The Principle of Separate Corporate Personality

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The Principle of Separate Corporate Personality

The principle of separate corporate personality has been firmly established in the common law since the decision in the case of Salomon v Salomon & Co Ltd, whereby a corporation has a separate legal personality, rights and obligations totally distinct from those of its shareholders. Legislation and courts nevertheless sometimes "pierce the corporate veil" so as to hold the shareholders personally liable for the liabilities of the corporation. Courts may also "lift the corporate veil", in the conflict of laws in order to determine who actually controls the corporation, and thus to ascertain the corporation's true contacts, and closest and most real connection. Throughout the course of this assignment we will begin by explaining the concept of legal personality and describing the veil of incorporation. We will give examples of when the veil of incorporation can be lifted by the courts and statuary provisions and incorporate the varying views of judges as to when the veil can be lifted. Finally we will state whether or not we agree with the given statement. “The principle of a separate corporate personality is a fundamental concept in Business Law. However, this does not stop the courts from lifting or piercing the veil to see what lies beneath.” When a company receives a certificate of incorporation it has a 'separate legal personality'. In law the company becomes a legal person it its own right. The fundamental concept to become familiar with when starting up a business is the idea that the business has a legal personality in its own right, particularly when it assumes the form of a limited liability company. This essentially means that if one commences business as a limited liability company, then the corporation or company is a legal entity with distinct legal personality separate to that of the owners, members, or shareholders. This is known as the concept of legal personality. The 'veil of incorporation' can be described as being the separation between a company and its members. Due to the separate legal status of a company from its members this is usually very strictly maintained. However, there are certain circumstances when the courts will deny the people who run the company the advantage of hiding behind the corporate veil. In these instances the veil of incorporation is said to be 'pierced' or 'lifted', i.e. the barrier between a company and its members is removed so there is no legal separation between them. These instances are however, difficult to predict as the reasons depend on the judges interpretation of "fairness" or "policy" or of how a particular statute should be interpreted. In the leading case of Salomon v Salomon & Co Ltd, Salomon incorporated his boot and shoe repair business, transferring it to a company. He took all the shares of the company except six, which were held by his wife, daughter and four sons. Part of the payment for the transfer of the business was made in the form of debentures (a secured loan) issued by the company to Salomon. Salomon transferred the debentures to Broderip in exchange for a loan. Salomon defaulted on payment of interest on the loan and Broderip sought to enforce the security against the company. Unsecured creditors tried to put the company into liquidation. It was argued for the unsecured creditors that Salomon's security was void (not legally binding) as the company was a sham and in reality the agent of Salomon. However, the House of Lords held that the company had been properly incorporated and therefore the security was valid and could be enforced. Lord McNaughten stated that, "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 same hands receive the profits, the company is not in law the agent of the subscribers or trustee for...
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