Question 1

Hugo, Grant and Elizabeth run a business buying and selling antiques as a partnership. They are considering forming a private company to run the business, and have sought your advice. They are particularly concerned to know:

• The extent to which their liability for the debts of the business will be limited;
• Whether they will exercise the same control over the membership as with a partnership;
• The extent to which they will have the same right to be involved in the management of the company;
• The public disclosure to which the business would be subject as a limited company.

Advise them on these matters, and on which would be the best choice of business vehicle for them.

Answer guidance

To answer this question you need to be able to identify the ways in which a partnership differs from a limited company. Focus on the specific matters outlined in the question, reflecting on the clients’ position and priorities, although you can raise other issues as relevant in order to advise on the best choice overall.

Establish the basic principle of limited liability, mentioning CA 2006, s. 3(2). Focus on when the benefits of limited liability can be lost: whether the veil of incorporation is likely to be lifted by the courts; statutory provisions that impose personal liability on those behind the veil (such as IA 1986, s. 214); the giving of personal guarantees.

As to control over membership, compare the position for partnerships (PA 1890, s. 24(7)) with companies having freely transferable shares, but subject to potential restrictions in the articles of association, and directors’ power to refuse to register a transfer.

On the third point (management) show how the organisational structure of a company differs from a partnership. Consider appointment of H, G and E as directors (to give them management powers) and whether they could prevent their removal (CA 2006, s. 168) by means such as weighted voting (Bushell v Faith [1970] AC 1099). You should also reflect on whether CA 2006, s. 994 and/or IA 1986, s. 122(1)(g) might come into play if one of them were removed.

You don’t need much detail on matters of disclosure, but establish the basic principles and function. Recognise that many of the requirements are relaxed for small companies (CA 2006, ss. 382-3).

Remember to weigh up these points (and others, such as cost and perpetual succession) and evaluate the benefits and drawbacks for H, G and E. You could also reflect on whether another option – the LLP – might be worth considering instead.

Question 2

“The doctrine laid down in Salomon v Salomon & Co. [1897] AC 22 has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can and often do draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way with group accounts and the rest. And the courts should follow suit.” (Lord Denning, Littlewoods Mail Order Stores v IRC [1969] 1 WLR 1241)

Critically assess the statement above and the extent to which it reflects the current state of the law on lifting or piercing the veil of incorporation.

Answer guidance

For this question you need to assess the current law on lifting/piercing the veil of incorporation, but with reflection on earlier/alternative approaches.  Avoid working through the cases chronologically.

Recognise the context of the quote, explaining the Salomon principle and the ‘veil of incorporation’, and changing judicial attitudes to lifting or piercing the veil. You could indicate that the quote dates from possibly the highpoint of judicial activity in this area, and while the quote links to the ability of statute to lift the veil, there is little clear relation between judicial and statutory veil lifting.

Explain and analyse the current law on lifting/piercing the veil, focusing on Prest v Petrodel Resources Ltd [2013] UKSC 34 and Adams v Cape Industries plc [1990] Ch 433.  Explain the ‘evasion’ principle and link to the ‘mere façade’, and distinguish from the ‘concealment’ principle, so far as this is possible.

It is essential you assess how far the statement reflects current law, picking up on comments such as ‘pulling off the mask’ and ‘seeing through the veil’ to link to the modern approach, and explaining how far these are still possible (and whether they are different things). You should also evaluate the merits of both wide and narrow approaches, exploring justifications and concerns.