FE-1 Company Law and Equity 1 — Questions and Answers
Question 1: What is the principle of separate legal personality established in Salomon v Salomon & Co [1897] and applied under the Companies Act 2014 in Ireland?
- A company is a legal person distinct from its shareholders and directors — it can own property, enter contracts, and sue and be sued in its own name. Shareholders' liability is limited to their capital contribution (Correct answer)
- A company's debts are automatically the personal debts of its directors
- Separate legal personality only applies to publicly listed companies
- The principle was modified by the Companies Act 2014 to allow piercing in all cases of insolvency
Correct answer: A company is a legal person distinct from its shareholders and directors — it can own property, enter contracts, and sue and be sued in its own name. Shareholders' liability is limited to their capital contribution
Salomon established the cornerstone of company law. In Ireland, the Companies Act 2014 preserves this principle. A company is a separate entity from those who own or run it. The corporate veil can be pierced in limited circumstances including fraud and agency.
Question 2: Under the Companies Act 2014, what are the main duties of directors in Ireland?
- Duty to act in good faith in the interests of the company, to act within their powers, to avoid conflicts of interest, to exercise reasonable care, skill and diligence, and not to benefit from their position (Correct answer)
- Directors owe duties only to shareholders, not to the company
- The duties under the 2014 Act are entirely separate from the old common law and equity duties
- Directors have no fiduciary duties — only contractual obligations under their service contracts
Correct answer: Duty to act in good faith in the interests of the company, to act within their powers, to avoid conflicts of interest, to exercise reasonable care, skill and diligence, and not to benefit from their position
The Companies Act 2014 codified and extended directors' duties including: acting in good faith (the subjective element), acting honestly, using powers for proper purposes, avoiding conflicts, not gaining unauthorised benefits, and exercising the objective standard of care of a reasonable person with their knowledge and experience.
Question 3: What is the rule in Foss v Harbottle [1843] and when can shareholders bring a derivative action in Irish company law?
- The proper plaintiff for a wrong done to the company is the company itself — shareholders generally cannot sue. Exceptions include: fraud on the minority by those in control, ultra vires acts, and breaches of special resolution requirements (Correct answer)
- Any shareholder can bring an action on behalf of the company at any time
- The rule was abolished by the Companies Act 2014
- Shareholders can only bring derivative actions with the court's pre-approval
Correct answer: The proper plaintiff for a wrong done to the company is the company itself — shareholders generally cannot sue. Exceptions include: fraud on the minority by those in control, ultra vires acts, and breaches of special resolution requirements
Foss v Harbottle prevents shareholders from litigating over corporate wrongs — the company is the proper plaintiff. Exceptions allow minority shareholder actions for fraud on the minority where the wrongdoers control the company and block the company from suing.
Question 4: What is a constructive trust in Irish equity law?
- A trust imposed by equity independently of the parties' intention to prevent unjust enrichment — it arises by operation of law where a person holds property in circumstances that make it unconscionable to deny the beneficial interest of another (Correct answer)
- A trust created by the express words of the settlor
- A trust created to hold property for charitable purposes
- A trust imposed by statute under the Succession Act 1965
Correct answer: A trust imposed by equity independently of the parties' intention to prevent unjust enrichment — it arises by operation of law where a person holds property in circumstances that make it unconscionable to deny the beneficial interest of another
A constructive trust arises by operation of law without the need for any agreement or intention. It is equity's response to unconscionable conduct — examples include: strangers who knowingly receive trust property, and cases of common intention regarding family homes (as in Gillespie v Gillespie in Irish family law).
Question 5: What is the maxim 'equity follows the law' and how does it operate in Irish law?
- Equity supplements but does not override the common law — where legal and equitable rights exist, equity will follow the allocation of rights established at common law unless there is a specific equitable reason to do otherwise (Correct answer)
- Equity always overrides the common law in all cases
- The maxim means equity applies the same rules as common law
- Equity follows the law only in land transactions
Correct answer: Equity supplements but does not override the common law — where legal and equitable rights exist, equity will follow the allocation of rights established at common law unless there is a specific equitable reason to do otherwise
Equity historically grew up alongside common law to provide remedies where common law was deficient or harsh. It supplements rather than supplants the common law. Where no equitable rule intervenes, equity applies the common law position.
Question 6: Under Irish company law, what is the difference between a private company limited by shares (LTD) and a designated activity company (DAC)?
- An LTD has no objects clause and can carry on any lawful activity — a DAC has a constitution with specific objects clauses and is used for companies whose activity needs to be restricted or defined (Correct answer)
- Both have identical constitutions under the Companies Act 2014
- A DAC has unlimited liability while an LTD has limited liability
- LTD companies can have unlimited members while DACs are capped at 50
Correct answer: An LTD has no objects clause and can carry on any lawful activity — a DAC has a constitution with specific objects clauses and is used for companies whose activity needs to be restricted or defined
The Companies Act 2014 created the LTD (a simplified private company with no objects clause — its capacity is unrestricted) and retained the DAC for situations where specific objects are needed (e.g. single purpose vehicles, companies with particular regulatory requirements).
FE-1 Company Law and Equity 1
What is the principle of separate legal personality established in Salomon v Salomon & Co [1897] and applied under the Companies Act 2014 in Ireland?