Company law

Ingrid has had a lifelong interest in herbs and she and her partner, Lola, have recently bought a small hobby farm which they own jointly as tenants in common in equal shares with no mortgage. They wish to run the farm as a herb supply business, sharing the profits and risks equally, and would like you to advise them as to the legal structures available to them, outlining the principal attractions and shortcomings of each. After receiving your advice on business structures, they decide to set up a company and call it Herbivore Ltd (‘Herbivore’). Advise them as to the key constitutional decisions they will need to consider and the decisions they will need to take before they set-up the company. Spice plc (‘Spice’) is the parent company of a corporate group of companies that have been growing and supplying a wide range of fresh herbs for over 50 years. Ten years ago it acquired Plant Ltd (‘Plant’), a company growing and supplying pot plants, which became its wholly owned subsidiary. Until she resigned two months ago, Lola was employed by Plant as PA to the Managing Director. Lola’s employment contract with Plant contained a restrictive covenant prohibiting Lola from supplying plants of any kind to any customer of any company within the Spice corporate group for 12 months after leaving her employment. Ingrid and Lola would like your advice on the legal implications of Herbivore approaching all the customers of Spice as they are confident that Herbivore’s prices are much lower than Spice’s prices. You can assume that the covenant is not an unreasonable restraint. Ingrid and Lola would also like your advice on Lola’s right to bring a negligence claim to recover damages for ill health she has suffered caused by exposure to Tox, a chemical used by Plant, traces of which were brought home by Lola over many years. Spice has always employed a Head of Risk Management with responsibility for managing risks and overseeing the insurance arrangements of the entire corporate group. Two weeks ago, Plant’s farm was transferred to Spice in repayment of the sum it owed Spice under an intra-group loan. Plant is now a dormant company with negligible assets. The insurance policies it has had in place since becoming part of the Spice group have all excluded liability for personal injury or death caused by Tox. Advise Ingrid and Lola on the above issues. Provide your advice on business structures first, before moving on to provide the remaining legal advice they seek. Advice as to the legal structures available, outlining the principal attractions and shortcomings of each. The three legal structures that should have been focused on are the general partnership, the LLP and the private company limited by shares. The important benefits and shortcomings to have mentioned and linked correctly to each structure were those concerning: • administrative efficiency derived from the separate corporate personality (e.g., the company/LLP is the party to contracts, not both Lola and Ingrid) • no filing obligations (time and resources saved) • limited liability of shareholders/members • lower cost borrowing due to the ability to grant floating charges • confidentiality • assets not exposed to personal creditors of Ingrid and Lola • ability to transfer ownership interest • unfamiliarity of legal regime resulting in higher compliance costs • tax treatment (students should have simply identified that different tax treatments exist and stated that advice from a tax expert would be needed) • a minimum capital requirement Advice on Lola’s right to bring a negligence claim to recover damages for ill health she has suffered caused by exposure to Tox. Again, a correct reading and analysis of the facts was needed here and identification of potential causes of action and arguments available to Lola. Her principal action lies against her past employer, Plant, but, recognising the limited resources of that company to satisfy any judgment (it has no assets, no means of making profits and no insurance coverage), students should have explored the potential for Lola to bring a successful claim against Plant’s parent company, Spice. The likelihood of a court piercing Plant’s corporate veil should have been recognised as very low (Adams v Cape (1990), Ord v Belhaven (1998), Prest v Petrodel (2013)). The potential for a negligence action directly against the parent company, Spice, should have been the focus of consideration. Students should have explored the application of the test from Caparo v Dickman (1990) in Chandler v Cape (2012), as clarified by the Court of Appeal in Thompson v Renwick Group Plc (2014) and applied in Lungowe v Vedanta Resources Plc (2017), His Royal Highness Okpabi v Royal Dutch Shell Plc; Lucky Alame v Royal Dutch Shell Plc (2017) and AAA v Unilever PLC and Unilever Tea Kenya Ltd (2017). The facts appear to support the finding of a duty of care owed by Spice to Lola and a breach of that duty.      

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