Useful cases for 203 complete.docx

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University of Auckland
Commercial Law

Salomon v Salomon Ltd [1897] Separate Legal Entity Piercing the Corporate Veil Summary:  Mr Salomon had a successful sole proprietor  He wished to transfer business to company  Mr Salomon entered into agreement to transfer business to company in return for a debenture and shares  20,000 shares and 10,000 pounds in cash secured by debenture over the assets of the company.  Company formed  Mr Salmon and four sons, daughter and wife took one fully paid share each – 7 Shareholders Held: There was no fraud as no one was mislead. A company either exists or it doesn’t. Lee v Lee’s Air Farming Ltd [1961] Separate Legal Entity Summary:  Lee formed LAF in 1954  LAF had 3,000 shares, Lee took 2,999 and a solicitor took the other share  Lee was appointed Governing Director  Lee was also chief pilot of LAF  Lee died in an aircraft accident in 1956  Wife wanted “workers” compensation  Workers were only available to “workers”, must be “employed” by company.  Issue: Was Lee an employee of LAF< even he was governing director and (virtually) the sole shareholder? Held: There was a contractual relationship between Lee and LAF The fact he was director did not change this. He wore two hats, as Governing Director he gave instructors on behalf of company, and as employee acted on those instructions. If he had ever ceased to be a director, there would still be valid contract. Gave orders on behalf of LAF, and Obeyed them in a personal capacity. Re: Securitibank Ltd [1978] Separate Legal Entities Summary:  Two companies Merbank and Commercial Bills were wholly owned subsidiaries of Securitibank  Involved in financing transactions  Issue: Were the transactions money lending? –If so, void for failure. There was no sham, compnies were separate entities and dealth with each other as such. Court was reluctant to pierce veil. Savill v Chase Holdings Ltd [1988] Separate Legal Entities Representations from CC were not enough to create apparent authority. Authority must come from the principal Summary:  Chase Holdings (CH) was a subsidiary of Chase Corporation (CC)  Savills agreed to sell shares to CH  Agreement was conditional upon CC agreeing to sell a piece of land to the Savills  Agent acting for CH told Savills that CC had agreed to sell the land  CC denied this and says that the agent had no authority  Issue: Were CH and CC bound to complete the agreements? Held: “It is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts”. On facts, veil not breached. No sham. Chen v Butterfield [1996] Piercing corporate veil Summary:  Mr and Mrs Butterfield leased a furniture shop as partners from Clydebank  Sold premises to Chens  Notified Chens that Butterfields were forming a company to take over the lease, would not give a personal guarantee.  Company formed and took over the lease.  Company failed to make rental payments and the Chens sued the Butterfields personally claiming that the company was a mere sham and that the veil should be pierced. Held: No Sham Re: Fletcher Challenge Forests Ltd [2004] Major Transactions Separate Legal Entity Summary:  Fletcher Challenge Forests Ltd (FCF), owned three subsidiaries, which owned forest assets.  Subsidiaries received an offer to buy forest assets; FCF was not a party to the contracts.  Total value of forest assets more than half the value of FCF’s assets  Was this a major transaction for FCF? Held: Plain meaning of company does not include a group of companies FCF was not actually disposing of assets; still held shares in subsidiaries. Therefore FCF not required to obtain special resolution. Case turned upon wording of s.129 Daimler Co Ltd v Continental Tyres [1916] Piercing the Corporate Veil Summary:  Case during WW1 when England and Germany were at war.  Company incorporated in England but shareholders and directors were German-Continental tyres sued Daimler for payment of a debt. Held: Debt should not be paid and the veil was lifted as the Court said not where company incorporated but where the control was that was important. Gilford Motor Co Ltd v Horne [1933] Piercing Corporate Veil Summary:  Horne was appointed Managing Director of Gilford Motor Company Ltd  Horne’s contract contained a restraint of trade clause prohibiting him from soliciting customers of GMC both while and after he was Managing Director  Horne was dismissed and he set up his own business in competition with GMC (in clear breach of the restraint)  GMC advised Horne of the clause and in response he formed a company JM Horne and Co Ltd to carry on his business  JM Horne was his wife’s name  He used the letterhead from previous business. Held: Veil was pierced, injunction issued. “The company was a mere cloak or sham”. He was using a legal form to hide what the reality was. Jones v Lipman Contract Separate Legal Entity Piercing the Corporate Veil Summary:  Lipman agreed to sell land to Mr and Mrs Jones and signed agreement  Lipman changed his mind and moved land to a company owned and controlled by him  Company was purchased specifically for the purpose of holding the land. Held: There was a sham. Beckett Investment Management Group Ltd [2007] Contract Separate Legal Entity Summary:  Mr Hall signed an employment contract with the parent holding company promising not to solicit its customers within a certain period after leaving.  Parent company had no customers, all services performed by subsidiaries.  Literal meaning of contract would render the contract meaningless Held: Group was treated as one entity for the purposes of enforcing the covenant. Veil was lifted through the interpretation of the contract and at the request of the group. Official Assignee v 15 Insoll Avenue Ltd [2001] Fraud Separate Legal Entity Piercing the Corporate Veil Summary:  Mr Russell formed a company called Jojac Holdings Ltd  Original directors for fictitious persons  Russell issued shares to his young children, subscribing for them as “parent”; children never received dividends and didn’t know that they owned shares; Russell subsequently transferred shares away without their knowledge.  Shares issued to wife, girlfriend, children without their knowledge.  Shareholders signed documents without knowing what it was about.  Jojac purchased a property in 1989  1994 Russell became bankrupt. Held: Jojac was a clear sham. The whole company was questioned to be a valid legal entity at all, given the way in which it was incorporated. Mountfort v Tasman Pacific Airlines of New Zealand [2006] Statutory Lifted of the Veils Summary:  Tasman Pacific Airlines Ltd acquired Tasman Pacific Regional Airlines Ltd  Regional relied upon Airlines for 99% of its income  After takeover, the CFO of Airlines directed Regional to transfer $650,000 to Airlines  Airlines arranged for Regional to execute a guarantee of the group’s liabilities  Both companies went into liquidation  The liquidator of Regional applied for a pooling order Held: Regional was a “slave” of Airlines. Other statutes: Fair Trading Act, etc Meridian Global Funds Management Asia Ltd v Securities Commision [1995] Established: The rules of attribution Memorandum of Association Prior to 1984: Companies had to set out a document which states the objectives of the company. A company had to act within it’s Memorandum, if not, the transaction would be ultra vires and void. Third parties had to check the memorandum before contracting with company. Re Arahi Properties [1989] The rules of attribution The correct interpretation of the natural person formula4d Summary:  Arahi proposed to issue options to purchase shares and the shareholders passed a resolution to that effect.  The resolution provided that option holders had right to attend shareholder meetings and vote  Several shareholders then argued that the company did not have the right to give non-shareholders a right to vote.  Issue: The correct interpretation of the “natural person formula” Held: The term “natural person” needed to be given a wide interpretation to include the power to issue the options. Ashbury Railway Carriage and Iron Co v Riche [1875] Corporate capacity – Ultra Vires Summary:  Company’s memorandum stated that its objects included making and selling railway carriages and other railway plant and machinery  Company entered into a contract to construct and run a railway operation in Belgium  The shareholders ratified the agreement, however, the company subsequently repudiated it Held: Contract was ultra vires the company and so an action for breach of contract against it failed Cabaret Holdings Ltd v Meanee Sports and Rodeo Club Inc [1982] Corporate capacity Ultra vires Contract Cannot sue upon a contract which it had no power to enter. Summary:  Meanee was a body corporate under the Incorporated Societies Act 1908  Meanee and Cabaret had agreed for Meanee to organise a rodeo and for Cabaret to reimburse Meanee for expenses  Cabaret claimed that the contract was ultra vires Meanee and so it could nt sue on the contract  The contract was ultra vires Held: Action failed, because it is not possible for an incorporated society to sue upon a contract which it had no power to enter into Re: Introductions Ltd Changing business Summary:  Company formed as a hospitality service for overseas visitors  Memorandum provided that its objects were the provision of entertainments….. company expressly given the power to borrow money  Subsequently it changed its business to pig farming  Opened an account with a bank and provided the bank with a copy of the memorandum  Bank knew that the company carried on business of pig farming  Company borrowed money from bank and issued it with two debentures  Company failed  Issue: Could the bank enforce debentures? Held: The borrowing and debentures were ultra vires Even though the company had express power to power – only for hospitality purposes. “A power or an object conferred on a company to borrow cannot mean something in the air: borrowing is not an end to itself and must be for some purpose of the company…” Note: Bank was held to have known of limitation in objects; the case wouldn’t be decided the same today. S17 – No act is invalid “merely” because the company did not have capacity S18(1) – Agency – If a third party by virtue of his or her position with or relationship to the company, had “knowledge” the constitution restricted the capacity of the company, transaction may still be invalid Wairau Energy Centre Ltd v First Fishing Co Ltd [1991] Rules of Attribution – Primary Rules Summary:  Two shareholders agreed to sell shares in Wairau to Mr O’Malley  Mr O’Malley agreed in the contract that he would cause Wairau to pay a fee of $50,000 to a company owned by the vendors  At the time he signed agreement, O’Malley was neither a director nor a shareholder of Wairau  Once he had the shares, O’Malley declined to make the payment. Held: Assent of all shareholders will cure defect, however, this was a personal undertaking by O’Malley; he did not purport to enter into it on behalf of Wairau (nor could he). In essence, rule did not apply because Wairau never entered into the contract. Pascoe v DFC Overseas Investments Ltd Rules of Attribution – Primary Rules Summary:  Pascoe lent $100m to another company without obtaining any security  Further, the loan was only repayable in limited circumstances  Borrower couldn’t repay  Pascoe sought to sue its directors claiming that y making the loan, they had breached their fiduciary duties to Pascoe  Issue: By authorising the advance of $100 million without any possibility of repayment, had the directors breached their duty to the company? Held: The directors were not liable, the sole shareholder of Pascoe has consented to the loan. General Rules of Attribution (Agency) – Binding the company in a contract with a third party S180 sets out methods by which a company can contract To bind a company to a contract, a person purporting to act on behalf of the company must have authority. Agents may be directors, employees, or third parties such as solicitors Some agents may have the power to delegate to other agents. Bolton v lambert [1899] General Rules of Attribution – Agency by Ratification Summary:  Lambert wrote to the managing director of Bolton offering to purchase sugar works for the company  The managing director accepted the offer but had no authority to do so  Lambert withdrew his offer  Board of directors then (after Lambert withdrew the offer ratified acceptance) Held: Ratification dated back to the date of initial acceptance. Therefore, offer was withdrawn too late and contract was binding. Jessett Properties v UDC Finance Ltd [1992] Agency by estoppel (Agent has apparent or ostensible authority) Summary:  The case concerned an unregistered lease and an unregistered mortgage of that lease  Key fact was that agent had been appointed to negotiate on behalf of principal because of his existing knowledge of property  Therefore, principal had “purchased his knowledge”. Held: The agent was “an agent to know” and his principals had “purchased” the knowledge which he had. General Rule: Notice given to or knowledge acquired by an agent Is imputed to the principal only if the agent is at the time employed on the principal’s behalf. Knowledge acquired before the agency began, or probably even during its currency, but outside the scope of the engagement should not, in general, be imputed to the principal. Agent to know: Agency employed for the purposes of gathering information. Hely–Hutchinson v Brayhead Ltd [1967] Implied Actual Authority Summary:  Individual acted as chairman of directors and started making major contracts for the company, and the other directors acquiesced in him acting in such Held: He had actual authority to bind the company Investment Research Unit Ltd v Rada Corp Ltd [1988] Apparent Authority Summary:  IRU entered into negotiations to sell shares to Rada Wheeler, the managing director of Rada, agreed to purchase shares at $9.6m  The share market subsequently crashed and Rada denied liability  Rada argued that Wheeler only had authority to purchase shares up to $5, and that Hunn, a director of IRU, should have known of the limited authority of Wheeler as he was auso a director  IRU argued that Rada had previously allowed Wheeler purchase of shares over $5m Held: Rada liable By allowing Wheeler to make the previous purchases over the $5m limit, h
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