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Company Law - Essay Example

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The various ways by which the court has lifted the veil of incorporation and disregarded the corporate entity are so varied as to strongly suggest that the court is guided above all by the principle that it will do so when fairness and justice require it.-Discuss…
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Company Law
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Company Law

The intention of the law makers is to establish a corporate fiction which is regarded as a legal juristic person with a separate legal entity, which is distinctive from the shareholders who own it and which gives the primary benefit of limited liability to shareholders. The main aim behind is that to encourage the shareholders to offer capital and to assume more risk on investments. By designing this, not only the costs are externalised but also the risk is mitigated to third parties. Due to this limited liability criterion, investor confidence is encouraged which in turn will kindle the economic development. Thus, limited liability can be seen as the foundation of the capitalism. Further, as moral hazard comes into operation, the benefits may not be equal to the externalisation costs thereby creating economic losses to third parties. So as to promote justice and fairness, the court may disregard the assumption of limited liability infrequently and thus court will inflict personal liabilities on the shareholders for the losses suffered by third parties in dealing with the company. This doctrine is called as lifting of corporate veil and this research essay will analyse how the courts are lifting the corporate veil when fairness and justice require it. Thus, the lifting of the corporate veil is a highly litigated issue in the corporate law sector1. Lifting of Corporate Veil under Fairness and Justice Grounds Under English Companies Act, the company is a distinct legal person wholly divergent from its members, and the company is entrusted to enjoy the privileges and owe some duties, which are distinct from that of rights or duties enjoyed by its shareholders. This notion has been regarded as a veil, a curtain or a shield between the members and the company. As an iron curtain, the shield is regarded as an impassable curtain. This has been well established in the case Salomon v Salomon & Co Ltd2. In this case, “it was held by the House of Lords that the company had been incorporated appropriately, and it was a legal person before the law and was different from those who established it”. As there was no fraud was committed by Solomon, the House of Lords were of the opinion that the secured debentures issued to Solomon would have priority over the unsecured creditors in the case of winding up proceedings of the company. Though 100% shares were held by Solomon and his family members, the court observed that company is distinct from its shareholders3. The creditors witness an inherent peril in dealing with a company since liability of shareholders is limited. When the risks are improperly or excessively transferred to creditors by the shareholders, then the liability shield is not justified. Under this scenario, courts have the capacity to disregard the separate corporate identity. The courts balance two competing features namely offering economic and democratic justification for the limited liability characteristic so as to promote the growth of the economy and the corporations and hence, the courts will be always hesitant to lift the corporate veil. However, the society and the creditors should be safeguarded as well from any peril unleashed by the companies and the shareholders. This fairness argument compels the courts to lift the corpo ... Read More
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