Law for Managers- Lifting the Corporate Veil - Essay Example

?The concept of separate legal personality is of great importance in company law but it has been realised that under certain occasions, it has been used to shield erring directors. Against this background, this essay seeks to critically analyse the circumstances under which the corporate veil can be lifted as well as analysing the effectiveness of the law in piercing this veil when necessary. The essay starts by outlining the overview of the concept of legal personality through analysing different court cases that have influenced the development of the law and the decisions made by the courts. The essay will also consider the wide range of circumstances where the corporate veil can be pierced and this can be both under statute and at common law. Finally, the paper will attempt to evaluate the reasons why the courts decide to lift the veil and in other instances keep it firmly drawn down. According to Cillers et al (2004), an association of persons or an organised body can acquire legal personality in the few ways that are recognised by the law. There are mainly three ways in which this can be effected and these are: by way of separate Act, general enabling Act or by conduct. Legal personality can be acquired by virtue of separate Act obtaining within a particular legal framework of a given country or in terms of a general enabling Act such as the Companies Act which is used in many countries. This is modelled under the English common law. Many of the English common law of companies were readily accepted by different countries which adopted this form of law as their guiding principle in the legal framework and these were also accepted by the courts with little or no modification. It can also be seen that an association of 20 persons can also acquire legal personality by conducting itself as a legal person in compliance of certain requirements. On its formation, the company as a separate entity acquires the capacity to have its own rights and duties (Gibson, 1988). Once the company has been incorporated, it can be treated as an independent person with rights and liabilities that are appropriate to itself. As such, a company has a legal existence with rights and liabilities of its own as aptly illustrated by the case of Salomon v Salomon& Co [1897] AC 22 (Hl). The brief facts of the leading case were as follows: Salomon was the sole proprietor of the prosperous company and he decided to turn the business into a limited company after realising its great potential. Salomon received ?10 000 in debentures from shareholders which were secured by a bond of the company’s assets. However, the company faced a downturn of events and had to be liquidated through the sale of the assets. The sale of assets was far short to cover the debentures whereby the liquidator suggested that creditors had to be paid first before the debentures. Thus, the shareholders were left in the cold. Apparently, the court ruled in favour of Salomon on the reasonable ground that the company was just like Salomon. It was treated as an individual person. This given scenario aptly illustrates the magnitude to which this the concept of legal personality has come under criticism for shielding the erring company directors. Though it is generally accepted that upon incorporation, the company comes into existence as a separate entity, many divergent views have emerged which challenges the legality of this particular concept in as far as the operations of a particular company are concerned. Strydom (2007) posits to the effect that this legal provision gives more power to the directors and at times it often disadvantages the unsuspecting shareholders of that particular company. Given such a scenario, it can be noted that some directors can take advantage of this unfavourable balance in the law which can result in losses being incurred by other people. In as far as fraud is not suspected in the demise of the company, the court can rule in favour of the director since he or she can be treated just like an individual person. The company is protected as a legal entity by the court and it can be observed that the law is not fair at times with regards to this particular concept. With the case of legal personality clearly outlined in the case given above, it must be contrasted with other cases that are related to lifting the corporate veil or piercing the veil. There has been much debate about the authenticity of this legal concept in view of certain situations and there are certain circumstances where the corporate veil can be pierced under the statute or common law. This section of the essay attempts to discuss some of the cases where the principle of legal personality has been pierced to protect the interests of the people affected. In incidences where the corporate personality has been used as a mechanism to cover cases of fraud or improper conduct, the courts may be compelled to pierce the veil. A discussion of the effectiveness of this measure will be given as well. In certain instances, the courts are prepared to pierce the corporate veil or ignore the existence of the legal person under certain circumstances. There are various reasons why the corporate veil can be lifted in certain circumstances. Usually, there are common law offences that are committed by the directors, employees and shareholders against the company shareholders or creditors and these are punishable in accordance with the dictates of criminal law (Benade, 2000). Thus, a director who with the knowledge of an order of court against the company causes the company to be in breach of that order is himself liable or guilty of contempt of court. In some instances, cases of fraud involving the directors who knowingly defraud the company have often led the courts to lift the corporate veil. This step is taken as a measure to protect the interests of the company and the shareholders who may fall prey to the activities of the greed leaders. In such a scenario, the law has to take its course in order to ensure that such cases are minimised. In as far as the aspect of disregarding the principles regarding to the separate corporate personality of a company are concerned, it can be noted that the following are case is a good example. In Daimler Co Ltd v Continental Tyre and Rubber Co, the House of the Lords held that in spite of the decision made in the case involving Salmon and Salmon, it was entitled to look at the nationality of the members of the company to decide that the company was either alien or not during the First World War. Under the provisions of the law stipulated in this case, it can be noted that the court pierced the veil of the corporate personality since it was deemed to be in contravention of the statutory regulations. The court can also disregard the aspect of corporate veil where fraud is used to further personal interests by the directors at the expense of the company or the shareholders. It is the duty of the courts to protect the interests of all shareholders in the company so that they are not easily taken for a ride by other unscrupulous directors who are bent on enriching themselves through improper means. When such a scenario has been reported, the courts can disregard the corporate veil since it will be used as a shield to conceal the criminal behaviour of the directors of the company or other shareholders. Under statutory as well as common law, criminal liability by the legal persons is an offence that is punishable when the court is able to prove a prima case against the accused. All criminal activities under the guise of legal persons are persecuted in the court of law. The law does not allow improper conduct by the legal persons who may be aware that they are protected by the law. This amounts to fraud hence it is a punishable offence. It can also be noted that in as far as the tax liability of the company is concerned, the courts will not permit a situation where the true state of affairs are concealed by the company as this is regarded as illegal. Such action is tantamount to an attempt to evade legal requirements compelling all registered companies to honour their obligations of paying taxes to the government. The government generates the bulk of its revenue through tax collection hence the aspect of legal personality can be pierced if it is suspected that it is used for purposes that are meant to deprive the government from generating revenue through tax collection from the company. On the other hand, it can also be observed that sometimes the legislature disregards the principles regarding the separate corporate personality of a company. Benadine (2000) posits to the effect that if a director, officer or agent of the company signs a promissory note for goods on behalf of the company in which the registered name of the company is not mentioned correctly, he is committing an offence. That person will be liable to the holder of that bill unless it is fully paid for by the company itself. The legal personality can also be lifted in the event that the director uses his influence to acquire a loan using the name of the company while it is meant for personal use. If full company details are concealed in this kind of deal, then the legislature can deem it to be illegal which warranties the lifting of the legal personality which can be abused by unscrupulous directors. In other instances, the legal personality can be lifted if the business of the company is carried recklessly with the intent to defraud other people (Havenga, 1996). Any person who knowingly conducts himself in such a manner is liable for any debts of the company that can be incurred during the process. The financial statements of the company should also be presented fairly to all the stakeholders involved in the company. Any attempt to conceal the true factors with regards to financial statement of the company can result in the court taking legal action against that company since it would be suspected that it will be suspected that it is carrying illegal activities. The company has an obligation to ensure that it is operating within the confines of the law. If properly implemented, the law is very effective in piercing the veil whenever necessary. Every individual person or organisations are supposed to be protected by the law of the land against cases of fraud or theft by people who purport to be operating legitimate business. This law is very effective since the operations of all companies can be done in a transparent manner. It may be difficult for the directors to recklessly behave on the pretext that they will be protected by the aspect of legal person as they can be dragged to the court if they conduct themselves in an improper way. It can be seen that some directors abuse the name of their respective companies to commit a range of crimes hence this law is very effective in dealing with such cases. The interests of all the stakeholders are protected by this particular law. However, in some instances, it can be noted that the courts attempt to keep the corporate veil of the company firmly drawn down as a result of various circumstances. The court should not lightly disregard the company’s separate corporate personality but should try to uphold it. If the courts act otherwise, they would be negating or undermining the policy as well as the principles that underpin the concept of separate personality as well as the legal consequences that attach to it (Mallor et al, 2007). It can be noted that the court has no general jurisdiction to simply disregard the company’s legal personality whenever it considers doing so. The balancing test between the interests of the company with regards to legal terms as well as interests of the stakeholders have to be taken into consideration and this is one of the reasons why the courts often decide to keep the aspect of the legal personality drawn. However, there are certain consequences or challenges that currently face the courts, particularly with regard to the position of subsidiaries. If a company is a separate entity existing from its members, its estate is assessed apart from the estates of the individuals or subsidiaries (Benadine, 2000). For instance, the company’s debts are its own and not those of the members of the company. For instance, the liquidation of the company may not necessarily entail the cessation of estates of the members of the company. Conversely, the cessation of the estates of the members of the company does not necessarily mean to say that the company’s estate also ceases to exist. This is due to the fact that it operates as a separate entity and in this case, it may be challenging for the court to enforce the concept of legal personality. Another major challenge that can be faced by the court is that the assets of the company belong to it not subsidiaries as provided by the statutory provisions with regards to company law. The members have no proportionate right to the property. This state of affairs often excludes the members and it may be difficult for the court to rule in favour of the members should they raise a case that is related to misappropriation of company assets. The company exists on its own and the members also exist on their own. It seems that the members are excluded and have no legal representation which is a great challenge to the court. Given such cases, the court may decide to keep the aspect of legal personality intact since it is clearly outlined that the company is different from its subsidiaries. It can also be seen that no one especially subsidiaries to act on behalf of the company but only those appointed by the company as representatives can bind the company. Given the existence of the issue of separate entity between the company and its subsidiaries, it can be noted that issues such as theft of company assets by the director can be challenging and can be addressed if due regard of the true nature of the company is established. If the entire board of the company consent or agree to a director of misusing the assets of the company, he may not be regarded as guilty of theft. The subsidiaries in this case have no power to prove the misappropriation of the company assets by the director as a result of the existence of separate entity between the company and its subsidiaries. Over and above, it can be noted that the aspect of separate legal personality is very significant in company law but it has been realised that under certain occasions, it has been used to shield erring directors. This mainly emanates from the assertion that the company is treated as an individual person with his or her own rights. As noted, this leaves the shareholders as well as other subsidiaries at risk in the event that the company directors abuse their power to misappropriate company funds or assets. Under the provisions of the company law in relation to the aspect of legal personality, the director may not be guilty since the company is treated as an individual person. However, the corporate veil can be lifted if it is suspected that it has been used for fraudulent purposes by erring directors. This aspect is very important since it is meant to protect the interests of all stakeholders involved. As discussed above, in some instances, the court may decide to uphold the principles of the legal personality as a result of a variety of reasons. (Words 2665) Reflective journal In as much as company law is concerned, it can be noted that though the aspect of legal personality is very important to the company, it has been subjected to abuse by other people. As such, in my opinion, I think the provisions of this law have to be diluted such that they are not used as scapegoats by other erring directors who may be bent on defrauding the company. This disadvantages the stakeholders as well as the subsidiaries as they may be left in the cold in the event of liquidation of the company. The directors have a fiduciary role to play and this should be done in a transparent manner in order to ensure that the interests of all stakeholders are protected. It is my strong conviction that the law must not over protect the directors as they can end up abusing it fully knowing that they can get away with it. I am therefore in support of the view that the corporate veil has to be pierced in order to protect the interests of all stakeholders involved in that particular company. The directors can also be held accountable for their activities. Instead of treating a company as a separate entity, I believe that it can be helpful to regard it as a collective entity. If this law is fully implemented, the interests of all stakeholders will be protected in a balanced manner. I also believe that it is the duty of the courts to decide if the company directors have abused the aspect of the legal personality in a bid to ensure that the interests of all people are catered for. Bibliography Anderson, AM, Dodd, A & Roos, MC 2003, Everyone’s guide to law, Zebra Inc, CT. Benade, ML 1992, Corporate Law, 2nd Edition, Butterworth Publishers, London. 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