However, both old and recent cases contain exceptions which cannot be neatly categorized and are quite wide and uncertain. The creditors must go against the company and it is only if the company is being wound up and there is some evidence of fraud that they may possibly have recourse against the shareholders. Another circumstance for lifting the veil of incorporation, is when companies in a group are not treated as a single economic entity, this would only happen when the group structure was a sham or use to commit a fraud. Under Company Act 2006, group of companies filling one account would lift the veil as well as companies in a group are required to produce a group account.
Separate legal personality & limited liability
In relation to a company limited by shares, whether a public or a private company, which is being wound up, s 74(2)(d) of the Insolvency Act 1986 is the statutory basis on which the liability of shareholders to contribute to the company to enable it to pay its debts and other liabilities is limited. If that amount has been paid to the company, a shareholder is under no further obligation to contribute. The power to make such calls on shareholders, to determine when and how much, is ordinarily given to the directors of the company who must exercise the power in accordance with their duties to the company. It follows inexorably from the separate identity of the company from its owners/shareholders and managers/directors that if a company incurs debts, those debts are the debts of the company, owed by the company to the lender/creditor. This means that not even the owners/shareholders of the company are liable to pay any sum owed by the company to the lender/creditor. Any legal action to recover the debt must be brought by the creditor naming the company as the defendant in the legal action.
Separate Legal Personality of the Company
- xii It follows that a parent company is not the agent of its subsidiaries and vice versa.
- Secondly, the corporate structure cannot be used as a means to avoid legal or contractual responsibility.
- A person dealing with a company can often work around the main consequence of the company being a person separate from its shareholders, namely that its shareholders are not liable for the debts and obligations of the company, by putting appropriate contractual or agency arrangements in place.
- “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”.
- A letter of comfort issued by a parent company to a subsidiary’s creditors is generally not legally binding, as it does not create direct obligations.
Courts may lift the corporate veil where the corporate form is used to commit fraud. For instance, in Jones v Lipman20 the defendant contracted to sell land and later tried to get out of this by conveying the land to a company he had formed for this express purpose. The court held that his company was ‘cloak’ or ‘sham’ and lifted the corporate veil, ordering specific performance of the contract. For instance, s.213 Insolvency Act 1986 states that a court may ignore the corporate veil if, during winding up a company it appears that the company’s business has been carried on with intent to defraud its creditors, a court can force anyone who is knowingly a party to this business to contribute to the company’s debts. In Trustor AB v Smallbone and others (No3) 59 the managing director of Trustor had transferred money to Introcom, a company which he controlled, and one of the issues which arose was whether the corporate veil of Introcom could be pierced so as to treat receipt by Introcom as receipt by him.
Thus, the member’s of company would benefit of this separate legal personality. Indeed, the distinction between a director/employee and company, as discerned, assures that the employee will have all the guarantees which derives by such position. As a consequence, one person, although a majority shareholder, may function in two roles as employer and employee within the company without prejudicing the validity of employment contract. xxxiv This case has become “the landmark authority” xxxv for following cases where a one-man company/employee is questioned. In addition, in the Salomon case it was emphasised that the company was not the agent of its shareholders or “the trustee for them”.
Separate Legal Personality Explained: The Concept, Its Limits & Its Implications for Businesses
He disputed the validity of the debentures on the ground of fraud and on the same ground; he claimed rescission of the agreement for the transfer of the business, cancellation of the debentures and repayment of the balance of the purchase money by Mr. Salomon. In the alternative, he claimed payment of £20,000 on Mr. Salomon’s shares, alleging that nothing had been paid on them. This online application consists of a two-stage process; (1) Application for approval and reservation of a company name, (2) submission of incorporation application and documents. A total of $315 in registration fees would have to be paid (i.e. $15 – Name Approval Fee, $300 – Registration Fee). A company will survive regardless if management changes frequently or even if shareholders sell up. Provided it can comply with all regulations of the Companies Acts it will remain until such times where it is decided to wind up the business or if they face unfortunate administration.
The company’s Board of Directors will decide whether or not to commence actions on behalf of the company. To set up a company in Singapore, one must first submit an application vide the Accounting and Corporate Regulatory Authority’s BizFile online platform. Sometimes the veil also be lifted simply by the public interest or national emergency. In Figure 3.5, O, the ex-employer, could protect itself by appropriate language in E’s contract of employment. The contractual clause containing the restrictive covenant could be drafted so that the restriction covered sales to O’s customers by E or any company owned or controlled by E. A company can make calls on nil-paid or partly paid shares until all shares are fully paid-up.
Forms of business vehicle—fundamentals
For instance, in Re FG (Films) Ltd17 a British film company was held to have been an agent for an American company which had provided all the finance and facilities for the making of a film. The UK company also had no place of business, and almost all of its shares were owned by the American company. This is a very wide exception, as an agency relationship could really apply to any company where members control the company18. In the study of business organisations, we are not concerned with corporations sole; we are concerned with corporations aggregate. Corporations aggregate may (but need not) have more than one member at any given time.
- However, Lizardi was in substantial debt to Mr. Currie’s bank and was being pressed for payment.
- This information is for general educational and entertainment purposes and is subject to change at any time.
- The House of Lords held that only the company had an insurable interest in the property.
- In Woolfson case, Lord Keith referring with approval to a passage in the judgment of Ormerod L.J.
- We have established how the effects of an ultra vires contract can render it unenforceable and companies should make certain they act within the object of their memorandum.
The concept of separate legal personality has long existed in our law and is fundamental to company law. A company is defined in section 1 of the Companies Act as a juristic person incorporated in terms of the Act and in terms of section 19(1)(b) of the Companies Act, a company is a legal person with a separate legal personality. The Act has consequences of incorporation separate legal personality therefore given recognition to the fact that a company possess its own legal personality to acquire rights and incur obligations that are distinct from those of the directors and shareholders. Although fundamental, developments in common law as well as by the legislature have indicated that this privilege is not absolute and will not be upheld in instances of abuse. However, it will be argued that the court’s development of these exceptions has safeguarded against the threat of destroying this foundation of company law and is a necessary tool to ensure that separate legal personality is respected.
Understanding the Corporate Veil in South Africa’s Companies Act 71
The leading case Salomon v Salomon & Co Ltd(1897) AC 22 established the principle of separate legal personality by House of Lords. Where one man owned however large proportion of shares and debentures in a company, or even if he hold other shares in trust for him, neither the company’s acts not its liabilities are this person’s acts or liabilies. The ‘veil of incorporation’, protecting members from liability for company debts, and highlighting that companies as a separate entity are distinct from members in the company.
COMPANY LAW Separate Legal Personality
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.
