Professional Documents
Culture Documents
National Corporate Law in Globalizations
National Corporate Law in Globalizations
David Milman
Lancaster University, UK
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© David Milman 2009
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
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copying, recording, or otherwise without the prior permission of the publisher.
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1 Introduction 1
1 Aim of the text 1
2 Company law in society 3
3 Corporate law history 4
4 Corporate law ‘families’ 7
4.1 Systems based on English law 7
4.2 US-inspired models 9
4.3 Civil/continental law jurisdictions 10
4.4 Other families 10
5 Unitary and federal models 11
6 The picture in the UK and British Isles 12
7 Harmonisation of corporate law 15
7.1 The EEC programme 15
7.2 Other harmonisation schemes 19
8 Legislative measures 20
9 Convergence and the courts 21
10 Legal and other commercial transplants 24
11 The Company Law Review 1998–2001 26
12 The Companies Act 2006 27
13 Does corporate law matter? 28
vii
viii National corporate law in a globalised market
Appendix 162
Bibliography 165
Index 195
Abbreviations used for law reports and
periodicals
ABLR Australian Business Law Review
AC Appeal Cases
ACLR Australian Corporate Law Reports
ACSR Australian Corporate and Securities Reports
All ER All England Law Reports
ALR Australian Law Reports
Am Jo of Comp Law American Journal of Comparative Law
Am Jo of Int Law American Journal of International Law
Anglo-Am L Rev Anglo-American Law Review
App Cas Appeal Cases
Aust Jo of Corp Law Australian Journal of Corporate Law
xi
xii National corporate law in a globalised market
KB King’s Bench
QB Queen’s Bench
xvi
Table of cases xvii
AUSTRIA
AUSTRALIA
Graz [2001] 1 CMLR 38 122
ASC v Bank Leumi Le Israel (1996)
21 ACSR 474 84
August Investments Pty Ltd v FRANCE
Poseidon Ltd and Samin Ltd
[1971] 2 SASR 71 22 Energotech SARL [2007] BCC 123
Ayres v Evans (1982) 39 ALR 129, 139
[2000] BPIR 697 133 Klempka v ISA Daisytek SA [2003]
Bruninghausen v Glavanics [1999] BCC 984 139
NSWCA 199 76
Crabtree Vickers Pty v Australia
Direct Mail Advertising (1975) IRELAND
133 CLR 72 51
Dynason v JC Hutton Pty Ltd (1935) Allied Irish Coal v Powell Duffryn
ALR 419 22 [1997] 1 ILRM 306 63
Gambotto v WCP Ltd (1995) 182 Fennel v Frost [2003] 1 IR 80 48,
CLR 432 159 90
IATA v Ansett [2008] HCA 3, [2008] Frederick Inns Ltd, Re [1994] 1
BPIR 57 71 ILRM 387 23
Industrial Equity v Blackburn (1977) Interview Ltd, Re [1975] IR 382
137 CLR 567 63 41
xxviii National corporate law in a globalised market
UNITED STATES OF
NEW ZEALAND AMERICA
AG v Equiticorp [1996] 1 NZLR Liggett v Lee (1933) 288 US 517
528 63 154
Coleman v Myers [1977] 2 NZLR Loy, Re [2008] BPIR 111 115, 143
225 76 Maxwell Communications Corp v
Fournier v The Ship Margaret Z Société Générale [2000] BPIR
[1997] 1 NZLR 629 135 764 110, 134
Nicholson v Permakraft [1985] 1 Pepper v Linton (1939) 308 US 295
NZLR 242 23 65
Securitibank (No 2), Re [1978] 2 Santa Clara County v South Pacific
NZLR 136 63 Railroad (1886) 118 US 394
Supercool Refrigeration v Hoverd 65
Industries [1994] NZLR 300 24 Taylor v Standard Gas (1939) 306
Turners and Growers Exporters Ltd US 307 65
Table of legislation
ENGLAND AND WALES s. 118 82
s. 120 49
Statutes s. 151 101
s. 212 84
Navigation Acts 1650–63 80 s. 242A 43
South Sea Bubble Act 1720 5, 6, 22 s. 289 88
Bubble Repeal Act 1825 5 s. 309 71
Limited Liability Act 1855 66 s. 310 31, 70
Directors Liability Act 1890 6 s. 349 49
Companies (Memorandum of s. 359 128
Association) Act 1890 26 s. 362 80
Limited Partnerships Act 1907 25 s. 379A 42, 73
Companies Act 1907 97 s. 389A 6
Registration of Business Names Act s. 389B 6
1916 82 s. 401 42
The Companies (Foreign Interests) s. 409 107, 109
Act 1917 82 ss. 410–24 41
Companies Act 1928 ss. 425–27 101, 102
s. 43 107 s. 428 85
Foreign Judgments (Reciprocal s. 429 52
Enforcement) Act 1933 113 s. 430C 52
Trading with the Enemy Act 1939 s. 432 2, 75
s. 7 82 s. 434 2
Exchange Control Act 1947 82 s. 442 2
Companies Act 1948 8 s. 447 2
Administration of Justice Act 1977 s. 453 118
s. 7 137 s. 458 43
Companies Act 1980 35 s. 459 39, 44, 124
s. 72 77 s. 652 54
Companies Act 1985 (c. 6) s. 656 75
s. 13 42 s. 694A 106
s. 32 75 s. 695 106
s. 35A 51 s. 723B 47
s. 36C 100 s. 724 137
s. 111A 36 s. 726 104
xxix
xxx National corporate law in a globalised market
s. 76 75 ss. 1024–28 54
s. 125 128 s. 1044 98
s. 129 81 s. 1046 98
ss. 129–35 80 s. 1052 109
s. 132 81 s. 1059 98
s. 155 92 s. 1067 90
s. 165 47 s. 1120 103
ss. 171–7 57 s. 1139 106
s. 172 70, 71, 147 s. 1180 108
s. 232 31, 70 s. 1185 119
s. 233 70 s. 1186 119
ss. 234–238 70 s. 1187 119
s. 239 52 ss 1188–9 119
s. 259 126 s. 1190 119
ss. 260–64 53 s. 1269 39
s. 265 95 s. 1282 40
s. 270 35 s. 1284 95
ss. 288–300 42, 73 ss. 1285–7 14
s. 333 57 s. 1289 37
s. 341 57 s. 1290 37
s. 453 43 Part 11 149
ss. 499–501 6 Part 15 35
ss. 527–31 57 Parts 17–20 35
s. 534 21 Part 22 47, 84
s. 542 22, 68, 82 Part 23 35
s. 580 67 Part 28 38, 85, 129
s. 612 36 Part 34 37, 95, 96
ss. 622–8 82 Part 35 103
s. 763 82 Part 40 48
s. 771 68
s. 793 44, 84 Delegated Legislation
s. 869 42
ss. 878–92 41 Insolvency Rules 1986 (SI
ss. 895–901 41 1986/1925)
s. 965 129 r.12.12 112
s. 979 52 The Cooperation of Insolvency
s. 986 52 Courts (Designation of Relevant
s. 993 43 Countries and Territories) Order
s. 994 44, 124 1986 (SI 1986/2123) 113
s. 1000 54 The European Economic Interest
s. 1003 54 Grouping (EEIG) Regulations
s. 1012 75 1989 (SI 1989/638) 16
xxxii National corporate law in a globalised market
xxxv
xxxvi National corporate law in a globalised market
alised economy, in terms both of competing for inward investment, and producing
internationally competitive companies. (para 3.8)
Similar sentiments are also apparent in the terms of reference for the Company
Law Review – see second bullet point in para 5.1 of those terms. The Irish
Company Law Review Group, which produced its First Report in 2001 and
consolidated recommendations for reform in 2007, adopted a similar perspec-
tive when embarking upon its reform study.
If we want concrete examples of how businesses are prepared to relocate to
exploit more favourable corporate laws found in other jurisdictions, I would
point to the migration of German businesses to the UK to use our private
company format, with its lack of a minimum share capital requirement.
Similarly, distressed German firms have been keen to move their base to this
country prior to a declaration of insolvency, so as to be entitled to use the
company voluntary arrangement model. Both of these phenomena will be
discussed in this work.
My awareness of the diversity in national corporate systems, already whet-
ted by interaction with my LL.M. students, was sharpened when I was asked
in 1999 by the Company Law Review to lead a team of academics from the
Centre for Law and Business at the University of Manchester to produce a
study of national corporate law regimes in the EU. This study was made avail-
able on the Company Law Review website and is mentioned in the Final
Report (see p. 7).
Having moved to Lancaster University in 2005 I was exposed to a new way
of looking at the subject of corporate law. Heavy emphasis was given to the
social and cultural foundations of corporate law. Whilst not entirely comfort-
able with an approach exclusively based on such perceptions, I did find a
number of insights gleaned from this tradition particularly useful. My conver-
sations with Philip Lawton undoubtedly opened my eyes to a perspective on
Company Law that until that stage I had not fully appreciated.
I have taken liberties when defining the parameters of corporate law. In
Preface xxxvii
David Milman
Centre for Law and Society,
Lancaster University,
December 2008
1
2 National corporate law in a globalised market
one example of how globalisation in this wider sense has worked change on
UK corporate law. In the 1980s, a headline financial scandal was the so-called
‘Guinness Affair’2 in which the shares in a party to a contested takeover (a
public company) were allegedly propped up by illegal means in order to
promote their attractiveness as an exchange for shares in the target company.
When this alleged abuse came to light, the Department of Trade and Industry
conducted an investigation3 which resulted in the prosecution of certain lead-
ing City figures. That prosecution rested heavily upon evidence gleaned from
interrogations by DTI inspectors, which were carried out without the benefit
of the interviewee enjoying ‘the right of silence’.4 After convictions were
obtained, one of the defendants, Ernest Saunders, challenged his conviction by
arguing that to base a prosecution largely on compelled evidence involved an
infringement of his civil rights under the European Convention on Human
Rights, in particular Art 6 ECHR. The right to remain silent was cited as being
allegedly infringed. The European Court of Human Rights, having concurred
with this contention,5 the offending statutory provisions in the Companies Act
1985 had to be changed6 to reflect this new perception. Thus, ‘how’ this form
7 As far as I am concerned, these terms are interchangeable. The fact that this
branch of law is more usually labelled as ‘Corporate’ rather than ‘Company’ is an indi-
cator of a growing US influence on discourse – see Chapter 9 below.
8 For instance, Janet Dine, quoting published data, tells us in Company Law
(6th edition, 2007) (Palgrave Macmillan) at 353 that 51 of the top 100 economies in the
world are operated by corporations rather than by nation states. Having said that, it is
sometimes easy to overstate the case for the power of multinationals – see S. Wheeler,
Corporations and The Third Way (2002) (Hart) at 9–10.
4 National corporate law in a globalised market
9 The classic exposé was presented in A. Sampson’s The Seven Sisters (1975)
(Hodder and Stoughton). Note also P. Muchlinski, Multinational Enterprises and the
Law (1979) (Blackwell). See also Joel Bakan, The Corporation (2004) (Constable),
Noreen Hertz, The Silent Takeover (2002) (Arrow), Janet Dine, International Trade
and Human Rights (2005) (CUP). There is an excellent selection of essays in M.K.
Addo, Human Rights Standards and Responsibilities of Transnational Corporations
(1999) (Kluwer). See also D. Kinley (2004) 25 Co Law 298. The piece by R.
McCorquodale and P. Simons in (2007) 70 MLR 598 is also recommended.
10 In the UK, clearly little thought was given as to whether corporations quali-
fied for protection under the Human Rights Act 1998.
11 For the advent of chartered companies, see chapter 2 in J. Micklethwait and
A. Wooldridge, The Company (2003) (Weidenfeld and Nicholson), W.E. Minchinton in
chapter 7 in T. Orhnial, Limited Liability and the Corporation (1982) (Croom Helm)
and M.B. Likosky, The Silicon Empire (2005) (Ashgate) at 61–8. For an illuminating
history of the Russia Company, see R. Griffith (1994) 15 Co Law 105.
12 See DTI Annual Companies Report 2005–06 for further details.
Introduction 5
perusal of the case law of the period throws up some delightful and exotic
corporate names.20 Public outcry at prospectus frauds led to corrective legis-
lation in the form of the Directors Liability Act 1890. Another element in the
jigsaw was the issue of foreign seizure of assets held by UK companies
engaged in global commerce and in particular seizures effected in the wake of
the Russian Revolution in 1917. This caused many difficulties for the English
courts.21
Bringing us through to modern times, we can clearly see how the collapse
of the US-based energy giant Enron in 2001 has shaped the development of
corporate law not merely in the US (through the Sarbanes-Oxley Act 200122),
but also in many jurisdictions where Enron subsidiaries were incorporated and
operated.23 Foreign issuers in the US have been forced to comply with new
tougher US standards on disclosure and corporate governance, thereby
promoting a greater degree of convergence in these areas. In the UK, the
Companies (Audit, Investigations and Community Enterprise) Act 2004
contained a number of elements influenced by a desire to combat an Enron-
style fraud.24 There is a growing consensus that there has been an overreaction
to the Enron débâcle25 and parallels have been drawn with the misguided
Bubble Act. On a European level, the Parmalat scandal26 will have compara-
This group consists of jurisdictions which formerly were part of the British
Empire or territories that fell under the British mandate after the First World
War (for example, Palestine30/Israel). Reflecting the massive extent of that
political entity, one finds systems of corporate law dotted across the globe that
are reassuringly familiar. This similarity arose out of the wholesale export of
2003), see A. Melis (2005) 13 Corp Gov: An International Review 478. The Parmalat
case has not had a great impact in the UK, but it was problematical in Ireland hence the
fiercely contested Eurofoods litigation – see Chapter 8.
27 On the implications of Northern Rock for the European Single Market, see C.
Bamford (2007) 29 Co Law 65.
28 See J.H. Farrar and B.M. Hannigan, Farrar’s Company Law (4th edition,
1998) (Butterworths) by at 748. Note also K. Pistor et al. (2003) 31 Jo of Compar Econ
676 and K. Pistor et al. (2003) 23 Univ of Penn Jo of Int Econ Law 791.
29 See Maps of World Financial Law (3rd edition, 1997) (Allen & Overy Global
Law Maps), and P. Wood (2003) 24 Co Law 34 for an unusual classification.
Geographers have shown scholarly interest in the distribution of governance models –
see G.L. Clark and D. Wojcik, Geography of Finance: Corporate Governance in a
Global Marketplace (2007) (OUP).
30 For a recent study that suggests that the transplantation of English company
law into post-Ottoman Palestine was not as simple a process as it might appear to be,
see R. Harris and M.Crystal – http://works.bepress.com/ron_harris/13. This article will
appear in (2009) Th Inq Law.
8 National corporate law in a globalised market
31 On this, see R. McQueen (1995) 5 Aust Jo of Corp Law 187 and his more
recent piece in (2008) 17 Griff L Rev 383. Note also R.S. Rungta, The Rise of the
Business Corporation in India (1970) (CUP).
32 (1962) 4 Mal L Rev 36.
33 See, for example, North West Transportation Co v Beatty (1887) 12 App Cas
589 (shareholder voting obligations), Natal Land v Pauline Colliery [1904] AC 120
(pre-incorporation contracts), Cook v Deeks [1916] 1 AC 554 (fiduciary duties of direc-
tors), Lee v Lee’s Air Farming [1961] AC 12 (corporate personality) Howard Smith v
Ampol Petroleum [1974] AC 821 (directors’ duties on a takeover), Taupo Totara v
Rowe [1978] AC 537 (directors’ payoffs), Downsview Nominees v First City
Corporation [1993] AC 295 (liability of receivers in negligence), Agnew v IRC
(Brumark) [2001] UKPC 28 (fixed or floating charge?), Citco Banking Corp v Pusser’s
Ltd [2007] UKPC 13 (alteration of articles), Gamlestaden [2007] UKPC 26 (unfair
prejudice jurisdiction), Benichou v Mauritius Commercial Bank [2007] UKPC 36
(floating charge crystallisation). Most former British colonies have discarded the Privy
Council and we are left with a number of small independent Commonwealth countries
plus a few Crown dependencies. Canada ceased sending cases to the Privy Council in
1949. Malaysia followed suit in 1985, as did Australia in the following year. In more
recent years, Singapore (1994), Hong Kong (1997) and New Zealand (2003) have gone
down the route of deciding not to send appeals to the Privy Council.
34 The prime example here is Ghana, which for many years had one of the most
advanced corporate law models in the Commonwealth. Jamaica implemented the
recommendations of the Jenkins Committee (1962) in 1965, some time before the UK
legislated – see S.J. Leacock [1975] JBL 252.
Introduction 9
Originally a British colony, the USA became an imperialist power in the old
sense of the concept (witness its conquest of the Philippines35 and other
Spanish colonies) and that political status enabled its models of corporate law
to penetrate the furthest corners of the globe from the Caribbean36 across the
Pacific. The military victory of the US over Japan in 1945 also had profound
effects upon Japanese corporate law.37 In more modern times, the overwhelm-
ing economic power of the USA (and US-based multinationals) has led to an
even wider dissemination of US corporate law influence. Thus, today, much of
the Caribbean and many Central/South American states now take their corpo-
rate law lead from the US.38 The influence has spread to Canada, New Zealand
and other Pacific rim jurisdictions. Even within Continental Europe (where
latent hostility to US cultural dominance is strong), it is not uncommon to find
corporate law concepts and reforms being inspired by American ideas. The
idea of a group of companies is indisputably American in origin and is now
used as a primary business vehicle across the developed world. Certainly, a
perusal of reforms in the area of corporate rescue across many nations will find
the pervasive influence of the iconic Chapter 11 of the US Bankruptcy Code.39
The same could be said of the development of rules regulating insider trading/
market abuse, the evolution of codes of corporate governance practice and the
emergence of the corporate social responsibility philosophy. The role of US-
based institutional investors (such as CalPERS, the Californian public service
employees’ retirement services pension fund) also cannot be underestimated in
the spreading of US corporate law hegemony, as a significant percentage of its
holdings are in foreign securities. US vulture funds dealing in distressed debt
are making their presence felt in many economies (and legal systems). The
media has also played its part by elevating to cult status certain American law
corporate practices. Popular discourse in corporate law matters is dominated
by ‘Americanisms’ – terms such as ‘insider trading’, ‘Chinese walls’, ‘poison
pills’, ‘raiders’, ‘greenmail’, ‘junk bonds’, ‘prepacks’ and, most recent of all,
‘sub-prime lending’ are now universally recognised.
This residual category is diverse. One could certainly assert that there is now
an EU family of corporate law spanning some 27 jurisdictions. That ‘family’
is best viewed as second generation, drawing upon traditions from the discrete
categories outlined above. The US influence on EU law is clearly present
(particularly in the area of business rescue), though until recently there has
been a marked reluctance to concede the fact.
arises in major corporate law players such as Canada and Australia. In these
countries, corporate law is restricted by internal ‘state’ boundaries. This has
the potential to generate much confusion and economic dislocation.
‘Uniform’48 companies legislation seems to be the preferred solution, but
constiutional difficulties abound. Thus, in Australia in 1990, a bizarre legal
power battle over the soul of corporate law was played out. In NSW v The
Commonwealth,49 the High Court of Australia confirmed that the
Commonwealth of Australia lacked the constitutional power to enact a manda-
tory statute governing corporations. A pragmatic settlement then had to be
brokered which involved the states themselves opting into a new Uniform
model statute.50
The solutions to the problem of federal states here are varied. One way out
is to make corporate law the exclusive subject of federal legislation, but polit-
ical sensitivities need to be borne in mind. Another, more subtle, model is to
start from the premise that corporate law is the province of the local states, but
to provide a standard model into which such states can contract. This is now
the favoured approach. One could note here the Model Business Corporations
Act51 in the US and the Canadian Business Corporations Act52 as exemplars
of this methodology. This was also the solution worked out in Australia in the
wake of the constitutional litigation mentioned above. In addition, one could
identify certain strategic areas of corporate law that are to be governed by
federal law: for example, the Securities and Exchange Acts and more recently
the Sarbanes-Oxley Act 2001 in the USA.53 The US Bankruptcy Code of 1978
also exemplifies the federal perspective.
Indeed, in the realm of corporate law, we have always had several distinct
systems operating alongside each other for some 150 years. Thus corporate
law is administered in England and Wales separately from the regimes operat-
ing in Scotland and Northern Ireland. Each of the latter jurisdictions has its
own Companies Registry, based in Edinburgh and Belfast respectively. The
significance of this multiplicity of company law administrative units was
reflected by the extraordinary case of Re Baby Moon (UK) Ltd,54 where it was
held by Harman J that an English company, which had erroneously located its
registered office to Scotland, could be wound up in England as the English
jurisdiction applied, but leave would need to be granted by the English courts
to serve the petition out of the jurisdiction at its registered office.
Although the administration of UK corporate law is devolved, the fundamen-
tal substantive core has much in common. Many of the provisions of the
Companies Act 1985 apply automatically in Scotland, though that Act did contain
discrete provisions designed solely for Scotland (for example, Part XVIII on float-
ing charges). These provisions have since been superseded by Part 2 of the
Bankruptcy and Distress (Scotland) Act 2007 (ss. 37–49). The same is, however,
still true of the Insolvency Act 1986 – one could note here the different approaches
taken towards preferences in ss. 239 and 242 respectively. Section 239 requires
the person giving the alleged preference to be influenced by a desire to prefer; no
such motivation requirement is found in s. 242, which focuses on the effect of the
alleged preference. Under the Scotland Act 1998, company law is a reserved
matter outside the competence of the Scottish Parliament and therefore notwith-
standing the fact of devolution, the power to legislate in company law matters is
reserved by Westminster.55 Notwithstanding these trends towards a harmonised
approach, the courts of the two jurisdictions have in the past indicated a propen-
sity for divergence and there is no reason to doubt that this healthy diversity of
judicial attitudes will continue and become more marked in the future.56
The position is somewhat different for Northern Ireland,57 which had its
own statutory code prescribed by the Companies Order (Northern Ireland)
54 (1984) 1 BCC 99, 298. The distinct nature of the two systems is also apparent
on reading Arthur Little v Ableco Finance [2003] Ch 217, though that case illustrates
how blurred the boundaries can become. Note also Re Brownridge Plastics Ltd (unre-
ported) (2005), where the question before Hart J was the appropriate court to file notice
with when putting a Scottish company into administration.
55 Under the Scotland Act 1998.
56 See, for example, the difference of opinion reflected in Dimbula Valley
(Ceylon) Tea Co v Laurie [1961] Ch 353 and ex parte Westburn Sugar Refineries
[1951] AC 625 (on dividend payments), and Jesner v Jarrad Properties [1993] BCLC
1032 and Re Guidezone Ltd [2000] 2 BCLC 321 (unfair prejudice jurisdiction).
57 Under CA 1985, s. 745, Northern Ireland generally fell outwith the scope of
the Companies Act.
14 National corporate law in a globalised market
58 See the summer 2005 consultation carried out by Angela Smith MP acting on
behalf of the Department of Enterprise, Trade and Investment in Northern Ireland.
59 For Isle of Man Company Law, see J. Bates, The Isle of Man Companies Act
1992 (1992) (Sweet & Maxwell). The basic legislation is the 1931 Act as amended.
Note the Isle of Man Companies Act 2006, which was driven by the need to attract
offshore business – see (2007) 28 Co Law 46. As a result of the 2006 Act, companies
incorporated under the 1931 regime can re-register and take advantage of new facili-
ties (such as corporate directors and deregulated share capital maintenance rules).
Foreign companies can simply continue their personality by adopting the 2006 Act.
Protected cell companies are envisaged by Part VII of the 2006 Act.
60 A major source of Jersey Company Law is the Companies (Jersey) Law 1991
as amended.
61 See the Companies (Guernsey) Law 1994 as amended. For aspects of
Company Law in Guernsey, see A. Walters and A. Sarchet (1997) 18 Co Law 219
(protected cell company novelty). See also G. Moss [2001] 14 Ins Intell 73 and the
news item noted in (2006) 27 Co Law 21 which refers to the Protected Cell Companies
Regulations 2005. See N. Carey and A. Sarchet (2006) 27 Co Law 252 generally. The
protected cell idea has been adopted in jurisdictions such as Bermuda and the Cayman
Islands.
62 On this lacuna and its implications for English law see Official Receiver v
Vass [1999] BCC 516.
Introduction 15
Since 1972 the UK has been locked into the EEC Company Law harmonisa-
tion project.63 That project is carried out largely through the medium of direc-
tives authorised under Art 44(3)(g) of the EEC Treaty. That article forms part
of the regulatory matrix concerned with achieving the goal of freedom of
establishment. This right of establishment is protected by Art 43 of the Treaty
and the philosophy behind it is reinforced by the European Charter on
Fundamental Rights (Art 16). The prohibition on new incorporation taxes also
reflects the same mindset.64 Without a doubt, this harmonisation process has
proved to be the prime driver behind company law reform in the UK for the
past 35 years. That programme has advanced on many fronts and has experi-
enced the full range of ups and downs, with these setbacks often related to
general political problems within Europe rather than being due to inherent
problems with the proposed harmonisation measure. Looking at the picture
today, we can see the influence of harmonisation in most fields of corporate
law through adopted directives in the following fields:
For the future the most likely possibilities for Company Law Harmonisation
Directives relate to small businesses.68 The proposal for a Draft Fourteenth
Directive on relocation of registered office has now encountered problems and
it is not clear whether it will ever come to fruition (see below Chapter 9 for
consideration of this issue).
The harmonisation programme has also spawned new corporate entities
ranging from the European Economic Interest Grouping (EEIG Regulation
1985/213769), through the ‘single member company’ (Twelfth Directive
1989/667) to the European Company or Societas Europea (Regulation
2001/215770 and Directive 2001/86). More specialised organisational struc-
tures were harmonised with regard to Open Ended Investment Companies
set up in the wake of the débâcle over the initial failure to adopt the Takeover
Directive, has made some significant proposals for reform. Reforms in the
area of corporate governance seem likely having been spurred on by the
Parmalat affair.86 Equally, existing harmonisation regimes may be revisited
under the SLIM (Simplified Legislation for the Internal Market) initiative.87
The Directive 2006/68, which introduces the possibility of deregulation of the
notorious Second Directive,88 is a perfect example of this new policy direction
at work.
8 LEGISLATIVE MEASURES
The UK Parliament has always kept one eye on commercial developments
occurring in other jurisdictions in the area of business organisation structures,
where those developments may threaten the economic stability of the UK. A
perusal of the Parliamentary and public debates in the mid-19th century, when
the possibility of limited liability companies being introduced into the UK was
being considered, clearly attests to that concern.92 This is certainly true if one
scrutinises the deliberations of the Mercantile Law Commission93 in 1854.
The formal introduction of the private limited company into English law in
1907 offers a good illustration of these convergence forces at work in the
legislative process.94 However, it should be noted that the private company
had in reality been on the scene for a number of years prior to that date, as is
clear from a perusal of the works of leading practitioners95 and from judicial
pronouncements.96
The Law Commissions in England/Wales and Scotland certainly undertake
comparative research before making recommendations for the reform of UK
company law.97 Indeed it appears from s. 3(1)(f) of the Law Commissions Act
1965 that they have a statutory obligation to do so. This technique is most
recently apparent when one looks at the policy deliberations leading to the
introduction of Part 11 of the Companies Act 2006 (statutory derivative
claims).
In more modern times, the introduction of the limited liability partnership
in April 2001, via the agency of the Limited Liability Partnerships Act 2000,
shows how concerns that the UK was falling behind commercial competitors
in the provision of business structures sought after by the professions, can lead
to legislative reform. The Limited Liability Partnerships (LLP) emerged in the
US in Texas in 1991 as a response by the professions to the burgeoning risks
of professional liability litigation. The recent introduction of the LLP into
Jersey98 coupled with threats from major accountancy firms that they would
‘go offshore’ arguably proved a decisive factor in persuading the UK govern-
ment to act. Since that legislation was enacted, several thousand firms (mainly
professional firms) have changed their legal basis from that of partnership to
that of limited liability partnership.99 The legal model devised in Texas has in
the space of a mere decade well and truly crossed a continent and ocean.
98 Under the Limited Liability Partnerships (Jersey) Law 1997. See P. Morris
and J. Stevenson (1997) 60 MLR 538. For the debate leading to the introduction of the
LLP into English Law, see A. Griffiths [1998] CFILR 157, C. Bradley [2001] CLWR
330. On LLPs, see J. Freedman and V. Finch [1997] JBL 387, V. Finch and J. Freedman
[2002] JBL 475, E. Deards [2003] JBL 435, M. Lower (2000) 22 Liv L Rev 89, S.
Cross [2003] JBL 268. For the leading monograph see Palmer’s Limited Liability
Partnership Law (2002) (Sweet & Maxwell) edited by G. Morse et al.
99 A perusal of the Companies Annual Report for 2005/06 discloses some 16,699
LLPs registered in England and Wales. The irony is that the Companies Act 2006 now
allows auditors to cap liability (see ss. 534 et seq.) – one wonders whether some of
those firms that have rushed into the LLP may now have had second thoughts.
100 See Marleasing (C106/89) [1990] ECR I-4135.
101 Lord Mansfield was Lord Chief Justice 1756–88. Lord Mansfield had a role
in devising the rule against fraudulent preferences, a staple of corporate insolvency law.
On Lord Mansfield’s influence generally, see C.H.S. Fifoot, Lord Mansfield (1936)
(Clarendon Press).
22 National corporate law in a globalised market
the dead hand of the Bubble Act for the entirety of Lord Mansfield’s tenure as
Lord Chief Justice. What matters was that Lord Mansfield affected the envi-
ronment in which company law later came to operate.
In Re Scandinavian Bank,102 a case which we discuss in Chapter 4 below,
Harman J gave the green light to UK public companies having shares denom-
inated in foreign currencies. The Companies Act 2006 has confirmed this
ruling by giving it a statutory imprimatur (see s. 542).
The issue in the test case of Acatos & Hutcheson plc v Watson103 was
whether there was a breach of the bar on companies acquiring their own shares
in a scenario where a company acquires another company which just happens
to own shares in the first company. After considering a range of factors,
including the stance taken by the Australian courts,104 Lightman J ruled that
this situation (which was not uncommon in practice) should not be deemed a
breach of company law. Again, the fact that to hold otherwise would be to frus-
trate takeovers in the City of London arguably influenced the process of form-
ing the judgment.105
In Re Maxwell Communications Corp (No. 2),106 Vinelott J had to decide
whether English law should permit a creditor to contractually assent to a
deferred or subordination status on liquidation. At first sight, this would
appear to offend against the fundamental principle of equality of treatment of
non-secured creditors. In deciding this question in the affirmative, the judge
was impressed by the fact that contractual subordination was permitted in a
number of jurisdictions enjoying developed economies – namely South Africa,
Switzerland and the USA. That survey again proved decisive in the final judg-
ment. As Vinelott J stated: ‘It would, I think, be a matter of grave concern if,
at a time when insolvency increasingly has international ramifications, it were
to be found that English law alone refused to give effect to a contractual subor-
dination’.107
A different use of comparative legal material was at the heart of the House
of Lords ruling in Re BCCI (No. 8).108 Here the House of Lords had to deter-
mine, amongst other things, whether a bank could take a charge over monies
deposited with it by the chargor client, a so-called ‘charge-back’ arrangement.
Millett J, as he then was, had indicated in Re Charge Card Services109 that this
outcome was a conceptual impossibility. Banking practitioners were disap-
pointed with this analysis and the Legal Risks Review Committee expressed
its concerns.110 Subsequently, in Re BCCI (No. 8),111 Lord Hoffmann rejected
the ‘conceptual impossibility’ thesis by pointing out that a number of legal
systems based upon English law had explicitly legislated for charge-backs,
thereby proving that the concept was a feasible legal option. This argument
could have been countered by the retort that the need for legislation indicated
a non-acceptance at common law, but that is not significant to our discussion
here; comparative insights informed the conclusion.
This trend (which over the years admittedly has had its setbacks112)
towards ensuring that English law is internationally competitive runs along-
side a more established phenomenon reflecting the evolutionary processes of
the common law. Although it is true to say that the English courts have always
been prepared to give judicial notice to Commonwealth authorities, that will-
ingness to be receptive to new ideas has become more marked in recent
decades.113 This is not exclusively a phenomenon only reflected in corporate
law; it is much more pervasive. As far as corporate law is concerned, we could
point to Commonwealth authorities playing a pivotal role in the emerging law
of directors’ duties to creditors.114 Certainly, a perusal of the judgment of the
Court of Appeal in West Mercia Safetywear Ltd v Dodd115 would point to that
influence. More recently, in National Westminster Bank v Spectrum,116 the
House of Lords sided with their judicial brethren from New Zealand117 in
deciding that a fixed charge over future book debts based upon the orthodox
English Siebe Gorman118 precedent created only a floating charge. Thirty
years of City of London practice disappeared overnight, much to the angst of
the banking community.
1925)123 and finally to the Netherlands (BV, 1971)124 offers another good
illustration of how successful corporate models can migrate. On much the
same theme, we could cite the emigration of unit trusts125 from the US to the
UK in the 1930s, a transition that eventually required a regulatory response.
On the other hand, a good illustration of the difficulties that can arise is
provided by the story of the limited partnership in English law. This was a
model that had been operated successfully on the Continent for many a year.
Accordingly, it was introduced into English Law by the Limited Partnerships
Act (LPA) 1907. It proved to be unpopular and even today there are only
13,426 limited partnerships registered in this country.126 Compare this statis-
tic to the 17,499 LLPs registered since 2001. Why has the limited partnership
registered such a poor performance? The introduction of the private limited
company into English law in the same year may offer some explanation in that
apart from possible technical tax advantages, the limited partnership has little
to offer entrepreneurs over and above that provided by the private company.
The attempt to transplant the South African rescue device of judicial
management into Australia in 1961 (albeit under the guise of official manage-
ment) was a resounding failure.127 Another example of a failed transplant is
illustrated by the fate of the two-tier board in France. This German corporate
governance idea has never really taken off in France,128 though it has been
adopted successfully in the Netherlands.
Having noted the successes and failures, what one can conclude? As we
noted above, there is much in Kahn-Freund’s observation that failed trans-
plant may not necessarily be attributed to inherent weaknesses in the trans-
123 The GmbH model arrived in France through the back door. It had been used
in Alsace and Lorraine and when these provinces were returned to France at the end of
the First World War, this model was allowed to continue, thereby creating pressure to
introduce it generally into France – for the fascinating story, see F. Wooldridge [1970]
JBL 317.
124 See P. Sanders [1973] JBL 194.
125 See K.F. Sin, The Legal Nature of the Unit Trust (1997) (Clarendon Press) at
27–9.
126 On the LPA 1907, see E. Berry [2005] JBL 70 at 85, J. Henning (2000) 21 Co
Law 165, S. Sheikh (2002) 23 Co Law 179 and T Prime and G. Scanlan (2007) 28 Co
Law 262. For current limited partnership registrations, see DTI Annual Companies
Report 2004–05, where the figure of 12,377 is reported for Great Britain, with more
than a third of these in Scotland (an interesting statistic). The limited partnership has
enjoyed a significant boost in popularity in the past five years.
127 For a critique of judicial management, see H. Rajak and J. Henning (1999)
116 SALJ 262. On the failure of official management in Australia, see J. Farrar [1976]
JBL 214.
128 For French resistance to the German model, see CLAB survey of national
systems of European Corporate Law (1999).
26 National corporate law in a globalised market
plant but may owe more to underlying cultural differences. 129 There is a
path-dependency130 aspect to legal reform that is particularly relevant
when contemplating transplants. It is a recognition of this problem that has
led the EU to seek to harmonise not merely substantive company law, but
also the social and economic environment in which it operates. But, even
with this fair wind, transplants do not always succeed because culture is
resilient.
129 See T. Ruskola (2000) 52 Stan L Rev 1598. See P. Lawton [2007] 49 Manag
Law 249 for discussion of how cultural aspects of the Chinese family firm might have
an impact upon the enforcement of shareholder rights through standard substantive
mechanisms.
130 For the convincing path dependency theory in corporate law, see M.J. Roe
(1996) 109 HLR 641.
131 For the Final Report see URN 01/942 (2001). See J. Rickford, chapter 1 in J.
de Lacy, The Reform of UK Company Law (2002) (Cavendish). Note also B. Pettet
(1998) 19 Co Law 134 for an early appraisal of the project. See also M. Arden [2002]
JBL 579. The UK was not alone in reflecting on the state of its company law. In France
in 1998, the Marini Report covered similar ground – see A. Tunc in B. Rider (ed.), The
Realm of Company Law (1998) (Kluwer) at 161–6, P. Omar (1998) 19 Co Law 62,
(1999) 20 Co Law 310.
132 A compelling critique of the process of company law reform before 1998 is
provided by L.C.B. Gower in (1980) 14 Law Teacher 111 at 115 and by J. Freedman,
chapter 11 in F. Patfield (ed.) Perspectives on Company Law (I) (1995) (Kluwer).
133 [1960] JBL 151 at 151.
134 See Modernising Company Law (Cm 5553-I, 2002) and Company Law
Reform (Cm 6456, 2005). For a reaction to the 2002 White Paper, see R. Goddard
(2003) 66 MLR 402 and for comment on the 2005 follow-up, see C. Howell (2005) 26
Co Law 203.
135 See here the observations of Eve J in Re Jewish Colonial Trust [1908] 2 Ch
287 at 295, commenting upon the rationale behind the Companies (Memorandum of
Association) Act 1890 which apparently was designed to enable English companies to
change their objects to compete more effectively with foreign firms.
Introduction 27
136 For discussion of this issue, see para 1.2 of the Report. The point was made
that Ireland had updated other regulatory systems to cope with the globalised economy,
but that companies regulation had lagged behind. The Irish Company Law Reform
Group was established under s. 68 of the Company Law Enforcement Act 2001.
137 Centre for Law and Business (University of Manchester). Noted in Final
Report (URN 01/942) at p. 7
138 For this 1997 report (which is available electronically) see C. Jordan [1997]
IFLRev (July) 29.
139 See J. Birds (2007) 49 Manag Law 13.
140 For the background to the legislative passage, see P. Bovey (2008) 29 Stat L
Rev 11.
28 National corporate law in a globalised market
met remains to be seen. Further details on the current state of play with regard
to implementation can be found in Appendix 1.
141 See B. Cheffins (2001) 30 Jo of Legal Studs 459, where the point was made
that the development of corporate law regimes owes more to market forces than legal
norms.
142 For an excellent account of the ‘law matters’ thesis, see B. Cheffins (2001) 1
JCLS 71 at 76–7.
143 J. Dunning, Multinational Enterprises and the Global Economy (1993)
(Addison-Wesley).
144 See R. La Porta, F. Lopez de-Silanes, A. Shliefer and R. Vishny (1998) 106 Jo
of Pol Econ 1113, and the later work published in (1999) 54 Jo of Fin 471, (2000) 58
Jo of Fin Econ 3. For a review of the so-called ‘LLSV’ thesis with critique, see A.
Pekmezovic [2007] ICCLR 97 and 147.
145 For a compelling critique of this methodology, see M.M. Siems [2005] 16
ICCLR 300. An alternative ‘leximetric’ methodology is developed by P. Lele and M.M.
Siems in (2007) 7 JCLS 17.
146 A.J. Perry, Legal Systems as a Determinant of FDI: Lessons from Sri Lanka
(2001) (Kluwer). See also her work in (2003) 23 Leg Studs 649, (2002) 29 Jo of Law
and Soc 282 and (2000) 49 ICLQ 779.
147 On the importance of institutions in a variety of senses, see K. Pistor (2002)
50 Am Jo of Comp Law 97. In this context, M. Whincop, An Economic and
Jurisprudential Genealogy of Corporate Law (2001) (Ashgate) is worth reading. K.W.
Dam would agree with La Porta that law matters – but what really matters is efficient
legal institutions to enforce that law – see The Law-growth Nexus: The Rule of Law and
Economic Development (2006) (Brookings Institute Press), especially at 230. In
Introduction 29
support of this argument, Dam cites the failed attempt to import the highly successful
German bankruptcy law into Russia, a failure attributed to inefficient Russian legal
institutions.
148 This point with regard to the positive impact of protection on investors is
made by R. La Porta et al. (2002) 57 Jo of Fin 1147.
2. Comparing core regulatory strategies
30
Comparing core regulatory strategies 31
This theory also draws support from the complimentary perspective offered by
Manne and others that there is limited need for harsh regulatory rules because
the capital markets provide the necessary regulatory constraints upon abusive
behaviour – the so-called market for corporate control theory.15
A further refinement of this approach has been to focus on the contractual
basis16 of companies as organisations. Academics17 have argued that, as the
key relationships within companies and between companies and the outside
world are regulated by a nexus of contracts, it is best left to the contracting
parties themselves to arrange their own private form of regulation to allocate
risks between the contractors. Such a perspective is not restricted to ivory
tower academics; it has been used, albeit in non-explicit fashion, by English
judges to underpin iconic rulings of the House of Lords in Bushell v Faith18
and Russell v Northern Bank.19 This is a valuable perspective, but it ignores
the impact of limited companies upon non-contracting parties (for example,
the passer-by who is run over by one of the company’s vehicles which is being
14 Ibid at 465. In more recent times, K. Pistor has stressed the importance of a
system of company law allowing for innovation – (2003) 31 Jo of Comp Econ 676.
15 See H. Manne (1965) 73 Jo of Pol Econ 110, C. Bradley (1990) 50 MLR 171,
A. Belcher (1997) 17 Leg Studs 22 at 28–9. Note also B. Clarke [2006] JBL 355 for a
discussion of this concept in the context of EU takeover regulation.
16 For excellent explanations of the origins and impact of contractarianism, see
M. Whincop (1999) 19 OJLS 19 at 27 et seq., P. Ireland (2003) 23 Leg Studs 453, B.R.
Cheffins [2004] CLJ 456 at 481 et seq., J. Armour and M. Whincop (2007) 27 OJLS
429.
17 For discussion of this idea, see F. Easterbrook and D. Fischel (1989) 89 Col L
Rev 1416 and their text, The Economic Structure of Corporate Law (1991) (Harvard
University Press). See further L.A. Bebchuk (1989) 102 HLR 1883. A critique is
provided by W. Bratton (1989) 74 Cornell L Rev 407. For an English perspective, see
also J. Parkinson, chapter 7 in D. Feldman and F. Meisel (eds), Corporate and
Commercial Law: Modern Developments (1996) (Lloyd’s of London Press).
18 [1970] AC 1099. It may also explain the ruling of the ECJ in Powell Duffryn
plc v Petereit (C214/89), The Times 15 April 1992.
19 [1992] 1 WLR 588. See E. Ferran [1994] CLJ 343 for in-depth analysis.
Comparing core regulatory strategies 33
We start with the general principle that company law should be primarily enabling
or facilitative – i.e. it should provide the means for those engaged in business and
other corporate activity to arrange and manage their affairs in the way which they
believe is most likely to lead to mutual success and effective productive activity.23
Again:
These comments were made within the past decade but now must be viewed
in the light of the global financial crisis, which has placed all regulatory
systems under strain, and may well lead to a general ratcheting up of corpo-
rate law regulation or even a bout of protectionism.
2 HOW TO REGULATE?
In spite of the existence of these alternative perspectives, not even the most
hardened zealot would deny that some regulation of limited companies is
necessary. There is considerable dispute, however, on both the most efficient
mode of such regulation and on the most appropriate degree of regulation.
Consensus favours a cocktail of regulatory devices.25
29 See Companies Act 1985, Parts 5, 13 and 14 and now Companies Act 2006,
Parts 17–20 and 23.
30 For a comparative overview of the philosophy as applied in a range of coun-
tries, see J.J. Henning (2003) 24 Co Law 353.
31 Final Report URN 01/942 (2001) para 1.53. The Irish have adopted this
maxim – see Company Law Review Group First Report (2001), para 2.3.
32 See, for example the structure of Part 15 of CA 2006, which makes this point
apparent.
33 See, for example, the position in Italy (outlined by F. Wooldridge in (2004) 25
Co Law 93) and Belgium (see F. Wooldridge (2007) 28 Co Law 154).
34 Lon Fuller, The Morality of Law (1964) (Yale University Press) rule 3 (out of
eight).
35 (1980) 14 Law Teach 111 at 115.
36 D. Campbell (1997) 7 Aust Jo of Corp Law 343 at 344.
36 National corporate law in a globalised market
One trend is all too apparent in the UK – the use of delegated legislation as a
means of regulating companies. This approach, which has been self-evident
for the past 20 years, was favoured by the Company Law Review.44 Major
reforms of primary legislation have been carried out by this method, for exam-
ple, the introduction of treasury shares into English law in 2003.45 The
Company Law Reform Bill 2005 (as the Companies Act 2006 was initially
designated) sought to progress this trend further through the medium of
Company Law Reform Orders. Provisions catering for these were in the Bill
as originally introduced (see Part 31). They were rejected in the House of
Lords on constitutional grounds46 and no attempt was made to resurrect them
when the Bill returned to the Commons. That said, there is no doubting the
reliance placed by the Companies Act 2006 on secondary legislation. A perusal
of the sections contained in Part 34 on overseas companies (which lack the
critical detail) would confirm that observation. Such delegated legislation may
be subject to either the negative or the affirmative resolution procedure for
Parliamentary approval (see CA 2006, ss. 1289 and 1290 for these alterna-
tives).
These are also of growing significance. This is partly due to the increased
complexity of companies legislation, but the trend has also been boosted by
constraints upon Parliamentary time.
A pattern emerges of self-regulatory contracts becoming increasingly
‘legitimised’. The historical evolution of the Takeover Code provides the best
47 For the early history of the Takeover Panel and its Code, see A. Johnston, The
City Takeover Code (1980) (Clarendon Press). See also A. Johnston [2007] CLJ 422.
48 R v Takeover Panel ex parte Datafin plc [1987] QB 815. See also R v
Takeover Panel ex parte Guinness plc [1990] 1 QB 146.
49 For the use of judicial review in Australia, see G. Morse (2007) 22 NZULR
622, R. Halstead and S. Magee [2005] (14) SMCLN 1, [2005] (16) SMCLN 5 and
[2005] (20) SMCLN 5.
50 Re Chez Nico Restaurants Ltd [1991] BCC 736, Dunford and Elliott Ltd v
Johnson and Firth Brown [1977] 1 Lloyds Rep 505, St Piran [1981] 1 WLR 1300. As
the Takeover Code was viewed as quasi law, matters of interpretation were for the
judge and not the jury in criminal trials – see R v Spens [1991] 1 WLR 624.
51 Under the auspices of the FSMA 2000, the Financial Services Authority
entered a concordat with the Takeover Panel in 2001.
52 See A. Johnston (2004) 25 Co Law 270.
53 See Takeovers Directive (Interim Implementation) Regulations 2006 (SI
2006/1183) superseded by Companies Act 2006, Part 28.
54 For example in Australia and Ireland – see B. Clarke, Takeovers and Mergers
Law in Ireland (1999) (Round Hall Press).
Comparing core regulatory strategies 39
70 The arrival of the floating charge in Scotland in 1961 was entirely the result
of statutory intervention via Companies Floating Charges Act 1961, in that under
Scottish common law, floating charges were not recognised – Carse v Coppen [1951]
SC 233. It was an import from south of the border. Scottish floating charges are still
governed by CA 1985, Part XVIII. Registration of charges in Scotland is regulated by
CA 1985, ss. 410–24 and CA 2006, ss. 878–92. See now Bankruptcy and Diligence
(Scotland) Act 2007, Part 2.
71 See the furore over Sharp v Thompson [1998] BCC 115. The Scottish Law
Commission Report No. 208 (2007) is recommending change – see SE/2007/242.
72 A point made elegantly by the French academic A. Tunc (1982) 45 MLR 1 at
5.
73 [1976] 1 WLR 676.
74 See Re Weldtech Ltd [1991] BCLC 393. See Chapter 7 below.
75 The Irish experience commenced with Re Interview Ltd [1975] IR 382, which
is noted by D. Milman in (1978) 122 SJ 172. For an overview of title retention in
Ireland, see J de Lacy (1987) 22 Ir Jur 212.
76 See J de Lacy [2001] Ins Law 64 and K. Stock [2002] 15 Ins Intell 1.
77 [1969] 2 Ch 365.
78 For comment, see R. Grantham [1993] CLJ 245. For recent authorities apply-
ing this principle, see Extrasure Travel Insurance v Scattergood [2003] 1 BCLC 598.
Compare Domoney v Godinho [2004] 2 BCLC 15.
42 National corporate law in a globalised market
which has been further advanced by the introduction of the written resolution
procedure via statute.79 There have been suggestions that the Duomatic prin-
ciple is now so well established that it ought to be converted into a statutory
rule. This was the view of the Company Law Review.80 Those suggestions,
however, have not met with official support and were rejected in both the 2002
and 2005 White Papers.81 Certainly, the principle is not formally recognised in
the Companies Act 2006.
79 See CA 1989, s. 116, introducing s. 379A into CA 1985. Now CA 2006, ss.
288–300.
80 Final Report (URN 01/942).
81 See Cm 5553-I (Modernising Company Law) and Cm 6456 (Company Law
Reform) respectively.
82 See CA 1985, s. 13(7) (CA 2006, s. 15(4)) and Jubilee Cotton Mills v Lewis
[1924] AC 958.
83 See CA 1985, s. 401(2)(b) (CA 2006, s. 869) and R v Registrar of Companies
ex parte Central Bank of India [1986] 2 WLR 177.
84 See R. Drury (1985) 48 MLR 644 for a lucid account of the concept of nullity
of companies.
85 The Cooney Committee (1989) recommended this approach towards adop-
tion of civil penalties and it was implemented in 1993.
86 On the suitability of civil penalties in Singapore, see P.-W. Lee [2006] CLWR
1.
87 On the Irish approach, see CLRG First Report (2001), para 8.2.4.
Comparing core regulatory strategies 43
So, for instance, civil sanctions have been used in a variety of contexts
where directors are in breach of duty. This might involve the setting aside of
improper transactions regarded as voidable, exerting an ‘account’ or requiring
monetary compensation to be paid. It is significant that the wrongful trading
regulatory innovation (see Insolvency Act 1986, s. 214) fell exclusively under
the civil law umbrella.88
The criminal law has been used to punish the more serious types of breach of
companies regulation, for example fraudulent trading under CA 1985, s. 458
(now restated by CA 2006, s. 993, a provision which increases the maximum
penalty to ten years’ imprisonment). Successful prosecutions for fraudulent trad-
ing are rare, according to official figures. This reflects a general problem with
regard to the real value of criminal law sanctions in this area.89 As far as insider
trading/market abuse is concerned, English law again has traditionally opted for
criminal sanctions, but the failure of these has forced a rethink, with a move
towards administrative penalties operated through the auspices of the Financial
Services Authority being the result (see FSMA 2000, s. 123 here). Civil sanc-
tions are also a possibility, to compensate victims of market abuse.90
An alternative is the use of civil penalties imposed by bureaucratic bodies.
One such example is provided by s. 242A of the Companies Act 1985 (to be
replaced by CA 2006, s. 453). This provision enables the registrar to levy a
penalty upon a defaulting company, though that levy can only be enforced
where the company fails to pay up, by the registrar applying to the county
court. The scale of the levy was determined by regulation and enforcement
policy was guided by an internal practice manual.91 In R (on the application
of POW Trust) v Registrar of Companies,92 it was held by Lightman J that this
penalty system was ECHR-compliant and that it did not infringe Art 6 or Art
1 of the First Protocol. Lightman J did, however, suggest that the practice
manual be put into the public domain.
Finally, the state can resort to more subtle means. ‘Naming and shaming’,
a device made more effective by the dissemination opportunities offered by
the internet, is beginning to be used against unfit directors.93
88 Compare IA 1986, ss. 216 and 217, which operate both civil and criminal
sanctions in tandem. The criminal offence specified in s. 217 is one of strict liability –
R v Cole [1998] BCC 87.
89 See L. Linklater (2003) 24 Co Law 1. For evaluation of the role of criminal
sanctions, see (2001) 1 JCLS 381 at 406.
90 See the episode recorded in (2006) 27 Co Law 51 for this remedy at work. For
civil remedies in Singapore, see R. Chandran (2001) 22 Co Law 63.
91 For regulations under the 2006 Act see SI 2008/497.
92 [2004] BCC 268. On s. 242A civil penalties, see Registrar of Companies v
Radio-Tech Engineering Ltd [2004] BCC 277.
93 Details of disqualified directors are often mounted on the BERR website.
44 National corporate law in a globalised market
This is a primary objective of any modern system of company law. Most prag-
matists accept that companies (unlike partnerships) do not materialise out of
thin air or alternatively through private contractual bargaining; there must be
some form of bureaucratic incorporation procedure designated by law.
Prior to the Companies Act 2006, incorporation procedures in English law
had remained largely unchanged since Victorian times. They were paper-based
and cumbersome. Admittedly, there was some tinkering as to the minimum
number of subscribing members,104 but the fundamentals were stable. With
the development of speedy incorporation models in other jurisdictions, the
English procedures were increasingly seen as uncompetitive.105 Under the
2006 Act, there have been changes to improve the position. For example, the
traditional distinction between memorandum and articles of association is no
longer maintained as an article of faith. The memorandum under the 2006 Act
is but a pale shadow of its former self and, indeed, it is no longer treated as
part of the constitution (see s. 17).
The incorporation process should also offer choice – that is, a menu of
different corporate entities suitable for the diverse needs of a range of would-
be incorporators. There is a world of difference between a large business set
up to generate profits for a myriad of shareholders and a small venture
designed to promote social good. English law has consistently broadened
choice here, with the most recent addition being the community interest
company introduced under the auspices of the Companies (Audit,
Investigations and Community Enterprise) Act 2004. This legislative base
remains intact, notwithstanding the enactment of the 2006 Act (for confirma-
tion, see CA 2006, s. 6).
106 Some 60 years ago Kahn-Freund argued that traditionally English law had
given greater emphasis to protecting shareholders than creditors – at the time of writ-
ing, that comment might not have been an inaccurate assertion, but it does not fully
reflect the position today.
107 See Ashbury Carriage v Riche (1875) LR 7 HL 653 at 667 per Lord Cairns.
This was a curious rationale when one considers that unsecured creditors could not
invoke the rule to stop a company acting ultra vires.
108 See J. Armour (2000) 63 MLR 355.
109 For background, see E. Ferran [2005] 6 EBOLR 93. Under this Amending
Direction, the protection available to creditors on a reduction of share capital has been
watered down by switching the burden of proof onto creditors wishing to challenge a
share capital reduction – see the Companies (Reduction of Capital) (Creditor
Protection) Regulations 2008 (SI 2008/719).
Comparing core regulatory strategies 47
Member States the option to deregulate share capital maintenance rules for
public companies in a number of areas, including financial assistance, share
capital reduction procedures and issue of shares for non-cash consideration.
US-influenced corporate jurisdictions (including Canada, New Zealand and
Singapore110) have now discarded share capital maintenance in favour of
solvency-based regimes and the imposition of fiduciary duties upon directors.
This strategy appears to work well and the aforementioned EU reform should
be viewed in positive terms. The Isle of Man in its 2006 Companies Act has
also gone down this well-trodden route of deregulation.
A basic tool designed to ensure that there is public confidence in the system
of companies regulation is the so-called disclosure philosophy.111 It is no
surprise that it was the subject matter of the First EU Company Law
Harmonisation Directive (68/151) (since amended by Directive 2003/58).
Thus, the constitution of a company should be open to public inspection, as
should details of its directors, and information should be available as to its
balance sheet and accounts. Compliance rates are not perfect – the official esti-
mates suggest something in the region of 84 per cent in 2005/6. The flip side
of disclosure is that the public are deemed to have notice of these public docu-
ments112 and this has in the past113 and can continue to work to their disad-
vantage in some instances.114 This disclosure strategy, which has impacted
beyond the creditor protection sphere,115 has been called into question in
recent years in the UK, with abuse of open access to corporate information by
animal rights activists minded to attack the homes of directors of companies
whose businesses they disapprove of. Some corrective legislation geared to
offering protection through a system of ‘service addresses’ has therefore been
required.116
Another established control tool is the DTI investigation, which is often cited
as being a quid pro quo for access to limited liability.117 There are significant
doubts about the real value of these procedures, which often take an aeon to
produce a report. A wag has compared the formal DTI investigation to being
more like an archaeological dig than a post mortem! At best, they provide
useful empirical material for future reform of the law. It is curious that the
statutory provisions on DTI investigations are not consolidated in the
Companies Act 2006, but remain stranded in the 1985 legislation. It seems
likely that they will be relocated into a discrete statute at some future date.
With heightened concerns about the effectiveness of these old protective
mechanisms, new strategies have emerged to ensure that the privilege of
limited liability is not misused. So, for example, the director disqualification
regime has in recent years taken centre stage as a means of protecting the
public from continued abuse of limited liability. Director disqualification for
unfit directors essentially dates back to the Insolvency Act 1976. The rules
were substantially upgraded in the Company Directors Disqualification Act
1986 and then, because of the success of the regime and the consequential cost
to the public purse, were later deregulated in the Insolvency Act 2000 with the
introduction of the contract-based undertakings procedure. This approach
based upon barring unfit entrepreneurs from future access to limited liability
companies has been adopted in various jurisdictions, with local variations. In
Ireland, for example, there are what are known as director restriction orders.118
With the increased usage of this strategy across the globe, Part 40 of the
Companies Act 2006 has introduced a new mechanism to give effect to foreign
disqualifications in the UK – this will be discussed in Chapter 6.
In English law,119 apart from denying the use of limited liability compa-
nies to undesirables, increasingly ways and means have been sought to
enable out-of-pocket creditors (and those acting for them) to pursue the
personal wealth of directors. In 1929, fraudulent trading was criminalised
and also made a civil wrong.120 The advent of wrongful trading liability,
being treated exclusively as a civil wrong via the enactment of s. 214 of the
118 See CA 1990 (Ireland), s. 150. A helpful general review of the mechanisms
used to control errant directors in Ireland is provided by N. Fitzgerald in (2004) 20 IL
& P 108. The key cases dealing with restriction orders are Robinson v Frost [1999] 2
ILRM 169, Luby v McMahon [2003] 1 IR 133, Fennel v Frost [2003] 1 IR 80. For
comment, see A. Leyden (2006) 9 Trin Coll L Rev 147 and A. O’Neill (2007) 28 Co
Law 116.
119 Ireland introduced the notion of reckless trading in 1990 via s. 138 of the CA
1990 (which became s. 297A of CA 1963). In so doing, the Irish drew heavily upon the
South African model in CA (SA) 1973, s. 424. For reckless trading in Ireland, see H.
Linnane (1995) 16 Co Law 26, 319. Australia employs a similar concept via CA 2001,
ss. 588G and 588H, as does New Zealand under the auspices of CA 1993, s.135 – see
S.M. Watson [1998] JBL 495.
120 This was recommended by the Greene Committee (Cm 1926).
Comparing core regulatory strategies 49
Insolvency Act 1986121 is a good reflection of the new strategy, though it has
to be conceded that it has not been a resounding success.122 This disappoint-
ment is in sharp contrast to the satisfaction of policymakers with the disqual-
ification mechanism. The differential is almost entirely due to the fact that
wrongful trading requires private litigation finance, whereas the public purse
can fund disqualification. The courts in England have tended to increase the
risk of directors being held liable for corporate debts.123
The position here is fluid. In the wake of the high-profile Farepak
collapse,124 the government is again looking at imposed trust devices to
protect consumers who pay in advance for goods which are never delivered
because the supplier becomes insolvent.125 In the meantime, it has introduced
a statutory reserve fund for unsecured creditors out of floating charge realisa-
tions.126
Creditors themselves are taking matters into their own hands by exploiting
provisions imposing personal liability on directors. This has been happening
for some time in the area of incorrectly labelled company cheques,127 but more
recently, major creditors like the HMRC have utilised the potential of
s. 216 of the Insolvency Act 1986128 and s. 15 of the Company Directors
Disqualification Act 1986 to this end.129 These opportunistic developments on
121 Interestingly, in Zambia, wrongful trading is both a civil wrong and a crime
under the Zambian Companies Act 1994 – see K.K. Mwenda (2008) 8 Ox Univ Comm
LJ 93.
122 See D. Milman [2004] JBL 493.
123 In Germany, a similar trend has emerged under which shareholders in the
GmbH are being made personally liable for corporate obligations – see M. Shillig
(2006) 27 Co Law 348.
124 See the preliminary ruling of Mann J in Re Farepak Food and Gifts Ltd [2006]
EWHC 3272 (Ch), [2007] 2 BCLC 1.
125 See The Times March 2007. This is not a new issue – it was acknowledged to
be a problem in the 1980s and research was undertaken – see A. Ogus and C.K.
Rowley, Prepayments and Insolvency (1984) (OFT).
126 Insolvency Act 1986, s. 176A, inserted by Enterprise Act 2002. Attempts by
secured creditors to access this fund have been rebuffed – see Re Permacelle Finesse
Ltd [2008] BCC 208 and Re Airbase (UK) Ltd [2008] BCC 213 – discussed by A.
Walters in (2008) 29 Co Law 129. This statutory fund is likely to prove more useful
than the obsolete reserve capital mechanism (CA 1985, s. 120), which was abolished
by the Companies Act 2006.
127 CA 1985, s. 349. As far as the CA 2006 is concerned, it is not clear if this rule
will be reproduced.
128 IRC v Nash [2004] BCC 150, IRC v Walsh [2005] EWCA Civ 1291, HMRC v
Benton-Diggins [2006] 2 BCLC 255, HMRC v Yousef [2008] EWHC 423 (Ch), [2008]
BPIR 1491. Debt factors taking an assignment of a corporate debt can also exploit this
provision – First Independent Factors and Finance Ltd v Mountford [2008] BPIR 515.
129 IR v McEntaggart [2006] BPIR 750.
50 National corporate law in a globalised market
the ground might suggest the need for a rethink on core strategy.130
Undoubtedly, they should be a cause for concern for company directors.
Creditor protection may be self-executing, with the institution of security
being the prime mechanism to achieve this goal. Historically, English law has
always been pro-creditor. Witness the continued usage of the unique remedy
of administrative receivership,131 though its potential has been substantially
curtailed by the Enterprise Act 2002. Other jurisdictions, such as the US and
France, are pro-debtor – that is, in the present context, they are more inclined
to bolster the position of the borrowing company. However, socio-economic
as well as cultural factors come into play. It may be the case that in develop-
ing economies thirsty for inward investment, a pro-creditor strategy is the
sensible option in the medium term.
There are echoes of this policy in the rules discussed above, but the issue is
much wider. What we are talking about here ties in with concerns about corpo-
rate governance. Since Berle and Means published their classic thesis139 in
1932, the problem of how to monitor agents who run companies has been a
dominant theme in corporate law discourse, though it must be pointed out that
the common law had begun to tackle this problem from the late 19th century
by applying equitable principles. Companies are artificial persons who neces-
sarily rely upon fiduciary agents (that is, directors) to undertake transactions
on their behalf. It is therefore essential to have in place rules which prevent
such agents from abusing their position. The general rules of agency law have
to be modified to reflect the peculiarities of the corporate context. A key ques-
tion is the extent to which these rules can be relaxed by shareholders them-
selves – issues of ex post facto ratification come to the fore here. For a long
time, the basic rule on ratification has been that shareholders can ratify and in
any vote held to consider the propriety of directors’ conduct, the shares held
by the alleged wrongdoer(s) can be voted upon,140 but this has now been
modified by s. 239 of the Companies Act 2006 to ensure that only independent
shareholders can in future ratify.
The shareholder is the central player in the modern limited liability company.
Without the shareholder’s capital, the company would be starved of equity
funds and would be forced into the clutches of bankers. All systems of corpo-
rate law must therefore have in place mechanisms to protect the shareholder
interest in order to encourage investment.
All shareholders in the same class should be treated equitably. This funda-
mental is one of the General Principles in the Takeover Code (see General
Principle 1).
There is an expectation, but not a formal requirement, that all shares should
carry votes. The Jenkins Committee set its face against compulsion here,
though there was significant dissent on the point.141 The exercise of voting
rights should be protected legally142 and should be facilitated – for example,
by permitting proxy votes to be used.143
At the most basic level, shareholders should be protected from expropria-
tion of their economic interest in the company, as reflected by their share-
holding. The courts will scrutinise carefully attempts to alter articles to
introduce such a facility.144 The Companies Act 1985, Part XIIIA did embody
an expropriation facility (s. 429, now restated in CA 2006, s. 979) in the event
of a hostile takeover bid, but the bid must be genuine for that mechanism to be
engaged, as the House of Lords pointed out in Blue Metal Industries v
Dilley.145 Art 1 of the First Protocol of European Convention on Human
140 North West Transportation Co v Beatty (1887) 12 App Cas 589 – reversed by
CA 2006, s. 239(3). But the Companies Act 2006 does not allow for ratification in
circumstances where this was not available at common law – Franbar Holdings Ltd v
Patel [2008] EWHC 1534 (Ch), [2008] BCC 885.
141 Cmnd 1749, para 137.
142 A shareholder has a personal right to vote – such a right can be enforced with-
out the obstacle of the rule in Foss v Harbottle (1843) 2 Hare 461 – see Pender v
Lushington (1877) 6 Ch D 70.
143 On the story of how proxy voting was accepted by English law, see V. Edgtton
(2000) 21 Co Law 294.
144 See B. Hannigan [2007] JBL 471.
145 [1970] AC 827. The existence of s. 430C (CA 2006, s. 986) also exemplifies
the protective approach.
Comparing core regulatory strategies 53
4.7 Rehabilitation
This is a new goal widely embraced by modern corporate systems across the
globe.155
Until the 1970s, little was heard of this trend, though English law has had
in place reconstruction procedures since the start of the 20th century. South
Africa, which did not recognise the floating charge, had been operating a
154 It has been estimated that the average life span of a UK company is now a
mere 8.6 years (DTI Annual Report 2004/05, table A5).
155 See D. Milman, chapter 17 in J. de Lacy (ed.), The Reform of UK Company
Law (2003) (Cavendish).
Comparing core regulatory strategies 55
model called judicial management156 since 1926, with mixed success. The
global business rescue lobby received a major kickstart with the reforms
embodied in the US Bankruptcy Code of 1978 and particularly the revitalisa-
tion of the Chapter 11 procedure. In English law, the issue was taken on board
by the Cork Committee (1977–82).157 In the great reforms of 1985–6 two new
corporate rescue regimes, the Company Voluntary Arrangements (CVA) and
the administration order mechanism, arrived on the scene. Across the globe,
other jurisdictions felt the need to respond to corporate distress. Continental
jurisdictions upgraded their rescue models in the 1990s.158 Ireland introduced
its court examiner procedure in the Companies (Amendment) Act 1990, partly
in response to the sudden economic pressures placed on its native beef indus-
try by the UN embargo on trade with Iraq after its invasion of Kuwait.159
Australia introduced its highly successful voluntary administration procedure
in 1993.160 Asian jurisdictions rushed to introduce corporate rescue proce-
dures in the wake of the 1997 financial crisis.161 This is borne out by the expe-
rience of countries such as South Korea, Indonesia and Thailand.
What has happened in most of these jurisdictions is that they have now
moved to second-generation business rescue models. That is certainly true of
the UK, which has tweaked the CVA regime (via the Insolvency Act 2000) and
completely restructured the administration model via the Enterprise Act 2002.
The new administration model has gone from strength to strength, soaking up
cases that previously would have been disposed of via administrative receiver-
ship or creditors’ voluntary liquidation. Ireland also exemplifies a similar
pattern of evolution, in its court examinership rehabilitation tool.162 Even the
iconic Chapter 11 procedure in the US has required a facelift.163
The rescue bandwagon has seemed inexorable in all corners of the globe.
One reason for its popularity is that it appeals to the diverse needs of politi-
cians and practitioners. Awkward questions, however, remain. Has it worked?
Statistics in the UK seem to suggest a negative answer164 but powerful lobbies
with vested interests are not always swayed by inconvenient data. So much
credibility has been invested in the corporate rescue idea that it is difficult to
see it being ditched. If anything, governmental interventions in the market to
prop up key players in a range of economies suggest that there is still consid-
erable vigour in the idea.
164 See Insolvency Service seminar, 12 February 2008, unveiling its evaluation
study.
165 See above at 35, where a quotation is drawn from Cmnd 1749, para 6.
166 Company Law and Commercial Reality (1984) (Sweet & Maxwell). See also
E. Jacobs (1990) 11 Co Law 215 for an Anglo-Canadian comparison.
167 At the last count, the Australian Corporations Act had at least 1471 sections.
In fairness, the problem has been recognised in Australia and since 1992 a simplifica-
tion process has been under way producing reforms – see V. Mitchell (1999) 20 Co Law
98, G.P. Stapledon [1999] CFILR 114 and P. Darvas (2000) 21 Co Law 101. But see I.
Ramsay (1992) 14 Syd L Rev 474 (an excellent explanation of why companies legis-
lation is bound to be detailed and complex).
168 The Canadian Business Corporations Act (CBCA) 1985 has 268 sections. For
background to the CBCA see Partnerships and Business Corporations (edited by J.S.
Ziegel et al.) (2nd edition, 1989) (Carswell) at 99–103. New Zealand, whose 1993 Act
boasts a mere 397 sections, has adopted a similar approach.
Comparing core regulatory strategies 57
policy now is ‘Think Small First’. The Companies Act 2006 tries to improve
the position by restating common law rules in accessible statutory form. The
best example of this is to be found in the new rules on directors’ duties (ss.
171–7). These provisions seek to lay out general standards of behaviour, with-
out stifling the possibility of organic development in the future through the
common law.
When considering this question, it is important to bear in mind the poten-
tial diversity of users. Professional groups (such as credit reference agencies)
may be users and may be entitled to expect clarity.169
Offshore jurisdictions place a high priority on the needs of international
users. Witness the recent reforms of Company Law in the Isle of Man.170
Any system of corporate regulation should make the best of emerging tech-
nologies.171 The legislative challenge is immense here because the pace of
technological change will always outstrip legislative reform.172 English
company law has for generations operated a paper-based system in terms of
provisions for communication between stakeholders and the holding of infor-
mation. That has been replaced in many fields via orders made under the
Electronic Communications Act 2000,173 and, most recently, the Companies
Act 2006, which does much to move our system into the digital age. So, for
instance, ss. 527–31 of the 2006 Act make provision for shareholders in listed
companies to have their concerns about the audit process mounted on a
company website. Documents related to company meetings can be communi-
cated electronically (s. 333). Poll results can also be mounted on a website (s.
341). Although these moves are progressive, we do not appear to have gone as
far as jurisdictions like Delaware, Canada and Australia in permitting virtual
shareholder meetings, using modern remote but instantaneous communication
techniques.174 Germany has also recently introduced reforms designed to
169 So, for instance, mechanisms used to check corporate files with regard to the
usage of the new administration model are not working – see J. Harris (2006) 27 Co
Law 321. See also (2006) 27 Co Law 305.
170 For this development in the Isle of Man, see (2007) 28 Co Law 46.
171 See U. Noack (1998) 9 EBLR 100.
172 A point made by C.P. Rutledge (2000) 21 Co Law 62.
173 See Companies Act 1985 (Electronic Communications) Order 2000 (SI
2000/3373). The courts have also shown a willingness to adapt company law to new
technologies – PNC Telecom plc v Thomas [2004] 1 BCLC 88.
174 For an excellent review from a Nigerian perspective, see I.O. Bolodeoku
(2007) 36 CLWR 106. For Australia, see Corporations Law, s. 250B. In the Isle of Man,
electronic/telephonic shareholder and board meetings are permitted by ss. 67(4) and
58 National corporate law in a globalised market
In this respect English law has kept up with the field. The UK Stock Exchange
has proved its competitive edge over the years, though it did require major
revision via the Big Bang177 in the 1980s. That revolution was designed to
introduce greater competitive forces into the London securities markets. The
advent of paperless shares is an important move in ensuring that market trans-
actions can be carried out effectively in a digital age. The Financial Services
Authority (which replaced the Securities and Investments Board in 1997) is
charged with this important responsibility and as such, has wide powers dele-
gated to it.
The EU has recognised the need for effective capital markets – hence the
Lamfalussy initiative.178 The importance of this goal for all systems is exem-
plified by the push to curtail abusive market activities like insider trading179
and cold calling.180 The General Principles of the Takeover Code also stress
the need to prevent the creation of false markets on a takeover.
The Markets in Financial Instruments Directive (2004/39) came into force
in 2007, having been implemented in the UK via a number of statutory instru-
ments.181 This Directive182 replaces the Investment Services Directive
106(2) of their Companies Act 2006. In Europe, Professor Noack has been a leading
exponent of better use of information technology in this context – see (1998) 9 EBLR
100.
175 See T. Naruisch and F. Liepe [2007] JBL 225 at 235–7.
176 Note in particular Art 8 (right to participate in general meeting by electronic
means). See the comment in (2007) 28 Co Law 337.
177 On the ‘Big Bang’, see J.L. Jones (1986) 7 Co Law 99.
178 For the Lamfalussy process (2001), which was designed to speed up the adop-
tion of measures in the financial services arena, see A. Schaub [2005] 13 Jo of Fin Reg
and Comp 110.
179 The UK banned insider trading in 1980. Singapore had already taken this step
in 1970 – see W.Y. Wan (2007) 28 Co Law 1200. The US proscription in effect dates
back to 1961 when a general anti-fraud provision (rule 10b5) was first applied to it.
180 See Alpine Investments (C384/93) [1995] 2 BCLC 214.
181 See SI 2007/126, SI 2007/763, SI 2007/2160 and SI 2007/2932.
182 For illuminating accounts of MIFID, see N. Moloney (2006) 55 ICLQ 982,
J.D. Haines (2007) 28 Co Law 344.
Comparing core regulatory strategies 59
1 INTRODUCTION
We saw in Chapter 2 that all corporate law regimes seek to achieve certain
basic policy goals. It is hardly surprising, therefore, to find that all systems of
corporate law have a common core of substantive rules directed towards the
attainment of those same broad objectives. In the first chapter in their edited
work The Anatomy of Corporate Law, Henry Hansmann and Reinier
Kraakman observe that, notwithstanding inevitable cultural differences in
corporate law, ‘the underlying uniformity of the corporate form is at least as
impressive’.1 They continue on the same tack, thus: ‘Business corporations
have a fundamentally similar set of legal characteristics – and face a funda-
mentally similar set of legal problems – in all jurisdictions.’2
They identify five common features of any corporate system in another
paper.3 The effect of this homogeneity from the perspective of English law is
that there is now limited scope for cross-fertilisation of radically new ideas
from other corporate systems. A law of diminishing returns is in operation. But
possibilities do exist for subtle modifications in the common core.
Before examining the potential for change we must ask ourselves the ques-
tion: ‘What are these common core principles?’
1 (2004) (OUP) at 1.
2 Ibid at 1.
3 These are: 1. legal personality; 2. limited liability; 3. shared ownership of
capital by investors; 4. delegated management to directors; 5 transferable shares – see
H. Hansmann and R. Kraakman in J.N. Gordon and M.J. Roe (eds), Convergence in
Corporate Governance (2004) (CUP) at 34.
60
Commonality of fundamental principles 61
which had been part of the subconscious of corporate law jurisprudence from
the earliest days, was finally determined in English law by the House of Lords
at the end of the 19th century in Salomon v Salomon & Co Ltd,4 an iconic deci-
sion that has attained the status of a world precedent in the common law
family. Any perusal of company law texts from a range of jurisdictions will
confirm the universal pre-eminence of this ruling. It has its own counterparts
in all company systems based originally upon English law.5 The idea is also
adopted in civil law jurisdictions. Its celebrated position in English law has
been cemented by the approval it received from the House of Lords in
Williams v Natural Life Health Foods,6 a clear policy decision in favour of
preserving the benefits of incorporation. The application of the separate
personality rule in the context of the globalised business environment was
underscored in DTI v Rayner,7 where the House of Lords ruled that the
Member States who made up the International Tin Council were not responsi-
ble for its debts to brokers when the world commodity market for tin
collapsed.
This principle has even been supported by the International Court of Justice
in the celebrated Barcelona Traction case.8 Here we were concerned, some-
what belatedly, with the legal consequences of the expropriation in 1938 in the
context of the Spanish Civil War of the assets of the Barcelona Traction
Company. This company had been incorporated in Canada in 1911, with a
view to constructing a transport system in Spain. To add to the legal compli-
cations, the majority of shareholders (some 88 per cent) were based in
Belgium. Many years after the event, the Belgian shareholders, acting through
the Belgian government, sought compensation from Spain. The International
Court of Justice ruled the claim inadmissible because the proper claimant
should have been the state of Canada, as technically it was a Canadian citizen
(that is, the company itself) which had been deprived of its property. Canada
had made no such claim. The separate corporate personality principle has thus
been established as a global legal standard, a point that is reflected in the
jurisprudence of other supranational courts.9
4 [1897] AC 22. See Lord Cooke in his Hamlyn Lecture, Turning Points of the
Common Law (1997) (Sweet & Maxwell) at chapter 1. For a superb review of the status
of this principle a century later, see R. Grantham and C. Rickett (eds), Corporate
Personality in the 20th Century (1998) (Hart).
5 See, for example, Gumede v Bandha Vukani Bakithi Ltd 1950 (4) SA 560. In
India, there are many state-owned corporations – see I. Carr [1991] 10 ICCLR 339.
6 [1998] 1 WLR 880.
7 [1990] 2 AC 418. For discussion, see C. Greenwood [1990] CLJ 8.
8 [1970] ICJ Rep 3. See H. Briggs (1971) 65 Am Jo of Int Law 327.
9 The ECHR at Strasbourg made use of the concept in Agrotexim v Greece
(1996) 21 EHRR 250.
62 National corporate law in a globalised market
. . . we do not accept as a matter of law that the court is entitled to lift the corporate
veil as against the defendant company which is a member of a corporate group
merely because the corporate structure has been used so as to ensure that the legal
liability (if any) in respect of particular future activities of the group (and corre-
spondingly the risk of enforcement of that liability) will fall on another member of
the group rather than the defendant company.
10 But note Blumberg coined the distinction between the formal ‘entity’
approach and the more realistic ‘enterprise’ approach – see P.I. Blumberg, The
Multinational Challenge to Corporate Law (1993) (OUP).
11 [1980] 1 WLR 627.
12 [1990] BCLC 479.
13 Ibid at 520.
14 Ibid.
15 [2000] ICR 327.
16 [2004] 4 IR 266.
Commonality of fundamental principles 63
24 For recent attempts see M.T. Moore [2006] JBL 180, where the point is reit-
erated that the approach of English law is unsustainable.
25 On association of groups, see, for example, Employment Rights Act 1996, s.
231 and VAT Act 1994, s. 43. See also Dimbleby v NUJ [1984] 1 WLR 427.
26 For an empirical study, see C. Mitchell [1999] 3 CFILR 15.
27 The Times, 13 April 1985.
28 [2000] 2 BCLC 734
29 [2006] 2 BCLC 296. See also Trustor AB v Smallbone (No. 2) [2001] 1 WLR
177.
Commonality of fundamental principles 65
The practice of lifting the corporate veil is found in all corporate law
models, and indeed, it is more prevalent beyond our shores.30 Within the US
corporate law system the mere fact that a company has been undercapitalised
may trigger such an approach, so as to deny an insider creditor the benefit of
equal treatment under the pari passu distributional rule.31 Such a creditor may,
in effect, be subordinated to the rights of outside creditors by the court using
its discretion to defer its claim.
Another qualification to note is that not all jurisdictions adopt a common
stance on the attributes that flow from having corporate personality. For exam-
ple, there is some disagreement as to what extent companies can enjoy funda-
mental rights: for example, the privilege against self-incrimination.32
Although this idea has been accepted in the UK, it has not attracted much
support in the USA, Canada or Australia. In Santa Clara County v South
Pacific Railroad Co,33 the US Supreme Court had to decide whether corpora-
tions could enjoy the protection of the 14th Amendment (equal protection
under the law). The Supreme Court ruled (without permitting argument on the
point) that companies did enjoy the protection of the 14th Amendment. In
Europe, the European Convention on Human Rights and Fundamental
Freedoms has helped to clarify the position on a number of issues relating to
fundamental rights in the corporate context.34 Thus, we know that companies
enjoy the protection of property rights. They may also enjoy a right to protect
their commercial reputation, according to the House of Lords in Jameel v Wall
Street Journal.35
30 For a selection of overseas scholarship on this issue, see J.M. Dobson (1986)
35 ICLQ 839 (Argentina), S. Gates (1984) 12 ABLR 162 (Australia), J. Rinze (1993)
14 Co Law 143 (Germany), P. Hood [2001] JBL 58 (Scotland), A. Daehnert (2007) 18
ICCLR 393 (Germany). The Canadian courts, like their US counterparts, seem more
inclined towards lifting the veil – see A. Hargovan and J. Harris (2007) 28 Co Law 58.
31 For an early account of this US approach, see H. Ballantine (1925) 14 Calif L
Rev 12. The leading US cases now are Taylor v Standard Gas (1939) 306 US 307,
Pepper v Linton (1939) 308 US 295 – these cases establish the so-called ‘Deep Rock’
doctrine. See C.L. Israels (1942) 42 Col L Rev 376, M. Whincup (1981) 2 Co Law 158,
R. Schulte (1997) 18 Co Law 2.
32 See G. McCormack, chapter 20 in D. Feldman and F. Meisel (eds), Corporate
and Commercial Law: Recent Developments (1996) (Lloyd’s of London Press), D.
Milman [2000] (3) SMCLN 1.
33 (1886) 118 US 394.
34 See A.J. Dignam and D. Allen, Company Law and the Human Rights Act 1998
(2001) (Butterworths), A. Aldred (2002) 23 Co Law 241. See Pine Valley
Developments Ltd v Ireland (1992) 14 EHRR 319 and (1993) 16 EHRR 379, Tinnelly
& Sons Ltd v UK (1999) 27 EHRR 249.
35 [2006] UKHL 44. Thus there is no need to prove special damage before suing
in libel.
66 National corporate law in a globalised market
3 LIMITED LIABILITY
The notion of limited liability flows directly (but not inexorably) from the
concept of separate corporate personality. Those who subscribe for shares in
limited companies have their exposure to risk capped at the level of their
investment. Therefore, once shares are fully paid up, there is no residual liabil-
ity for shareholders. This is a universal concept, first adopted in the US in the
early 19th century,36 then in English law in 1855 via the Limited Liability
Act.37 France introduced it into its system of company law in 1867.38
The commercial significance of limited liability cannot be overstated. In Re
London and Globe Finance Corporation Ltd, Buckley J declared:39
The statutes relating to limited liability have probably done more than any legisla-
tion in the last fifty years to further the commercial prosperity of the country. They
have, to the advantage as well of the investor as of the public, allowed and encour-
aged the aggregation of small or comparatively small sums into large capitals which
have been employed in undertakings of great public utility, largely increasing the
wealth of this country.
Again this is a corporate law standard, but there are subtle variations in the
way in which it is applied in the group context. In particular, New Zealand has
pioneered the mechanism of ‘contribution orders’, under which a controlling
company which has interfered in the management of an insolvent subsidiary
can be required to contribute to the assets of that subsidiary on liquidation. The
current mechanism, which dates back to 1980, is found in ss. 271–2 of the
Companies Act 1993 and is extended by the Companies Amendment Act 2006
to voluntary administrations. Pooling orders which ignore the separate assets/
liabilities of group members and facilitate a more efficient winding up/
administration of a group are also a possibility. These ideas have travelled. The
model of contribution orders was adopted by the Irish in s. 140 of their
Companies Act 1990. Pooling orders under Irish law are based on s. 141 of the
said Act. Having noted that, in both New Zealand and Ireland this mechanism
does not appear to have been extensively used, which might indicate a lack of
36 New York introduced it in 1811 and it had spread to the east coast states by
1830. For the arrival of limited liability into the USA, see A. Santuari (1996) 17 Co
Law 281.
37 See L. de Koker (2005) 26 Co Law 130. For the spread of the idea of the
limited liability company with separate personality throughout the colonies, see R.
McQueen (2008) 17 Griff L Rev 383.
38 Though limited liability partnerships pre-dated such companies. See gener-
ally, M. Lobban [1996] 25 Anglo-Am L Rev 397 at 411. Note also A. Santuari (1996)
17 Co Law 281.
39 [1903] 1 Ch 728 at 731. For general discussion, see B. Pettet [1995] CLP 124.
Commonality of fundamental principles 67
practical utility.40 Other jurisdictions seek to attain the same result, but by
more circuitous methods. Thus, in Europe, an interfering parent company can
often be made liable for its subsidiaries’ debts.41
The importance of limited liability is reflected by the pressure placed on the
government by professional firms to introduce the LLP, pressure that produced
dividends in the form of the Limited Liability Partnerships Act 2000.
Although we have all come to accept limited liability as a permanent
feature of the corporate law landscape, that is not to say that it has escaped crit-
icism from those who question its role in a modern economy.42 Certainly,
some critics would argue that, for a developed economy where access to
investment funding is not difficult, the idea of limited liability should now be
questioned as part of a balanced debate.
40 For the position in New Zealand, see R.P. Austin, chapter 4 in R. Grantham
and C. Rickett (eds), Corporate Personality in the 20th Century (1998) (Hart).
41 See generally E.J. Cohn and C. Simitis (1963) 12 ICLQ 189.
42 See S. Griffin (2004) 25 Co Law 99, T. Morgan (2003) 24 Co Law 194.
43 For Canada, see CBCA, s. 24 (mandatory). No par value shares were intro-
duced into South Africa in 1973, whereas Singapore did not take this step until 2005.
They were recognised in the Isle of Man by s. 29 of the Companies Act 2006.
44 (1954, Cmnd 9112) paras 11 and 27. The Jenkins Committee in 1962 took a
similar view (see Cmnd 1749, para 34).
45 Final Report (URN 01/942).
68 National corporate law in a globalised market
have created an anomaly with public companies (where the concept had to be
retained in order to ensure compliance with the EC Second Company Law
Harmonisation Directive) and so the status quo prevailed. Accordingly, in the
Companies Act 2006, the par value concept is retained; indeed, it is specifi-
cally reinforced by explicit statutory provision (s. 542).
Shareholder membership is the relationship at the heart of the modern
company. The idea of one share one vote is an ideal espoused by many (but
not all) company law systems. Companies that do not adhere to this principle
may be denied access to the capital-raising facility of public stock exchanges.
But it is not universally adhered to even in English law. Private companies
may use a system of weighted votes on shares.46 In Scandinavian corporate
law systems, weighted votes are not uncommon. This tradition caused some
difficulty in the protracted debate surrounding the introduction of the EC
Takeovers Directive (2004/25/EC). Eventually concessions had to be made in
order to secure adoption of the Directive.47 Another variant is cumulative
voting rights, for example, on the election of directors. This clever vote accu-
mulation device which empowers small shareholders by allowing them to
target their overall voting power tactically is used in some US-inspired corpo-
rate law jurisdictions.48
If shares exist, there must be cost-effective procedures designed to facili-
tate share transfers. The English courts have talked about a presumption of
transferability.49 However, the preference has always been for a registration
procedure linked to transfer. In private companies, this has produced a situa-
tion where directors usually enjoy discretion not to register certain transferees
(see Table A, Art 24, which will be replicated in the new Table A, Art 26(5)
with effect from 1 October 2009). The justification for this right to block a
share transfer lies in the fact that private companies may still be viewed in
some quarters as exclusive clubs. The Companies Act 2006 modifies the posi-
tion here by requiring directors within two months to give reasons for a refusal
to register a transfer (see s. 771).50 English law has been more hostile than its
European counterparts to bearer shares or share warrants which can be trans-
51 See, for example, Colonial Bank v Cady & Williams (1890) 15 App Cas 267
– refusal by court to treat registered shares as negotiable instruments in spite of
evidence that they were being dealt with as such in the market.
52 For typical private company share transfer curbs, see CA 1985, Table A, Art
24 and the philosophy reflected by cases such as Charles Forte Investments v Amanda
[1964] Ch 240. See now Art 26 of the new Model Articles for Private Companies
Limited by Shares (SI 2008/3229).
53 See CA 1989, s. 207 and the Uncertificated Securities Regulations 1995 (SI
1995/3272).
54 Re Bugle Press Ltd [1961] Ch 270.
55 Re Peveril Gold Mines [1898] 1 Ch 122, Exeter City AFC v Football
Conference [2004] BCC 498. But compare Re Vocam (Europe) Ltd [1998] BCC
396.
56 (1986) 8 EHRR 329.
57 (1999) 27 EHRR 566.
58 Bramelid and Malstrom v Sweden (1982) 5 EHRR 249. See also Re Waste
Recycling Group Ltd [2004] 1 BCLC 352.
70 National corporate law in a globalised market
59 Hence cases such as Howard Smith v Ampol Petroleum [1974] AC 821 and the
resistance to poison pills.
60 This was one reason why the issue of defensive measures poisoned the debate
over the adoption of the Takeovers Directive.
61 See Thorby v Goldberg (1964) 112 CLR 597 and Fulham FC v Cabra [1992]
BCLC 863.
62 See now CA 2006, s. 232.
63 See CA 1989, s. 137 (CA 1985, s. 310(3); CA 2006, s. 233).
64 See The Companies (Audit, Investigations and Community Enterprise) Act
2004, ss. 19 and 20, superseded by CA 2006, ss. 234–8.
Commonality of fundamental principles 71
common law and through legislation) to this rule and as a result, there is
considerable academic debate as to the current status of this rule. Respected
scholars such as Rizwaan Mokal68 and Look Chan Ho69 would argue that the
pari passu rule as commonly understood is a myth. In spite of these well-
argued reservations, it remains the case (rightly or wrongly) that the principle
of pari passu distribution is still applied as a basic philosophy underpinning
many winding-up models across the globe.70 It is sometimes difficult to disen-
tangle myth from reality.
Although we have asserted that the pari passu rule may be viewed as the
starting point, there are exceptions.71 One of these relates to preferential cred-
itor status.72 It is not uncommon to find that certain creditors, typically
government agencies and employees, are given favourable treatment. As far as
the state protecting itself is concerned, this has long been regarded as unfair
and a blot on the landscape of the system. The Cork Committee73 was severely
critical of its continued existence. Preferential status for state debts has been
discarded in many jurisdictions,74 including Australia,75 though surprisingly it
endorsed by the Privy Council in a conflicts of law scenario in Wight v Eckhardt Marine
[2003] BCC 702. It is standard fare in all legal systems derived from English law – see,
for example, India Companies Act 1956, s. 528, Corporations Law, s. 555 (Australia),
Companies Act 1993, s. 313 (New Zealand), Companies Act 1963, s. 275 (Ireland). See
D. Milman, in A. Clarke, Current Issues in Insolvency Law (1991) (Stevens) at 57–85,
also V. Finch [2000] Ins Law 194. The pari passu debate took an interesting turn in Sons
of Gwalia v Margaretic [2007] HCA 1, where the High Court of Australia ruled that
shareholders who had been misled into investing in the company could be treated as
creditors. This surprising decision has provoked a government review.
68 Corporate Insolvency Law (2005) (OUP) especially Chapter 4. See also his
perceptive essay in [2001] CLJ 581.
69 For the views of Look Chan Ho on this controversy, see (2003) 19 IL & P 155,
and [2004] JIBLR 54.
70 Blackburne J used it to justify his ruling in the test case of Re Courts plc
[2008] EWHC 2339 (Ch), [2008] BCC 917 (no selective disapplication of the
prescribed part). It was an important element in the advice tendered by the Privy
Council in the British Virgin Islands case of Hague v Nam Tai Electronics Inc [2006]
UKPC 52, [2007] 2 BCLC 194.
71 In Australia under s. 562A of the Companies Act 2001, policyholders of an
insolvent insurance company enjoyed protected status – see Re HIH Casualty and
General Insurance Co [2006] EWCA Civ 732 (reversed appeal to the HL sub nomine
McGrath v Riddell [2008] UKHL 21, [2008] BCC 349).
72 First introduced into English law in 1888. See A. Keay and P. Walton [1999]
CFILR 84 and [1999] Ins Law 112.
73 Cmnd 8558 (1982).
74 Thus state preferential claims have been dropped in Germany and Austria. For
an instructive comparative survey see A. Keay, A. Boraine and D. Burdette (2001) 10
Int Insolv Rev 167.
75 Australian Crown preferential claims in respect of unpaid tax were abandoned
in 1993.
Commonality of fundamental principles 73
has been retained in New Zealand.76 In the UK, Crown preferential debt status
was finally surrendered by the Enterprise Act 2002.77 Preferential status has
not disappeared completely in English law – it survives for certain employee
claims and other specialised debts – but its long-term future is under threat.
The problem here is that it is inconsistent on the one hand to view employees
as stakeholders and then to featherbed them in the event of enterprise failure.78
76 See s. 312 of New Zealand Companies Act 1993. The Insolvency Act 2006
surprisingly did not change the position in New Zealand – see D. Brown and T.G.W.
Telfer, Personal and Corporate Insolvency Legislation (2007) (LexisNexis NZ) at 86
et seq.
77 Section 251, with effect from 15 September 2003.
78 See D. Milman in A. Clarke, Current Issues in Insolvency Law (1991)
(Stevens) at 57 and C.L. Symes, Statutory Priorities in Corporate Insolvency Law: An
Analysis of Preferred Creditors (2008) (Ashgate).
79 In Australia there are distinctive rules for the proprietary company (designated
Pty).
80 Close Business Corporations Act 1984 – discussed by J.J. Henning in (2007)
28 Co Law 253.
81 For example, in Germany there are separate regimes for public companies
‘aktiengesellschaft’ (AG) in the form of the 1965 Act and for private companies
‘Gesellschaft mit beschranker Haftung’ (GmbH). On the latter, see K. Muller, The
GmbH – A Guide to the German Limited Liability Company (3rd edition, 2006)
(Kluwer).
74 National corporate law in a globalised market
philosophy now is ‘Think Small First’.82 Thus, the Companies Act 2006
focuses upon small companies first and then considers whether variants are
appropriate for larger counterparts. A similar strategy has been commended in
Ireland by the First Report of the Company Law Review Group83 and indeed
the proposed new Irish Companies Bill seems to reflect that wisdom. As far as
Europe is concerned, the Centros84 bombshell has led to a major reappraisal
of the traditional harmonisation obsession with public companies. There is
now a real push towards introducing a standardised format for a European
Private Company.85 So, for example, in July 2007 the European Commission
published a consultative document dealing with the proposed European
Private Company Statute.86 Events on the ground might suggest that that is
already occurring, with minimum share capital requirements for private
companies gradually being watered down.
89 CA 1985, s. 432. See the discussion in Norwest Holst Ltd v Secretary of State
for Trade and Industry [1978] Ch 201.
90 Insolvency Act 1986, s. 124A. Strangely, this facility is not available in
Ireland – see First Report of Company Law Review Group (2001) para 15.2.3.
91 Re Titan International Inc [1998] 1 BCLC 102 at 108–9 per Peter Gibson LJ.
92 CA 1985, s. 656, restated in CA 2006, s. 1012.
93 For nationalisation of UK companies, a dominant feature of the late 1940s,
see the Coal Industry Nationalisation Act 1946. In the 1970s, nationalisation again
became a prominent issue – see Aircraft and Shipbuilding Act 1977. When Railtrack
got into financial difficulties at the turn of the decade, it was effectively nationalised
via being put into a special administration regime in 2001. For this administration and
its outcome, see S. Plant (2002) 18 IL & P 18 and S. Elboz (2002) 18 IL & P 187. An
attempt by shareholders to challenge this governmental intervention via a class action
failed in 2005. In Malaysia, the so-called Danaharta Act 1998 was used to exert state
control over companies distressed in the wake of the 1997 financial crisis – see M.
Likosky, The Silicon Empire (2005) (Ashgate). A somewhat similar regime called
special administration was applied in the Italian Parmalat insolvency. For a flavour of
the global impact of the Parmalat collapse, see Parmalat Capital Finance Ltd v Food
Holdings Ltd [2008] UKPC 23.
94 As evidenced by the billions of pounds pumped into Northern Rock in
2007–8, finally resulting in the nationalisation of that company. See Banking (Special
Provisions) Act 2008. For comment on Northern Rock, see R. Tomasic (2008) 29 Co
Law 297 and (2008) 29 Co Law 330. For the EU implications of this state support, see
C. Bamford (2008) 29 Co Law 65. A similar, but in this case a public/private, bailout
was extended to Bear Stearns by the US Federal Reserve in March 2008, leading to the
76 National corporate law in a globalised market
lies. The real question is how far this characteristic should intrude into the
mainstream of companies regulation. That very question will exercise the
minds of policymakers and regulators in the months to come.
When considering state control, we need to distinguish between state
control in the general public interest and the notion of state control designed
to protect the direct economic interests of the state. The debate over the use of
golden shares, discussed below in Chapter 4, is apposite here. In post-
privatisation economies, this is a common issue that raises concerns best dealt
with later in this study.
sale of that investment bank to a competitor at a greatly reduced price, reflecting its
current perceived share market valuation. More evidence of Federal intervention came
in the wake of the rescue operation for the leading private financial institutions Fanny
Mae and Freddie Mac in 2008. After refusing to save Lehman from collapse in
September 2008, the Federal government then produced a plan to spend trillions of
dollars in buying up ‘toxic’ debts. Meanwhile, back in the UK at the same time, the
British government waived domestic competition laws to allow Lloyds Bank to take
over Halifax plc as part of a rescue operation. There is evidence that within the EU, the
European Commission is taking a relaxed view of state aids in the wake of the global
financial crisis.
95 R v De Berenger (1814) 3 M & S 67. For a fascinating account of the real
story behind this case featuring Admiral Lord Cochrane as one of the defendants, see
R. Dale, Napoleon is Dead: Lord Cochrane and the Great Stock Exchange Scandal
(2007) (Sutton Publishing). Cochrane was eventually vindicated in 1832, but doubts
still remain as to his culpability. See also D. Cordingly, Cochrane the Dauntless (2007)
(Bloomsbury Publishers) chapter 15. Full details of the trial can be sourced from the
contemporary work of B. Gurney, which is electronically available through Project
Gutenberg.
96 [1902] 2 Ch 421.
97 Coleman v Myers [1977] 2 NZLR 225, Bruninghausen v Glavanics [1999]
NSWCA 199.
Commonality of fundamental principles 77
98 Companies Act 1980 s. 72 – see now Criminal Justice Act 1993, s. 52. Ireland
has favoured civil sanctions but there can be enforcement problems there – see B.
Clarke [2009] JBL 68 for discussion of recent litigation in the Irish courts.
99 On Part V of the Criminal Justice Act 1993, see K. Wotherspoon (1994) 57
MLR 419.
100 The FSA replaced the Securities and Investments Board in 1997.
101 EEC/2003/6. On market abuse, see A. Haynes (2007) 28 Co Law 323.
102 [1998] 2 BCLC 447.
4. Foreign shareholders and non-resident
controllers
Since the dawn of modern company law, overseas shareholders have always
been present on the UK corporate scene, because the City of London has
always been seen as a magnet for foreign capital.2 For example, in the 18th
century foreign investors are believed to have held some 15 per cent of
government bonds. One reason for this was the availability of a capital market
operating within a stable political economy. Moving forward to the 20th
78
Foreign shareholders and non-resident controllers 79
century, as far as public companies are concerned it has been possible for
many years to track the participation rate of the overseas investor. An exami-
nation of the data produced by what is now the Office of National Statistics3
reveals a clear pattern of increasing foreign ‘penetration’ of the UK equities
scene. Focusing on the position for listed companies for various dates over the
past 30 years, the statistics are revealing:
in the West sought fresh capital injections from any available source in the
wake of the worldwide credit crunch.
8 The Navigation Acts 1650–63 were designed to protect the English merchant
fleet, particularly from Dutch competition. They were repealed in 1849. Sir David
Hughes Parry regarded them as a legislative expression of the economic theory of
mercantilism – see (1931) 47 LQR 183 at 198.
9 The Corn Laws restricted the import of foreign corn and were another protec-
tionist measure designed to protect British farmers (at the expense of consumers). They
were repealed in 1846.
10 Princess of Reuss v Bos (1871) LR 5 HL 176.
11 Williams and Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1985] 1 All
ER 619.
12 Bechuanaland Exploration Co v London Trading Bank Ltd [1898] 2 QB 658.
See also Edelstein v Schuler [1902] 2 KB 144 (negotiability of bearer debentures).
Some jurisdictions exemplify a hostility to bearer securities – see the Isle of Man
Companies Act 2006, s. 30.
13 There is a lack of clarity here. The only restriction imposed by English law on
holding shareholder meetings abroad seems to be the unfair prejudice jurisdiction
which has been invoked in this context – see McGuinness v Bremner plc [1988] BCLC
673, where an attempt to delay and then to hold an EGM outside the jurisdiction was
overturned by the Scottish courts. A shareholder has a right at common law to attend
and vote at meetings. This issue of the venue for meetings was commented upon in the
First Report of the Irish Company Law Review Group – see para 6.5.7, where it was
noted that there is no right to hold an AGM abroad unless this is permitted by the arti-
cles or unless the shareholders agree. The possibility of holding company meetings
outside the jurisdiction is envisaged by the Isle of Man Companies Act 2006, s. 67(3).
14 Formerly s. 362 of and Sched 14 to CA 1985.
Foreign shareholders and non-resident controllers 81
15 [1988] 1 Ch 87.
16 Adelaide Electric Supply Co Ltd v Prudential Assurance Co Ltd [1934] AC
122.
17 See Miliangos v Geo Frank Textiles Ltd [1976] AC 443 – discussed in R.
Bowles and J. Phillips (1976) 39 MLR 196 and F.A. Mann (1976) 92 LQR 165. Having
said that, it is a rule of liquidation law that for matters of administrative convenience,
proof of debts must be converted into equivalent sterling amounts at the date of liqui-
dation – Re Lines Brothers Ltd [1983] Ch 1. For currency conversion processes in the
context of a scheme of arrangement, see Re Telewest Communications (No. 2) [2005]
1 BCLC 772.
82 National corporate law in a globalised market
(ii) In the case of a plc, there must be at least £50,000 worth of shares denom-
inated in sterling in order to comply with the terms of s. 118 of the
Companies Act 1985 (see now CA 2006, s. 763).
Although foreign shareholders are welcome, they are only received on the
understanding that they become subject to the same obligations as native
shareholders. This fundamental point was exemplified by Re FH Lloyd
Holdings plc.31 Here we were concerned with the rules contained in what
became Companies Act 1985, Part VI (now Part 22 of the Companies Act
2006), requiring those investors acquiring beneficial interests in UK public
companies to disclose the nature of that interest. In order to circumvent that
obligation, it has become the practice for reclusive acquirers to hide behind
foreign nominees. Typically, such investors would build up a strategic stake in
a UK company in a clandestine fashion and then would pounce in the market
through what became known as a ‘dawn raid’,32 denying the directors of the
company any opportunity to react. To counteract this stratagem, the law
enables the company to apply to the court for a freezing order on the shares
registered against the name of the nominee, if the nominee refuses to identify
the real beneficial owner.33 This was similar to the scenario that presented
itself to the court in this case. Here the foreign nominee (for whose interme-
diate benefit shares were held by an English nominee) faced with the possi-
bility of being subjected to a share-freezing order was an institution based in
Luxembourg and it refused to disclose the identity of its client (the beneficial
share owner), possibly because to do so would result in an infringement of
Luxembourg law. Nourse J ruled that those foreign shareholders who acquire
However, I would add this caveat. I have some unease as to the practice, which
appears to become standard in the City, of not directly communicating a takeover
34 Ibid at 299.
35 Notwithstanding the apparently uncompromising approach reflected in the
above quotation, the English courts have acknowledged that a foreign shareholder may
be given a short period of grace to enable advice to be taken on the position under
English law – Re Lonrho plc (No. 2) [1989] BCLC 309. Here the court had to weigh
speed of communication against the need to respect local religious practices and days
of observance.
36 [2002] BCC 174. Similar reasoning may be said to explain the decision in
Mutual Life Insurance Co of New York v The Rank Organisation [1985] BCLC 11. See
also Parkstone Ltd v Gulf Guarantee Bank plc [1990] BCC 534, which offers another
illustration of the practical difficulties that can arise when communicating with foreign
shareholders. Here Warner J adopted a flexible interpretation of the articles to facilitate
the sending of postal notices to shareholders based in Gibraltar.
37 Ibid at 196.
86 National corporate law in a globalised market
38 For an account of the legal issues associated with privatisation, see C. Graham
and T. Prosser (1987) 50 MLR 16, C. Graham (1988) 9 Co Law 23 and A.P.
Rutabanzibwa (1996) 17 Co Law 40.
39 See M. Likosky, The Silicon Empire: Law, Culture and Commerce: Global
Perspectives (2005) (Ashgate) at 44–51. Privatisation, the brainchild of the Thatcher
government in the 1990s, has spread as a commercial culture across Europe and to many
jurisdictions whose economies were formerly dominated by a state-controlled sector.
Complicated transitional issues can arise where an enterprise is switched between public
and private owners and vice versa – see R (on the application of National Grid Gas plc
[formerly Transco plc] v Environmental Agency [2007] UKHL 30.
40 See (2004) 25 Co Law 244.
Foreign shareholders and non-resident controllers 87
but were still being maintained (and, in some cases, introduced) in other EU
states. The principles governing this usage of ‘golden shares’ were explained
in June 2002 by the European Court of Justice in Portugal et al v Commission
(Cases C367/98 and C483/99).41 In this instance, the Court of Justice was
invited to give its views on three ‘golden share’ arrangements adopted respec-
tively by the Portuguese, French and Belgian governments. The Portuguese
arrangement related to privatisation issues in general, and capped foreign
shareholders. The European Court of Justice ruled that this arrangement could
not be objectively justified. In the case of the French ‘golden share’, in an oil
company, the restriction was rejected. Again, the approach of the Court was to
rule this arrangement to be contrary to EU law and unjustified. In the third
case, that involving the Belgian veto designed to protect its energy supplies,
the Court of Justice here found in favour of the Belgian government.
Transparency and proportionality linked to a real public need seem to be the
essential requirements for a golden share or equivalent regime to survive
scrutiny by the ECJ. The reluctance of national governments to accept this loss
of state control was apparent by virtue of the fact that some twelve months
after this ECJ ruling, Portugal had to be reminded of the need to comply. A
similar approach was taken by the European Court of Justice in Commission v
Italy (C58/99),42 where Italian privatisation laws that retained special powers
for the state in the privatised companies were found to be incompatible with
freedom of establishment and free movement of capital.
Subsequent to these cases, other proceedings have arrived at the door of the
Court of Justice. In Commission v Spain (C463/00)43 and the Commission v
UK (C98/01),44 it was necessary to give judgment on the legality of a general
Spanish privatisation law and on the ‘golden share’ in British Airport
Authorities (BAA), which capped foreign share ownership in the company. In
both instances, a finding of incompatibility was made, with the restrictions
being unjustified. In the case of BAA, it was seen as an unwarranted restric-
tion on free movement of capital. Other cases of similar ilk and portent are
Commission v Italy (C174/04)45 and Commission v Netherlands (C282 and
283/04).46
‘Golden shares’ are not the only devices which can be used to restrict
foreign acquisitions. Witness the so-called ‘Volkswagen law’, which restricted
voting rights in Volkswagen to prevent any shareholder having more votes
41 [2003] 2 WLR 1.
42 [Unreported]. See also Commission v Belgium (C503/99) [2002] ECR I-4809.
43 [2003] ECR I-4581.
44 [2003] ECR I-4641.
45 [2005] ECR I-4933.
46 [2006] ECR I-9141.
88 National corporate law in a globalised market
than the state of Saxony, thereby effectively blocking a foreign takeover. This
arrangement was struck down by the European Court of Justice in Commission
v Germany (C112/05) in 2007.47
The conclusion must therefore be that each case turns on its own facts,
though with a strong presumption that ‘golden shares’ (and comparable
arrangements) do indeed infringe EU law. Had these rulings been handed
down 20 years ago, they would have had serious implications for UK privati-
sation policy. As it happens, the British government has quietly abandoned
most of its ‘golden share’ arrangements.48 A blemish on the face of our open-
door policy has fortunately been swept away.
I can see no reasons of comity which would prevent those who voluntarily were
officers or otherwise participated in the formation or running of an English
company being capable of being summoned by the English court for the purposes
of public examination.57
The efficient and thorough conduct of such investigation by the official receiver is
of great public importance, as several recent notorious cases have demonstrated.
This process would be frustrated if, for example, a director, who had with the aid of
modern methods of communication run the company entirely from abroad, was
immune from public examination . . . The same applies to a director who has
defrauded the company in England and then absconded abroad shortly before the
liquidation.58
In Re Seagull Manufacturing Co Ltd (No 2),59 much the same point was made
by the judge, Mary Arden QC, in the context of the operation of the director
disqualification regime against non-resident directors. Here the judge
dismissed an application to restrain the commencement of director disqualifi-
cation proceedings against a director who was not present in the jurisdiction in
circumstances where the alleged misdeeds may have occurred outside the
jurisdiction. Mary Arden QC ruled that s. 6 of the Company Directors
Disqualification Act 1986 was meant to have extraterritorial effect:
Accordingly, in my judgment, Parliament must be presumed to have been legislat-
ing not simply for British subjects and foreigners who happened to be here at the
relevant time, but also for other foreigners who were out of the jurisdiction at the
critical time. Likewise, in relation to conduct, section 6(1) contains no territorial
restriction. Accordingly, the court must ask what is the conduct in respect of which
Parliament must have been presumed to have been legislating?60
She continued:
Secondly, in these days of modern communications, a person may conduct himself
as a director in such a way as to affect persons within the jurisdiction without
himself ever entering the jurisdiction. Again, in my judgment, Parliament must be
presumed to have been legislating with this in mind, and, accordingly, by plain
implication, to be taken to have been referring to conduct wherever committed.62
58 Ibid at 250.
59 [1993] BCC 833. A director can be disqualified even if his COMI is located
abroad – Official Receiver v Stojevic [2007] EWHC 1186 (Ch), [2008] Bus L R 641. In
Ireland similarly, it has been held that a restriction order can be granted against a non-
resident director – Fennel v Frost [2003] 1 IR 80 and O’Ferral v Coughlan [2004] 4
IR 266.
60 [1993] BCC 833 at 841.
61 Ibid at 841.
62 Ibid at 841.
Foreign shareholders and non-resident controllers 91
Non-residence arguably was one of the reasons for the imposition of a 12-
year disqualification in respect of an individual in Official Receiver v Vass63
who had based himself offshore in Sark and had taken on no fewer than 1313
directorships of UK companies with complete disregard for the attendant
responsibilities!
This judicial policy was taken a step further in Re Howard Holdings Inc64
where the English courts indicated that foreign non-resident directors of a
foreign company, which was being wound up under English law, could in
theory become subject to wrongful trading liabilities pursuant to s. 214 of the
Insolvency Act 1986.
In Re Mid East Trading Ltd,65 the investigative procedures in s. 236 of the
Insolvency Act 1986 were made available to the liquidators of a foreign
company being wound up within the jurisdiction to permit the production of
documents located overseas. Although the case does not focus upon action
taken against foreign-based officers, the points made in the judgment by the
Court of Appeal on the need to balance carefully competing interests are appo-
site. Any extension of sovereignty must be justified.
Although legal systems can deal with the non-residence issue by stretching
the meaning of substantive problems, there is no denying the practical diffi-
culties involved in imposing corporate law standards against directors who are
outwith the jurisdiction. This point was noted in Ireland in the First Report of
the Company Law Review Group with regard to the difficulties often encoun-
tered in prosecuting such individuals.66
63 [1999] BCC 516. See the news item in (1999) 20 Co Law 117 and L. Hitchens
[2000] CFILR 359.
64 [1998] BCC 549 – noted by K. Dawson in [1999] Ins Law 67.
65 [1998] BCC 726.
66 See para 8.3.15, where it was suggested that changes should be made in the
rules on service of prosecution papers to address this difficulty.
67 [1907] 2 Ch 458.
92 National corporate law in a globalised market
immaterial. The potential for abuse here was exemplified by Official Receiver
v Brady,68 where Jersey-based companies were used as part of a scheme
designed to disguise the participation of certain individuals in UK companies.
Most jurisdictions do not take such a liberal approach. Even the offshore juris-
diction of the Isle of Man banned corporate directors until the enactment of
reforms in 2006 (see Chapter 1 above). Ireland maintained its position of
opposition in the First Report of the Company Law Review Group.69 The posi-
tion in English law has been reviewed recently. At one stage, it seemed likely
that a prohibition would be introduced on corporate directors.70 The govern-
ment71 has backed away from this draconian option (possibly because of the
fact that there are many thousands of corporate directors recorded at present
and to replace all of these would be a massive task). Instead, the new rule,
which is now applied under s.155 of the Companies Act 2006 with effect from
1 October 2008, is that every company must have at least one natural person
acting as a director. If that requirement is met, corporate directors are still
viewed as acceptable. It remains to be seen if this classic British compromise
achieves the desired goal of eliminating the perceived abuse.
68[1999] BCC 259. See also the case mentioned by R. Goddard in (2007) 28 Co
Law 281 – based on Re Citylink Ltd [2005] EWHC 2875 (Ch).
69 (2001) para 11.8.10.
70 See Company Law Review, Final Report (URN 01/942).
71 See White Paper (Cm 6456) (2005).
5. Reception of overseas companies by
the English legal system1
93
94 National corporate law in a globalised market
2 DEFINITION
The law on overseas companies (that is, companies incorporated outside Great
Britain) is dealt with by Part 23 of the Companies Act 1985, which will be
replaced by Part 34 of the Companies Act 2006 with effect from October 2009.
Where do companies incorporated in other parts of the UK or the British
Isles fit into the picture?
Companies incorporated in Scotland are not within the scope of Part 23, but
are covered by the Companies Acts and Insolvency Act generally, unless
specific excusion is provided for.13 As far as Scotland is concerned, the posi-
tion is reflected by Re Baby Moon Ltd,14 where the distinctive nature of the
English and Scottish systems was stressed in the context of the English
winding-up jurisdiction.
The position is different vis-à-vis Northern Irish companies, which at
present fall outside the scope of the Companies Acts and the Insolvency Act.15
Northern Irish companies at present rank as oversea companies and there are
91 such companies registered under Part 23. The position has changed now
that the Companies Act 2006 has come into force, because s. 1284 extends the
Companies Acts to Northern Ireland.
Companies incorporated in Channel Islands jurisdictions16 and in the Isle
of Man17 also deserve special mention. They both fall within the parameters
of Part 23. Companies statistics indicate that there are 476 and 515 respec-
tively of these companies operating in the jurisdiction. In Curragh Investments
v Cooke,18 the court treated an Isle of Man company as an overseas company.
A second option would be to seek formal recognition for the foreign company
under English law. In English law, this is achieved by registration under Part
XXIII of the Companies Act 1985 (now Part 34 of the Companies Act 2006).
The registration process is painless and there are no risks that registration
would be refused.21 Statistics covering companies registered under Part XXIII
are revealing. In the DTI Companies Annual Report for 2005–6,22 we learn
that of 8066 registered overseas companies:
Compare this with the figures for 1993–4 where the total of registered overseas
companies was only 4881; we thus have a significant increase over the last
decade. In 1987/8, the equivalent figure was 3749; the total has now doubled in
two decades. Having said that, the total is still only a small drop in the ocean
when compared to the two million plus registered companies in Great Britain.
For many years, the legal rules here were settled. A separate legal regime
for overseas companies had been constructed on the recommendation of the
Loreburn Committee23 way back at the start of the 20th century. That regime
operated without major problems. So, for instance, the Jenkins Committee24 in
1962 concluded that it was fundamentally sound and needed only minor
surgery. Part XXIII of the Companies Act 1985 was engaged when the foreign
company established a place of business within the jurisdiction. Much
jurisprudence evolved around the concept of establishing a place of business;
the degree of permanence in the link was important.25 The waters here were
muddied26 by the transposition of the 11th EC Company Law Harmonisation
Directive (1989/666) into English law. This Directive used as its critical
element the concept of a ‘branch’, an idea well understood by continental
lawyers but new to their English counterparts. In Etablissement Somafer SA v
Saar-Ferngas AG (C33/78),27 a case dealing with jurisdiction under the
Brussels Convention, a ‘branch’ was defined as:
A place of business which has the appearance of permanency, such as the extension
of a parent body, has a management and is materially equipped to negotiate busi-
ness with third parties so that the latter, although knowing that there will, if neces-
sary, be a legal link with the parent body, the head office of which is abroad, do not
have to deal directly with such parent body but may transact business at the place
of business constituing the extension.28
Thirdly, the foreign entity may seek to disregard both of the previous options.
What are the consequences of such behaviour? The legal status of the foreign
entity would still be recognised in English law. Moreover, any contracts made
by it would remain enforceable. In Curragh Investments v Cooke,32 which was
mentioned above, contracts made by an Isle of Man company in this country
in circumstances where the company had failed to fulfil its obligations under
Part XXIII were held to be enforceable. The court reasoned that, although
invalidity may be used as a sanction to support a criminal penalty, there has to
be a point of connection between the breach of the technical provision and the
use of a civil avoidance sanction. The court could find no such logical connec-
tion in this particular instance.33
4.4 Redomestication34
A route that is not often chosen is to redomesticate the foreign company under
English law. As far as English law35 (and many other legal systems) are
concerned, this is not an attractive option, as it would involve dissolution in
the home jurisdiction and incorporation in this country.36 Moreover, it is not
possible to simply move a company’s registered office from one EU Member
State to another.37 Needless to say, any transition involving dissolution is
fraught with legal difficulty, threatens goodwill and therefore is not used
widely. A private Act of Parliament, a time-consuming and expensive process,
may be required for such a redomestication.38 It is contrary to company law
32 [1974] 1 WLR 1559. The Jenkins Committee (1962, Cmnd 1749) para 515
would have applauded this ruling.
33 See the comments of Megarry J, ibid at 1564.
34 For an excellent review of this subject, see D. Lewis (1995) 16 Co Law 295.
35 Under the Manx Companies Act 2006, s. 162, foreign companies can simply
adopt the 2006 Act, thereby creating a form of redomestication by continuation.
36 For an insight into some of the issues that can arise, see Re Datadeck Ltd
[1998] BCC 694 (redomestication of an English company to Delaware).
37 Daily Mail (C81/87) [1988] ECR 5483. For comment, see C. Schmitthoff
[1988] JBL 454.
38 Note The Henry Johnson, Son & Co Ltd Act 1996. See D Lewis (op. cit. note
34) at 297 for comment.
100 National corporate law in a globalised market
39 Bateman v Service (1881) 6 App Cas 386. See P. Smart [1990] JBL 126.
40 See Isle of Man Companies Act 2006, ss. 162 and 167, which allow both
foreign companies and local companies to redomesticate provided they are solvent.
These provisions appear to date back to 2003 – see (2004) 25 Co Law 114. Note also
the Companies (Redomiciliation) Regulations 1996 in Gibraltar.
41 URN 01/942 especially at paras 14.3 et seq.
42 Under s. 442 of the Insolvency Act 1986, an order in council can extend the
Act to companies from the Channel Islands.
43 [1987] 3 BCC 369 – decision was reversed by Court of Appeal ([1988] BCLC
710), but on grounds unrelated to the preincorporation point.
Reception of overseas companies by the English legal system 101
The inconvenience of this decision was quickly recognised and the case was
neutralised by the Foreign Companies (Execution of Documents) Regulations
1994.44 These regulations in turn will be superseded by Part 2 of the Draft
Overseas Companies (Company Contracts and Registration of Charges)
Regulations 2009).
In Re Dallhold Estates Pty Ltd, 45 Chadwick J sitting in the High Court was
required to decide whether a company incorporated in Western Australia could
enter into administration under English law. Possibly relying on comments of
Hirst J in the case of Felixstowe Dock and Rwy Co v US Lines Inc,46 the court
proceeded on the basis that the provision in s. 8 of the Insolvency Act 1986 did
not apply to foreign companies. Having drawn this inference, the court rescued
the position by invoking the judicial comity facility embodied in s. 426 of the
Insolvency Act 1986 to produce the desired effect (see Chapter 6 below).
A variant on this interpretative conundrum surfaced in Arab Bank v
Mercantile Holdings.47 Here Millett J was invited to decide whether the word
subsidiary when used in the Companies Act 1985, s. 151 (which prohibits
subsidiaries giving financial assistance to the acquisition of shares in their
parent) was restricted to domestic subsidiaries or whether it encompassed
foreign subsidiary companies. According to Millett J, the former construction
was to be preferred, with the consequence that a foreign subsidiary could
financially assist the acquisition of shares in the parent.48 This, of course,
assumed that such behaviour was not illegal under the law of the place of
incorporation. Furthermore, as Millett J was at pains to stress, the setting up of
a foreign subsidiary simply to evade the restrictions imposed by s. 151 would
not be tolerated by the English courts. This approach towards the interpreta-
tion of the financial assistance bar has recently been followed by Evans-
Lombe J in AMG Global Nominees (Private) Ltd v SMM Holdings Ltd.49
In Re International Bulk Commodities,50 the interpretative question
involved s. 29 of the Insolvency Act 1986. Did this permit a foreign company
to be placed into administrative receivership under English law? This question
was answered in the affirmative.
The availability to a foreign company of the corporate reconstruction
procedure mapped out by ss. 425–7 of the Companies Act 1985 (ss. 895–901
44 SI 1994/950.
45 [1992] BCC 394.
46 [1989] QB 360. See I. Fletcher [1993] 6 Ins Intell 10.
47 [1993] BCC 816.
48 This precedent has apparently been confirmed by the Companies Act 2006 –
see para 991 in the Explanatory Notes to the Act.
49 [2008] 1 BCLC 447. Confirmed on appeal sub nomine AMG Global
Nominees (Private) Ltd v Africa Resources Ltd [2008] EWCA Civ 1262.
50 [1992] 3 WLR 238.
102 National corporate law in a globalised market
of CA 2006) was the issue at stake in Re Drax Holdings Ltd.51 The court
(Lawrence Collins J) found no difficulty in holding that a scheme of arrange-
ment was available. Here the company had been incorporated in the Cayman
Islands, but was running a power station in this country: clear evidence of a
sufficient jurisdictional link. A similar conclusion was arrived at in Re The
Home Insurance Co,52 where a company incorporated in New Hampshire was
permitted by Mann J to exploit the scheme of arrangement procedure. To
permit this to happen did not infringe the concept of comity. In Re La Mutuelle
de Mans Assurance,53 Pumfrey J followed this line of authority and held that,
as the French insurer was not covered by the jurisdictional rules in the EC
Regulation on Insolvency Proceedings (1346/2000), it could in theory be
wound up under English law and, therefore, in fact was eligible for recon-
struction under ss. 425–7. This point at least therefore appears to be well
settled.
Issues of the applicability of English law to foreign companies have
cropped up with regard to the operation of director disqualification orders
handed down by the English courts. In Official Receiver v Stern (No. 2),54 the
Court of Appeal held the English courts, in spite of the uncertainty as to the
position, did indeed have the power to extend any disqualification of a direc-
tor to his/her actions in respect of a foreign company operating here. Lloyd J
explained:55
Nor do I accept that the public, with whose protection the court is concerned, is only
the public in the UK, or for that matter, in England and Wales. The effect of a
disqualification order is defined by the Act so as to extend to foreign companies and
therefore it is clear that an effective order from which no relevant exception is made
will have, or is capable of having, a protective effect in relation to some foreign
classes of actual or potential creditors.
51[2004] 1 BCLC 10. See also Re DAP Holdings [2006] BCC 22 and Re
Sovereign Marine and General Insurance Co Ltd [2006] EWHC 1335 (Ch), [2006]
BCC 774.
52 [2005] EWHC 2485 (Ch), [2006] BCC 164.
53 [2005] EWHC 1599 (Ch), [2006] BCC 11.
54 [2001] BCC 305.
55 Ibid at 358.
Reception of overseas companies by the English legal system 103
At the beginning of this chapter, we noted the desire of the English legal
system to attract foreign parties to litigate in this country. However, there is a
catch – where an overseas non-resident party wishes to commence litigation in
the English courts, it runs the risk of being required to pay a deposit in the
form of security for costs.62 This risk existed for all limited liability compa-
nies, no matter where resident, as section 726 of the Companies Act 1985
made clear. Under s. 726 (now conflated within CPR, r. 25.13),63 any corpo-
rate claimant that appears to be unlikely to meet an adverse costs award can
be required to provide security for costs. However, the risk is exacerbated for
non-residents, because under Civil Procedure Rule 25.13, the court may
require such security to be furnished irrespective of the financial standing of
the company in question. Under Rule 25.13, security may be ordered in the
case of a company not resident in a Brussels/Lugano Convention territory,
60 See I. MacNeil and A. Lau (2001) 50 ICLQ 787 for a lucid analysis.
61 For discussion of the position of foreign issuers in the US, see M.J. Lunt
[2006] JBL 249.
62 See D. Milman in B. Rider (ed.), The Realm of Company Law (Kluwer)
(1998) 167–81. For an up to-date review of the subject, see J. Ching (2009) 28 CJQ 89.
A defendant who is raising substantial counterclaims may be treated as a claimant for
these purposes – Thistle Hotels Ltd v Orb Estates plc [2004] 2 BCLC 174.
63 See Jirehouse Capital v Beller [2008] EWCA Civ 908, [2008] BPIR 1498 for
analysis of CPR 25.13.
Reception of overseas companies by the English legal system 105
even if there are no questions about its ability to meet the costs of the proceed-
ings. How has that jurisdiction been exercised?
In Little Olympian Each-Ways Ltd (No. 2),64 the position was that a Jersey
company was treated as ordinarily resident overseas with the result that it
became susceptible to a security for costs order. It is difficult to see how
Lindsay J could have come to any other conclusion on the particular facts of
this case.
Attitudes in this area are changing. Within the EU, it is not possible by
virtue of Art 12 EEC to impose national65 discriminatory requirements and
indirectly this would cover discrimination based upon residence. Moreover,
Art 14 of the European Convention on Human Rights, with its prohibition
on discrimination, should also be noted in this context. In Texuna
International Ltd v Cain Energy plc,66 the court indicated that to order secu-
rity for costs simply because the claimant was non-resident might well
infringe the fundamental expectations embodied in Art 14. On the facts of
this case, Gross J ordered security for costs to be paid; the company was
incorporated in Hong Kong and although its directors were resident here, the
evidence suggested that it had not paid tax in this country and so must be
deemed to be non-resident. The additional expense in enforcing a costs order
abroad was a relevant consideration when considering an order for security
for costs.
At the end of the day, all factors need to be evaluated by the court before
making an order for security for costs in such circumstances. Non-residence is
a factor, but is no longer a major consideration in its own right.67 The making
of security for costs orders against foreign or non-resident companies as a
knee-jerk response looks to be a thing of the past.68 Companies litigation is
thus evolving in this respect in reflection of a changing world.
the English courts? This to a large extent depends upon principles of private
international law.69
Even if the jurisdictional hurdle is overcome, there is the question of
service of proceedings. Under current rules, if the intended defendant has
established a place of business for the purposes of the Companies Act, then
proceedings can be served at that location.70 What constitutes ‘establishing a
place of business’ has occupied much judicial effort. There is clearly some
requirement for a substantial link,71 but it does not have to be a company’s
main place of business. The occupation of premises for business purposes
would suffice,72 but this is not an absolute prerequisite. Merely having an
agent (as opposed to having employees) located in the jurisdiction would not
be viewed as sufficient.73 Equally, if there is a branch, that can be an appro-
priate venue for service.74 In Saab v Saudi American Bank,75 the Court of
Appeal held that if there was a place of business suitable for service within the
terms of s. 694A of the Companies Act 1985, the fact that the litigation did not
exclusively relate to matters carried on at that branch was immaterial.
The above rules have their flaws. So, in Rome v Punjab Bank (No. 2),76 a
company established a place of business and gave an address for service. It
then ceased to have an established place of business, but the court held that
proceedings could still be served against it at the nominated address.
These dedicated company law solutions must now be viewed alongside the
Civil Procedure Rules, which complicate matters further. Under CPR,
r. 6.5(6), proceedings can be served at a place of business. The difference
between this more relaxed test and the stricter criterion applied by s. 695 of the
Companies Act 1985 was noted by the Court of Appeal in Lakah Group v al-
Jazeera Satellite Channel.77
Under s. 1139(2) of the Companies Act 2006, a general provision which
applies to overseas companies, the position will be that valid service is
(1) This Chapter extends to charges on property in England and Wales which are
created, and to charges on property in England and Wales which is acquired, by a
company (whether a company within the meaning of this Act or not) incorporated
outside Great Britain which has an established place of business in England and
Wales.
(2) In relation to such a company, sections 406 and 407 apply with the substitution,
for the reference to the company’s registered office, of a reference to its principal
place of business in England and Wales.
79 [1980] 1 WLR 1076 – see A. Boyle (1980) 1 Co Law 214, D. Milman (1981)
125 SJ 294.
80 For details of the Slavenburg register, see Companies House website at
www.companieshouse.gov.uk. Note also Arthur D Little Ltd v Ableco Finance LLC
[2002] 2 BCLC 799 – noted by I. Fletcher [2004] 17 Ins Intell 61.
81 A Review of Security Interests in Property (1989). For discussion of the report
of the Diamond Committee, see M. Lawson [1989] JBL 287.
82 [1986] 1 WLR 180. See also Re Alton Corporation [1985] BCLC 27.
83 This distinction, which has been made in other cases such as Stojevic v
Komercni Banka AS [2007] BPIR 141, reflects the orthodox legal distinction between
the identity of the company and that of its controller. Where a director is present in a
jurisdiction to attend to a company’s affairs, this does not mean that the centre of main
interests is also located there.
Reception of overseas companies by the English legal system 109
1 EXTRATERRITORIALITY
It is somewhat ironic, bearing in mind the constructive theme of this chapter, but
we must first address the concept of the aggressive extraterritorial application of
national law. In a globalised economy, domestic courts will increasingly be
called upon to deal with parties or assets located in foreign jurisdictions. A range
of strategies has emerged to combat this problem. One controversial methodol-
ogy is to apply directly English law beyond the shores of this jurisdiction – that
is, in an ‘extraterritorial’ fashion. This is a vexed issue in international law gener-
ally.1 The legal device of extraterritoriality is used extensively by the US courts,
but only where sanctioned by Act of Congress.2 A few examples will show the
potential for usage of this strategy in English law.
The general principle is that provisions in the Companies Acts do not apply
extraterritorially.3 This reflects the general stance of English law.4 So, for
110
Cooperation with foreign courts and overseas regulators 111
5 [1997] BCC 907. Having so decided, the court affirmed its inherent jurisdic-
tion to prevent creditors from retaining the benefits of a foreign execution by granting
what was in effect an anti-suit injunction, though such a power was to be exercised
sparingly.
6 [1992] 3 WLR 690.
7 Compare BNC v Cosmos Trading Corp [2000] BCC 90 – refusal to make an
s. 238 order because of the protective effect of state immunity.
8 [2005] BPIR 220.
9 [1999] 2 BCLC 101 – for comment, see K. Dawson in [2000] Ins Law 81 and
(2000) 21 Co Law 132.
10 [1998] BCC 726.
112 National corporate law in a globalised market
In our view there is force in the submission that, in so far as the making of an order
under s. 236 of the Insolvency Act 1986 in respect of documents which are abroad
does involve an assertion of sovereignty, then that is an assertion which the legisla-
ture must be taken to have intended the courts to make in an appropriate case.11
Having made that point, it was conceded that at the end of the day, the court
must conduct a balancing exercise and will take account of the fact that
compliance with the s. 236 order may expose a party abroad to criminal liabil-
ity for breach of confidentiality in that foreign jurisdiction.
The use of extraterritoriality inevitably involves service of process out of
the jurisdiction. The general rules are now found in Civil Procedure Rules (SI
1998/3132 as amended) (in particular CPR 6.21).12 For insolvency cases in
particular, it is Insolvency Rules 1986 (SI 1986/1925) r. 12.12 which deter-
mines the appropriate procedures and requires the leave of the court before
insolvency proceedings can be served out of the jurisdiction.13 There are limits
to the ambit of Insolvency Rule 12.12. For instance, it only covers the service
of ‘proceedings’; not the serving of notice of creditors’ meetings. This point
was emphasised by David Richards J in Re T & N Ltd,14 where it was held that
the leave of the court was not required to give notice of a CVA creditors’ meet-
ing to foreign creditors and this conclusion will do much to reassure practi-
tioners, who increasingly these days are faced with foreign creditors of
English businesses. Any additional procedural burdens would be most unwel-
come because of their attendant cost implications.
2 JUDICIAL COMITY
Asserting extraterritorial jurisdiction is hardly a diplomatic or constructive
way forward in the modern world. Fortunately, for many years a principle of
judicial comity between courts of different nations has emerged as an alterna-
tive way forward. Comity has many aspects to it. Clearly, there is an element
of reciprocity involved; and therefore comity will only be extended to the
11 Ibid at 754.
12 See Re Krug International (UK) Ltd [2008] EWHC 2256 (Ch), [2008] BPIR
1512.
13 A. Walters, I.G. Williams and H.M. Marsh [2006] (19) Ins Intell 58.
14 [2006] EWHC 842 (Ch).
Cooperation with foreign courts and overseas regulators 113
courts of those foreign jurisdictions that in turn extend their comity to the UK
courts. The comity approach might result in the recognition of foreign entities,
a process described in Chapter 5. It could more often feature practical cooper-
ation between courts in particular cases. It might lead to a policy of non-inter-
vention in foreign legal processes.15 It could involve the enforcement of
foreign judgments.16
One formal legal instrument used to access judicial comity is the letter of
request.17 This is a procedure whereby a foreign court at the behest of an appli-
cant seeks the assistance of the English courts. In the specific area of insol-
vency law, s. 426 of the Insolvency Act 1986 provides an opportunity for the
English courts to support requests for assistance from foreign courts based in
specified jurisdictions.18 This procedure has its origins in s. 122 of the
Bankruptcy Act 1914.19 The Cork Committee on Insolvency Law and
Practice20 recommended that this facility should be further developed.
Essentially, the procedure under s. 426 involves a party applying to their local
court in order to get that local court to request assistance in an insolvency
matter. The assistance sought must be particularised. There is no direct right
of application to the English courts; the existence of this local judicial filter is
therefore significant. Another restriction imposed on the jurisdiction is that it
is only available if the request is made from a court in a scheduled territory –
various statutory instruments21 have been made identifying these territories
and they are essentially countries that were at some stage former British
colonies. This makes practical sense, as the insolvency laws of such countries
will often embody familiar basic legal principles. If the application is proce-
durally well founded, the English courts have a range of options at their
15 See Mitchell v Carter [1997] BCC 907 at 913 per Millett LJ. Note New
Hampshire Insurance Co v Rush & Tompkins Group [1998] 2 BCLC 471, where the
English courts refused to wind up a foreign company that was already undergoing
insolvency proceedings in the Netherlands. The creditors would be adequately
protected under Dutch law.
16 Under the Foreign Judgments (Reciprocal Enforcement) Act 1933 – for the
relevance of this legislation in determining forum, see Konamaneni v Rolls Royce
Industrial Power (India) Ltd [2002] 1 BCLC 336 at 370 [para 131].
17 On the limitations of letters of request (or letters rogatory), see Re
International Power Industries NV [1985] BCLC 128.
18 The jurisdictions are specified by statutory instrument (see SI 1986/2123, SI
1996/253, SI 1998/2766) – essentially they are a selection of common law jurisdictions
– see L.S. Sealy and D. Milman, Annotated Guide to Insolvency Legislation (11th
edition, 2008) (Sweet & Maxwell) at 476 for the full list of jurisdictions falling within
the ambit of s. 426.
19 For discussion, see Al Sabah v Grupo Torras [2005] BPIR 544.
20 Cmnd 8558, Chapter 49.
21 See SI 1986/2123, SI 1996/253, SI 1998/2766.
114 National corporate law in a globalised market
22 See P. Smart (1996) 112 LQR 397, (1998) 114 LQR 46, I. Fletcher [1997] JBL
471, P. Omar [2003] Ins Law 74, W. Trower [2004] 17 Ins Intell 136.
23 [1997] BCC 921.
24 [2006] EWCA Civ 732. See also Re Focus Insurance Co Ltd [1996] BCC 659
for a similar refusal of comity.
25 [2008] UKHL 21, [2008] BCC 349.
26 See G. Moss [2008] 22 Ins Intell 145 and J. Bannister [2008] (232) SMCLN
1.
27 [1992] BCC 394. Compare Re Maxwell Communications Corp (No. 3) [1995]
1 BCLC 501, where Vinelott J refused to let a US attorney conduct an s. 236 interro-
gation. This case did not involve a request for assistance under s. 426 and turned rather
upon the interpretation of s. 236.
Cooperation with foreign courts and overseas regulators 115
available to hedge funds32 based in the Cayman Islands. The decision appears
to turn on a lack of COMI. An appeal in this high profile case was heard by
District Judge Sweet, who upheld the first instance ruling.33
3 PROTOCOLS
Another device that has evolved is the use of a judicial protocol or concordat
between courts. An early example of its usage is found in the aftermath of the
Maxwell Communications Corporation collapse.34 Although welcome, such
concordats smack of ad hoc solutions brought about by the lack of a more
formal framework.
Advances in communications technology have opened up further avenues
for collaboration. For example, video conferencing between courts located in
different jurisdictions is now a real option. The courts will not, however,
always embrace new technology if there are concerns that it will be detrimen-
tal to the administration of justice in English law. In Re T & N Ltd,35 David
Richards J refused to agree to a conference call arrangement with a US court
in the context of resolving the affairs of companies which were undergoing
Chapter 11 bankruptcy proceedings in the US and administration under
English law. A protocol had already been agreed between the courts of the two
jurisdictions, but David Richards J refused to comply with the request for a
conference call because the matters which it was intended to discuss (deter-
mination of quantum of asbestos-related liabilities) were so controversial as to
require careful handling. These contested issues were likely to be addressed in
the English courts. Where a matter was so much in dispute between the parties,
it would not be appropriate for a conference call to make binding rulings on
the issue. The request to use this facility was viewed as premature. In
commenting ex cathedra on this type of scenario, Mr Justice Lightman has
gone on record as stating that telephone conferences with foreign courts are
acceptable provided adequate safeguards are put in place. These safeguards
32 For the problems of regulating hedge funds, see J. Harris (2007) 28 Co Law
277 and H. McVea (2007) 27 Leg Studs 709. See also Chapter 9.
33 See G. Moss [2008] 22 Ins Intell 27 and [2008] 22 Ins Intell 118 for critique
– ‘Bitter Pill is Delivered by Judge Sweet’.
34 For discussion of the Maxwell concordat, see Glidewell LJ in Barclays Bank
v Homan [1992] BCC 757 at 769. See also chapter 5 in J. Flood and E. Skordaki,
Insolvency Practitioners and Big Insolvencies (1995) (ACCA Research Report No.
43). Mark Homan in [2002] 15 Ins Intell 60 at 62 points out the limitations of such
concordats.
35 [2004] EWHC 2878 (Ch), [2005] BCC 982.
Cooperation with foreign courts and overseas regulators 117
require all parties to participate in the telephone conference and for that
conference to be transcribed.36
tion and similar restriction orders (such as those used in Ireland). Such orders
will prevent individuals who are subject to foreign disqualification from
accepting directorships in companies in this country. Severe consequences will
flow from a breach of such foreign disqualification orders. These adverse
consequences might involve the commission of a criminal offence (s. 1186) or
a director being made personally liable for business debts, as is made clear by
s. 1187 of the 2006 Act. Mandatory disclosure of any foreign restrictions may
also be imposed (ss. 1188–9) and such information can be made public (s.
1190). The full operational details are Part 40 are not fully spelled out in the
Act; secondary legislation, which is not yet available, will be critical, as s.
1185 makes clear. What we do know is that this type of mechanism is in oper-
ation in other jurisdictions (for example in Ireland43).
1 ESSENTIAL PROPOSITIONS
Certain fundamental building blocks should first be established. So, for
instance, it is well settled that a parent company is not to be treated as present
in a jurisdiction merely because of the presence of a subsidiary.1 This princi-
ple is of great significance when considering the prevalence of multinationals
with subsidiaries scattered across the globe. Companies interacting with each
other may identify a legal jurisdiction by which their relationship is to be
determined; but such a choice of law provision cannot exclude a jurisdiction
from determining rights under its own system of property law.2 The lex situs
is the dominant determinant here.
120
Corporate law and conflict of laws 121
Litigation ensued and a reference was made to the European Court of Justice,
seeking clarification as to whether freedom of establishment had been
infringed. The Court of Justice, came down in favour of the interpretation
favoured by the entrepreneurs. Where a company had been validly incorpo-
rated in one Member State, it had a right to establish branches in any other
Member State. There was no evidence of fraud here and the argument put by
the Danish authorities that the minimum share capital requirement offered an
essential safeguard to creditors was treated with considerable scepticism by
the European Court of Justice.
This development has thrown open many opportunities for UK corporate
law. It is estimated that hundreds of EC firms have relocated here by incorpo-
rating under English law. It is estimated that some 20,000 German firms have
used the Centros10 loophole by incorporating as a private company under
English law with the sole intention of trading with limited liability in
Germany. There are plans afoot to reduce the minimum share capital of the
GmbH from 25,000 to 10,000 euros.11 In response to this migration of enter-
prises, France in 2003 reduced its minimum share capital requirement for its
private company (SARL) to one euro! For dyed-in-the-wool share capital
maintenance lawyers this is a race to the bottom with a vengeance!
Centros12 has generated a huge amount of academic controversy.13 Some
continental corporate lawyers14 see it as the beginning of the emergence of a
‘Delaware syndrome’ in the EU. Certainly, it has serious implications for the
real seat tradition, because the tenor of the judgment suggests support for the
place of incorporation model. That interpretation has been challenged,15 but
subsequent rulings from the European Court of Justice indicate that it is a
reasonable analysis. Centros16 has also been followed by the Supreme Court
in Austria in Graz.17
10 Ibid.
11 See C. Jaehne and J. Henning (2007) 28 Co Law 34, J. Schmidt (2007) 18
ICCLR 306. Sweden is moving towards a reduction of its minimum share capital for
private companies, but the new figure will still be comparatively high – see C.
Svernlow and T.L. Dozet (2008) 19 ICCLR 379.
12 Ibid.
13 For articles on Centros, see, for example, T. Tridimas (1999) 48 ICLQ 708, P.
Cabral and P. Cunha (2000) 25 ELR 157, V. Edwards [2000] CFILR 342, E. Micheler
(2000) 21 Co Law 179, W.-H. Roth (2000) 37 CMLRev 147, H. Xanthaki (2001) 22
Co Law 2, J. Lowry [2004] CLJ 331, M. Gelter (2005) 5 JCLS 247, M. Andenas (2006)
27 Co Law 1.
14 On the Delaware syndrome generally, see the discussion in Chapter 1 and the
references cited therein.
15 S. Rammeloo (op. cit. note 3) at 85.
16 [2000] Ch 446.
17 [2001] 1 CMLR 38 – discussed by I. Rappaport in [2000] JBL 628. This case
Corporate law and conflict of laws 123
The Court noted that this prohibition in German law was general in nature and
lacked exceptions. The Court indicated that focused restrictions on cross-
border mergers that were intended to protect shareholder interests or the
integrity of revenue collection might be justified.
The pattern of these three rulings is thus consistent. The conclusion there-
fore that can be drawn from these rulings of the European Court of Justice is
that the place of incorporation model stands firm both in English and EU law.
Having said that, however, the real seat doctrine is not dead for all purposes.
is particularly interesting, in that the Austrian corporate law system applies the real seat
concept.
18 [2005] 1 WLR 315. See T. Bachner [2003] CLJ 47. For comment, see also D.
Robertson (2003) 24 Co Law 184, E. Micheler (2003) 52 ICLQ 521, D. Griffiths and
F. Tschentscher [2004] 17 Ins Intell 57.
19 [2003] ECR I 10155 or 10195. See W.-H. Roth (2003) 52 ICLQ 177, J. Lowry
[2004] CLJ 331.
20 [2006] 2 BCLC 510. See M. Andenas (2006) 27 Co Law 1.
21 Ibid, para [19].
124 National corporate law in a globalised market
22 See P. Omar [2002] Ins Law 122 – ‘Cross Border Allocation of Jurisdiction
and the European Insolvency Regulation’.
23 On the doctrine generally, see Spiliada Maritime Corp v Cansulex Ltd [1987]
AC 460. Note D.W Robertson (1987) 103 LQR 398. See also Cleveland Museum of Art
v Capricorn Art International (1989) 5 BCC 860.
24 [1991] BCC 249. For comment, see A.J. Boyle [2000] 11 EBLR 130.
25 Now CA 2006, s. 994.
26 [2005] QB 801 at paras [37]–[46] – for analysis, see C. Hare [2006] JBL 157
and A. Briggs (2005) 121 LQR 535. The background issues are admirably reviewed by
W. Kennett [1995] CLJ 552.
Corporate law and conflict of laws 125
27 [2000] 1 WLR 1545. The issue of pursuing MNEs to the courts of their home
jurisdiction is controversial. There have been particular problems in the US, particu-
larly with regard to the Alien Tort Claims Act 1789 and more recently in regard to the
Racketeer Influenced and Corrupt Organisations (‘RICO’) Act 2002 – see S. Joseph,
Corporations and Transnational Human Rights Litigation (2004) (Hart).
28 [2002] 1 BCLC 336 – discussed by A.J. Boyle (2002) 23 Co Law 263. This
decision was followed by Lewison J in Reeves v Sprecher [2007] EWHC 117 (Ch),
[2007] 2 BCLC 614, where the judge held that the place of incorporation was the
proper place for the determination of shareholder disputes. Investors who incorporate
overseas can hardly complain if the English courts adopt this stance.
29 See now CPR, r. 19.9A etc.
126 National corporate law in a globalised market
In my judgment the courts of the place of incorporation will almost invariably be the
most appropriate forum for the resolution of the issues which relate to the existence
of the right of shareholders to sue on behalf of the company. [para 128]30
Companies are increasingly trading across national borders and moving their trad-
ing operations from country to country. They must not by so doing escape proper
regulation or otherwise creditors and shareholders will suffer. The only system of
law that can consistently and effectively regulate such multinational companies is
the law of the place of incorporation. Accordingly, I would strongly disagree with
any suggestion that the duties imposed on directors . . . by the law of the place of
its incorporation should be regarded as irrelevant or ‘mechanistic’.34
Arden LJ explained that the merit in this solution was the resulting certainty
and the benefit for corporate governance generally.
In Macmillan Inc v Bishopsgate Investment Trust (No. 3),35 a question
arose as to whether a dispute over title to a block of shares should be heard
under English law or under the law of New York. The English Court of
Appeal favoured New York as the more appropriate forum because the
shares were issued by a company incorporated in New York. That was also
the appropriate lex situs here. Had the shares in question been viewed as
negotiable instruments, a different conclusion might have ensued. Had the
share registers been kept in England, that might also have been an influen-
tial factor.
that under both the Lugano Convention 1988 and under Art 22.2 of the EC
Judgments Regulation (44/2001), the proceedings should be heard in England
because they related to a constitutional issue relating to a Jersey company,
even though the agreement was stated to be subject to determination in the
courts in Switzerland.
Other important provisions in the Judgments Regulation are: Art 5.5, which
allows branches to be sued in the place where the branch is situated; Art 22.3,
which deals with disputes involving the validity of public registers; Art 23,
which retains the right of parties to make an agreement on exclusive jurisdic-
tion; and Art 60, which in effect determines the domicile of a company by
reference either to the real seat or place of incorporation.
46 For background, see B. Clarke, Takeovers and Mergers Law in Ireland (1999)
(Round Hall Press) at 35 et seq.
47 For enlightenment, see T. Ogowewo (2002) 23 Co Law 216.
48 See CA 2006, s. 965 and SI 2008/3122.
8. Dealing with transnational corporate
collapse
130
Dealing with transnational corporate collapse 131
and most recently, Lehman Bros (2008).8 In each of these cases, many of the
critical events leading to corporate failure arose outside the jurisdiction of
English law, but the consequences for creditors and other stakeholders were
felt acutely in this country. These are the most obvious examples in recent
memory; other modern instances can be cited to complete the overall picture.9
1.1 Principles
with asbestos liability. This led to the interminable T&N litigation, the burden of which
has been shouldered by David Richards J.
8 The Lehman collapse is already generating litigation in the English courts –
see, for example, Re Lehman Bros International (Europe) Ltd [2008] EWHC 2869
(Ch).
9 Barlow Clowes (1988) (an offshore investment scheme whose collapse led to
an official inquiry) – see L. Lever, The Barlow Clowes Affair (1992) (Macmillan) for
an intimate day-by-day account of the affair and the official Le Quesne Report, which
was summarised by D. Milman in (1989) 10 Co Law 113; Polly Peck (1990) (whose
high profile controller left these shores for Northern Cyprus); HIH Casualty and
General Insurance (2001) (an Australian insurance company whose difficulties led to
the setting up of a Royal Commission in Australia and have generated litigation before
the English courts) – for background, see M. Murray [2002] Ins Law 223; WorldCom
(2002) (a US Chapter 11 bankruptcy case).
10 See Cambridge Gas Transport Corp v Official Committee of Unsecured
Creditors of Navigator Holdings [2006] UKPC 26 and the analysis offered by Sir
Donald Nicholls VC in Re Paramount Airways Ltd (No. 2) [1992] 3 WLR 690 at
699–700.
11 On this, see the comments of Millett LJ in Mitchell v Carter [1997] BCC 907
at 912. Foreign creditors (for example, those claiming under a foreign judgment) are to
be treated with respect – on this, see Re Shruth Ltd [2005] EWHC 1293 (Ch), [2007]
BCC 960. Foreign governments have no special rights of preference – Re Rafidain
132 National corporate law in a globalised market
Bank Ltd [1992] BCC 376. In MG Rover Belux SA/NV [2007] BCC 446, administrators
were authorised to make payments to foreign creditors for the good of the administra-
tion, even though such payments were not strictly in accordance with English law.
12 Re Dynamics Corp of America [1976] 2 All ER 669.
13 See the comments of Scott VC in Banco Nacional de Cuba v Cosmos Trading
Corp [2000] 1 BCLC 813 at 820.
14 See Re BCCI (No. 10) [1997] Ch 213, English, Scottish and Australian
Chartered Bank [1893] 3 Ch 385 at 394 per Vaughan Williams J. For a strong statement
to the effect that the English courts must apply English law in an ancillary liquidation,
see Re BCCI (No. 11) [1997] 1 BCLC 80 – but this must now be viewed in the light of
the range of views expressed by the Law Lords in McGrath v Riddell [2008] UKHL 21.
15 On the origins of the hotchpot rule, see the bankruptcy cases of Selkrig v
Davis (1814) 2 Rose 291 and Banco de Portugal v Waddell (1880) 5 App Cas 161.
16 Banco de Portugal v Waddell (1880) 5 App Cas 161.
17 Re Oriental Steam Co (1874) LR 9 Ch App 557.
18 [2001] 2 WLR 1202.
19 [2003] UKPC 37 – see P. Smart and C. Booth (2004) IL & P 147, Look Chan
Ho [2003] LMCLQ 95.
Dealing with transnational corporate collapse 133
Islands liquidation in respect of a debt which had been extant at the time of
entry into liquidation, but which had been discharged by a statutory recon-
struction scheme in Bangladesh. The Privy Council advised that the pari passu
rule did not require the liquidators to admit proof of such a claim.
Another common law rule concerns the treatment of foreign revenue
authorities seeking to prove as creditors under English law. In spite of the
general trend in English corporate law not to discriminate against foreign
stakeholders, the traditional approach here is to deny this possibility of foreign
revenue authorities proving as creditors. In Government of India v Taylor,20
this discriminatory attitude was all too apparent. The thinking here is that
foreign revenue laws are viewed as akin to penal laws and therefore do not fall
within broad principles of comity. This House of Lords authority was followed
(and extended) by the Court of Appeal in QRS 1 Aps v Frandsen,21 where the
disqualification on proof was applied to the indirect enforcement of foreign
revenue laws. The point was noted that the Brussels Convention had not modi-
fied the position at common law. The status of this rule today is changing. As
far as revenue laws of EU Member States are concerned, it no longer applies,
as Art 39 of the EC Regulation on Insolvency Proceedings (1346/2000) specif-
ically displaces it. In the wider global community, the common law rule may
still have been regarded as valid. However, with the UNCITRAL Model Law
on Cross-border Insolvency being brought into effect in English law in April
2006 through the making of the Cross-border Insolvency Regulations22 (SI
2006/1030), we may safely assume that this common law rule has now been
superseded. Under Art 13 of the 2006 Regulations, foreign revenue debts are
not automatically to be disqualified, but may be challenged if characterised as
penal. The twin forces of globalisation and the need for greater judicial comity
have rendered the unthinking discriminatory approach at common law inap-
propriate in modern commercial conditions.
The courts in the exercise of their inherent jurisdiction and armed with notions
of comity have on occasions exercised discretion to facilitate the handling of
cross-border insolvencies. What might comity involve? It could encompass
20 [1955] AC 491 – see K. Dawson [2000] Ins Law 81 and P. Fidler [2000] Ins
Law 219. Note also Re Norway’s Application (Nos 1 and 2) [1990] 1 AC 723 – see J.G.
Miller [1991] JBL 144.
21 [1999] 1 WLR 2169. See P. St J. Smart (2000) 116 LQR 360. The Australian
courts were less keen on the bar – Ayres v Evans (1981) 39 ALR 129.
22 SI 2006/1030.
134 National corporate law in a globalised market
In the insolvency of MCC in which both assets and creditors are distributed world-
wide, it cannot sensibly be suggested that any one forum is the natural forum, that
is, the forum in which exclusively proceedings should be brought . . . The very fact
that the foreign court constitutes a natural forum usually means that the institution
of proceedings in it is not unconscionable25
was whether the Manx courts could assist a Chapter 11 reorganisation in New
York. In deciding that assistance was possible in this instance, Lord Hoffmann
explained:
The English common law has traditionally taken the view that fairness between
creditors requires that, ideally, bankruptcy proceedings should have universal appli-
cation. There should be a single bankruptcy in which all creditors are entitled and
required to prove. (para [16])30
A common law remedial device that has proved its worth in the context of
insolvency is the asset-freezing order. Although not restricted to the insol-
vency scenario, the prevention of assets leaving the jurisdiction clearly has
added utility in that traumatic context. Developed by the Court of Appeal in
Mareva,33 the mechanism is now contained in the Civil Procedure Rules.34 It
is possible to obtain orders freezing assets in this jurisdiction and also
30 [2006] BCC 962 at 967. Cambridge Gas (above) was followed by Registrar
Jaques in Re Phoenix Kapitaldienst GmbH [2008] BPIR 1086.
31 This, arguably, may be one consequence of the views expressed by certain of
the Law Lords in McGrath v Riddell [2008] UKHL 21.
32 [1974] 3 All ER 451. See also Fournier v The Ship Margaret Z [1997] 1
NZLR 629.
33 [1980] 1 All ER 213. It should be noted that the grant of such an injunction
does not create a security interest – Cretanor Maritime Co Ltd v Irish Marine
Management Ltd [1978] 1 WLR 966.
34 See CPR, r. 25.1(1)(f). In Ireland, under s. 55 of the Company Law Enforcement
Act 2001, there is a dedicated provision facilitating the grant of Mareva-type injunc-
tions against company directors who may be tempted to transfer assets out of the juris-
diction. This is an important facility if there is the chance of personal recovery actions
being brought against company directors.
136 National corporate law in a globalised market
2 LEGISLATIVE RESPONSES
Clearly, the common law had its limitations in dealing with all of the ramifica-
tions of cross-border insolvencies. For example, there is no power at common
law to wind up a foreign company; this is a wholly statutory jurisdiction. As was
mentioned in Chapter 5, Parliament intervened and such explicit power now
exists in the form of s. 221 of the Insolvency Act 1986, which permits the wind-
ing-up of unregistered companies. This statutory jurisdiction specifically states
(see s. 225) that it can be used, notwithstanding the fact that the foreign company
may have been dissolved in its home jurisdiction.37 Where the jurisdiction is
invoked, the winding-up will be carried out according to the requirements of
English law.38 Let us examine how this jurisdiction has been exercised by the
English courts. There is a respectable corpus of case law to note.39
The original view, as exemplified by Lord Evershed MR in Banque de
Marchands de Moscou Koupetchesky v Kindersley,40 was that this jurisdiction
could only be exercised if the foreign company had assets in the jurisdiction.
There was a presumption that the English courts would not interfere in the
administration of a winding-up properly afoot abroad.
In Re Compania Merabello San Nicholas S,41 the court moved towards the
modern position. Megarry J indicated that six factors needed to be taken into
account. Although there is some repetition involved in this exposition, those
factors included a recognition of the fact that there was no need to establish
35 See Derby & Co v Weldon [1990] Ch 48. For recent guidelines on worldwide
injunctions, see Dadourian Group International Inc v Simms [2006] EWCA Civ 399.
36 Discussed by T. Rutherford (2006) 156 NLJ 837, F. Meisel (2007) 26 CJQ
176, K. Qureshi and T. Sprange (2007) 157 NLJ 1958. On anti-suit injunctions in an
insolvency context, see Look Chan Ho (2003) 52 ICLQ 697. See also the comments of
Hoffmann J in Banque Indosuez v Ferromet Resources [1993] BCLC 112 at 117–18.
37 On this possibility, see Re Russian Bank for Foreign Trade [1933] 1 Ch 745
and Russian and English Bank v Baring Bros [1936] AC 405.
38 Re Suidair International Airways [1951] 1 Ch 165.
39 See Re Normandy Marketing Ltd [1993] BCC 879, where this jurisdiction was
used to wind up a company incorporated in Northern Ireland. See generally, I.J.
Dawson [1995] (October) Ins Law 3. For a review of a comparable jurisdiction in
Australia, see P. Omar [1999] Ins Law 69.
40 [1951] Ch 112.
41 [1972] 3 All ER 448. See also Eloc [1981] 3 WLR 176, where a Dutch
company was wound up here in order to trigger a strategic advantage for employees.
Dealing with transnational corporate collapse 137
that the foreign company had ever carried on business here and that there was
no need to show the presence of hard assets. What did need to be shown was
the reasonable possibility of a benefit accruing to creditors if a winding-up
was ordered.
The leading modern case is the Court of Appeal ruling in Stocznia v
Latreefers,42 where the Court of Appeal indicated three prerequisites that must
be satisfied before the winding up jurisdiction could be exercised against a
foreign company – a sufficient link to the English jurisdiction, potential bene-
fit to creditors and the creditors should be subject to the English jurisdiction.
A potential benefit to creditors might exist where a liquidator could bring a
recovery action against directors or seek the setting aside of a transaction.
Conversely, in Re Real Estate Development Co,43 jurisdiction was declined
by Knox J, because the connection with the English jurisdiction was deemed
insufficient. Here there was an allegation that assets had been transferred into
this country under a transaction that was voidable under French law.
With the advent of the EC Regulation on Insolvency Proceedings
(1346/2000), these rules allocating insolvency jurisdiction require a rethink.
The ability of the English courts to wind up a foreign company having its
COMI in another participating Member State44 will be limited to territorial or
secondary proceedings (Arts 3(2) and 3(3)). Winding up of foreign companies
where there is no COMI located within a participating Member State remains
unaffected. The above principles therefore still have value.
Another statutory provision worthy of a footnote is s. 72 of the Insolvency
Act 1986, which permits a receiver appointed under Scottish law to exercise
powers of realisation of a floating charge in England and vice versa. There is,
however, little evidence of this provision (which ultimately can trace its
origins back to s. 7 of the Administration of Justice Act 1977 and then s. 724
of the Companies Act 1985) being engaged in practice.45
Section 426 of the Insolvency Act 1986 is the most apparent manifestation
of the need to have legislative mechanisms to enhance judicial comity. This
has been considered above in Chapter 6 and requires no further comment.
42 [2001] 2 BCLC 116. See K. Dawson [2000] Ins Law 173 and [2005] JBL 28.
43 [1991] BCLC 210. For further discussion, see Jubilee International Inc v
Farlin Timber Pte Ltd [2005] EWHC 765 (Ch), [2005] BPIR 765. Jurisdiction was also
refused by Clarke J in Re OJSC ANK Yugraneft [2008] EWHC 2614 (Ch), partly
because the court felt that the petitioners had not made full disclosure
44 Denmark has opted out of the Insolvency Proceedings Regulation – for discus-
sion of the implications, see Re Arena Corp [2004] BPIR 375 (Lawrence Collins J) and
[2004] BPIR 415 (CA), which involved analysis of whether an Isle of Man company with
its COMI in Denmark could be subject to the English winding-up jurisdiction.
45 For a rare example of the usage of s. 72, see Norfolk House v Repsol
Petroleum [1992] SLT 235.
138 National corporate law in a globalised market
There are provisions in the Enterprise Act 2002 that take matters further.
For example, under s. 254 the Secretary of State for Trade and Industry is
empowered to make regulations to extend insolvency legislation to companies
incorporated outside Great Britain. This power has not yet been exercised.
3 MULTILATERAL APPROACHES
3.1 EC Level
presumption can be, and frequently is, rebutted, as we shall see illustrated
below.
Re BRAC Rent-a-Car International Inc,50 a company incorporated in
Delaware was placed in administration in this country, because its COMI was
located here. This was the first reported case on ECRIP in English law and in
his judgment, Lloyd J set the tone for future developments. Similarly, in Re
Ci4net.com Inc,51 the existence of COMI within the English jurisdiction
enabled the English court to place a Jersey company in administration and a
Delaware company into liquidation.
In Re Enron Directo SA,52 it was held that a company which had been
incorporated in Spain (where it also traded) in fact had its COMI in England
and so could be placed in administration here. Similar conclusions were
arrived at in Re Sendo Ltd53 (in respect of a Cayman Islands company), Re
Parkside Flexibles SA54 (which involved a Polish company) and Re 3 Tel Ltd55
(where the company had been incorporated in Northern Ireland). This impres-
sive stream of authority shows how frequently the presumption that COMI is
located at the place of incorporation can be rebutted.
The Daisytek-ISA Ltd case56 well illustrates the modern position. Here we
were dealing with a large business group ultimately controlled from the USA,
but having an intermediate parent company based in Bradford, which ran its
European operations. The Bradford parent company controlled the finance and
marketing activities of various European subsidiaries located in France and
Germany. Judge McGonigle (sitting as a Deputy Judge of the High Court)
concluded that all of these European subsidiaries had their COMI in England
and so could be placed in administration here. This conclusion met with initial
opposition from first instance courts in both France and Germany who
objected to loss of control of insolvency proceedings featuring ‘their’ compa-
nies. However, on appeals, both the French57 and German appellate courts
50 [2003] BCC 248. There is a marked similarity between the factors relevant for
COMI and those used under conflict of laws to determine presence in the jurisdiction
– see Adams v Cape Industries [1990] BCLC 479 at 506–7 per Slade LJ.
51 [2005] BCC 277.
52 Unreported, Lightman J, 4 July 2002 – but see the note of this case in [2002]
15 Ins Intell 64.
53 [2006] 1 BCLC 396.
54 [2006] BCC 589.
55 [2006] 2 BCLC 137.
56 [2003] BCC 984. The group implications of this case are evaluated by I.
Mevorach [2006] JBL 468. See also Energotech SARL [2007] BCC 123 – French courts
finding that COMI of Polish company was in France. Key factors underpinning this
decision were location of board meetings, governing law of contracts, situs of creditors
and place where commercial policy was determined.
57 Klempka v ISA Daisytek SA [2003] BCC 984.
140 National corporate law in a globalised market
58 [2007] BCC 127. For background, see S. Moore [2009] 22 Ins Intell 9.
59 [2005] BCC 90.
60 Re Collins and Aikman [2006] BCC 606. But see Staubitz-Schreiber (C1/04)
[2006] BCC 639, where COMI is moved after commencement of insolvency proceed-
ings, but before the court opens proceedings.
61 Telia AB v Hilcourt (Docklands) Ltd [2003] BCC 856.
62 Ibid.
63 [2007] BCC 127 – noted by R. Rose in (2006) 22 IL & P 225.
64 Information on how the Regulation has fared in the national courts of other
member states can be obtained from the website – www.eir-database.com.
Dealing with transnational corporate collapse 141
65 [2006] BCC 397. See G. Moss [2006] 19 Ins Intell 97, J. Armour [2006] CLJ
505 and C. Rapinet [2006] (10) SMCLN 1 for comment.
66 See ibid at para 67 for discussion of the public policy angle.
67 See ECRIP Art 31.
68 There are instances where this systemic fault is already creating problems –
see Stojevic v Komercni Banka AS [2007] BPIR 141, where this led to recriminations
between the national courts in England and Austria, partly due to a fundamental misun-
derstanding of the role of the English courts in processing insolvency petitions. For
general discussion of the problems, see G. Flannery (2005) 21 IL & P 57.
142 National corporate law in a globalised market
Holmqvist (Case C310/07).73 The point at issue here was whether an employee
of a Swedish transport company, which was carrying out operations in other
Member States without establishing a branch or establishment in such states,
could claim against the Swedish guarantee fund. The Court ruled that,
although a branch or establishment was not required, there must be evidence
of a stable economic presence featuring human resources which enable it to
perform its activities there. In the case of a transport company delivering to
businesses in other Member States, that criterion would not normally be met,
so the home guarantee fund should remain responsible. As Art 8a is replicated
by Art 9 of the consolidated EC Directive 2008/94, this preliminary ruling
should remain valuable for the foreseeable future.
73 Unreported
74 For analysis, see I. Fletcher [2000] 13 Ins Intell 57, P. Omar [2000] Ins Law
211, K. Dawson [2000] 4 RALQ 147, P. Omar [2002] Ins Law 228. The Model Law is
reproduced in Volume 2 of Sealy and Milman, Annotated Guide to Insolvency
Legislation (11th edition, 2008). See also Look Chan Ho (ed.), Cross Border
Insolvency (2006) (Globe Law and Business), which offers an excellent multi-jurisdic-
tional study by expert authors.
75 See Insolvency (Cross-border) Act 2006 – for comment, see D. Brown and
T.G.W. Telfer, Personal and Corporate Insolvency Legislation (2007) (LexisNexis) at
105 et seq.
76 The US have adopted the Model Law by introducing via the Bankruptcy
Abuse Prevention and Consumer Protection Act 2005 a new Chapter 15 into their US
Bankruptcy Code to replace the widely used mechanism in s. 304 of the Code – for
explanation, see J. Tovrov (2006) 22 IL & P 17, T. Zink and F. Vazquez [2007] 20 Ins
Intell 17. For discussion of Chapter 15 in the US bankruptcy courts, see Re Loy [2008]
BPIR 111.
77 See D. Emmett (2005) 21 IL & P 199.
78 SI 2006/1030. See I. Fletcher [2006] 19 Ins Intell 86, L.S. Sealy [2006] 7
SMCLN 1, L. Verrill (2006) 22 IL & P 155.
144 National corporate law in a globalised market
1 CONVERGENCE
Any astute observer of the development of company law across the globe
could not fail to pick up on the fact that national systems of corporate law are
converging.1 In chapter 9 of The Anatomy of Corporate Law, Paul Davies,
Gerard Hertig and Klaus Hopt assert:
Our analysis clearly establishes that corporate law has converged significantly
across our benchmark jurisdictions over the past two decades. Jurisdictions are
under pressure to adopt uniform ‘best practices’ to facilitate the cross border tapping
of investors by their publicly-traded companies. In addition, national lawmakers
have come to realise that a modernised framework of company law can provide
even their closely held companies with a competitive advantage.2
145
146 National corporate law in a globalised market
The idea of the limited company with shareholder owners and managed by
directors is now standard fare in every developed legal jurisdiction.
Having made that point, the modern large corporate enterprise has its crit-
ics.4 That is not surprising, because it is an easy target that often conspires with
the forces of capitalism to produce a negative impact. Joel Bakan, in his
polemic The Corporation,5 attacks many of the aspects of its operation.
Noreena Hertz is equally scathing in her monograph, The Silent Takeover.6 In
response to such impressive voices of dissent, one could argue that, although
there is no doubt that corporations can provide the basis for inappropriate
behaviour, equally, they can be forces of progress by encouraging economic
development. Commentators such as Bakan and Hertz are still in a minority
and, more significantly, foreign governments are voting with their feet. Even
in countries where a socialist tradition has held sway, the adoption of the
Western corporate law paradigm seems inexorable. China, the fastest growing
economy in the world, appears firmly committed to a Western-style capitalist
structure, based upon the limited liability corporation. With its recent corpo-
rate law revisions of 1993 and 2005, China has shown a willingness to take on
board ideas from a range of cultures. The original 1993 law was heavily influ-
enced by continental corporate law traditions, with a strong liking for the
discipline of share capital maintenance and a two-tier board structure.7 In its
2005 corporate law revision, there has been a definite move towards the
Anglo-American model, with the share capital maintenance doctrine being
watered down to a considerable extent.8
Even the most hard-line of capitalists accept that some concession needs to
be made to a wider group of stakeholders – hence the rise to prominence of the
somewhat cosmetic campaign for ‘corporate social responsibility’.9 Attempts
4 For an extreme vision of the stakeholder-oriented company and how the law
might help to attain that vision by moving corporate law into the sphere of public law,
see K. Greenfield, The Failure of Corporate Law (2006) (University of Chicago Press).
5 (2004) (Constable).
6 (2002) (Arrow).
7 See P.C. Ann (1996) 17 Co Law 199. On shareholder rights in China, see L.
Miles and M. He (2005) 16 ICCLR 275.
8 For the 2005 China Company Law Revision, see A.Y.S. Li and S.S.M. Ho
(2006) 27 Co Law 311, A. Lau (2006) 27 Co Law 376. For the cultural background of
Chinese company law, see T. Ruskola (2000) 52 Stan L Rev 1599.
9 On the Corporate Social Responsibility debate, see W. Wedderburn (1985) 15
Melb Univ L Rev 4, B. Pettet [1997] CLP 279, C.M. Slaughter (1997) 18 Co Law 313
The future of national corporate law systems 147
2.2 Globalisation
shiny new corporate law models. One could cite here the work of Professor
Jim Gower in devising the revolutionary Ghana Company Law14 and the
contribution of Professor Robert Pennington in advising governments on
corporate law reform in both the Seychelles and Trinidad and Tobago.15 Such
scholars do not simply transport in an uncritical way the existing system of
corporate law from their home jurisdiction to the host country. Cherished
reforms unimplemented in the home jurisdiction can be introduced into the
host jurisdiction. They may thus be forces for reform.
On a more subtle level, through the natural processes of academic debate
(which is increasingly internationalised), scholars raise awareness of the good
and bad points of their native system of corporate law, thereby enabling
foreign policymakers to adopt solutions seen to be working overseas. The
boom in international conference activity has also contributed to a broader
knowledge of corporate law models across the globe.
The influx of foreign academic corporate lawyers into the English legal
faculty, whether they be Jewish refugees from Nazi Germany (such as Clive
Schmitthoff16), academics dissatisfied with the apartheid system in South
Africa or simply scholars looking to broaden their intellectual horizons (or
enhance their salaries), has heightened our awareness of comparative solutions
to common problems affecting the operation of limited liability companies.
Globalisation is very much in evidence in the international market for the
services of legal academics.
The employment of academics, with their comparative insights, by law
reform bodies is becoming marked.17 It is the norm for any review panel in the
UK to include at least one academic, and not merely in a token role. In recent
decades, one could cite the Gower Report18 and the Prentice Report19 as exam-
ples of this reform process at work, with academics leading from the front.
One danger to note here is the growing tendency always to look primarily
at US scholarship as an inspiration for theoretical debates in other jurisdic-
tions. Ideas that work well in the US context may have less value in the diverse
cultures in other parts of the world. One also detects an inward-looking
perspective in some US scholarship, a mindset which often plays down acad-
emic work undertaken beyond the circuit of the leading US universities.20 For
academic discourse to operate at an optimum level in corporate debates, it
must be bilateral. The need for a wider search for solutions to the conundrums
of corporate law regulation is highlighted by the global financial crisis which
has placed in jeopardy the assumed superiority of US regulatory ideas, with
their emphasis on market supremacy.
corporate law. This may be seen as a form of cultural imperialism, but with the
decline of alternative models to capitalism, few criticisms are being raised.
Bodies such as the World Trade Organization, the Organisation for Economic
Cooperation and Development (OECD), the International Monetary Fund, the
World Bank, the International Institute for the Unification of Private Law
(UNIDROIT) and UNCITRAL have all contributed to the emergence of a
common corporate structure and guiding principles, particularly in the devel-
oping countries. This may happen in a variety of ways. Such jurisdictions may
be looking to borrow and changes in private law may be imposed as a precon-
dition for lending. Alternatively, such countries may be in the market for a new
corporate system and will naturally look to internationally favoured models.
OECD has produced a model code of conduct for multinationals,28 but the real
utility of such voluntary codes or ‘soft law’ is open to question.29
28 The first OECD Code dates back to 1976. For the 2000 version, see the note
in (2000) 21 Co Law 306, A. Dignam and M. Galanis [1999] EBLR 396, S. Tully
(2001) 50 ICLQ 394. For later developments, note F. Macmillan (2003) 24 Co Law
355. See now Annual Report on OECD Guidelines for MNEs (2004). In the UK, see
DTI Press Notice, 13 July 2006 for details of the UK National Contact Point for the
implementation of the OECD Guidelines
29 For a lucid analysis, see S. Picciotto (2003) 42 Col Jo of Transnat Law 131.
See also S. Wheeler, Corporations and The Third Way (2002) (Hart) at 126.
30 See D. Branson (2001) 34 Cornell Jo of Int Law 321.
31 See generally S.D. Girvin (1992) 13 Jo of Leg Hist 63.
32 For a consideration of the issues here see the essays in G. Teubner (ed.),
Global Law without a State (1997) (Ashgate).
152 National corporate law in a globalised market
33 [2000] Ch 446.
34 Deminor ratings originated in the 1990s. For comment on this and other rating
systems, see H. Sherman [2004] 12 Corp Gov 5.
The future of national corporate law systems 153
Although operating at greatly attenuated levels these days, the common law
can still promote convergence. Some of its vigour has been lost through
greater usage of legislation at a local level, but it still has a role to play. This
is particularly evident with the importation of principles developed in
Commonwealth courts into English Company Law (discussed in Chapter 1).
The Cambridge Gas Transport case40 shows the continued inventiveness of
the common law in areas where specific legislative models have been intro-
duced but may not be available to particular applicants (see Chapter 8).
funds’45 and ‘poison pills’ have become prominent and such concepts have
therefore become the subject of regulatory attention in a number of jurisdic-
tions at the same time. The characterisation of the final period of a company’s
existence as the ‘twilight zone’46 is well recognised in corporate law
discourse. A common language of corporate law is being created. That
language is indisputably American in character.47 That said, the English courts
have cautioned practitioners about using metaphors (no matter what their
origin) to draw legal conclusions as a substitute for following clear legislative
provision.48
Convergence may already exist in certain fields of corporate law, but in theory
it could disappear, as new solutions to age-old problems emerge. Very often,
that novelty fails to materialise because a nation state is reluctant to break
ranks. It may be that it supports an extant legal principle because it is efficient.
But it may also do this in order not to offend the international business
constituency upon which the well-being of its economy depends. The failure
to tackle multinationals and, in particular, to make them responsible for the
actions of their subsidiaries, may be a manifestation of this malaise at work.49
Paralysis may be voluntary or it may be enforced. The best illustration of
this is the inability of Member States within the EU to change outmoded
corporate law models because they are locked into the harmonised structure.
Much work has to go on behind the scenes to convince European partners of
the need for change. However, this is not a futile exercise – witness the adop-
tion of Directive 68/2006, which introduces much-needed flexibility into share
capital maintenance regimes.
45 On the regulation of hedge funds, see H. McVea (2007) 27 Leg Studs 709 and
T.R. Hurst (2007) 28 Co Law 228.
46 The term is universally recognised – see Directors in the Twilight Zone
(INSOL, 2001). For discussion see D. Milman [2004] JBL 493.
47 Thus the English term ‘book debts’ increasingly gives way to the US phrase
‘receivables’. Had the Company Law Review been set up a decade later, it probably
would have been labelled the ‘Corporate Law Review’. Perhaps the only surprise is that
the Companies Act 2006 was so entitled.
48 See the comments of Lewison J in First Independent Factors v Mountford
[2008] BPIR 515 on the phoenix syndrome and its relevance to the interpretation of ss.
216 and 217 of the Insolvency Act 1986.
49 See A.J. Boyle (2002) 23 Co Law 35, P. Muchlinski (2002) 23 Co Law 168.
156 National corporate law in a globalised market
Corporate mobility will be very much part of the future of UK corporate law.
The presumptive 14th EC Harmonisation Directive, if it had ever been
adopted, would have permitted the moving of registered offices within the
EC.50 This initiative, first floated in 1997, is important because, at present, if
a company wishes to move its legal home from one Member State to another,
it will have to be dissolved in the first state and reincorporated in its new host.
This is profoundly disruptive in commercial terms. The discussion of this issue
is to be found in Chapter 5. As it happens, the future of the proposed 14th
Directive is now unclear partly because of general developments in the area of
freedom of establishment producing a view at Commission level that there is
no need for an explicit Directive.51
The UK government appears committed to change here. It has supported
the proposals of the Company Law Review52 designed to facilitate redomesti-
cation. The Company Law Review favoured opening up migration avenues for
companies to move within Great Britain and to and from Great Britain,
provided adequate safeguards for creditors were put in place.53 However, a
perusal of the Companies Act 2006 will find no such provisions.
As rules develop to iron out the inevitable difficulties of cross-border
commerce, this pattern will become more evident.
4 OVERVIEW
How has English law fared in respect of convergence?
The drive towards convergence in the UK and other national systems is
clear and the reasons for it are compelling. Since the millennium, we have
admitted into our corporate law system treasury shares,59 abolished financial
assistance bars for private companies,60 introduced statutory derivative
claims61 and allowed both LLPs and the Societas Europa (SE) to be set up in
this country. In the decades before 2000, title retention clauses and sharehold-
ers’ pre-emption rights62 made their entrance onto our local scene.
Convergence in corporate governance regimes (which does not necessarily
require legislative action) has been more marked. We thus have in this aspect
a form of what has been labelled as ‘functional convergence’.63
But one must not assume that complete convergence is inevitable64 or that
there will not be setbacks on the way. Looking at the history of UK corporate
law, we have steadfastly refused to admit the US ‘business judgment rule’ to
protect directors.65 Perversely, for no apparent reason we have held out against
the idea that preincorporation contracts may be ratified, when that solution has
been universally adopted elsewhere.66 Our refusal to accept the possibility of
a fifth exception67 to Foss v Harbottle68 has been robust,69 though with the
59 See G. Morse [2004] JBL 303. Singapore introduced treasury shares in 2005
– see H. Tijo (2006) 21 BJIBFL 316.
60 The financial assistance bar was removed from private companies in the UK
with effect from October 2008. For an impressive review of the financial assistance bar
in Pacific rim jurisdictions, see K. Fletcher (2006) 6 Ox Univ Comm LJ 157.
61 See A. Keay and J. Loughrey (2008) 124 LQR 469. Hong Kong has recently
introduced statutory derivative claims – see P. von Nessen, S.H. Goo and C.K. Low
[2008] JBL 627.
62 Pre-emption rights were a feature of US law, but were actually introduced into
English Law in 1980 via the Second EC Company Law Harmonisation Directive
(77/91) – see Art 29. The ECJ reviewed this Article in Siemens AG v Nold (C42/95)
[1997] BCC 759. For general background, see I. MacNeil [2002] JBL 78.
63 Coffee stresses this in his piece in (1999) NwUL Rev 641 at 679.
64 Once again I commend D. Branson (2001) 34 Cornell Jo of Int Law 321. E.
Micheler makes a similarly cautious observation in (2007) 123 LQR 251.
65 For the business judgment rule, see M.R. Pasban, C. Campbell and J. Birds
(1997) 26 Anglo-Am L Rev 461, M.R. Pasban [2001] JBL 33, M. Hemraj (2003) 24 Co
Law 218, D. Arsalidou (2003) 24 Co Law 228. A revised version of the business judg-
ment rule was recently introduced for German public companies – see T. Naruisch and
F. Liepe [2007] JBL 225 at 238.
66 See, for example, the acceptance of ratification of preincorporation contracts
in Singapore (Cosmic Insurance Corp v Khoo Chiang Poh (1981) 131 NLJ 286), which
is discussed by W. Woon in (1983) 25 Mal L Rev 399. Ratification is accepted in
Malaysia, India and New Zealand. Nigeria accepts this posibility – see L.O. Okeke
(2000) 21 Co Law 320. The Isle of Man accepted the idea most recently in s. 87(1)(b)
of its Companies Act 2006. The Jenkins Committee (Cmnd 1749, para 54) called for a
ratification facility to be adopted by English law. Indeed, the First Company Law
Harmonisation Directive (66/151) seems to assume that ratification is permitted.
67 The fifth exception, which is open ended and based on the interests of justice,
is recognised in jurisdictions such as Australia, Israel and Nigeria – see K.D. Barnes
The future of national corporate law systems 159
advent of statutory derivative claims, that now may only be of historical rele-
vance. Most recently of all, the Privy Council70 has made it clear that the
Australian Gambotto principle,71 which seeks to protect minorities when arti-
cles of association are varied, has no place in English law. The idea pioneered
in North America of an appraisal remedy for shareholders in a private
company, guaranteeing exit rights in defined circumstances, has not found
favour.72 No par value shares have not been accepted in English law, though
one suspects that it is the EU factor that is preventing that.73 In the corporate
insolvency arena, we have refused to introduce an explicit facility offering
super-priority for business rescue funding.74 Attempts to introduce a security
registration scheme based upon Art 9 of the US Uniform Commercial Code
have come to nothing.75
Looking at matters from the other side of the fence, we have not been
particularly successful in selling the floating charge to those jurisdictions that
have enjoyed choice in the matter of corporate law reform.76 It is hardly coin-
cidental that the private receiver is also largely unique to the followers of
English law.77 Only offshore jurisdictions find our flexible approach to ‘corpo-
rate directors’ attractive. By way of balance, we have been successful in
(1987) 8 Co Law 93, O.A. Osunbor (1987) 36 ICLQ 1, L.S. Sealy (1989) 10 Co Law
52, A. Reisberg (2003) 24 Co Law 250.
68 (1843) 2 Hare 461.
69 See Prudential Assurance v Newman Industries (No. 2) [1982] Ch 204.
70 Citco Banking Corp v Pussers Ltd [2007] UKPC 13 – see R. Williams [2007]
CLJ 500.
71 Gambotto v WCP Ltd (1995) 182 CLR 432 – see M. Whincop (1995) 23
ABLR 276.
72 See O’Neill v Phillips [1999] 1 WLR 1092. Hong Kong is considering adopt-
ing this idea – R. Cheung (2008) 19 ICCLR 325.
73 The Jenkins Committee (Cmnd 1749, para 34) favoured no par value shares,
as had the Gedge Committee (Cmd 9112, para 11) previously.
74 This idea was dismissed in the policy discussions leading up to the Enterprise
Act 2002. With the poor record of rescue mechanisms in English law, it is likely to
return to the agenda – see G. McCormack [2007] JBL 701. For cultural differences
between the US and the UK on corporate rescue, see G. McCormack (2007) 56 ICLQ
515.
75 See the Law Commission Report No. 296 (2005) (Cm 6654) and the back-
ground analysis of G. McCormack in chapter 5 of J. de Lacy (ed.), The Reform of UK
Company Law (2002) (Cavendish).
76 Notable exceptions of non-common law jurisdictions where the floating
charge has found favour abroad are to be found in Scotland (1961) (where it was recog-
nised by legislation) and Mauritius (1969). On the floating charge in Mauritius, see
Aquachem Ltd v Delphis Bank [2008] UKPC 7. Surprisingly, Denmark introduced a
variant of the floating charge in 2006.
77 See I. Macdonald and D. Moujalli (2001) 14 Ins Intell 76. Note also F. Dahan
(1996) 17 Co Law 181.
160 National corporate law in a globalised market
exporting the idea that company accounts should present a true and fair picture
of a company’s finances78 and corporate governance standards.79 We have
also exported the idea of a takeover code, with its underlying philosophy of
protecting the interests of the shareholders in the target company as the main
priority.80 Our preference for the place of incorporation principle in private
international law has attracted widespread support.81
What these examples show us is that English law, like all other systems, is
not going to be rushed into harmonising in every instance. This reality has
been recognised in the European Union, with its political doctrine of
‘subsidiarity’82 now driving forward harmonisation in a more culturally sensi-
tive manner. This pattern of selective adoption of ideas is practised in most
jurisdictions, with few legal systems surrendering completely to foreign
corporate law influences.83
Why is there opposition to convergence when it may appear to be the only
rational option? Fundamental cultural heritage may offer an explanation,84 as
may naked self-interest on the part of those who would stand to lose out in the
event of corporate law reform.85 Lawyers can be influential figures here.
162
Appendix 163
At the time of going to press the major substantive Parts of the legislation not
fully commenced include elements of:
Part 1 (introductory)
Part 2 (formation)
Part 3 (constitution)
Part 4 (capacity)
Part 5 (name)
Part 6 (registered office)
Part 7 (re-registration)
Part 8 (members)
Part 10 (directors)
Part 12 (secretaries)
Part 17 (share capital)
Part 18 (financial assistance)
Part 24 (annual return)
Part 25 (company charges)
Part 31 (dissolution)
Part 33 (companies not formed under companies legislation)
Part 34 (overseas companies)
Part 35 (registrar of companies)
Part 36 (offences)
Part 40 (foreign disqualifications)
Part 41 (business names)
Part 45 (Northern Ireland)
164 National corporate law in a globalised market
165
166 National corporate law in a globalised market
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OFFICIAL REPORTS
Loreburn Committee (1906) (Cd 3052)
Greene Committee (1926) (Cmd 2657)
Cohen Committee (1945) (Cmd 6659)
Gedge Committee (1954) Report of the Committee on Shares of No Par Value
(Cmnd 9112)
Jenkins Committee (1962) (Cmnd 1749)
Cork Committee (1982) (Cmnd 8558)
Committee on Financial Aspects of Corporate Governance (1992) (Gee)
Gower, C.B., A Review of Investor Protection (Part I) (1984) (Cmnd 9125)
Company Law Review (1998–2001) (UK) Final Report (URN 01/942)
Company Law Review Group: First Report 2001 (Ireland)
Company Law Review Group: Second Report (2007) (Ireland)
Cromme Code (2001) (Germany)
Annual Report on OECD Guidelines for MNEs (2004)
Dickerson Report (Canada) – Dickerson, R.W.V., Howard J.L., and Getz, L.,
‘Proposals for a New Business Corporations Law for Canada’ (1971)
(Information Canada)
Law Commission Report, LC no. 296, ‘Company Security Interests’ (2005)
(Cm 6654)
Marini Report (1996) (France)
Index
academics, influence of 147–149 credit crunch 7, 161
Aktiengesellschaft (AG) 34, 73 criminal sanctions 42–43
alien enemies 82 cross-border insolvency 130–44
Asian financial crisis 1997 55 Crown dependencies 14
auditors 40 culture 1, 160
Australia 12, 56, 72, 73
Delaware 17
Barbados 19 Delaware effect 17
bearer shares 80 delegated legislation 37
Berle and Means 51, 154 deminor ratings 152
board of directors 70–71 denomination (of shares) 81
branches 15 Department of Business, Enterprise and
British Empire 7 Regulatory Reform (BERR) 162
Bubble Act 5 Department of Trade and Industry (DTI)
business judgment rule 158 2, 47–48
deregulation 33, 41, 47, 54
CalPERS 9, 153 Dickerson Report (Canada) 12
Canada 12, 56 directors 70
capital maintenance 47 discourse 154
capital markets 58 disqualification of directors 118
CARICOM 19 dividends 13, 83
centre of main interests (COMI) 94, domicile 121
138–141
China 146 electronic communication 57
Chinese walls 154 Enron 6
choice of law 127 established place of business 97, 106,
civil law 10 108
civil penalties 42–43 European Court of Justice 18
close companies 34 European Economic Interest Grouping
comity 112–116 (EEIG) 16
common law 154 European Union 3, 15
community interest companies 46 expropriation (of shares) 52
Companies Act 2006 27 extradition 118
Company Law Review 26–27 extraterritoriality 110
Concordat 116
conflict of laws 120–29 families (of corporate law) 7
consolidation xviii federal states 11
convergence 145–61 fiduciaries 47
corporate directors 91–92 Financial Services Authority 43
corporate governance 39 floating charge 159
corporate personality 60–61 foreign shareholders 78–92
Corporate Social Responsibility 146 forum non conveniens 124
195
196 National corporate law in a globalised market