xii It follows that a parent company is not the agent of its subsidiaries and vice versa. Thus, the principle of separate legal personality is admitted also for group companies or, as defined by Moore, for “multinational inter-corporate group enterprise”. xiii This relation is established between two completely different legal entities, a parent company and subsidiaries, with same consequences as to company and shareholders . Since 1897 i , the principle of the separate legal personality of a company has become a vital part of company law. This date marks a quasi Copernican revolution of the entire UK system of company law.
THE SALOMON PRINCIPLE: OF WHAT RELEVANCE IN TODAY’S BUSINESS WORLD?
Secondly, the corporate structure cannot be used as a means to avoid legal or contractual responsibility. In case Jones v Lipam 1962 1 All ER 442, the defendant (L) supposed to sell a land to claimant (J) under a contract, however, L sold the land to another person. Held that the L’s new company was a sham obligation, the L and his ‘old’ company were bound to perform the contract with J. If there is an attempt to use corporate structure to undermine the provisions of the law, the veil could be lifted, too.
- She makes tax exemption and 18A (deduction of donations) applications, and applications to be registered with the Nonprofit Organisations Board.
- A shareholder’s liability in the event the company is wound up is limited to any unpaid amount of the nominal value of his shares (s74(2)(d) Insolvency Act 1986.
- It discusses how incorporation creates a company as a legal entity distinct from its shareholders, with perpetual existence and the ability to own property, enter contracts, and sue/be sued.
- Therefore, it reaffirmed the value of the fundamental principle of the separate legal personality of a company.
THE THEORY OF INCORPORATION AND CRITICAL PERSPECTIVE ON THE DOCTRINE OF SEPARATE CORPORATE PERSONALITY
The wider approach, as the narrower, does not allow company’s member to be considered in relation to the company’s rights and obligations, but it seems that there are no limitation related to legal principles to do so. lxvi Therefore, it is necessary to consider few cases for evaluating how these approaches and the previous consideration have affected the separate legal personality on the judiciary reality. The following cases regard the piercing the veil within the group of companies.
COMPANY LAW 1.5 CONSEQUENCES OF INCORPORATION
He wished to run his business through a limited company which he achieved by registering a company and selling his business to that company. “I would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil, but in this case the two subsidiaries were both wholly owned; further, they had no separate business operations whatsoever”. So to succeed in a claim for damages against a director on the basis that the director breached a duty that caused the shareholder a loss, a shareholder must prove the shareholder had a special factual relationship with the director in terms of which this duty was owed to the shareholder. This is a type of equitable security which can only be granted by companies and others who are empowered under specific legislation. The essence of a floating charge is that it floats over the undertaking or class of assets until an event occurs which causes it to crystallise, whereupon it becomes a fixed equitable charge.
Mark Lee
- Therefore, this decision seeks to restrict the DHN case and to make it only applicable to interpreting statutes.
- The House of Lords found in favour of Mr Salomon and affirmed the concept of separate legal personality which affords a privilege that enables shareholders and directors to be protected in their personal capacity from any potential liability arising as a result of the actions of the company.
- The court then went onto say that the veil could only be lifted for groups of companies in cases involving interpretation of statutes, where the subsidiary was a façade or sham, and where there was an agency relationship.
- The common law remedy of piercing the veil has not always been consistent in our law with regards to when exactly the courts will resort to piercing the corporate veil but it is clear from case law that the courts will not resort to this remedy easily and the court will look for some kind of abuse of separate legal personality.
The law relating to promoter’s duties and liabilities with the relationship of company is mostly developed through case law. Although promoters are personally liable to the company before the company incorporate (pre-incorporation),their motives in setting up a company are absolutely irrelevant in determining corporate liability. The corporate personality protects individual members from paying limited liability on companies’ act.
Statutory corporations, chartered corporations, registered companies, building societies, industrial and provident societies (co-operatives and community benefit societies), credit unions and limited liability partnerships are all examples of corporations aggregate. In this context, the aim of this essay is to discuss and evaluate to what extent the separate legal personality has affected the company law and with what consequences. In other words, whether or not this principle evokes “more questions than it does answers”. In addition, it has to born in mind that this essay does not purport to cover every single aspect related to this principle. However, it more emphasise will be given towards a few aspects which have been considered more controversial and useful to explain the essay’s purpose.
Separate legal personality and the corporate veil
Following numerous case law, a novel provision in the Companies Act 71 of 2008 was introduced to give recognition of the court’s ability to disregard a company’s separate legal personality. It is important to note, however, that this provision has not replaced the common law piercing the veil remedy but rather that they run in tandem. Section 20(9) of the Act allows an interested person to approach the court for an application to declare the company not to be a juristic person, thereby attributing liability to shareholders or directors, where there has been an ‘unconscionable abuse’ of separate legal personality. Section 20(9) also empowers the court to make any further order that the court considers appropriate and does not require, as the common law, that the remedy is of last resort.
Furthermore, directors are personally liable when they commit a wrongful or fraudulent acts during their company’s insolvency, or directors would be jointly liable with the company while director continuing to act disqualified. First of all, the veil would be lifted where a company was set under the purpose of committing fraud. In Trustor AB v Smallbone (No.2) 2001 1 WLR 1177, a company was used to commit fraud, it was held that the owner of this company was personally liable to refund the debts to the claimant.
Commentators note that this leaves uncertainty about which approach courts will take35. Adams v Cape does support lifting the veil to prevent fraud, but only if the fraud is to evade an existing liability and it involves the use of corporate structure itself. However, 2 years later in Woolfson v Strathclyde Regional Council32 the House of Lords upheld the Scottish courts’ decision not to follow the DHN case, even though the facts were similar. For instance, in Creasey v Beachwood Motors25 the judge consequences of incorporation separate legal personality lifted the corporate veil in the interests of justice.
The law governing the obligation of a shareholder to contribute money to a company that has ceased trading and is being wound up is found in s 74 of the Insolvency Act 1986. When a company is being wound up, it is essential to distinguish limited and unlimited companies. A person can become a shareholder by acquiring shares in a company either from the company itself or from an existing shareholder.
