Milesofpaper Ltd Analysis

Introduction

As Mr Frank and Mr Stamp entered into the contract with Milesofpaper Ltd before the incorporation of Wearboaters Ltd, it would appear that the contract was entered into under the partnership of Pleasure Boats & Co and thereby governed by the Partnership Act (PA) 1890. In order for a partnership to be created, there must be two or more persons that conduct business with a view to profit. Partnerships are defined under s. 1(1) PA 1890 as a “relation subsisting between persons carrying on business in common with a view of profit”. Mr Frank and Mr Stamp had clearly entered into a partnership as they carried on business (pleasure boat building and repairing) with a view to profit; Khan v Miah, Ahad and Miah[1]. Unlike companies, partnerships do not have a separate corporate personality and are instead regarded as a collection of individuals or persons.[2] This means that each partner is jointly liable, without limit, for the debts and obligations of the partnership incurred while he or she is a partner (s. 9 PA 1890). Mr Frank and Mr Stamp will therefore both be personally liable for any debts the partnership incurred; M Young Legal Associates Ltd v Zahid[3]. In considering whether Milesofpaper has any rights in respect of payment for the stationary and office equipment, it will need to be considered whether Mr Frank and Mr Stamp are personally liable the contact is capable of binding the partnership.

Given that both partners entered into the contract with Milesofpaper, they will be deemed to have had actual authority to bind the firm. S. 5 PA 1890 states that every partner is an agent of the firm whose acts bind the firm and his partners, unless the partner acting had no authority to do so. Given that both Mr Frank and Mr Stamp would have the authority to enter into the contract with Milesofpaper, it is clear that their actions would have bound the firm. However, because the contract was entered into under the company’s name; Wearboaters Ltd, it is doubtful that this particular transaction will be binding against the partners. It is noted under s. 6 PA 1890 that an act relating to the business of the firm must be done in the firm name or any other manner to be binding on the firm and all its partners. Since the act relating to the business of the firm was done in the name of the new unincorporated company, it is unlikely that the partnership will be liable for the debt. Yet, the individual who entered into the contract may be liable for the debt as their own private act[4]; Sangster v Biddulph[5]. Furthermore, even though Wearboaters Ltd has now been incorporated, Milesofpaper Ltd will not be able to enforce the pre-incorporated contract. The reason for this is that; “before incorporation, the company is not competent to enter into contract in its own name as it has no legal entity”[6].

As such, Wearboaters Ltd will not be capable of being sued for the pre-incorporation contract that was entered into between Mr Frank, Mr Stamp and Milesofpaper. In Re English & Colonial Product Co[7] it was held that a company was not liable to pay for services and expenses incurred by a solicitor pre-incorporation as the company was not in existence at the time when the expenses were incurred. In addition, it was also held in CIT v City Mills Distilleries (P) Ltd[8] that a company has no status prior to its incorporation and can have no income or liability. As the company had not been incorporated, Mr Frank and Mr Stamp will be classed as ‘promoters’ who will have purported to enter into a contract by or on behalf of Wearboaters Ltd[9]. As promoters, Mr Frank and Mr Stamp will be personally liable unless the contract states otherwise (s. 51 Companies Act (CA) 2006). In Phonogram Ltd v Lane[10] it was held that a promoter of a company was personally liable to repay a debt that was made on the company’s behalf under s. 51 CA 2006 (previously 2. 36 CA 1985) even though the claimant was unaware that the company was not in existence at the time the contract was entered into. Overall, it is likely that Milesofpaper will have a claim against Mr Frank and Mr Stamp in respect of payment for the stationery and office equipment.

What legal rights (if any) do Mr Frank and Mr Stamp have in respect to payment for compensation for the destroyed boats and equipment?

Once a company has been incorporated, it is separate and distinct from its members as shown in Salomon v Salomon[11]. Here, it was made clear that a company shall be solely liable for any losses or mishaps that arise within the company. In accordance with this principle, a company has the capacity to enter into contracts and sue and be sued in its own name. If the company suffers a breach of contract, it is the company who will be able to sue on the contract for breach and thereby seek to take the appropriate remedial action[12]. As business assets are owned by the company, it is the company who is responsible for insuring them. Because Mr Frank had insured the assets of the business under the partnership, the assets that have been transferred to the company will no longer be insured. This is because Mr Frank does not have an insurable interest in the company’s assets and a new contract would need to have been entered into between the company and the insurer. This was identified in Macaura v Northern Assurance Co Ltd[13] where Macaura was the owner of a timber estate who took out an insurance policy in his own name. Most of the timber was destroyed by fire but Macaura could not claim for loss of goods as he did not have an insurable interest in the timber. It was held that a person cannot claim for loss of goods that are owned by another party. As the company owned the timber, Macaura could not make a claim.

Since Wearboaters Ltd is the new owner of the assets, Mr Frank will not be able to make a claim as they no longer have an insurable interest in the assets. When the assets were transferred a new insurance policy should have been taken out in Wearboaters Ltd’s name. As Mr Frank and Mr Stamp have failed to take out a new insurance policy, they will be deemed to have breached their directors’ duties and will be found personally liable for the loss that has been caused to the business. It cannot be said that Mr Frank and Mr Stamp were promoting the success of the company as required under s. 172 CA 2006 and will therefore be liable for any losses incurred; Re Duomatic[14]. This is an exception to the rule in Salomon that a company is separate and distinct from its members and thus allows the corporate veil to be lifted in certain circumstances. In addition, Mr Frank and Mr Stamp also breached their duty to “exercise reasonable care, skill and diligence” under s. 174 CA 2006 as shown in Secretary of State for Trade and Industry v Goldberg[15]. Although the courts are generally reluctant to lift the corporate veil, they will do so when “common sense and reality demand it”[16] and when “there is a powerful argument of principle for lifting the corporate veil where the facts require it”[17]. It could be said that this is to apply in the instant situation as Mr Frank and Mr Stamp should have insured the assets of the business as they were the first directors of Wearboaters Ltd.

The courts will only pierce the corporate veil in very limited circumstances, however, and if Mr Frank and Mr Stamp can demonstrate that there was no evidence of “fraud, illegality or a sham or if the company is a mere facade concealing the true facts” (ss. 213-215 of the Insolvency Act 1986, s. 993 CA 2006 and s. 15 of the Company Directors Disqualification Act 1986), then it is unlikely that they will be found personally liable; Adams v Cape Industries plc[18]. As noted by Talbot; “veil piecing is not an end in itself but a means to an end”[19]. Therefore, unless the circumstances of the case give rise to fraud or a pre-existing obligation, the courts will be unlikely to pierce the veil in its entirety; Pirelli Cable Holding NV v IRC[20]. It has been said that the courts will “go to great lengths to avoid any obvious penetration of the corporate veil, whilst still making the sort of inquiries that would be satisfied by just such a process”[21]. This prevents the doctrine from being completely undermined, whilst also protecting the public; Millam v Print Factory (London) 1991 Ltd[22]. The veil will only be lifted in exceptional circumstances[23] so as to prevent individuals from being discouraged from investing in companies[24]. Overall, given that it Mr Frank and Mr Stamp appear to have made a genuine mistake in respect of the insurance, it is unlikely that they will be found personally liable. However, they will not be entitled to compensation for any loss suffered.

Bibliography

Text Books

A Dignam and J Lowry. Company Law (Core Text Series). (Oxford: OUP Oxford, 2012).

D French. S Mason. and C Ryan. Mason, French & Ryan on Company Law, (Oxford: Oxford University Press, 2013).

L Jones. Introduction to Business Law. (Oxford: OUP Oxford, 2013).

L Talbot, L. Critical Company Law, (London: Routledge, 2007).

P P S Gonga. A Text Book of Company Law., (London: Chand, 2002).

Journal Articles

S Ghaiwal, S. ‘Chandler v Cape plc: Is there a chink in the corporate veil?’ (2012) Health and Safety at Work Newsletter, vol 18, no 3, 487-499.

V V Watcher. ‘The Corporate Veil’ (2007) New Law Journal, vol. 990, no. 7218, 22-27.

Legislation

Partnership Act 1890

Cases

Adams v Cape Industries plc [1990] Ch 433

CIT v City Mills Distilleries (P) Ltd (1996) 2 SCC 375

Khan v Miah, Ahad and Miah [2001] All ER

Macaura v Northern Assurance Co Ltd [1925] AC 619

Millam v Print Factory (London) 1991 Ltd [2007] EWCA Civ 322

M Young Legal Associates Ltd v Zahid [2006] EWCA Civ 613

Pirelli Cable Holding NV v IRC [2006] UKHL 4

Phonogram Ltd v Lane (1982) QB 938

Re Duomatic [1969] 2 Ch 365

Re English & Colonial Product Co (1906) 2 Ch 435

Salomon v Salomon [1987] AC 22

Sangster v Biddulph [2005] PNLR 33

Secretary of State for Trade and Industry v Goldberg [2004] 1 BCLC 557