed to contribute.)||The partners are personally liable for the debts of the firm. Their liability is joint and several.|
|Must make information about financial affairs and ownership publicly|
|Private business. No disclosure of results.|
|The business is run by the directors. Members have no right to participate.||Every partner has the right to take part in the management of the business.|
|Must comply with Companies Act requirements concerning meetings,|
special resolutions, filing accounts and annual return.
|No administrative requirements regarding meetings.|
|Formal dissolution procedure (known as liquidation). Death/bankruptcy of any member/director does not dissolve the company.||May dissolve by agreement. Automatically dissolved on the death/bankruptcy of any partner.|
|Companies pay corporation tax.||Partners pay income tax.|
Types of company
Private company versus public company
The following table summarises the basic differences between public companies and private companies.
| ||Public limited companies ||Private limited companies |
|Definition ||Registered as a public company.||Any company that is not a public company.|
|Name||Ends with plc or public limited company.||Ends with Ltd or limited.|
|Capital||In order to trade, must have allotted shares of at least £50,000.||No minimum (or maximum) requirements.|
|Raising capital||May raise capital by advertising its securities (shares and debentures) as available for public subscription.||Prohibited from offering its securities to the public.|
|Start of trading||Must obtain trading certificate from registrar before commencing trading.||Can begin from date of incorporation.|
|Directors||Minimum two.||Minimum one.|
|Secretary||Must have one. Must be qualified.||Need not have one.|
|Accounts||Must file accounts within 6 months.||Need not lay accounts before general meeting. Must file within 9 months.|
|Audit||Accounts must be audited.||Audit not required if turnover below £6.5m.|
|AGM ||Must be held each year.||Need not hold an AGM.|
|Resolutions||Can’t pass written resolutions.||Can pass written resolutions.|
Created at 8/21/2012 10:26 AM by System Account
(GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 11/14/2012 3:13 PM by System Account
(GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
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