INTRODUCTION
The word
‘corporation’ is generally used for publicly owned companies. A corporation under
Company law or corporate law is specifically referred to as a "legal
person"- as a subject of rights and duties that is capable of owning real
property, entering into contracts, and having the ability to sue and be sued in
its own name[1].
The Corporations Act 2006 section 1(a) and (b)
defines a corporation as:
(a) A company so formed and registered after the commencement
of this Part, or
(b) A company that immediately before the commencement of
this Part—
(i)
Was formed and registered under the Companies Act 1985 (c. 6) or
the Companies (Northern Ireland) Order 1986
(S.I. 1986/1032 (N.I. 6)), or
(ii) Was an existing company for
the purposes of that Act or that Order, (which is to be treated on commencement
as if formed and registered under this Act.”[2]
This process of formation and
registration of a company in accordance with the legislation is known as
“incorporation” and once a company is incorporated, it has an identity
of its’ own, known as “separate legal personality.”
CORPORATE LEGAL PERSONALITY
As a corporation is formed, a corporation becomes
a legal person on its own, independent of its’ management and shareholders which
is the concept of corporate legal personality. This concept of legal
personality was established in the case of Salomon
v Salomon & Co Ltd[3]. This doctrine is
ancient, however the most valid and cited case is Salomon v Salomon & Co
Ltd. The facts of the case are as follows:
Salomon
v Salomon & Co Ltd:
Salomon had been in
the boot and leather business for some time. Together with other members of his
family he formed a limited company and sold his previous business to it.
Payment was in the form of cash,shares and debentures. When the company was
eventually wound up it was argued that Salomon and the company were the same,
and, as he could not be his own creditor, his debentures should have no effect.
Although earlier courts had decided against Salomon, the House of Lords held
that under the circumstances, in the absence of fraud, his debentures were
valid. The company had been properly constituted and consequently it was, in
law, a distinct legal person, completely separate from Salomon.[4]
Lord MacNaghten of the
House of Lords observed that:
"The company is at law a different person altogether
from the subscribers to the memorandum and though it may be that after
incorporation the business is precisely the same as it was before, and the same
persons are managers, and the same hands receive the profits, the company is
not in law the agent of the subscribers or trustee for them."[5]
In an Australian case, Peate v Federal
Commissioner of Taxation, Windeyer J, in the High Court stated that a
company represents:
“[A]
new legal entity, a person in the eye of the law. Perhaps it were better in some cases to say a
legal persona, for the Latin word in one of its senses means a mask: Eriptur
persona, manet res.”[6]
Though the concept of separate legal personality had been
established years ago, however, courts realized the importance of the concept
of corporate legal personality after the Salomon v Salomon case. By definition,
corporate legal personality is defined as:
Separate or corporate legal personality means that the artificial
legal person, the company, can do almost everything a human person can do; it
can make contracts, employ people, borrow and pay money, sue and be sued, among
other things.[7]
Over a period of time, a number of similar other cases came in
front of the courts which led to the provision of corporate legal entity being
added to the Companies’ Act 2006. By
CA 2006, s 15(1), on the registration of a company, the registrar of companies
is to certify that the company is incorporated. A certificate of incorporation
given under s 15(1)[8] and
this legally establishes the corporate legal personality of a company. With the
corporation treated as a separate legal entity, regarded as separate from the
owner of the company, there are certain key effects that arise from this
concept.
KEY EFFECTS
At least four points follow from the proposition that
incorporated companies have a separate legal personality:[9]
1.
Company’s property
2.
Transferability of shares
3.
Perpetual succession
4.
Contractual capacity
5.
Limited liability
While certain books categorize these effects as being
advantageous or disadvantageous; this, however, depends on the standpoint
from which the value judgment is made.
1. The
company’s property: One of the major key
effects of corporate legal personality is that the company’s property belongs
entirely to the company (Gramophone and Typewriter,
Ltd. v. Stanley[10]).Establishing
the concept of ownership of assets is important when it comes to debts of the
company which are undertaken on the behalf of assets and if these debts are not
paid then claims can be brought against the assets.[11]
So personal property of members and the company should be separate.
In Macaura v Northern Assurance Co Ltd[12]:
Five insurers
refused to pay the appellant’s insurance claim on the ground that he did not
have an insurable interest. The
appellant Mr Macaura had sold all of the timber then standing upon his land to
a company, in which he was a shareholder and creditor, for £42,000. After the
assignment, Macaura had insured the timber against fire damage by policies
in his own name. The House of Lords
upheld the insurers’ refusal to pay.
Lord Buckmaster’s decision
represents the Court’s view:
Turning now to his position as a shareholder, this must be
independent of the extent of his share interest. If he were entitled to insure
because he held all the shares in the company, each shareholder would equally
be entitled if the shares were in different hands. Now, no shareholder has any right to any
item of property owned by the company, for he has no legal or equitable
interest therein….[13]
Lord Wrenbury shortly
observed that:
This appeal may be disposed of by saying that the
corporator, even if he holds all the shares, is not the corporation, and that
neither he or any creditor of the company has any property, legal or equitable,
in the assets of the corporation.[14]
2. Transferability
of shares: A
shareholder of the company is free to transfer his right in the company to
another person. This can be done by selling the shares of the company. Shareholders
can also transfer their shares within the company. In the case Millam v Print
Factory (London) 1991 Ltd[15], the court of Appeal upheld the employment tribunal’s
findings that there had been a transfer on the purchase of a company’s shares
because of the extent to which that business had been integrated into the
purchaser’s business.
3.
Perpetual succession: To put it simply, a company can survive the death of
its’ members. Since the company is a legal person, it is not dependant on
its’ shareholders. Hence, even if the members of the company are dead, even
then the company can continue. The rule of perpetual succession is best seen in
the case of Re
Noel Tedman Holdings Pty Ltd[16]
where it was established that even if the company loses all of its’ shareholders,
it can still continue.[17]
4. Contractual
capacity: Since the company is considered as a separate person from its’
members, the company is free to contract with its’ members (Farrar v Farrars Ltd[18]).
The most common case of company contracting with members of the company is
buying the shares. When the investors buy shares in the company, they basically
have contract of shareholding in the company. The case Lee v Lee’s Air Farming Ltd[19]
develops this point.
Mr Lee incorporated a company, Lee’s Air Farming Ltd, in
August 1954 in which he owned all the shares. Mr Lee was also the sole
‘Governing Director’ for life. Thus, as with Mr Salomon, he was in essence a
sole trader who now operated through a corporation. Mr Lee was also employed as
chief pilot of the company. In March, 1956, while Mr Lee was working, the
company plane he was flying stalled and crashed. Mr Lee was killed in the crash
leaving a widow and four infant children.
The company, as part of its statutory obligations, had been
paying an insurance policy to cover claims brought under the Workers’
Compensation Act. The widow claimed she was entitled to compensation under the
Act as the widow of a ‘worker’.[20]
The Judicial Committee of the Privy Council firmly rejected
the insurer’s argument. Lord Morris’
opinion is instructive:
In their Lordships’
view it is a logical consequence of the decision in Salomon v A Salomon and Co
Ltd [1897] AC 22 that one person may function in dual capacities. There is
no reason, therefore, to deny the possibility of a contractual relationship
being created as between the deceased and the company.[21]
5.
Limited liability: One of the prime key effects of separate personality; it
can be said that the concept of limited liability and separate personality go
hand in hand. One of the main advantages of the principle laid down in Salomon
v Salomon & Co Ltd[22]
was the establishment of the concept of limited liability in addition to the
corporate legal personality. This concept was a blessing in disguise as
businessmen like Aaron Salomon could now protect their personal property from
the company in case of the failure of the business.[23]
As mentioned above that the company’s
assets belongs entirely to the company, similarly, it is only the company who
is responsible for its’ debts and not the shareholders. The legal existence
of a company (corporation) means it can be responsible for its own debts. The
shareholders will lose their initial investment in the company but they will
not be responsible for the debts of the company.[24]
Lord Sumner, in the case, Gas
Lighting Improvement Co Ltd v IRC[25] clarified that it is the company as a separate person that owns the
company’s property and enters into contracts and incurs debts.
In
a recent Pakistani case Province of Punjab( through District Coordination Officer, Okara) v
Market committee, Okara[26], the definition and key effects of corporate
legal personality were mentioned by the Supreme Court:
In
order to qualify as a "local
authority" a body/institution should have a juristic personality distinct from
its members; it should have perpetual succession and a common seal and may sue
and be sued in its corporate name; it should exercise its authority and perform
its functions within a defined territory.
VEIL OF INCORPORATION
The
case Salomon v Salomon & Co Ltd[27]
has been one of the most crucial cases in the history of English Company law.
The case established the basis of corporate personality as well as limited
liability; however, this decision is not uniformly approved. The
distinguished commentator Otto Kahn-Freund called the
decision "calamitous"[28]. The
reason for the criticism of Salomon is, by and large, the opportunities
which the decision gives to corrupt promoters of private companies to abuse the
advantages which the Companies Act gives them by achieving a ‘wafer thin’
incorporation of an under-capitalized company and, further, to give even the
apparently honest incorporators the advantage of limited liability in
circumstances in which it is not necessary in order to encourage them to
initiate or carry on their trade or business.[29]
Even though the courts have tried to trim down the unjust
advantage corporators try to take from the limited liability principle; however
corporators still try and hide behind the corporation. These cases give rise to
the concept of “piercing” or “lifting the veil of incorporation.” Young J, in
the case Pioneer Concrete Services Ltd v Yelnah Pty Ltd[30] defined lifting the
corporate veil as:
“That
although whenever each individual company is formed a separate legal personality
is created, courts will on occasions, look behind the legal personality to the
real controllers."
"Veil of
incorporation" no bar to Court to lift, pierce or rent, to determine true relationship of shareholders with
regard
to their dealings
with Company
or to ascertain
true nature of
Company itself-Court would not hesitate to lift veil of incorporation
even where
questions of public policy”
While in some cases, it is
difficult to ascertain when the veil of incorporation is uplifted and when it
isn’t, there are however 2 categories under which the veil of incorporation is
lifted. They are: judicial veil uplift and statutory veil uplift.
These categories are further divided into subcategories which will be mentioned
later on.
Judicial veil lifting
Judicial veil lifting is when the courts’ have
the discretionary powers to lift the veil of incorporation. In Adams v Cape Industries
plc[32] it was decided
that the courts can lift the veil of incorporation under certain categories.
These categories are:
Ø Agency;
Ø Fraud;
Ø Group
enterprises;
Ø Unfairness/justice
Agency: Under
this category courts’ will lift the veil of incorporation when the personality
of the agent company is ignored and the parent company is held liable
for the acts of the agent company. This is done when the two companies are in
an agency relationship and the principle company is held responsible for the
acts of the agent company. Atkinson J gave a reasoned decision in the case Smith,
Stone and Knight Ltd v Birmingham Corporation[33] where the implication of agency is found:
if
ever one company can be said to be the agent or employee, or tool or simulacrum
of another I think the [subsidiary company] was in this case a legal entity,
because that is all it was. ... I am satisfied that the business belonged to
the claimants, they were ... the real occupiers of the premises
Along similar lines
is the decision in Re FG (Films) Ltd[34]
where Vaisey J held that an English company with no significant assets or
employees of its own was merely an agent or nominee for its American parent
company.
Fraud: This is a general area of consensus where the courts will certainly
lift the veil of incorporation if the company was registered for fraudulent
purposes of dodging an obligation or liability (Gilford
Motor Co Ltd v Horne[35]). Professor Ford observed that the main point in Gilford Motor Co v Horne, was
that the veil of incorporation will be overlooked if there is an ‘unrebutted
inference that one of the reasons for the creation of an intervening
company was to evade a legal or fiduciary obligation.’ [36]
Subsequently the same
principle lifting the veil of incorporation was seen in cases like Jones
v Lipman[37] and International Credit and
Investment Co (Overseas) Ltd v Adham.[38]
Group enterprises: The argument of group enterprises is to the effect that in certain
cases, some companies that act as a corporate group, may operate to hide
behind the advantages of limited liability to the disadvantage of their
creditors. They may operate in a way that the parent entity is not clearly
distinguishable from the subsidiaries. The argument in favor of piercing the
corporate veil in these circumstances is to ensure that a corporate group which
seeks the advantages of limited liability must also be ready to accept the
corresponding responsibilities. Roskill LJ stated, in the
leading case on the matter of group enterprises, in The Albazero[39]:
...
each company in a group of companies (a relatively modern concept) is a
separate legal entity possessed of separate legal rights and liabilities so
that the rights of one company in a group cannot be exercised by another
company in that group even though the ultimate benefit of the exercise of those
rights would enure beneficially to the same person or corporate body
irrespective of the person or body in whom those rights were vested in law. It
is perhaps permissible under modern commercial conditions to regret the
existence of these principles. But it is impossible to deny, ignore or disobey
them.[40]
Other than The Albazero, the main case cited in the issue
of group enterprises is the DHN Food Distributors v Tower Hamlets London
Borough Council.[41]
Here, Lord Denning MR, observed that:
These
subsidiaries are bound hand and foot to the parent company and must do just
what the parent company says. ... This group is virtually the same as a
partnership in which all the three companies are partners. They should not be
treated separately so as to be defeated on a technical point. ... The three
companies should, for present purposes, be treated as one, and the parent
company DHN should be treated as that one
The
Court of Appeal awarded DHN compensation for the disturbance to the business
that the compulsory purchase caused.[42]
The
authority of Lord Denning’s findings were doubted by Lord Keith in the
Scottish House of Lords case, Woolfson v Strathclyde Regional Council[43],
and further doubted and restricted in Adams v Cape Industries plc. To
the extent that DHN might have been construed as authority for the
proposition that the courts can generally treat closely connected companies in
a group as one economic entity, ignoring their separate personalities, it
must be conceded that the decision is no longer good law[44].
Unfairness/justice:
In this case the courts’ will lift the veil of
incorporation if it is felt that it is fair or just to do so. In the case, Re a Company,[45]
the courts established the principle that:
“The court will use its powers to pierce the corporate veil
if it is necessary to achieve justice.”
There may also be certain cases in which the members of a
corporation might seek to get the veil of incorporation pierced to get the
underlying reality of a situation, so that the unfair outcomes of a decision
may be avoided. This example is cited in the case Harrison v Repatriation
Commission.[46]
In the paper “From
peeping behind the veil to ignoring it completely,” S. Ottolenghi
described the different attitudes that
courts acquire when the veil of incorporation is lifted. These different approaches can be classified
into four subtypes:
1. Peeping behind the veil
2. Penetrating the veil
3. Extending the veil
4. Ignoring the veil
Ø Peeping
behind the veil: Regarded as the least
offensive of the 4 subtypes; peeping behind the veil aims to lift the veil
only to obtain information in regard to the controllers of the company (shareholders)
and proportion of their holdings. This is regarded as an act of curiosity
by the courts and once the information is gathered, the veil is pulled back down
and the company is treated as a separate legal personality once again (Wallersteiner v Moir [47])
Ø Penetrating
the veil: The second category of lifting the veil relates to the
courts reaching through the veil and grasping the shareholders personally (R v London County Council, ex p London & Provincial
Electric Theatres Ltd[48]).
This is done in order to
impose upon the shareholders’ the
responsibility of the company’s acts and establish their interest in company’s
assets.
Ø Extending
the veil: The third technique of lifting the
veil is by its extension; so that it embraces a bunch of companies. Here,
the veil of each one of the components is lifted - only to draw it again over a
large number of components (Re London Housing Society's Trust Deeds[49])
Ø Ignoring
the veil: The most extreme form of lifting the veil is
when the courts ignore it completely. This approach is as a sanction to
which the courts turn when they think that the company was not founded for
commercial or other sound grounds, but only as a means to defraud or
defeat creditors or to circumvent laws.
The author
describes the four categories of Judicial veil lifting to be falling under the
categories of peeping behind the veil, penetrating the veil, extending the veil
and ignoring the veil. It is seen that “agency” falls under the category of
penetrating the veil, “group enterprises” is under extending the veil and
“fraud” and “unfairness/justice” comes under ignoring the veil.
Statutory Veil Lifting
Under statutory
veil lifting, the Companies’ Act 1985 can set aside separate personality of a
company and lift the veil of incorporation on the following basis[50]:
- The s 24 constitutes a minimum requirement for
membership which companies must maintain in order to continue carrying
on business.
- S 349 (4) articulates
that an incorrect description of the company will allow the veil of
incorporation to be lifted
- S 458 of the Companies’ Act and s 213 of the Insolvency Act place emphasis
on fraudulent trading being an important reason for statutory veil
uplift
- S 214 of the Insolvency Act 1986 for wrongful trading by a company director.
- S 216 of the Insolvency Act 1986 places a prohibition of the directors of an insolvent
company being associated with a company with a similar name.
- S 177 (8) says
that the veil of incorporation will be uplifted if the company starts trading
without a trading certificate
- S 227
places an obligation on the Companies’ to file group
accounts
REFORMS
The above
discussion raises the issue of the current standing of the principle of
separate legal personality and limited liability which was laid down in the
case Salomon v Salomon & Co Ltd[51]? David Powles in his article “The See-through
Corporate Veil” mentions that due to the contradictions of lifting the veil
in the case of The Albazero[52]
and DHN Food Distributors v Tower Hamlets
London Borough Council[53];
the current positioning of the Salomon principle is weakened. Also,
judges like Lord Denning favor the idea of courts being always free to ignore
separate personality. However, this does not mean that there is no current
standing of the Salomon principle. Recent cases have shown that courts are now
reluctant to lift the veil of incorporation and are concentrating more on
strictly applying the Salomon principle. Lord Denning MR ruling in both Littlewoods
Mail Order Stores Ltd v Commissioners of Inland Revenue[54] and Wallersteiner
v Moir[55]
was criticized by other members of the Court of Appeal as they did not agree on
lifting the veil of incorporation.
CONCLUSION
In conclusion, it
can be said that there is no unifying principle as to when the courts will lift
the veil of incorporation and when they will not. However, due to the lack of a
unifying principle, it can be seen that the Salomon principle is being applied
more strictly.
[4]
http://193.120.211.33/Ecom/Library3.nsf/FilesWeb/84A8D294CA8DEF5C80256E7E0042A339/$file/Chapter_9.pdf
[6] Ian
M Ramsay, “Piercing the Corporate Veil in Australia” (2001) 19 Company and
Securities Law Journal 250-271
[7]Eavan Murphy; “Business and company law for
Irish students”
[8]
Mayson,
French and Ryan; “Company
Law”;bookshop.blackwell.co.uk/extracts/9780199547050_mayson.pdf
[9]
“Roach: Card & James’:
Business law for business, accounting and finance students”; www.frontierlaw.com.au/Sites/192/Images%20Files/Lecture05.doc
[11]
Roach: Card & James'; “ Business Law for Business,
Accounting, and Finance Students”
[14] http://www.vanuatu.usp.ac.fj/courses/LA313_Commercial_Law/Cases/Macaura_v_NAC.html
[15]
[2007] EWCA Civ 322; [2007] IRLR 526
[16]
[1967] Qdr 561
[18]
[1888]
40 ChD 395
[20]
http://www.londoninternational.ac.uk/current_students/programme_resources/laws/subject_guides/company_law/company_law_ch3.pdf
[21] Mayson, French and Ryan; “Company
Law”;bookshop.blackwell.co.uk/extracts/9780199547050_mayson.pdf
[22]
[1897]AC
22 (HL)
[23]
Cotterell, The Sociology of
Law, 2nd edn., (London: Butterworths, 1992), 126.
[24]
http://www.londoninternational.ac.uk/current_students/programme_resources/laws/subject_guides/company_law/company_law_ch3.pdf
[25]
[1923] AC 723
[26]
Province
of Punjab( through District Coordination Officer, Okara) v Market committee,
Okara [2011] SCMR 1856
[27]
[1897] AC
22 (HL)
[28]
Modern Law Review titled “Some reflections on company law
reform” [1944] 7 MLR 54
[29]
Simon Goulding; “company law”; 2nd
edition
[30][1986]
5 NSWLR 254
[31]
PLD [1971] SC 585
[32]
[1990] Ch 433
[33] [1939] 4
All ER 116.
[34]
[1953]
1 WLR 483
[37]
[1962]
1 WLR 832
[39]
[1977] AC 774 (HL)
[40]
http://pntodd.users.netlink.co.uk/cases/cases_a/albazero.htm
[41]
[1976]
1 WLR 852.
[42]
Roach: Card & James'; “ Business Law for Business,
Accounting, and Finance Students”
[44] Mayson, French and Ryan; “Company
Law”;bookshop.blackwell.co.uk/extracts/9780199547050_mayson.pdf
[45]
[1985] BCLC 333
[46]
Unreported, Administrative
Appeals Tribunal, Barbour SM, 18th October 1996
[48] [1915]2
KB 466
[49][1940]Ch 777
[50]
Nicholas Bourne; “Principles of Company Law”
[51]
[1897]
AC 22 (HL)
[52]
[1977] AC 774 (HL)
[53]
[1976]
1 WLR 852.
[54]
[1969] 1 WLR 1241
[55]
[1974]1 WLR 991
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