Business Law - Veil of Incorporation and Its Consequences - Essay Example

Business Law Table of Contents Business Law Table of Contents 2 Introduction 3 “Veil of Incorporation” and Its Consequences 3 Explanation of “Veil of Incorporation” 3 Practical Consequences of Separate Legal Personality 4 Lifting the ‘Veil of Incorporation’ 5 Meaning of the Practical Terms 5 Circumstances under Which the Law Will Lift the Veil 5 Examples of Case Law 6 Acts of Parliament to Lift the Veil 6 Law Should Be Able To Lift the Veil 7 Court Often Do Lift the Veil 7 Examples of Where the Veil Should Be Lifted More Often 7 Conclusion 8 Introduction One of the major purposes of incorporating a company is to separate the individuals from legal liabilities of that company. However, once a company is incorporated, it then becomes a separate lawful unit that is distinct from its shareholders, owners and directors. The company therefore possesses its own obligations, duties and rights that are separate from those of the owners and the shareholders. This separate legal entity of the company is referred to as the ‘veil of incorporation’ (Blackwells, 2014). Considering the above, the discussion will revolve around arguing the fact about considering ‘veil of incorporation’ as one of the decisive notions in the field of Company Law with a focus on the case of Salomon v A Salomon & Co Ltd [1897] AC 22 as well as the practical consequences that are derived from being a separate legal entity. Moreover, the lifting of ‘veil of incorporation’, which ignores the doctrine of separate legal entity, will also be discussed in this essay. “Veil of Incorporation” and Its Consequences Explanation of “Veil of Incorporation” According to the doctrine of ‘veil of incorporation’, a company is considered as a separate lawful body, thereby possessing its own rights, duties and obligations. However, by considering the case of Salomon v A Salomon & Co Ltd [1897] AC 22, the concept of ‘veil of incorporation’ can be understood in a clear manner. In relation to the case, Salomon had a leather boot business and acquired the maximum share by incorporating a company (Palma, 1897). A few days later, the company suffered from financial crisis and thus a third party named Mr. Broderip decided to provide a loan to the company. The amount realised from liquidation was allocated to Mr. Salomon and thus Mr. Broderip was to be repaid. However, after repaying him, it was found that a minimal amount is left to be distributed amid the unsecured creditors and the external shareholders. The Court of Appeal was in favour of the liquidators but the House of Lords argued that Mr. Salomon was not responsible personally even though he was the sole owner of the company (Palma, 1897). Practical Consequences of Separate Legal Personality There lay certain practical consequences of separate lawful personality. A company is completely liable to pay the liabilities and the debts to the creditors and the preference shareholders, as it is a separate lawful unit. They tend to lose their money in case the company fails to repay their amounts. Thus, if a shareholder dies, his/her share is transferred to someone else, but the business still continues to conduct its activities. A company may be closed only if the partners of a company die or it is being liquidated (Blackwells, 2014). However, the example relating to the case of Salomon v A Salomon & Co Ltd [1897] AC 22, which has been discussed above, may illustrate a clear idea about the notion of veil in operation. According to my opinion, the outcome of the case is not fair enough, because the acting of the company as a separate lawful body has deprived the creditors and the preference shareholders from obtaining their desired amount or share from the company. A company is not a living entity and therefore should not be made responsible for repaying the debts to the creditors. Rather, Salomon should be held responsible for repaying the debts. However, arguments also arise to the fact that if Salomon would be made responsible to pay off the desired amounts to the creditors and the preference shareholders, he had to use his personal assets for the purpose that might lead towards insolvency (LLRX, 2015). Lifting the ‘Veil of Incorporation’ Meaning of the Practical Terms In certain cases, it can be found that a veil is created over the personality of a company and this restricts the court to ascertain actual scenarios. With this concern, the term ‘draw aside the veil’ refers to the decision of the courts concerning lifting the veil with due regards to the underlying circumstances. On the other hand, the term ‘often do’ refers to the courts’ decision whether to “draw aside the veil” or “pull off the mask” (ACCA, 2015). These terms can be related to the case of Littlewoods Mail Order Stores Ltd. v. IRC. In this regard, based on the viewpoints of Lord Denning, the corporation i.e. Littlewoods Mail Order Stores Ltd. cannot entirely cast a veil, as it is involved in defeating public convenience and also justifying the conduct of any sort of wrongdoing. In this circumstance, the courts may pull off the mask and likely to observe the conditions underlying behind fulfilling the same (Blackwell’s, 2014). Circumstances under Which the Law Will Lift the Veil There are certain circumstances under which the law lifts up the veil. One of such circumstances can be ascertained as during the act of any fraudulent activity or wrong doing by the companies. Moreover, in case of group enterprises, the principle of ‘veil of incorporation’ may not be adhered and considering the economic realities, the court may adopt the decision to lift the veil. If the company is considered as the agent of proprietor or if war exists between the countries, the court will lift the veil considering the situation (Common Law Society, 2015). Examples of Case Law An example relating to the case of Daimler Co. Ltd and Continental Tyre & Rubber Co. may be taken into concern wherein the court has lifted the veil is being witnessed. The scenario of this case belonged to the time when Germany was engaged in war with England. Based on the observation, Continental Tyre & Rubber Co. sued a case against Daimler Co. for the dues receivable from the same. However, according to Daimler, the Germans owned the company and there it would be considered illegal paying to the company of England under Enemy Act. However, the corporate veil was lifted by the court in order to discover the relevancy of the fact. Ultimately, the court was in favour of Daimler Co. Ltd and thus the company succeeded in presenting itself in the defence mode against Continental Tyre and Rubber Co. (AWE, 2011). Acts of Parliament to Lift the Veil According to the Insolvency Act 1986 (Section 761), a personal liability is imposed on a person, when he/she runs a company with the intention of deceiving the creditors and also the preference shareholders or having the aim of conducting any fraudulent activity. However, the motive behind the establishment of this Act by the parliament was to make the companies liable to pay the desired debts to the creditors, rather than utilising the same as a vehicle of fraud. Moreover, according to the Company’s Act 2006 (Section 761), a public company is not liable to carry out the business, unless the minimum requirements and the share capital are being compiled by the same. Similarly, as per the Companies Act 2006 (Section 767), if any damage or loss is made to a company due to the intervention of any third party, the director of that particular company is solely responsible towards addressing such a critical situation in an efficient manner (Crown, 2006). Law Should Be Able To Lift the Veil Based on my understanding, laws should be able to lift the veil. Justifiably, the law established by the parliament associated with lifting the veil is ought to focus on providing the benefits to the creditors and the preference shareholders. The law must state that the companies are not separate entity and thus they are not responsible to pay off the liabilities of the creditors. Even though, under this law, there remains a risk for the directors and the partners of the company, as they are liable to pay off the debts from their personal assets (ACCA, 2015). Court Often Do Lift the Veil The courts often do lift the veil depending upon the circumstances that are duly considered as correct. When the court identifies that a company is involved with the conduct of certain fraudulent cats or wrongdoings that may harm the interests of the creditors, the court eventually takes a decision to lift the veil (ACCA, 2015). However, there lay small number of instances wherein the court decides to lift the veil. These situations are seen rarely when the court presumes that the company’s partners or the directors are intentionally performing fraudulent actions to run the business that may harm the interests of the creditors at large (ACCA, 2015). Examples of Where the Veil Should Be Lifted More Often The court would lift the veil more often in the cases, wherein the companies are involved in the conduct of fraudulent activities or there exists war between two countries. If the court assumes that the companies have intentionally engaged in wrongdoings that are harmful for the creditors, it is forced to lift the corporate veil. Conversely, in case, if there is a war between two countries, as that can be seen in the case of Daimler Co., the court should lift the veil in order to determine the nature of the shareholders (Common Law Society, 2015). Conclusion From the above analysis and discussion, it has been quite evident that the principle of ‘veil of incorporation’ and lifting the veil of a company completely depends upon the court of law after analysing the prevailing scenario of the issue. By analysing the case of Salomon v A Salomon & Co Ltd [1897] AC 22, a detailed understanding about the ‘veil of incorporation’ can be understood. Based on lifting the ‘veil of incorporation’, the companies are not considered as a separate legal entity and thus the partners or the directors involved with the same are liable to pay off debts to the creditors. References ACCA. (2015). While lifting the veil of incorporation is rare in practice, the courts do permit it, as a recent case illustrates. Technical Resources. [Online] [Accessed on 30th January 2015] http://www.accaglobal.com/in/en/technical-activities/technical-resources search/2014/may/lifting-corporate-veil.html AWE. (2011). ‘The nature of the company.’ Company Law, p. 1-8. Blackwells. (2014) Lifting the veil. Introduction. [Online] [Accessed on 30th January 2015] https://bookshop.blackwell.co.uk/extracts/9780199232871_dignam.pdf Common Law Society. (2015) Lifting the corporate veil at common law. Introduction. [Online] [Accessed on 30th January 2015] http://www.commonlawreview.cz/lifting-the-corporate-veil-limited-liability-of-the-company-decision-makers-undermined-analysis-of-englishus-german-czech-and-polish-approach Crown. (2006). ‘Companies and companies acts.’ Companies Act, p. 1-701. LLRX. (2015) The veil doctrine in company law. Features. [Online] [Accessed on 30th January 2015] http://www.llrx.com/features/veildoctrine.htm Palma, A. S. (1897). ‘Salomon v salomon & co.’ Comparative Legal English, p. 1-2. Read More