SOLUTION :

1. Private Limited Company (Ltd):

This refers to the type of business entity that FC Wolfscastle Limited is. A private limited
company is a legal entity separate from its owners (shareholders) and directors. It offers
limited liability to its shareholders, meaning their assets are generally protected in case
the company encounters financial difficulties. The ownership of a private limited
company is typically divided into shares, and ownership can be transferred subject to
certain restrictions. It is this huge benefit which has enabled companies to grow. It
is important to take calculated risks when in business, to allow a business to expand.
Directors of companies can take more risks because most of the time their personal
assets are safe from creditors.
2. Unamended Model Articles:
The Model Articles of Association are a standard set of rules for the internal
management of a company prescribed by the Companies Act 2006 in the UK.
Companies (Model Articles) Regulations 2008: schedule 1 contains the version
for private companies limited by shares and schedule 3 contains the version for
public companies. These Model Articles provide default provisions that apply to
companies if they do not adopt their own bespoke articles. "Unamended" means that
FC Wolfscastle Limited has not made any modifications or amendments to these default
Model Articles. Therefore, the company's internal governance, such as procedures for
board meetings, shareholder rights, and the appointment and removal of directors,
would be governed by these default rules unless explicitly altered in the company's
articles of association.

3. The potential appointment of Emilia Sanchez as a director, including the

proposed fixed-term service contract.
a. In considering Emilia Sanchez's appointment as a director, the duty to promote
the success of the company, as outlined in Section 172 of the CA 2006,
becomes pertinent. Emilia must act in a manner she considers, in good faith,
would be most likely to promote the success of the company for the benefit of its
members as a whole. This duty encompasses various factors, including
considering the long-term consequences of decisions, the interests of
employees, business relationships, community and environmental impacts,
standards of business conduct, and fairness among members.

b. In the context of Emilia's potential appointment, the board should assess her
qualifications, experience, and potential contribution to the company's success,
both on the playing side and commercially. They must ensure that her
appointment aligns with the long-term goals of the company, fosters positive
relationships with stakeholders, and upholds high standards of business conduct.
Additionally, they should consider how Emilia's appointment could impact the
company's reputation and shareholder value over time.
c. Ultimately, if the board determines that Emilia's appointment would further the
company's success and benefit its members as a whole, they can proceed with
her appointment in accordance with their fiduciary duties under Section 172.
However, they must ensure that their decision is made in good faith and with due
regard to all relevant factors outlined in the provision.
d. In considering Emilia Sanchez's potential appointment as a director, it is essential
to evaluate her ability to fulfil the duty to exercise reasonable care, skill, and
diligence, as outlined in section 174 (CA 2006). Emilia's experience as a director
of football for a leading club in Italy suggests that she possesses a certain level
of expertise in managing sports-related operations. However, her specific
qualifications and experience should be assessed to the functions she would
undertake as a director of FC Wolfscastle Limited. The board must ensure that
Emilia's knowledge, skill, and experience align with the responsibilities she would
carry out within the company, as required by section 174 CA 2006. Therefore,
thorough consideration of Emilia's background and qualifications is necessary to
determine her suitability for the role and her ability to fulfil the duty of care
expected of a director.
e. The appointment of Emilia Sanchez as a director involves considering her role in
the day-to-day operations of the company and the proposed fixed-term service
contract, as outlined in (MA 3).
f. According to (MA 17), directors can be appointed either by the board or by
ordinary resolution of shareholders. Involving shareholders in the appointment
process allows for their input and oversight, aligning with corporate governance
principles. (MA 17) allows for Emilia Sanchez's appointment either by the board
or by ordinary resolution of shareholders, with the former being a quicker and
easier process.
g. Section 188 (CA 2006) stipulates that long-term service contracts exceeding two
years require shareholder approval through an ordinary resolution. This includes
decisions regarding salary, responsibilities, benefits, and notice periods, as
governed by (MA 3) and (MA 19), with shareholders having the right to veto the
guaranteed term element to protect the company's interests.
h. Under section 188(5) (CA 2006), the terms of a proposed service contract must
be available for shareholder inspection before and during a general meeting, or
circulated with written resolutions. Contracts exceeding two years without
shareholder approval render the guaranteed term portion void, while the
remainder remains enforceable, subject to reasonable notice termination.
i. Directors' service contracts must be accessible for shareholder inspection at the
company's registered office, as per sections 228 and 229 of the (CA 2006),
ensuring transparency and accountability in corporate governance.
j. Details of Emilia Sanchez's appointment need to be recorded in the company's
register of directors and register of directors’ residential addresses, as required
by sections 162, 163, and 165 (CA 2006), ensuring compliance with statutory
obligations.

4. Tom Stone's Failure in Sponsorship Contract:

a. Tom Stone's failure in the sponsorship contract would be assessed in light of the
duty to exercise reasonable care, skill, and diligence as per section 174 (CA
2006). As a director responsible for commercial operations for 20 years, Tom is
expected to possess a certain level of general knowledge, skill, and experience
relevant to his role. Therefore, the standard of care expected of him would be
that of a reasonably diligent person with the general knowledge, skill, and
experience required for carrying out his functions in relation to the company.
However, if Tom did not conduct any research before entering into the
sponsorship contract, it would suggest a failure to meet this standard of care.
The board must assess whether Tom's actions fell below the level of care, skill,
and diligence expected of a director in his position, considering both the general
expectations for someone in his role and his specific experience and knowledge.
b. Breach:
Tom Stone's failure in the sponsorship contract would be considered a breach of
the duty to exercise reasonable care, skill, and diligence under section 174 SCA
2006). This breach is akin to negligence, and the remedy for such breach would
typically involve common law damages assessed in a manner similar to damages
for negligence. In this case, the company may seek damages to compensate for
any losses incurred as a result of Tom's failure to exercise the required level of
care, skill, and diligence in managing the commercial operations and entering
into the sponsorship contract. The damages would be assessed based on the
extent of the harm suffered by the company as a direct result of Tom's
negligence in fulfilling his duties as a director.

5. Purchase of Land for New Stadium:

a. The board's consideration to purchase land near The Wolf Whistle Stadium
for a new stadium must adhere to the duty to avoid conflicts of interest
outlined in section 175 (CA 2006). Given that Tom Stone's brother, Timothy
Stone, owns the land, there exists a potential conflict of interest as Tom Stone
may benefit indirectly from the transaction.

b. Directors must avoid situations where their interests conflict with those of the
company, particularly in the exploitation of property or opportunities (s. 175
CA 2006). To comply with this duty, the board should ensure transparency in
the decision-making process, consider alternative options, and obtain
independent advice or valuations to mitigate any perceived conflicts of
interest. If the board proceeds with the transaction, it must be authorized
through a board resolution, ensuring that Tom Stone does not participate in
the decision-making process to protect against potential breaches of the duty
under section 175 CA 2006.

c. Additionally, under section 175(4) and (5) CA 2006, a board resolution

authorizing the breach or potential breach is enough to protect the director in
question (Tom Stone) from a claim for breach of duty under this section.
However, the director in question will not count in the quorum for the vote to
 authorize the infringement, and if they vote, their vote will not be counted,
even if MA 14 has been excluded (s. 175(6) CA 2006).

d. Remedies :

Breach consequences under ss 171–177 mirror common law or equitable

principles, enforceable similarly to fiduciary duties. (Tom Stone) Remedies
include profit account, equitable compensation, contract rescission,
injunctions, and property restoration. Breach of s 174, akin to negligence,
warrants common law damages akin to negligence damages.

e. The shareholders can ratify a breach or potential breach of a director’s duty

by ordinary resolution (s 239 CA 2006). Similarly, if the ordinary resolution is
proposed at a general meeting and the director is a shareholder, their votes
(and those of any connected shareholder) will not be counted. Ratification of
the director's breach absolves them of liability, as if no breach occurred,
providing a safeguard for directors concerned about potential legal action for
breach of duty.
f. Tom Stone, as a director of the company, must declare any interest he has,
whether direct or indirect, in the transaction involving the purchase of land for
the construction of a new stadium, as per section 182 (CA 2006). This
declaration must be made to the other directors of the company as soon as
reasonably practicable, either at a meeting, by written notice to all other
directors, or through a general notice at a board meeting (ss. 184 and 185
CA 2006). However, if Tom Stone has already declared his interest under
section 177 regarding a proposed transaction, then section 182 does not
apply. Exceptions to the duty to declare include situations where the director
is not aware of the interest or if it cannot reasonably lead to a conflict, among
others. Failure to declare an interest in an existing transaction is a criminal
offence punishable by a fine under section 183 CA 2006, in contrast to
section 177, where non-compliance is a civil matter. Therefore, Tom Stone
must ensure prompt and proper declaration of any interests he holds in the
transaction concerning the purchase of land for the new stadium to comply
with statutory requirements and avoid potential legal consequences.

g. The purchase of the land for the construction of a new stadium constitutes a
substantial property transaction (SPT) under sections 190–196 (CA
2006). This is because a director, Tom Stone, or someone connected with
him (such as his brother Timothy Stone), intends to buy non-cash assets (the
land) from or sell them to the company at a substantial value. As such, the
shareholders' consent via an ordinary resolution is required, as SPTs
involve circumstances where a director or connected person could gain
at the company's expense. In this scenario, if Tom Stone or a connected
person is also a director of the company's holding company or a person
 connected with such a director, the transaction must additionally be
approved by ordinary resolution of the shareholders of the parent
company (s. 190(2) CA 2006). Therefore, the board must ensure that proper
procedures are followed and shareholder consent is obtained before
proceeding with the purchase of the land to comply with statutory
requirements regarding substantial property transactions.

h. Effect of breach

If the company proceeds with the purchase of the land for the new stadium
without obtaining the necessary ordinary resolution as required for a
substantial property transaction (SPT), the transaction becomes voidable
under section 195 (CA 2006). Additionally, the following individuals may be
held accountable to the company for any gains made and indemnify the
company for any losses resulting from the transaction:

A. Any director of the company (or its holding company) with whom the
company entered into the transaction.
B. Any person with whom the company entered into the transaction who is
connected with a director of the company or its holding company, as well
as the director with whom such person is connected.
C. Any other director of the company who authorized the transaction or any
related transactions pursuant to the arrangement.
D. Therefore, proceeding with the land purchase without obtaining the
necessary shareholder consent could lead to the transaction being voided
and potential legal liabilities for the individuals involved in the
arrangement, including directors and connected persons.

i. Regarding the proposed resolutions to appoint Emilia as a director, award her

a 3-year fixed-term service contract, and purchase the land for £200,000,
these decisions would typically require the approval of the shareholders
through a general meeting. Stephen Johnson's confirmation of the company's
policy to pass shareholders' resolutions via general meetings aligns with this
provision.

j. Based on MA 17 and Section 188 CA 2006, the appointment of Emilia as a

director and The purchase of the land for the construction of a new stadium
constitutes a substantial property transaction (SPT) under sections 190–196
(CA 2006). As such, the shareholders' consent via an ordinary resolution
requires shareholders' consent via an ordinary resolution in a shareholders'
general meeting.

k. Considering the shareholder distribution in FC Wolfscastle Limited, with

Stephen Johnson holding 30 shares, Tom Stone holding 10 shares, Susanna
Adlington holding 10 shares, Dennis Blackshaw holding 20 shares, and Barry
Smith holding 30 shares, the total allotted shares are 100.
 l. In the case of Emilia's appointment and the land purchase, the resolutions
would require a simple majority vote of the shareholders present at the
general meeting. Each shareholder's vote would be proportional to their
shareholding. Therefore, for both resolutions to pass, at least 51 shares out of
the 100 must vote in favour.

PART B

The legal academic Otto Kahn-Freund described Salomon v A Salomon & Co Ltd
[1896] UKHL 1 as “a calamitous decision.”

Kahn-Freund O, ‘Some Reflections on Company Law Reform’ (1944) 7 Modern Law

Review 54

Critically evaluate the impact and significance of the Salomon decision.

In this part of the assessment, you will be asked questions about the approach taken by
the courts to the issue of separate legal personality of a company.

It is important that you are able to critically evaluate this area of the law and present
your own reasoned views.

SOLUTION:

1. Can you briefly summarise the facts of Salomon v A Salomon & Co Ltd?

Mr Salomon owned a boot factory. He set up a limited company and sold the boot
business to the company for £39,000. The company paid him £9,000 in cash and issued
him with 20,000 shares at £1 each (cost £20,000). To comply the (then) Companies Act,
the remaining shares were held by members of his family. Mr. Salomon lent the
company the remaining £10,000 of the purchase price, and the debt was secured on the
company’s property.

The new company got into financial difficulties and had to be wound up, leaving its
debts unpaid. As a secured creditor, Mr Salomon was entitled to be paid before the
other unsecured creditors, so he got the £10,000 which he had lent to the company, but
the unsecured creditors did not recover what was owed to them.

2. What were the issues before the court?

The issues were:

1. Whether the company was a validly incorporated company.

2. Whether the company or Mr Salomon was liable for the company’s debts

3. Can you summarise the House of Lords decision?

The House of Lords decided that the company had been validly formed in accordance
with the requirements of the (then) Companies Act without fraud on the part of Mr
Salomon. It was a separate and distinct legal person. It was not relevant that Mr
Salomon owned a majority of the shares and the management of the company stayed in
the same hands as it had before. The company was a separate person from Mr
Salomon. It had borrowed the money from him and issued the debentures in its own
right, and so he was entitled to be paid back from the remaining assets of the company.

The House of Lords dismissed the arguments that had succeeded at first instance and
in the Court of Appeal that a validly incorporated ‘one person company’ established an
agency relationship or created a trust.

4. Can you explain why the House of Lords dismissed the arguments that
either an agency relationship existed or a trust had been created?

An agency relationship exists where a person (the agent) acts on behalf of another (the
principal). It is perfectly possible for someone to appoint a company, which is a legal
person, as an agent, and, under agency law, the principal will be liable under any
contracts entered into by the company on behalf of the principal – and this would
include the debts. This was one of the arguments put forward in Salomon and which
was accepted at first instance. The decision of the House of Lords established that in
the absence of an agreement or clear intention that an agency exists, the mere fact of
incorporation was not enough to establish an agency agreement.

The same applied to the argument that a trust could exist which would mean that the
company would hold the assets on behalf of the members. This argument had been
accepted by the Court of Appeal in Salomon. However, the House of Lords dismissed
this. The fact that a validly company appoints nominee or ‘dummy’ shareholders did not
mean that a trust was created.

5. What do we mean by separate legal personality?

A company is a legal entity, or person, separate from its members, with its own legal
rights and obligations. As a person, it can do most of the things that a human person
can do. For example, it can own property, enter into contracts, incur debts, be party to
legal proceedings, commit certain crimes and torts, and sometimes claim human rights,
all in its own right.

This means, as Mason, French and Ryan put it, a “company’s business is its business”
(Christina v Seear ) which it conducts in its own right. The members have no interest in
the company’s property, they can enter into contracts with the company, e.g.
employment contracts, the members cannot sue on its behalf, and, ultimately, it
survives the death of any of its members (perpetual succession).

6. What do we mean by limited liability?

Limited liability is, and arguably remains, a fundamental principle of company law. It is
the logical consequence of separate legal personality. As a company incurs debts on its
own behalf, it is the company, not the members, which is responsible for those debts. If
the company fails, the members lose the money which they have invested in the
company, but no more. They cannot be asked to pay the debts out of their personal
assets. The importance of this cannot be over-estimated. It opens the way for
investment in companies as the risk for investors is minimised, by allowing investors to
safeguard their personal assets from the company’s creditors. They are protected by
the veil of incorporation.

6. What is the difference between separate legal personality and limited

liability?

Separate legal personality refers to the legal status of the company. Limited liability is
the logical consequence of separate legal personality. It protects the shareholders from
liability for the company’s debts.

8. Can you give three reasons why the Salomon judgment so important?

a. The House of Lords upheld the concept of separate legal personality and firmly
established this as the fundamental principle of company law. This is now entrenched in
the Companies Act 2006, which refers to a company as a “body corporate” which
comes into existence on registration and is capable of exercising all the functions of an
incorporated company .

b. The concept of separate legal personality had been recognised in earlier cases such
as Re Raglan Hall Colliery Co . “Once a company is legally incorporated, it must be
treated like any other person with rights appropriate to itself” (per Lord Halsbury LC). In
upholding the concept, the House of Lords recognised that a validly incorporated
company gave its members the benefit of limited liability.

c. The judgment also established the validity of what has come to be known as the ‘one
person company’ – a company like Mr Salomon’s which was managed and controlled
by one person (albeit that there were other members of the company who took no part
in the management of the company). This paved the way for the development of the
small private company, the commonest form of limited company today. Lord
Macnaghten stated that a validly incorporated company cannot “lose its
individuality by issuing the bulk of its capital to one person..
9. Can you name two other cases where the court upheld the concept of the
separate legal personality of a company?

a. Macaura v. Northern Assurance Co Ltd & b. Lee v. Lee’s Air Farming Ltd

10. Are there any circumstance where the court will consider piercing the
corporate veil?

The fundamental rule here is that, although the courts have the power to disregard a
company’s separate legal personality, there are very limited circumstance in which the
courts will be prepared to genuinely pierce the veil. Arguably, this demonstrates that the
courts are reluctant to undermine the importance of the principles set out in Salomon.
There are instances where they have done so, for example, in Gilford Motor Co v Horne
where the defendant tried to avoid a restraint of trade clause by setting up a company
which carried on business in competition with the claimant. Subsequent case law has
considerably narrowed the circumstances in which the courts will be prepared to do so
(for example, Adams v Cape Industries plc ). The more recent case of Prest v Petrodel
Resources Ltd established that it will only be done where a company had been used to
deliberately evade a legal obligation and then only to deprive the company or give its
‘controller’ of an advantage that they would not otherwise have gained and there was no
other remedy that would achieve that purpose.

11. Can you give three examples of how the courts may find a way around the
corporate veil?

There are certain circumstances where the veil is not pierced but a way around it is
found. There are four main situations where this can be done – you should have been
able to explain three.

• Under Statute

The first is where it is permitted by statute, e.g. the Insolvency Act 1986 imposes
personal liability on directors if they have behaved in a certain way in the management
of the company in the period leading up to insolvency.

• Where there is an agency relationship

The courts may be prepared to find that an agency relationship existed, as in Smith,
Stone and Knight Ltd v Birmingham Corporation . However, this was based on the
specific facts of the case. In Adams v Cape Industries, the courts refused to do so.

• Where a trust has been created

In Prest v Petrodel, based on the particular facts of the case, the court did consider a
trust existed, and the assets in question could be accessed and used as part of the
divorce settlement.
• Under a contract

Contractually, it is common practice for lenders to require directors and shareholders in

small companies to give personal guarantees, which, as valid contracts, would be
upheld by a court.

It is generally accepted that in all these situations, by circumventing the corporate veil,
the courts are not disregarding the company’s separate legal personality. [You could
give a quote here: in Prest, Lord Neuberger referred to Lord Templeman’s metaphor
that the principle is the "unyielding rock" on which company law is constructed.]

12. Why would a court wish to find a way around the corporate veil?

Generally speaking, the veil of incorporation is a useful commercial tool. It encourages

investment in companies, and it provides a degree of commercial certainty. However,
since Salomon, it has become clear that this can produce some harsh or unfair results.
Members of companies can be tempted to use the protection given for their own benefit
or, worse still, for fraudulent purposes.

The examples given above are pragmatic, usually commercial, approaches where the
separate personality of the company is not relevant: where there is an agency
relationship, the outcome will be based on agency law; where there is a trust, equitable
principles are relevant; where there is a valid contract, the courts will consider contract
law; and where a statute imposes liability, the courts will look to the provisions in that
statute. In none of these cases is company law, and therefore separate legal
personality, relevant.

Criticism & Reforms :

1. Abuse of Corporate Personality: Kahn-Freund highlights the abuse of

corporate personality in British law and suggests that closer alignment between
company formation and capital raising could deter such abuse.

Kahn-Freund suggests that closer alignment between company formation

and capital raising could deter the abuse of corporate personality by
imposing stricter requirements for forming a company. Specifically, he proposes
that requiring a minimum initial capital investment (5000) for company
formation could serve as a deterrent. By setting a minimum capital threshold,
individuals seeking to establish a company would need to demonstrate a genuine
commitment to the enterprise and have sufficient financial resources to support it.
This requirement would act as a barrier to entry, preventing the formation of
companies with minimal capital solely to exploit corporate personality for
fraudulent or illegitimate purposes.

2. Preconditions for Registration: He proposes that registration should be

conditional upon the presentation of a certificate from the Board of Trade
 confirming the justification for forming the company and the personal reliability of
controlling interests. This certificate should not be open to public inspection,
preserving privacy while ensuring regulatory oversight.
3. Individuals contemplating fraudulent activities may be deterred by the legal
consequences of providing false information or attempting to form a
company without meeting the certification requirements. Fear of penalties
or legal action serves as a deterrent.
4. Legitimate Place for Small Companies: While advocating for reforms to
prevent abuse, Kahn-Freund acknowledges the legitimate place of small
companies in certain circumstances, such as facilitating the distribution of
financial interests among family members or embarking on uncertain
enterprises with limited resources.