CILEx L6 Company Law — Questions and Answers
Question 1: What is the 'Salomon principle' in company law?
- A company is a separate legal entity distinct from its shareholders, with its own rights and liabilities (Salomon v Salomon & Co [1897]) (Correct answer)
- A company's directors are personally liable for its debts
- A company's shareholders share liability for company debts
- A company cannot contract with its own shareholders
Correct answer: A company is a separate legal entity distinct from its shareholders, with its own rights and liabilities (Salomon v Salomon & Co [1897])
In Salomon v A Salomon & Co Ltd [1897] AC 22, the House of Lords confirmed that a registered company is a separate legal entity from its members. This principle of separate corporate personality is fundamental to company law.
Question 2: When will courts 'pierce the corporate veil' to hold individuals liable for a company's acts?
- Only in very limited circumstances where the company is used as a device to evade existing legal obligations (Prest v Petrodel Resources [2013]) (Correct answer)
- Whenever it is just and equitable to do so
- Whenever a company is insolvent
- Whenever directors have acted improperly
Correct answer: Only in very limited circumstances where the company is used as a device to evade existing legal obligations (Prest v Petrodel Resources [2013])
Following Prest v Petrodel Resources [2013] UKSC 34, the Supreme Court (Lord Sumption) held that courts may pierce the veil only where a person deliberately evades an existing legal obligation by interposing a company. Mere impropriety or injustice does not justify piercing.
Question 3: What are the general duties of directors under the Companies Act 2006?
- Seven duties under ss.171-177 including acting within powers, promoting the success of the company, exercising independent judgment, reasonable care and skill, avoiding conflicts of interest, not accepting benefits from third parties, and declaring interests in transactions (Correct answer)
- Three duties: to act in good faith, with skill, and without conflict
- Five duties derived from the fiduciary law of trusts
- Directors owe duties only to shareholders, not to the company itself
Correct answer: Seven duties under ss.171-177 including acting within powers, promoting the success of the company, exercising independent judgment, reasonable care and skill, avoiding conflicts of interest, not accepting benefits from third parties, and declaring interests in transactions
The Companies Act 2006 ss.171-177 codifies seven general duties: (1) act within powers, (2) promote the success of the company, (3) exercise independent judgment, (4) exercise reasonable care, skill and diligence, (5) avoid conflicts of interest, (6) not accept benefits from third parties, (7) declare interests in proposed transactions.
Question 4: What is the 's.994 Companies Act 2006 unfair prejudice petition'?
- A remedy for a shareholder whose interests as a member have been unfairly prejudiced by the conduct of the company's affairs (Correct answer)
- A remedy for a director removed from office without cause
- A remedy for creditors where a company is insolvent
- A remedy for employees unfairly dismissed by a company
Correct answer: A remedy for a shareholder whose interests as a member have been unfairly prejudiced by the conduct of the company's affairs
Under s.994 CA 2006, a member may petition the court where the company's affairs have been or are being conducted in a manner unfairly prejudicial to their interests. The court has wide powers, including ordering a buyout of the petitioner's shares.
Question 5: What is the 'rule in Foss v Harbottle [1843]' and what exceptions exist?
- Only the company (not individual shareholders) can sue for a wrong done to the company; exceptions include fraud on the minority and acts requiring special majorities (Correct answer)
- Any shareholder may sue on behalf of the company at any time
- The rule was abolished by the Companies Act 2006
- Directors can never be sued by shareholders directly
Correct answer: Only the company (not individual shareholders) can sue for a wrong done to the company; exceptions include fraud on the minority and acts requiring special majorities
The rule in Foss v Harbottle [1843] provides that the proper plaintiff for a wrong done to the company is the company itself. Exceptions allowing derivative claims include fraud on the minority (where the wrongdoers control the company) and acts beyond the company's constitution.
Question 6: What is a 'floating charge' and how does it differ from a fixed charge?
- A floating charge hovers over a class of assets (e.g., stock in trade) and attaches only on crystallisation; a fixed charge attaches immediately to specific identified assets (Correct answer)
- A floating charge is less secure than a fixed charge because it is not registered
- A floating charge only applies to cash; a fixed charge to property
- A floating charge is only available to public companies
Correct answer: A floating charge hovers over a class of assets (e.g., stock in trade) and attaches only on crystallisation; a fixed charge attaches immediately to specific identified assets
A fixed charge attaches immediately to specific assets — the company cannot dispose of them without the chargee's consent. A floating charge hovers over a class of assets, allowing the company to deal with them in the ordinary course of business, and crystallises (attaches) on specified events.
CILEx L6 Company Law
What is the 'Salomon principle' in company law?