Company Law is a cornerstone of the UK legal system and a core module for the LLB, GDL, and SQE. It governs the creation, operation, and dissolution of companies, which are the primary vehicles for business activity. This guide will provide a comprehensive overview of the key principles, landmark cases, and statutory provisions that every law student must know.
The Core Principle: Separate Legal Personality
The most fundamental concept in company law is separate legal personality. Once a company is incorporated under the Companies Act 2006, it is treated as a legal entity distinct from its owners (shareholders) and managers (directors). This principle was famously established in the House of Lords decision of Salomon v A Salomon & Co Ltd [1897] AC 22.
In Salomon v A Salomon & Co Ltd, Mr. Salomon, a sole trader, sold his leather business to a limited company which he had formed. He took all but six of the shares and received debentures (a secured loan) in return for the sale. When the company went into liquidation, the liquidator argued that Mr. Salomon and the company were effectively the same entity and that his debentures should not be paid out before the company's unsecured creditors. The House of Lords disagreed, holding that the company was a separate legal person, and therefore Mr. Salomon was a secured creditor and entitled to be paid first.
This separation has significant consequences:
- Limited Liability: Shareholders are generally only liable for the amount unpaid on their shares. Their personal assets are protected from the company's debts.
- Perpetual Succession: The company continues to exist even if its members die or change.
- Property Ownership: The company can own property in its own name. See Macaura v Northern Assurance Co Ltd [1925] AC 619, where a shareholder could not claim on an insurance policy for timber owned by his company.
- Contractual Capacity: The company can enter into contracts with other parties, including its own shareholders. See Lee v Lee's Air Farming Ltd [1961] AC 12.
💡 Key Takeaway
The principle from Salomon v Salomon is the bedrock of UK company law. It establishes the 'corporate veil' between the company and its members, affording them limited liability. This encourages entrepreneurship and investment by protecting personal assets from business risks.
Lifting the Corporate Veil
While the principle of separate legal personality is robust, courts are sometimes willing to "lift the corporate veil" and disregard the company's separate identity. This is rare and typically only occurs in specific circumstances where the corporate structure is being used to perpetrate a fraud or evade a legal obligation.
Common Law Exceptions
The courts have been reluctant to create fixed categories for lifting the veil. However, some principles have emerged from case law:
- Façade or Sham: The veil may be lifted where the company is a mere façade concealing the true facts. Key cases include Gilford Motor Co Ltd v Horne [1933] Ch 935, where an ex-employee used a company to breach a non-compete clause, and Jones v Lipman [1962] 1 WLR 832, where a seller transferred land to a company to evade a specific performance order.
- Agency: In some limited cases, a company may be found to be acting as an agent for its shareholders, but this is difficult to establish.
The Supreme Court in Prest v Petrodel Resources Ltd [2013] UKSC 34 clarified the doctrine, distinguishing between the 'concealment principle' (where the veil is not truly lifted) and the 'evasion principle' (the true basis for lifting the veil). The evasion principle applies when a person is under an existing legal obligation which he deliberately evades by interposing a company under his control.
Statutory Exceptions
Parliament has also created situations where the veil is lifted, for example:
- Wrongful Trading: Under s.214 of the Insolvency Act 1986, directors can be made personally liable for company debts if they continued to trade when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation.
- Fraudulent Trading: Under s.213 of the Insolvency Act 1986, anyone who is knowingly a party to carrying on the business with intent to defraud creditors can be held personally liable.
📝 Exam Tip
When answering a problem question on lifting the veil, always start with the presumption of separate legal personality from Salomon. Then, critically analyse whether the facts fit the narrow 'evasion principle' established in Prest v Petrodel. Avoid simply listing cases; instead, use them to argue by analogy.
Directors' Duties
The duties of directors are a central part of corporate governance, ensuring they act in the company's best interests. These duties, which were developed in common law, are now codified in ss.171-177 of the Companies Act 2006.
The General Duties
The seven general duties are owed by a director to the company, not to individual shareholders.
| Duty | Section | Explanation |
|---|---|---|
| Act within powers | s.171 | Directors must follow the company's constitution (Hogg v Cramphorn Ltd [1967] Ch 254). |
| Promote the success of the company | s.172 | The "enlightened shareholder value" approach. Directors must act in good faith for the benefit of members as a whole, considering a non-exhaustive list of factors (e.g., employees, community). |
| Exercise independent judgment | s.173 | Directors cannot fetter their own discretion (Fulham Football Club Ltd v Cabra Estates plc [1994] 1 BCLC 363). |
| Exercise reasonable care, skill, and diligence | s.174 | An objective and subjective test. The standard is that of a reasonably diligent person with the general knowledge, skill, and experience expected of a director, plus any special skills the director actually has. |
| Avoid conflicts of interest | s.175 | Directors must not put themselves in a position where there is a conflict between their personal interests and the company's interests (Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378). |
| Not to accept benefits from third parties | s.176 | Prevents directors from accepting benefits that arise from their position as a director. |
| Declare interest in proposed/existing transactions | ss.177 & 182 | Directors must declare any direct or indirect interest in a transaction with the company. |
A breach of these duties can lead to remedies such as damages, an account of profits, or rescission of a contract. Key cases include Re D'Jan of London Ltd [1994] 1 BCLC 561 on the duty of care and IDC v Cooley [1972] 1 WLR 443 on conflicts of interest.
Shareholder Remedies
While directors manage the company, shareholders have remedies if their rights are infringed or if directors mismanage the company. This is particularly important for minority shareholders who may be outvoted by the majority.
The Rule in Foss v Harbottle
The starting point is the rule in Foss v Harbottle (1843) 2 Hare 461, which establishes two principles: the 'proper claimant principle' (if a wrong is done to the company, the company is the proper person to sue) and the 'internal management principle' (courts will not interfere in the internal management of a company). This creates a high bar for shareholders wishing to sue.
Exceptions to the Rule
There are, however, crucial exceptions:
| Remedy | Provision | Description |
|---|---|---|
| Derivative Claim | Part 11, Companies Act 2006 | A shareholder brings a claim on behalf of the company for a wrong done to the company (e.g., breach of duty by a director). The shareholder must obtain the court's permission to continue the claim. See Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch). |
| Unfair Prejudice Petition | s.994, Companies Act 2006 | A member can petition the court if the company's affairs are being conducted in a manner that is unfairly prejudicial to their interests. This is the most common remedy. See O'Neill v Phillips [1999] 1 WLR 1092. |
| Just and Equitable Winding Up | s.122(1)(g), Insolvency Act 1986 | A last resort where the court orders the company to be liquidated. Often used in cases of deadlock or breakdown of trust in quasi-partnerships. See Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. |
⚠️ Common Mistake
A common error is to confuse a personal claim with a derivative claim. If a director's breach of duty causes a loss to the company (e.g., a bad investment), the proper action is a derivative claim. If the shareholder's personal rights are infringed (e.g., being denied a declared dividend), they have a personal claim. The s.994 unfair prejudice petition often blurs this line but is a distinct statutory remedy.
Frequently Asked Questions (FAQ)
What is the difference between a public (PLC) and private (Ltd) company?
A private limited company (Ltd) cannot offer its shares to the public, whereas a public limited company (PLC) can, typically on a stock exchange like the London Stock Exchange. PLCs have more stringent regulatory requirements, including a higher minimum share capital (£50,000, under s.763 Companies Act 2006) and the need for a company secretary.
Can a director be an employee of the company?
Yes. A director can also be an employee under a separate contract of employment. This was confirmed in Lee v Lee's Air Farming Ltd [1961] AC 12, where the controlling shareholder and sole director was also the company's chief pilot. When he died in a work accident, his widow was able to claim compensation because he was considered a 'worker' and the company was a separate legal entity.
What is a 'quasi-partnership'?
A quasi-partnership is a small, private company that is run on the basis of mutual trust and confidence, similar to a partnership. In these companies, shareholders often have legitimate expectations that go beyond their strict legal rights, such as being involved in management. These expectations are crucial in unfair prejudice petitions, as seen in Ebrahimi v Westbourne Galleries Ltd.
How does Company Law feature in the SQE?
Company law is a core part of the SQE1 assessment, falling under 'Business Law and Practice'. You will be tested on the formation of companies, financing, directors' duties, shareholder rights, and corporate insolvency. The questions are multiple-choice and require a strong grasp of the key principles and statutes.
What is the UK Corporate Governance Code?
The UK Corporate Governance Code sets out standards of good practice for listed companies on board leadership and effectiveness, remuneration, accountability, and relations with shareholders. It operates on a 'comply or explain' basis. While not legally binding in the same way as the Companies Act, it is a crucial part of the regulatory framework for large companies and influences best practice across the board.