Corporate Veil

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Corporate veil

Introduction

With the contemporary appreciation of the separate entity principle in courts, it has become increasingly difficult to predict the outcome of cases with precision as in the case of Salomon v. Salomon & Co Ltd (1897). Separate corporate personality has been firmly recognized by common law after the verdict given in the case of Salomon v. Salomon & Co Ltd (1897). It was confirmed that a corporation has legal right, personality, and obligations completely divergent from those of its shareholders (Tweedale and Flynn, 2007, p.270). Courts and legislation nevertheless sometimes “pierce the corporate veil” in a bid to hold the shareholders personally accountable for the corporation’s liabilities. Courts might also “lift the corporate veil” in the conflict of laws in order to decide who actually controls the corporation, and as such accurately ascertain the corporation’s contacts and closest links. This paper critically discusses the concept of lifting of the corporate veil with reference to Salomon v. Salomon and Co Ltd. Consequently, a comprehensive analysis of Lord McNaughton’s statement with reference to the case will be made by giving example of other cases. Finally, the paper addresses the notion of shareholder and corporate liabilities.

The doctrine of incorporation and Salomon v. Salomon & Co Ltd case

A conglomerate is born by listing under the 2006 Act. In the procedure, individuals proposing to craft a conglomerate have to send certain permissible documents to the companies’ registrar. If the documents sent are as par requirement, the companies’ registrar issues a certificate of incorporation, and as such, conglomerate becomes a commercial body. The policy of incorporation remains as a joint legal conception, which hypothesizes an incorporated conglomerate is a separate legal unit distinct from people who are in charge of its activities. The conglomerate’s debts as well as other obligations belongs to the conglomerate and not the directors; as well as, the shareholders (Bukola, 2002, p. 3)

This theory is present in the common law of the famous case of “Salomon Vs Salomon and Co Ltd.” Salomon and six other colleagues of his folk subscribed to the conglomerate’s memorandum for one share each, and the conglomerate then appointed two of his sons to its management board. The conglomerate made payment to the Salomon for business some catering for debentures and other for shares. Nonetheless, the business failed to prosper and wound up within a year with liabilities exceeding assets. The claims of the liquidator representing the unsecured creditors are that the company’s activities was in actual fact still Salomon’s liability for the debts incurred in company’s operations. Therefore, Salomon should indemnify the company against its debts and Salomon’s debenture debt should be held until other company creditors are indemnified. As Salomon’s motive in formation of the company was to using the company as a means to run his dealings for him, the liquidator reasoning was then accepted by the trial judge. A comparable stance was taken at the “Court of Appeal as well as, the House of Lords”; in particular, Lord MacNaughten stated that a company is a separate entity.

Are subscribers not liable in any shape or form for the company’s liabilities? Members are not liable to the corporate liabilities hinges on the concept of restricted liability and the nature of the company. Whereby, the doctrine of the limited liability goes closely with the concept of separate legal personality, and courts address the implications of the two notions separately. For instance, in “Foss and Harbottel case” the court validated the concept that when a corporate faces a wrong, the corporate itself assumes plaintiff position in the proceedings and not the shareholders (Cohen, 2006.p.7). The Salomon’s case reinforces the same principle, where the company was held as a separate...
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