Corporate Personality And Ignoring Corporate Veil Law Company Business Partnership Essay

Published Date: 02 Nov 2017

This essay analyzes the confusing area concerning corporate individuality/personality and at what time the ‘veil’ that is got hold of on incorporation can be ignored. It is an attempt to resolve how the veil can be disregarded from the time of deciding case of Salomon v A Salomon & Co Ltd [1897] AC 22. The essay will clearing up the term ‘ignoring the veil’ further by discussing the cases for disregarding the corporate veil in some way or another.

Aron Salomon was a flourishing leather businessman in leather boots manufacturing. He ran his industry as a sole owner for years. In 1892, his sons happen to be concerned about the business and wanted to take part in it. On this, Salomon decided to slot in his dealing as a Company, named Salomon & Co. Ltd. The shareholders and subscribers were he himself with 20,001 shares and his wife, daughter and four sons for 1 share each, totaling 20,007 shares of the company. Mr. Salomon was managing director and two of his sons were declared as directors. Business of Mr. Salomon was sold to the company for £39,000, of this amount; £10,000 was a debt to him as debentures. He was thus at the same time the company's main shareholder and its main creditor. In a little while after incorporation of the company a sequence of strikes directed the government, Salomon's major purchaser, to divide its agreements with more shoe producers. Company’s storehouse was filled of unsold collection. Company was out of cash so they sought £5,000 from a Mr. Edmund Broderip as loan. While the company went in insolvency, the liquidator squabble that the debentures to Mr. Salomon as protection for the obligation were unacceptable and are not valid, on the basis of deception.

The judge, Vaughan Williams J. accepted the argument of liquidator that in view of the fact that company was created exclusively to shift Mr. Salomon’s business to it, it was in realism his agent and he as the principal was legally responsible for amount overdue to unsecured creditors. The Court of Appeal as well ruled in opposition to Mr. Salomon; however on the basis that Mr. Salomon had ill-treated the rights of limited liability and incorporation, The lord justices of appeal portrayed the company as a falsehood and held that the incorporation had been a plain plot to allow him to hold on as before however with limited liability.

The House of Lords collectively upturned this conclusion; declining the opinion of agency and deception. They said that nothing is in Act as to whether the subscribers should be sovereign of the mass shareholder. The company was duly made up in law. Lord Halsbury said, he was not able to find out what assenting proposition the Court of Appeal's logic suggested. Lord Macnaghten asks over, what was incorrect if with Mr. Salomon got benefit of the provisions of statute, as he was completely legally permitted to do. It was not the purpose of adjudicators to interpret limitations devoted on a statute on the base of their personal perception that, if the regulation of the land permitted such a thing.

Whilst the Salomon case has been weigh up and it is apparent that company is a detached legal entity and alleged veil, it is elementary to analyze what is corporate veil. This study will be necessary to decide the efficiency of when the corporate veil is overlooked. The expression ‘veil of incorporation‘ match with that of detach lawful individuality where the shareholders of company are out of sight behind this veil and the liabilities and assets are of the company and are not the members. The corporate veil will be lifted in the following circumstances:

1) Trading Without a Trading Certificate – Section 767(3) of the Companies Act 2006.

2) Wrongful Trading – section 214 of the Insolvency Act 1986. This takes place where a director carries on trade in spite of no logical outlook that it would keep away from bankruptcy.

3) Phoenix Companies – Sections 216 and 217 of Insolvency Act 1986. Director of a company is legally responsible if they establish a company with the similar name as a bankrupt company.

4) Person in Management under a Disqualification Order – Section 15(1) of the Company Directors Disqualification Act 1986.

P Rodgers (2007), S Ottolenghi (1990) provided four techniques of lifting the veil, these were:

1. Peeping behind the Veil: generally used to find out the nature of the corporation by considering who is in command, example of this peeping is observed in the case of Daimler, 2 AC 307 (House of Lords)

2. Penetrating the Veil: this is insightful through the veil for clutching the shareholders individually, example is Wallersteiner v. Moir (1974) the judge said that the company was Wallersteiner‘s dummy and he be supposed to be legally responsible for its actions.

3. Extending the Veil: this is involved in groups of companies. This was seen in DHN Food Distributors Ltd. v. Tower Hamlets London Borough Council (1976) and Smith, Stone and Knight Ltd. v. Birmingham Corporation (1939) where the companies were under influence of parent and did as parent said.

4. Ignoring the Veil: It’s the most extreme case. Here the veil is completely ignored and persons at the back the veil are brought to light, usually used in cases of fraud J Payne (1997).

The argument that shows that the methods, of ignoring the veil, are effectual is that it put off the deceptive use of the company’s limited liability. This technique makes sure that the code of limited liability is not ill-treated. Moore M (2006) provided a universal rule for disregarding the veil called "genuine ultimate purpose rule’, here the court will have to look whether the subsidiary of a company is active or passive in relation to its parent. Though, is not in practice at courts and consequently there is still perplexity in this region of the law. It is obvious that the efficiency and the cause for ignoring the veil is yet a region of argument, FH Easterbrook & DR Fischel (1985) state that taking off the veil happen like lightning it is uncommon, ruthless and unprincipled, This unprincipled and unintelligible loom has led to this spot of the regulation, from the time of Salomon, being in a steady condition of fluctuation yet fasten to the code of the corporate individuality theory. Devoid of an obvious, brief and a more conventional method in ignoring the veil it direct the techniques putted into practice by the courts to be covered in a coating of incompetence, on the other hand when we gaze underneath this bewilderment and search all the way through the judgments it is apparent that the techniques mainly effort to reach a balance that guard creditors and encourage entrepreneurialism in the course of the use of limited liability. This limited liability is preserved to encourage business enterprise and investment, not to deceive creditors and other stake holders, ignoring the corporate veil guard creditors, Duening et al. (2010).

With effectiveness of methods of ignoring the veil, it has some flaws as well; ignoring the corporate veil can allow injustices particularly by international companies. For example in Adams v. Cape Industries Plc [1990] where the plaintiff were apprehended powerless to recover recompense for healthiness harms connected with being subject matter to asbestos; which occurred due to the reformation international subsidiaries of the Cape. This negation of recompense is unfairness and by means of the corporate structure to avoid paying recompense not supposed to be allowed, this is a solemn defect in the technique allowable to ignore the veil. The another case that demonstrate the techniques used to ignore the veil are unsuccessful is that there is no universal law and consequently the is perplexing and the cases can only be streamlined under the wide heading of guidelines, French D, Mayson S & Ryan C (2011). There have been a number of efforts by researchers and scholars to correct this, particularly Moore M (2006), and came up with ‘genuine ultimate purpose rule’.

To sum up, it is obvious that the efficiency and the basis for ignoring the veil is till now a region of argument. Roger Cotterell (1992) said, a company dwell in a dissimilar ethical situation from the human being in that stigma for its actions will not essentially decode unswervingly into stigma connecting to any person. While, the likelihood of companies commending crimes has been acknowledged by English law, is not a clear link to connect stigma for illegal or immoral actions to shareholders of company. Still company as nonentity facilitates persons to put out of sight at the back of corporate personality.

References

Duening et al. (2010), Technology Entrepreneurship: Creating, Capturing and Protecting Value p. 98-99

FH Easterbrook & DR Fischel (1985), Limited Liability and the Corporation‘52 U.Chi.L.Rev p89, 90

French D, Mayson S & Ryan C (2011), Mayson, French & Ryan on Company Law, 28th edn, p 150

J Payne (1997), Lifting the Corporate Veil: A Reassessment of the Fraud Exception‘56 C.L.J. 284, 289

Moore M (2006), A Temple Built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon‘J.B.L. 180

P Rodgers (2007), Commercial Awareness and Business Decision Making Skills: How to Understand and Analyse Company Financial Information, p.259

Roger Cotterell (1992), The Sociology of Law, 2nd edn., London: Butterworths, 126.

S Ottolenghi (1990), From Peeping Behind the Corporate Veil to Ignoring it Completely‘53 M.L.R. 338

Cases

Adams v. Cape Industries Plc [1990] Ch. 433, 532-538 per Slade LJ

Daimler Co. Ltd. v. Continental Tyre & Rubber Co. Ltd. 2 AC 307 (House of Lords)

DHN Food Distributors Ltd. v. Tower Hamlets London Borough Council [1976] 1 W.L.R. 852

Smith, Stone and Knight Ltd. v. Birmingham Corporation [1939] 4 All ER 116

Wallersteiner v. Moir (1974) 1 W.L.R. 991