Outline and critically discuss the statutory and common law examples of `lifting the veil` on corporate personality.
The corporate veil is a legal concept that separates the company from its shareholders. It separates the personality of the company from the personalities of the shareholders, so that they have separate entities and that the shareholders liability is limited to that they have invested into the company. The corporate veil also protects the shareholders from being personally liable for any of the company’s debts or other obligations, so that the personal assets of its shareholders are protected. However the corporate veil can be lifted if a court determines that a company has not acted in accordance the provisions of corporate legislation or the Companies’ act. A court can also decide to lift the veil if they believe a company is just a sham or in a façade situation, where the company has committed fraud or breached a contract. Therefore if the veil was to be lifted, the company and its shareholders would be treated as the same entity. The companies’ rights and liabilities would be treated as the same as the rights and liabilities of its shareholders. The corporate veil can also be lifted if a court believes a member or members are responsible for the companies’ actions. Therefore if the company where to be sued, the individuals responsible for these activities could be sued as well for damages that they have caused, due to these decisions.
The Salomon v A Salomon & Co Ltd case was a landmark in UK company law, and is the corner stone of company law. Mr A Salomon ran his business for 30 years, and decided to turn his business into a public company because his sons wanted to become business partners. Therefore Mr A Salomon, his wife and five eldest children became subscribers, with Salomon having 20,001 of the 20,007 shares and the rest one share each. After strikes and financial difficulties a Mr Edmund Broderip loaned Salomon £5,000 to help with the financial difficulties of the company. However the business still failed, and went into liquidation and Mr Broderip decided to sue, to enforce his security. Mr Broderip was repaid his £5,000 and the liquidator asked Mr Salomon to repay all the creditors due to he was the owner of the company. Salomon did not agree to this, because he believed he was owed for his debentures. Trial judge Vaughan Williams agreed with the liquidator that Salomon should pay the creditors on behalf of the company, because he was the owner of the company and the company was just an alias for Mr Salomon, therefore they were not separate entities. Salomon appealed the decision of judge Vaughan Williams at the Court of appeal, because he believed the company was a separate entity from him as there were six other shareholders of the company. The Court agreed with the liquidator that Salomon should pay the creditors, because he abused the benefits of limited liability and incorporation. The Court believed that Salomon formed the company with his wife and five eldest children to benefit from the limited liability of a corporation, so he could carry on trading but with limited liability. The other members were just nominees of Salomon, so therefore they were bound to indemnify the company’s debts. Salomon’s liabilities did not arise from the fact he was the majority shareholder, but from the way of that the company was set up. The creditors of the company could not sue Salomon directly, they could only sue him through the company. Salomon appealed the decision once more and it was taken to the House of Lords. The House of Lords overturned all of the judgements made by Judge Vaughan Williams and the Court of Appeal. The House of Lords decided that there was neither fraud in the way that Mr Salomon set up the company, nor Mr Salomon formed the company for fraudulent purpose. The House of Lords stated that there was nothing in the Companies Act 1862 to say that the shareholders should...
Hicks Andrew & Goo S.H., Cases & Materials on Company Law, 5th ed, (2004) Oxford University Press.
Cases and materials on company law By Andrew Hicks, S. H. Goo 6th edition 2008 p.121
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[ 4 ]. Cases and materials on company law By Andrew Hicks, S. H. Goo 6th edition 2008 p.121
[ 5 ]. Cases and materials on company law By Andrew Hicks, S. H. Goo 6th edition 2008 p.121
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