Company Law

Introduction

The case of Salomon v Salomon & Co.[1] firmly established the principle of the separate legal personality of a company i.e. that a company, once incorporated, is a legal person in its own right and is to be regarded as a separate entity from its members. The court in that case did however recognise that there could be instances where the courts would have to deviate from the principle of separate legal personality (commonly called " lifting the veil of incorporation") by stating that the principle was to be of general application provided that there was "…no fraud and no agency and if the company was a real one and not a fiction or a myth."

The cases in which the corporate veil has been lifted fall into four main categories namely: -

Where a relationship of agency is found to exist
Where the company is being used as a mechanism to avoid legal obligations
In the case of a group of companies, where the justice of the case requires that the companies within that group should be regarded as a single economic entity
Where the corporate veil is lifted to ensure compliance with a court order
Each of these categories will now be discussed in turn.

Where a relationship of agency is found to exist

In the case of Smith, Stone and Knight v Birmingham Corporation[2] the court listed six factors which were to be taken into account, all of which must be answered in the affirmative, in finding a subsidiary to be an agent of its parent.

Are profits of the subsidiary treated as profits of the parent?

Were persons conducting the business of the subsidiary appointed by the parent?

Was the parent the “head and brains” of the trading venture?

Did the parent govern the venture?

Were the subsidiary company’s profits made by the skill and direction of the parent?

Was the parent in effective and constant control of the subsidiary?
In that case the subsidiary of the Plaintiff company was treated as a department and the Plaintiff was... [continues]

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