The Separate Legal Personalty and Piercing the Corporate Veil

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BUSINESS LAW

Types of Businesses

A business refers to an organisation involved in the trade of goods, services, or both to consumers. Sole proprietorship is owned by one person and operates for profit. The individual has day-to-day responsibility for running the business however they can choose to operate singly or employ other people. The business is considered to be part of the individual and not a separate entity. As a sole proprietor, all responsibility, debts and liability are assumed by the owner. Therefore, it can be said that all assets of the business belong to the owner. A partnership is an entity with two or more individuals who share ownership of a single business. The partners should consult and have a legal agreement that sets out how profits will be shared, how partners can be bought out and what are the steps that will be taken to dissolve the partnership if needed. Time and capital must also be decided on. Each partner has unlimited liability for the risks, debts and actions the business incurs. Corporations are considered a unique entity, which is separate and apart from its owners. They are treated as individuals under the law. A corporation can be sued, it can be taxed and it can enter into contractual agreements. The owners of a corporation are referred to as shareholders. If ownership changes the corporation does not dissolve thus it has a life of its own. A corporation simply provides a way for individuals to run a business and to share in both profits and losses.

Separate Personality

A separate personality of a company means that the corporation is independent and distinct from the people who own or invest in them. In the case,Salomon V Salomon & Co. (1897), Salomon conducted his business as a soletrader. Hesold it to a company incorporated for the purpose called A Salomon & co ltd.The only members were Mr. Salomon, his wife and their five children. They shared the shares among themselves. Mr.Salomon loan moneys to the business. When the company failed the company liquidator contended that Mr. Salomon loan should not be honoured and that Salomon should be held responsible for thecompany’sdebts. Lord Halsbury LC stated that “it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.” From this case comes the fundamental concept thata company has a legal personality or identity separate from its members. Members have no interest in a company’sproperty. Inthe caseMacaurav NorthernAssuranceCompany Limited (1925), M bought insurance for his timber estate while he was a sole trader. M later converted his business into a limited company butdid not make another insurance contract. A fire broke out in his timber estate. The insurance company refused M’s claim for compensation. It was held that the insurance was correct not to honour. The house of Lordsheldthat in order to have an insurable interest in property a person must have a legal or equitable interest in that property, M’s claims because M and his company were separate legalentities. Theloss of the timber wasthe company’s lossnot M’s loss.

Lifting the Corporate Veil

The corporate veil is the concept that separates the personality of a corporation from the personalities if its shareholders. It protects them from being personally liable for the company’s debts and also other obligations. However, this protection is not impenetrable. Lifting this corporate veil is when the court disregards the corporate personality and look behind the real person who is in control of said company. The court comes to the conclusion that a company’s business was not or isn’t being conducted in accordance with the provision of corporate legislation. Under the legal concept of piercing the veil, the court may hold the shareholders of the company personally liable for the company’s obligations.

Grounds under Which the Veil Is Lifted

The corporate veil can be lifted in many cases. It can be lifted in the case of:
  1. Fraud/Improper conduct
The courts will pierce the corporate veil when it feels that the company is being used to hide or conceal the identity of the perpetrator of fraud. In the case Gilford Motor Company Ltd v. Horne (1933), Mr. Horne was an ex-employee of the Gilford motor company and his employment contract provided that he could not solicit the customers of the company. In order to defeat this he incorporated a limited company in his wife’s name and solicited the customers of the company. The company brought an action against him. The Court of Appeal was of the view that “the company was formed as a device, a stratagem, in order to mask the effective carrying on of business of Mr. Horne” in this case it was clear that the main purpose of incorporating the new company was to penetrate fraud. Thus the Court of Appeal regarded this case as a mere sham to cloak his wrongdoings.
  1. Tax evasion
The court has the power to disregard corporate entity if it is used for tax evasion purposes. Once the company conducts in schemes of tax avoidance without any necessary legislative authority the veil will be lifted.
  1. Protecting public policy
This occurs when there is a conflict between incorporated companies not adhering to public laws. Courts may pierce the corporate veil to protect policies of the public and also to help prevent transactions that may occur contrary to public policy.
  1. Avoidance of legal obligations
This is where the incorporated company is made and used to avoid any legal obligation(s). The court may disregard the legal personality of this incorporation and assume that no company really existed.
  1. Enemy character
In times of war, the court will be prepared to pierce the veil of the company to determine the nature of the shareholding. A company can be assumed as an enemy character when persons in control of its affairs are residents in an enemy country. In a case stated above the court may examine the character of the persons in real control of the company and then declare it to be an enemy company. In the case Daimler Co. Ltd v Continental Tyre and Rubber Co. Ltd, a company was incorporated in England for the mere person of selling in England. This company sold tyres which were made in Germany by a German company which held the bulk of shares in the English company. The holders of the shares remaining, with the exception of one, and all the directors were Germans who resided in Germany. During World War 1, the English company commenced action for recovery of a trade debt. It was held that the company was an alien company and the payment of debt to it would amount to trading with the enemy. Therefore, the company was not allowed to proceed with this current action. 1
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