Lifting the Coporate Veil

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LIFTING THE CORPORATE VEIL
(i) Introduction
(ii) Principles of Corporate Personality
(iii)Statutory Exceptions
(iv)Common Law and the Mere Façade Test
(v) Agency and Groups
(vi)Conclusions
INTRODUCTION
1. When a creditor discovers that a debtor company is insolvent, the creditor will frequently want to recover the debt from a shareholder, director or associate of the insolvent company. There exist various statutory and common law mechanisms by which the corporate veil can be lifted and liability imposed on individuals or other companies. This lecture sets outs and discusses those mechanisms in the light of recent authorities and of the Companies Act 2006.

PRINCIPLES OF CORPORATE PERSONALITY
2. One of the fundamental principles of company law is that a company has personality that is distinct from that of its shareholders. This rule was laid down by the House of Lords in Salomon v. Salomon & Co1, in which it was held that even if one individual held almost all the shares and debentures in a company, and if the remaining shares were held on trust for him, the company is not to be regarded as a mere shadow of that individual. Lord MacNaughten stated2:

“The company is at law a different person altogether from the subscribers to the Memorandum and, although it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the 1 [1897] A.C. 22

2 Ibid, at p. 51
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same hands receive the profits, the company is not in law the agent of the subscribers or the trustee for them. Nor are subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act3.” The rule in Salomon lies at the heart of corporate personality, and is the principal difference between companies and partnerships. However, there are situations in which the courts look beyond that personality to the members or directors of the company: in doing so they are said to lift or pierce the corporate veil. There is no single basis on which the veil may be lifted, rather the cases fall into several loose categories, which are examined below.

STATUTORY EXCEPTIONS
3. There are certain statutory exceptions to the rule in Salomon which involve a director being made liable for debts of the company because of breach of the companies or insolvency legislation. Eg:

(a) Failure to obtain a trading certificate
4. Where a public company fails to obtain a trading certificate in addition to its certificate of incorporation before trading, the directors will be liable to the other parties in any transactions entered into by the company to indemnify them against any loss or damage suffered as a result of the company’s failure to comply with its obligations. This provision Companies Act 1985, s.117(8) has been retained in the 2006 Act. See CA2006 s767(3).

(b) Failure to use Company’s name
5. Section 349(4) of the CA 1985 provided that if an officer of a company or a person acting on its behalf signs a bill of exchange, cheque or similar instrument on behalf of the company, in which the company’s name is not mentioned4, that person will be personally liable to the holder of the instrument in question for the amount of it (unless it is duly 3 i.e. Companies Act 1862

4 Thus contravening s.349 (1)(c) of CA 1985
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paid by the company). However, although CA2006 s.84 imposes criminal penalties for failure to use the company name on relevant documents, there is currently no equivalent provision in the 2006 Act imposing such a personal liability. (c) Disqualified Directors

6. Under s.15 of the Company Directors Disqualification Act 1986, if a person who has been disqualified from being a director of, or involved in the management of a company acts in contravention of his disqualification he will be liable for all those debts of the company which were incurred when he was so acting. The same applies to a person who knowingly acts on the instructions of a disqualified...
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