"British company law has failed, to come to grips with the problems posed by purely groups of companies, Adams v Cape Industries shows the dark side of this failure" - Explain and discuss this statement.

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Jamie Tredgold

“British company law has failed, to come to grips with the problems posed by purely groups of companies, Adams v Cape Industries shows the dark side of this failure”

Explain and discuss this statement.

The recent investigation into accounting irregularities at Hollinger International has reportedly, “focused upon the $5.5m of so called “non-compete payments” to senior executives purportedly arising from a deal with a wholly owned subsidiary… Investigators are… asking Lord Black, Hollinger’s former chief executive, and others how they were supposed to refrain from competing with themselves…” Whilst any allegations of wrongdoing are yet to be substantiated, it is doubtful as to whether British company law will be able to provide an appropriate mechanism with which to deal with any irregularities which may arise. This essay will evaluate a number of the provisions contained within British company law intended to deal with the problems posed by purely groups of companies. It is contended that such provisions have so far proved to be inadequate.  

The case of Salomon v A Salomon and Co Ltd establishes as a fundamental principle of company law that;

 “When the memorandum is duly signed and registered… The company is at law a different person altogether from the subscribers…” 

Thus, a company which has complied with the provisions contained within s13 of the Companies Act 1985 (CA 1985), is to be regarded as a distinct legal personality, giving rise to the notion of a ‘veil of incorporation’. A fundamental consequence of this is that the company itself, as opposed to its members, is liable upon its debts.  An advocate for economic efficiency might welcome the encouragement that this gives to public investment.  Fletcher however raises several concerns;

“Companies are allowed to own other companies, and the ownership of the shares of another company has led to the creation of… the corporate group. The evolution of the corporate group has generated the multinational group… The multinational that wholly owns subsidiaries has created a number of relevant problems. For example, when a subsidiary is trading in a host country… which national court should assume jurisdiction over the parent company for the multinational group… Further, should the parent be liable for the debts of the wholly owned subsidiary?”

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Where the ‘veil is lifted’ in respect of  groups of companies, the Court; ‘ignores the separate personality of each company in favour of the economic entity constituted by a group of associated companies.’ 

It was held by the Court of Appeal in the case of DHN Food Distributors Ltd v Tower Hamlets London Borough Council that the group of companies concerned constituted a ‘single economic unit’. The facts involved the mandatory sale of premises owned by a subsidiary company from which the parent company operated.  The decision of the Court appeared to be based primarily upon a consideration of ...

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