Corporate Law and

Corporate Governance
Ummar Ziauddin
LLM Berkeley, Barrister of Lincoln’s Inn
Lecture 1
Agenda
• Focus
• Outline
• Introduction to Corporate Law
• Introduction to legal character
• History of corporations
• Separate Legal Personality
• Limited Liability
• Two cases under limited liability
• Lifting the Veil of Incorporation, through/by;
• Statutes
• Courts with focus on three different eras with case law.
Focus
• Corporate Personality
• Constitution of the Company
• Relationship between the Board and the Executive
• Corporate Governance
COURSE OUTLINE
Relevant Reading
• Dignam, Chapters: 2 & 3
Introduction
• A study of body corporates or corporations or companies.

• Body corporate or corporation is Artificial Legal Person, invisible, intangible

and existing only in the contemplation of law.

• They can own property, enter into contracts, suffer or inflict wrongs, sue and
be sued, have a seal of perpetuity.

• The corporate law studies these corporations; how their shareholders, directors,
employees, creditors interact with each other and the society in general.
Scope of Corporate Law
• Regulatory in nature.

• Constraints and fetters on operations of companies.

• Preamble of the Companies Act, 2017 states

“WHEREAS it is expedient to reform company law with the objective of facilitating
corporatization and promoting development of corporate sector, encouraging use of
technology and electronic means in conduct of business and regulation thereof, regulating
corporate entities for protecting interests of shareholders, creditors, other stakeholders and
general public, inculcating principles of good governance and safeguarding minority
interests in corporate entities and providing an alternate mechanism for expeditious
resolution of corporate disputes and matters arising out of or connected therewith
Human are classified as legal persons – subject to legal systems.

Social Contract i.e. rights and duties.

All humans are not legal persons e.g. children.

Children are exempted from certain duties such as taxes and are not conferred upon all
the rights such as right to vote.

Conferring a legal status can lead to extending or denying of certain rights or

obligations
Legal Fiction
Legal personality is an artificial construct.

Legal Status on Non-Humans; common venture or engagement or

association or joint activity.

This forms the basis of corporation.

Latin word “corpus” meaning body and it literally means to create a

body.
Māori tribe of
Whanganui in
the North
Island has
fought for the
recognition of
their river –
the third-
largest in
New Zealand
Saga of Reko Diq

• 632. As to the first question whether Claimant had an "asset," the Tribunal is of the view that
Claimant's activities in Pakistan were primarily based on two pillars: (i) TCCA's own direct 75%
interest in the CHEJVA and the Joint Venture that was thereby established; and (ii) its 100%
interest in its Pakistani subsidiary TCCP, which was established for the exclusive purpose of
carrying out Claimant's activities in Pakistan.
History of corporations
Legal character was a concession in the form of Charter or Grants
given by the Crown.

Religious Orders.

Conferring legal personality on Religious Orders meant, that they now

became immuned to the weaknesses of flesh such as death. Seal of
Perpetuity was now attached to it.
11th to 16 Century
Process of corporatization, with time, extended to local authorities and commercial organizations
such as Guild of Merchants.

They attained monopoly through Charters and played by their own rules but observed strictly the
rules of the Guild.

Two forms were predominantly used were: commenda and societas.

Societas has developed into the modern day partnership. While commendas developed into the
limited liability partnership.

In the fourteenth century, for the first time, the word “company” was used by trading members to
trade overseas with foreign countries.
Greater Role of The Parliament
No longer prerogative of Crown.

Over time as parliament became more powerful grants had to be first

confirmed by Parliament and eventually a charter could only be
granted by an Act of Parliament
Trends In The 18th Century
By the start of 18th century, there was an active market in the trading of shares in
companies (Industrial Revolution 1760-1820 transition to new manufacturing
processes).

Known as the South Sea Bubble, the market crash at the time, due to
speculative trading combined with clumsy attempts by the government to
intervene, caused panic and led to the market crash. Many investors were ruined.

It had an enormous bearing on granting of charters as officials became wary of

granting them and when they did, they did so, by imposing onerous restrictions
on them.
Market Response
• Businesses started to take matters in their own hands.

• The use of trust as instrument to confer many privileges of

incorporation became common place.

• This new era with more power to businesses led to a new kind of
chaos as many unincorporated “Deed of Settlement” companies
became vessels through which fraud was easily committed
Government Intervention.
•Series of legislations to regulate which to-date form the basis of the company law in the UK.

•The Joint Stock Companies Act of 1844 provided for incorporation by simple registration, safeguards
against fraud by insisting on complete publicity and provided for the Registrar of Companies to maintain
the public records of the companies.

•The Act of 1844, while it conferred corporate status, still held members liable for the company’s debts.

•The Companies Act of 1862 was the first enactment to bear the title “Companies Act”.

•In India, it was Companies Act of 1860.

Limited Liability
• With different regimes now regulating businesses; it created more
confusion.

• Charter companies (created by an act of parliament) and Deed of

Settlement Companies (by legal complexity) had achieved limitations
on member’s liability.

• Limited Liability Act of 1885 (later subsumed into Joint Stock

Companies Act of 1885)
BREAK
Objective Separate Legal Personality sought
to achieve?
• It can carry out business in its own name
• It can sue and be sued in its own name
• It can hold property in its own name
• It can incur losses/profits that are its own and not that of the
members.
• It should have a seal of perpetuity.
• It should have “limited liability” i.e. liability of the shareholders should
be limited to the extent of their shares in the company. Limited
liability simply means no liability beyond the shares bought.
• Limited Liability is the logical consequence of separate legal
personality.

• It is possible to form registered company with unlimited liability under

the Companies Act, 2006 in the UK & Whales (s.3(4)).
• ―unlimited company” means a company not having any limit on the
liability of its members Companies Act, 2017
• Section 14 of the Companies Act, 2017 provides for the formation of
unlimited company.
• Words like ‘Ltd” for private companies and “PLC” for public
companies connote the liability of its members is limited.

• Members and the company have separate legal personalities.

• Note that words like Ltd. or PLC limit only to the liability of the
members. The company is liable to its debts and once its assets are
exhausted, it means, the creditors, cannot go after the assets of the
members
Lee v Lee’s Air Farming
Mr. Lee incorporated a company, Lee Air Farming Ltd. in August 1954.
The nominal capital of the company was 3000 shares of 1 dollar each.
Mr. Lee held 2,999 shares while his lawyer held the final share.
New Zeland Companies Act at the time required two shareholders at least
Mr. Lee was the sole governing director for life.
In addition, Mr. Lee also appointed himself as the chief pilot of the company. Article 33
of the Articles of Association stated:
“The company shall employ the said Goeffery Woodhouse Lee as the chief pilot of the
company at a salary of £1,500 per annum from the date of incorporation of the company
and in respect of such employment the rules of law applicable to the relation of master
and servant shall apply as between the company and the said Geoffery Woodhouse Lee.”
• Mr. Lee wore three hats for the company. He was the sole governing director, majority
shareholder and also an employee of the company.

• 1956, the company’s plane Mr. Lee was flying, stalled and crashed, leaving him dead.

• Mr. Lee was survived by a widow and four infants who were totally dependent on him.

• The company was paying, as part of statutory obligations, the insurance policy, to cover
claims brought under Workers’ Compensation Act of 1922. She claimed compensation as
widow of the “worker”
• The New Zeland Court of Appeal found against her.

• However, when the case went to the Privy Council in London, they held,
that since Mr. Lee and his company were distinct legal personalities,
therefore, they were capable of entering into legal relations. As such they
had entered into a contractual relationship where rules of master and
servant applied. The widow was therefore entitled to the compensation.
Macaura v Northern Assurance Co (1925)
• Mr Macaura was the owner of Killymoon estate in county Tyrone
• In 1919 he agreed to sell the entire timber on his estate, felled and
standing, to Irish Canadian Saw Mills Ltd
• In return Irish Canadian Saw Mills Ltd agreed to give Mr Macaura the
entire share capital of the company to be held by him and his nominees.
• In addition, he gave the company a license to enter the estate, fell the
remaining the trees and use the sawmill.
• By August 1921, the entire trees on the estate were cut down by the
company and had passed the timber through the mill.
Corporate Personality: a double edged sword.
• The timber, which represented the entire assets of the company were
then stored at the estate.
• On February 6, 1922 policy insuring the timber was taken out in the
name of Mr Macaura.
• On February 22, a fire destroyed the timber on the estate.
• Mr Macaura sought to claim under the policy he had taken out.
• The company claimed Mr Macaura had no insurable interest in the
timber as it belonged to the Company and not him.
• The case proceeded through the Northern Ireland Court System
• And eventually arrived at the House of Lords in 1925

• Lords affirmed the contention of the Company and held that even
though Mr Macaura owned all the shares in the Company, he had no
insurable interest in the timber, that was the property of the Company
“even if he holds all the shares is not the corporation and…neither
he nor the creditor of the company has any property legal or equitable
in the assets of the corporation”
Lifting the Veil of Incorporation
• It refers to situations when the legislature and the courts decided separation of
members and personality of the company is not to maintained.
• They thus lift the veil of incorporation.
• Pertains to both straight forward shareholder limitation of liability to the more complex
corporate group structures.
• Parent Company A Ltd., has three subsidiaries, X Ltd., Y Ltd., Z Ltd.
• A controls all its subsidiaries
• In reality it is one big business which is spread across four separate legal entities.
• So if Z conducts risk prone activities through Z and then things go wrong, A being
shareholder in Z with limited liability cannot technically be touched.
• Google’s restructuring with Alphabet as the holding company is a case in point.
• It presides over a collection of companies, the largest of which will be Google, a
wholly owned subsidiary of Alphabet Inc.
Statutory examples
• 7. Powers and functions of the Commission.—(1) The Commission shall exercise such powers and
perform such functions as are conferred on it by or under this Act.
• 221. Inspection of books of account by the Commission.—(1) The books of account and books and
papers of every company shall be open to inspection by any officer authorised by the Commission
in this behalf if, for reasons to be recorded in writing, the Commission considers it necessary so to
do
DISQUALIFICATION OF DIRECTORS BY THE COMMISSION

• 172. Disqualification orders.—(1) In any of the circumstances stated hereunder, the Commission
may pass a disqualification order against a person to hold the office of a director of a company for
a period up to five years beginning from the date of order d) the business of the company in which
he is or has been a director, has conducted to defraud its creditors, members or any other
persons or for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members
or that the company was formed for any fraudulent or unlawful purpose; or
Veil lifting by the Courts
• We don't quite know when they do actually lift the veil and when they
don’t

• Judicial creativity.

• Ottolenghi (1990) offers categorizations: “peeping” when information is

sought, “penetrating” where veil is disregarded and liability is attributed
to the members, “extending” where a corporate group is treated as one
legal entity, “ignoring” where a company is not recognized at all.
Classical Veil Lifting, 1897-1966
• Veil lifting was an exception rather than the norm.

• Daimler Co Ltd v Continental Tyre & Rubber Co Ltd: veil lifted to

inquire if the company was enemy during the WW1 as majority
shareholders were German.

• The Court held the company was indeed the enemy.

Jones v Lipman
• Mr.Lipman had entered into a contract with Mr. Jones to sell the land.

• Mr. Lipman then had a change of heart and did not want to complete the sale.

• He formed a company and conveyed the land to it in order to avoid the

transaction.

• Mr. Jones sued. The Court found that the company was but a façade and
ordered for specific performance of the contract
The interventionist years, 1966-1989
• In this time period, lead by crusader Lord Denning, the Court went
bonkers.
• Lord Denning held in Littlewoods Mail Order Stores v IRC (1969)
“The Courts can, and often do, pull off the mask. They look to see
what really lies behind.”
• Re a Company (1985), Court of Appeal stated:
“The court will use its power to pierce the corporate veil if it is
necessary to achieve justice irrespective of the legal efficacy of the
corporate structure under consideration.”
• Interest of justice argument illustrated the peak of intervention
Back to the basics, 1989 – present
Adams v Cape Industries Plc (1990)
• Case concerned enforcement of foreign judgment in the UK
• Key issue before the Court was whether Cape Industries could be regarded as
falling under the jurisdiction of US and therefore be subject to its jurisdiction.
• Until 1979, Cape, an English Company, mined and marketed asbestos.
• Worldwide marketing subsidiary was another English company, Capasco
• Also had a US marketing subsidiary incorporated in Illinois, NAAC
• In 1974, 462 people sued Cape, Capasco and NAAC in Texas for personal
injuries arising out of installations of asbestos in factories.
• Though Cape contended Texas had no jurisdiction, nonetheless, it settled the
actions
• In 1978, NAAC was closed down by Cape for the purposes of reorganizing
business in the USA and also to avoid tax and other liabilities.
• Between 1978 and 1979, another 206 similar actions were commenced
against Cape.
• Cape took the same earlier position and this time did not settle.
• Default judgments were entered against Cape and Capasco.
• 1979 Cape sold its asbestos mining and marketing business and therefore
had no assets in the USA.
• Claimants sought to enforce the judgment in England where Cape had most
of its assets.
• That could only occur if; the court lifted the veil of incorporation either
treating Cape as one entity or holding subsidiaries of Cape were a mere façade
or agents of Cape.

• First the Court considered if Cape was single economic unit. The Court held
that in all cases where it concluded corporate structures were one single
economic unit they interpreted documents or statutes. So a lack of clarity
either in the statute or contract would allow the Court to reduce the corporate
structure as single economic unit.

• The Court held that Cape was not a single legal entity.
• The Court then turned to lifting of the veil point and held that it could
pierce the veil of incorporation in special circumstances to examine
the facts ordinarily concealed behind the veil and to gauge the motives
of those behind alleged façade.

• Motives of Cape’s structuring of business in the US through its

subsidiaries; to minimize tax and other liability.

• Held nothing wrong.

• Then the Court turned to “agency argument”. It observed that if it could be
established that the subsidiary acted as agent of the parent company that had
apparent or actual authority then its actions would bind the parent company.

• The Court concluded that the subsidiaries acted independently with the parent
company having no actual or apparent control over the operations of the
subsidiaries. Therefore, agency argument too was found in favor of the Cape.

• And so the default judgments entered into against Cape in the US could
not be enforced in the UK.
• Court of Appeal’s decision in Adam’s Case leaves three scenarios in
which the veil of incorporation can be pierced.

i. If the Court is interpreting a statute or a document.

ii. Special circumstances exist indicating that it is a mere façade concealing true facts.
iii. Agency Principle.
SUMMARY
Cheers !!!