Introduction
Corporate personality is the fundamental
principle or doctrine that goes to the root of company law that a company,
being a legal person, is entirely distinct from its members who formed it.
After being incorporated, a company becomes an independent legal entity vested
with a personality separate from that of its shareholders. The personality
gives a company an artificial life, perpetual succession, the right to own and
dispose property, and limited liability. Thus, a company has full legal
personality and is, so far as possible, to be treated analogous to an
individual.
This
theory is a by-product of the English House of Lords decision in Salomon
v. Salomon& Co. Ltd[1] .
In that landmark case Aron Solomon, a successful leather merchant, decided to
incorporate his business in 1892, with himself, his wife and five children as
the only shareholders. The business assets were transferred into the corporate
name for the somewhat ambitious value of 39,000 pounds. Each of the other
members of the family took one share; Salomon himself took 20,001 shares. A
10,000-pound debenture was created charging the assets of the company. Less
than a year later the corporation encountered financial difficulties and, after
paying off the debenture holder, the company’s assets were insufficient to pay
off the unsecured creditors. These creditors then attempted to fix financial
liability on Aron Salomon. Both trial judge and the Court of Appeal held that
Mr. Salomon was liable for the company’s debts, on the ground that the company
was either an agent, a trustee or a nominee of the true owner. The House of
Lords rejected this view on corporations. Lord
Halsbury said[2]:
“Either the limited company was a legal entity or it was not. If it was, the
business belonged to it and not to Mr. Salomon. If it was not, there was no
person and no thing to be an agent at all”. Corporate law, therefore, erects an
imaginary wall between a company and its shareholders from liability for a
company’s actions. Once shareholders have made their promised capital
contributions to the company, they have no further financial liability. All
these mean that contracts of a company are not contracts of the shareholders,
and debts of a company are not debts of its shareholders[3].
Lifting/Piercing the Cooperate Veil
From
juristic point of view a company is a legal person different from its members Salomon
v Salomon & Co Ltd. (1897) A.C. 22.The principle may be referred to
as the ‘Veil of incorporation”. The courts in general consider themselves bound
by this principle. The effect of this principle is that there is a fictional
veil (and not a wall) between the company and its members. That is, the company
has a corporate personality which is distinct from its members.
The
human ingenuity however, started using this veil of corporate personality
blatantly as a crack for fraud or improper conduct, thus it became necessary
for the courts to break through or lift the corporate veil or crack the shell
of corporate personality and look at the persons behind the company who are the
real beneficiaries of the corporate fiction. In United States v. Milwaukee Refrigerator Co.[4],
the court observed “A corporation will be
looked upon as a legal entity as a general rule… but when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud or
defend crime, the law will regard the corporation as an association of persons”.
In
Littlewoods Mail Order Stores Ltd. V. Inland Revenue[5],
Denning MR. Observed: “The doctrine laid down in Solomon v. Solomon & Co. Ltd. has to be watched very carefully.
It has often been supposed to cast a veil over the personality of a limited
company through which the courts cannot see. But that is not true. The courts
can and often do draw aside the veil. They can, and often do, pull off the
mask. They look to see what really lies behind”.
The
power to pierce the corporate veil, though, is to be exercised “reluctantly”
and “cautiously” and the burden of establishing a basis for disregard of corporate
fiction rests on the party asserting such claim.
The
circumstances, which have been considered significant by the courts in actions
to disregard the corporate fiction, have been “rarely articulated with any
clarity”. This is true because the circumstances necessary vary according to
the circumstances of each case and every case where the issue is raised is to
be regarded as sui generic (to be decided in accordance with its own
underlying facts.) the law.
Various Cases in which corporate
veil can be lifted.
The
court may ignore the corporate entity where company is used for tax evasion.
Tax planning may be legitimate as it is within the framework of the law. Where
it is desired to determine for tax purposes the residence of a company the
court will lift the veil and find out where its central management is, and that
place will determine the residence of the company.
Prevention of fraud or improper
conducts
The
legal personality of a company may also be disregarded in the interest of
justice where the machinery of incorporation has been used for some fraudulent
purpose. In Jones v Lipman (1962) All ER 442. L agreed to sell certain land
to J. He subsequently changed is mind and to avoid the specific performance of
the contract, he sold it to a company which was formed specifically for that
purpose. L and a clerk of his solicitors were the only members. J brought
action for specific performance against L & and the company. The court
looked at the reality of the situation, ignored transfer and ordered that the
company should convey the land to J.
Determination of character of a
company whether it is enemy.
A company may assume an enemy character where
persons in de facto control of its affairs are residents in an enemy country.
In Daimler
Co. v Continental Tyre & Rubber Co. Ltd (1916) a company was
incorporated in England for the purpose of selling in England tires made in
Germany by a German Company which held bulk of shares in the English company.
The holders of remaining shares except one, and all the directors were Germans,
resident in German. During the First World War, the English company commenced
an action for recovery of a trade debt.
Held:
The Company was an alien company and the payment of the debt to it would amount
to trading with enemy, and therefore the company was not allowed to proceed
with the action.
Where the Company is a sham or is
formed to avoid legal obligations
Where the use of an incorporated company is
being made to avoid legal obligations the court may disregard the legal
personality. Nicole & Sandra partners, sell their business to Benja and
undertake not to start a similar business and not to compete with Charles for
certain number of years. After some time they form a private company, become
the principal shareholders and directors and start a similar business. The court
may restrain the company from carrying business. In the case of Gilford Co. Ltd v Horne (1933) Ch. 935 C.A.
Horne a former employee of a company was subject to a covenant not to
solicit its customers. He formed a company to carry on a business that, if he
had done so personally, would have been a breach of the covenant. An injunction
was granted against him and the company to restrain from carrying business. The
company was described in a judgment as “a device, a stratagem” and a
as a mere crack or sham for the purpose of enabling the defendant to commit a
breach of his covenant against solicitation.”
Protecting public policy
The
courts invariably lift the corporate veil to protect public policy and prevent
transactions contrary to public policy. In the case of Connors v. Connors Ltd
(1940) 4 All ER 174 it was held that where there is a conflict with public
policy, the court will lift the veil of incorporation.
Statutory lifting
Apart
from judicial considerations, the exercise may also be carried out statutorily
under the provisions of Companies Act e.g. where the number of members is
reduced bellow the statutory minimum
[1] [1897]
A.C. 22 (Eng., H.L.)
[2] See
Salomon v. Salomon., op. cit., at p. 31
[3] See
MALLOR J. et al., Business Law and the Regulatory Environment. Concepts and
Cases: 10th Edn: Boston: Mc Graw-Hill Companies, Inc., 1998, at p. 826.
[4] (1905)
142 Fed 247
[5] (1969)
WLR 1241
