“…the Courts Can and Often Do, Draw Aside the Veil. They Can, and Often Do, Pull Off the Mask. They Look to See What Really Lies Behind. the Legislature Has Shown the Way… the Courts Should Follow Suit”.

Topics: Corporation, Corporations law, Company Pages: 12 (4004 words) Published: September 23, 2011
Law of Business Associations

Assessed Coursework
Question 1 (a) Essay

“…The courts can and often do, draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way… the courts should follow suit”.[1]

When a company is incorporated, it is treated as a separate legal entity, distinct from its promoters, directors, members and employees and hence the concept of the corporate veil, separating those entities from the corporate body has arisen. The nature of corporate personality can be analysed by reference to the celebrated case of Salomon v. A. Salomon & Co. Ltd.[2] Indeed it has been said that Salomon forms a cornerstone of company law and that the separate legal identity of a company stands as a fundamental principle[3] of our English law.[4]

In modern English company law, the principle of the separate legal identity of the company is still firmly adhered to and the principle of Salomon has been upheld over time. However Salomon itself and subsequent judgements have indicated possible exceptions to the separate entity concept. Lord Halsbury recognised the separate entity providing there was: “… no fraud… and no agency and if the company was a real one and not a fiction or a myth”.[5]

It is, however, evident that the courts are prepared to abandon the strict view of Salomon[6] and disregard the principle in certain circumstances in order to reveal human culpability. Some researchers argue that the courts have become increasingly willing to lift the veil,[7] while others suggest that it will only be lifted (or extended) in very specific circumstances - in order to restrain the corporate personality by “reaching it through its shareholders”.[8]

It has also been suggested that all of the common law exceptions to the principle of separate corporate identity are simply symptomatic of the courts attempt to ensure that all parties involved are not disadvantaged by the actions of company management and shareholders protected by the status of limited liability.[9] They say that ultimately English law is remedy driven and that without a method of reaching in through the veil of incorporation, they question who will pay the price for a breach of the company’s powers? Furthermore, Gallagher and Ziegler argue that all of the common law exceptions traditionally proposed by the courts and other legal researchers, are in fact subsets of the one category – the prevention of injustice.[10] Ultimately they might be right. It does seem to come down very often, to the view of the judge as to the justice of providing a remedy in the case before him.[11]

There are a number of advantages that are linked to the existence of the corporate personality. The main ones to be considered here are (a) the ability to transfer shares and combine capital from different sources in a corporate framework, which, it is said will encourage business ventures and entrepreneurialism, that an unincorporated individual may be unwilling to undertake. (b) Perpetual succession and (c) the fact that the liability and assets of the company can be separated from those of its members.[12]

It seems that the guiding principle is to say that the doctrine of the separate legal personality of the company, prima facie, will be recognised and acted upon by the courts unless the public interest and/or public policy require that the veil of incorporation be lifted. Alec Samuels concludes that where the veil has been lifted in the past, while the motive of the court in each case is readily apparent, no pattern is discernible. Certainly such things as crime and fraud should be suppressed and the intention of Parliament, as expressed in various statutory schemes, such as those relating to taxation, ought to be upheld, and the device of incorporation should not be allowed to frustrate them.[13]

“…the fact that two persons are separate in law does not mean that one may not be under the...
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