Company Law in Ireland

A company, above all else, is a business. Its purpose is to make money. It is owned by shareholders, but run by its managing director.

A key trait of a company is that it is a spate legal entity from its shareholders. This is in contrast to sole traders and partnerships. In this sense then there is limited liability. A shareholder for example, cannot be chased for his own assets if a company he owns goes bankrupt.

Any business can be incorporated (made into a company). There are various advantages and disadvantages of doing so. To be incorporated means to be a company whose liability is limited by shares.  An advantage of this is that shares are easily transferable. It is also possible to place limitations on shares, such as no voting power. While a partnership will only last as long as both partners remain alive, a company can continue to exist forever.

It is also far easier to borrow money as a company, rather than as a sole trader. Limited liability is also a huge advantage of incorporation. This leads into the main advantage of incorporation; the company will have a separate legal personality.

There are disadvantages to running a company however. Some professions, such as barristers, are forbidden from doing so. There are also many obligations involved once one has incorporated; proper books of accounts must be kept, they may be subject to review and they have to keep minutes of meetings.

However, the main benefit of incorporation in Ireland is simple; individuals can pay up to 41% of their income in tax while companied bay a mere 12.5%.

It is important to note that companies can be either public or private. Most Irish companies are private. This means there is a restriction on the transfer of its shares, there is a 50 member cap, and there is also a prohibition on any invitation to the public to subscribe for shares of the company.

To form a company, what is required is a Memorandum of Association, Articles of Association,  the Form A1 and fees must be paid. A successful registration results in a “Birth Certificate” for the company and a host of other ongoing Obligations. The 1963 Act sets out the default regulations to be used by a company in Table A.

The memorandum must state what the authorised share capital of the company is. This is separate from the issued share capital. Authorised share capital refers to the total number of shares in a company, for example 2 million each worth €1. Issued share capital refers to how many of these shares have actually been issued, so in this case, of these 2 million shares, only 100,000 might have been issued.

The Memorandum contains the conditions upon which the company is granted the benefits of incorporation. The Articles are the rules of operation under which the company will regulate its affairs. These are public documents and are available for inspection at the company’s registration office in Parnell square, Dublin.

Section 21 of the Companies Act, 1963 states that there is a six month period of uncertainty in regards the name of the company. The Registrar of Companies has issued guidelines on meaning of “undesirable”. These include names which are Offensive, imply a connection with State, are misleading or are identical to registered name. This was seen in the case of Guinness Ireland Group v. Kilkenny Brewing Company

In this case The first named defendant developed, marketed and distributed beers, ales and stout including Kilkenny Irish Beer. The third named plaintiff owned the Irish registered trade marks used in connection with the Guinness brand. The plaintiffs claimed that the use by the defendant of its name Kilkenny Brewing Co. Ltd. in connection with its beer would confuse people into perceiving a link between the defendant’s beer and Guinness.

The High Court granted the plaintiffs the reliefs sought, namely an injunction restraining the defendant form carrying on business under its current name (Kilkenny Brewing Co. Ltd.) and directing it to change its name.

The plaintiffs had introduced sufficient evidence to satisfy the Court that by December 1995 (the year the defendant was incorporated) it had established goodwill in the name Kilkenny in connection with beer. For example, between July 1995 and December 1995 retail sales increased to the value of IR£1.8 million on the Irish market and in the first half of 1996, IR£70,000 was expended on marketing the Irish product.

The High Court rejected the defendant’s argument that the plaintiffs should not be entitled to the reliefs sought because they (the plaintiffs) had failed to establish an intention to deceive, create confusion or give a wrong impression of a connection between the plaintiffs and the defendant or their respective products.

Under Article 5 of the Companies Act 1983, all companies must be issued a certificate of incorporation. This is essentially a birth cert for companies. The rationale for this is to facilitate the smooth running of the business world and to protect third parties In the case of Jubilee Cotton Mills v Lewis it was held that the certificate was conclusive as to the date on which the company was incorporated. A company is deemed to be incorporated from the day of the date on its certificate of incorporation, and from the first moment of that day.

The Companies Bill 2012 proposes that a private company be allowed 99 members rather than its current 50.

The main consequence of incorporation is the creation of a separate legal personality. Section 18 of the Companies Act provides that the members of a company become a body corporate, capable of exercising all the functions of an incorporated company and having perpetual succession and a common seal but with the members liability to contribute to the assets of the company (on winding up) being limited.

Salomon v A Salomon & Co Ltd [1897] AC 22 is a landmark UK company lawcase. The effect of the Lords' unanimous ruling was to uphold firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company's shareholders to pay up outstanding debts.

Mr Aron Salomon made leather boots and shoes in a large Whitechapel High Street establishment. His sons wanted to become business partners, so he turned the business into a limited company. The company purchased Salomon's business for £39,000, which was an excessive price for its value. His wife and five eldest children became subscribers and two eldest sons also directors (but as nominee for Salomon, making it a one-man business). Mr Salomon took 20,001 of the company's 20,007 shares. Transfer of the business took place on June 1, 1892. The company also gave Mr Salomon £10,000 indebentures (i.e., Salomon gave the company a £10,000 loan, secured by a floating charge over the assets of the company). On the security of his debentures, Mr Salomon received an advance of £5,000 from Edmund Broderip.

Soon after Mr Salomon incorporated his business a decline in boot sales, exacerbated by a series of strikes which led the Government, Salomon's main customer, to split its contracts among more firms to avoid the risk of its few suppliers being crippled by strikes. Salomon's business failed, defaulting on its interest payments on the debentures (half held by Broderip). Broderip sued to enforce his security in October 1893. The company was put into liquidation. Broderip was repaid his £5,000. This left £1,055 company assets remaining, of which Salomon claimed under his retained debentures. This would leave nothing for the unsecured creditors, of which £7,773 was owing. When the company failed, the company's liquidator contended that the floating charge should not be honoured, and Salomon should be made responsible for the company's debts. Salomon sued.

The House of Lords held that there was nothing in the Act about whether the subscribers (i.e., the shareholders) should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient. Lord Halsbury LC stated that the statute "enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others.

A separate legal personality means that a company is able to contract, it can own property and it can sue or be sued. With these rights however, also come certain obligations

The limited liability of the owners/members/shareholders for the company’s debts is an important consequence of and reason for incorporation. However, limited liability refers to the liability of the members to the company, which can seek a contribution from the members to enable it discharge its obligations. The company however, as a separate legal entity can still be fully liable for whatever actions it may take.

The idea of perpetual succession is also important. A company will not cease to exist should one of its shareholders be declared bankrupt or insane.

The people who form the company are Promoters – save those acting in their professional capacities, such as lawyer. In the case of  Twycross v. Grant  it was states that a  Promoter  is “one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose.

These promoters owe both the company and its shareholders fiduciary duties. A fiduciary duty is a legal duty to act solely in another party's interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principals' express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries' other clients. A fiduciary duty is the strictest duty of care recognized by the Irish legal system.

Most issues arise in the case of the sale of property. If a Promoter for example,  buys property as a Trustee for the company he is forming, he must disclose any profit he makes on the sale to the company. If required, he must pay over the profit to the company. Even if he doesn’t buy as trustee for the co. he must disclose the profit on resale, if he bought with the formation of the company in mind.

A promoter is not an agent of the company, as the company has no existence prior to its incorporation as illustrated in Kelner v Baxter [1866]. It has also been held that a promoter is not a trustee of the company he is seeking to bring into existence: Re Leeds and Hanley Theatres of Varieties Ltd [1902]. However, a promoter stands in a fiduciary relationship and owes legal duties towards the company: Erlanger v New Sombrero. Phosphate Co. [1878]. Therefore, a promoter must avoid conflicts of interest and exercise reasonable skill in performing his duties. Accordingly, a promoter has a fiduciary duty to avoid secret profits and an obligation to disclose his interest in a transaction: Gluckstein v Barnes [1900]. A promoter must disclose to an independent board of directors (Erlanger case) or to the existing and intended shareholders.

Salomon v Salomon [1897] stipulates that disclosure may not be sufficient if the shareholders or the board of directors are not truly independent.

If a promoter fails to disclose a profit made by him out of the promotion, the company may have certain remedies. For instance, where the promoter profits from a sale of property to the company, and fails to disclose all material facts surrounding the transaction, the company may decide to rescind the contract and recover the amount paid (Erlanger case). The right to rescind a contract may be lost if, e.g. the parties cannot be restored back to their original positions or there has been undue delay seeking the remedy. Instead of seeking rescission the company may compel the promoter to account for the profit made, Gluckstein v Barnes, or it may sue the promoter for damages for breach of his fiduciary duty Leeds & Hanley Theatres of Varieties Ltd (1902).

Promoter can be treated as Constructive Trustee and the company can therefore recover profit on those grounds. Section 30 of the Companies Act provides that an independent expert must value any property being offered by a Promoter to a Public limited company (PLC) as consideration for his/her shares.

Before a company comes into being, contracts may be made on its behalf by the people who are incorporating it. However, several issues can arise in relation to this. The leading case is that of RE English & Colonial Produce Company Limited. In this case a company called the Forage Company was wound up. Its solicitors said that before the winding up occurred, the company gave instructions to them to incorporate a new company, which would take over Forage’s assets and liabilities. They did so, preparing the articles and memorandum and then sought the fees for their work. Justice Buckley said that ‘’the liability for the work done.... had already been incurred before the incorporation of the produce company. So who retained the solicitors? The court held that the individual directors of the Forage Company had, and thus they were liable to pay the fees.

At common law, the position was bluntly logical; if a company didn’t exist, it couldn’t enter into a contract. Section 37 of the Companies Act 1963 changed this. It states that;

‘any contract or other transaction purporting to be entered into by a company prior to its formation or by any other person on behalf of the company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by it and entitled to the benefit thereof as if it had been in existence at the date of such contract or other transaction and been a party thereto’

T he principles governing the ratification of contracts were stated by Justice Wright in Firth v Staines [22] to be as follows:

‘To constitute a valid ratification three conditions must be satisfied: first, the agent whose act is sought to be ratified must have purported to act for the principal; secondly, at the time the act was done the agent must have had a competent principal; and, thirdly at the time of ratification the principal must be legally capable of doing the act himself.’

Although now modified in the context of pre-incorporation contracts, the principles of ratification set out in Firth V Staines continue to apply to ratification of contracts generally in Ireland

A company has ongoing obligations. They must make annual returns, they must notify of a change of director, a change of office, and they must also disclose certain financial information.

A company is very limited in terms of object clauses. This was very true when company law first began to develop, in the middle of the 18^th and 19^th centuries.  This was shown in the case of Ashbury Railway Carriage and Iron Co Ltd v Riche. Incorporated under the Companies Act 1862, the Ashbury Railway Carriage and Iron Company Ltd’s memorandum, clause 3, said its objects were ‘to make and sell, or lend on hire, railway-carriages…’ and clause 4 said activities beyond needed a special resolution. But the company agreed to give Riche and his brother a loan to build a railway in Belgium. Later, the company refused the agreement. Riche sued, and the company pleaded the action was ultra vires.

Lord Cairns in Ashbury Railway described the objects clause as one which “states affirmatively the ambit and extent of vitality and power which by law are given to the corporation… nothing shall be done beyond that ambit …” .

While a company’s object clause might have contained ten or fifteen objects, the court would look for a main objective and would then treat all others as merely ancillary. This became known as the ‘main objects rule’. In the case of Re German Date Coffee Co Ltd  Lord Justice Lindley said that the governing principle, when trying to find what they main object of a company is, was to loom at the real object of the company, which he specified meant the thing for which the people subscribe their money.

Companies found this rule to be very limiting and so sought a way to circumvent it. The first way of getting around it was to list all the objects as usual and then state at the very end that ‘each of these objects is independent and none of them are more or less important than the others. This was known as the ‘Independent Objects Clause’ and was approved by the House of Lords in the case of Cotman v Brougham.

The second way of getting around it came in Bell Houses Ltd v City Wall Properties Ltd. The main business of Bell Houses was buying vacant property sites and building homes on them. The board delegated all matters to the chairman, who built up a good understanding of how property development is financed. When Bell Houses found a company called City Wall Properties Ltd, a company that would provide it with bridging finance. City Wall was to pay Bell’s Houses a procuration fee, and tried to get out of this by stating the contract was ultra vires. The Court decided that if the directors honestly believe that a certain activity would be of benefit to the main object of the company, then the company can extend its reach to that area; it doesn’t matter that it is not specifically provided for. This became known as the Bells House Clause.

Using Bell houses and Independent Objects clauses, Ultra Vires can largely be avoided. It should be noted that Section 10 of 1963 Act allows a company amend its Objects by Special Resolution. Section 10(6) also provides for application for cancellation by a dissenting minority representing 15% of the members. This must be done within 21 days of the Special Resolution