Critical Study of Corporations and Limited Liability

Running Head: BUSINESS ORGANIZATION ASSESSMENT
CRITICAL STUDY OF CORPORATIONS AND LIMITED LIABILITY
Name of the Student
Name of the University
Author’s Note

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BUSINESS ORGANIZATION ASSESSMEMNT
The most common method of carrying a business in British Columbia is by the way of
establishing corporations. The corporations offer limited liability to the shareholders and exist as
separate legal entity having all the legal rights and capacity as similar to a natural person along
with a common seal of its own, unless the contrary is mentioned in the Articles of incorporation
of the company. The provisions and procedure to incorporate a company are enacted in the
British Corporation Act (British Columbia), 2002. A company incorporated under the Act is
required to compulsorily have a registered office located within the territory of British Columbia
at the office addressed in the Articles of Incorporation.
A company incorporated under the Act is a separate legal entity having its own legal
capacity as that of a natural person along with a common seal. The company, although having its
own legal existence, the decision makers and the soul of the company are the people running the
business that is the directors and the shareholders of the company. The shareholders are under
the duty of care and diligence towards the best interest of the company.
The doctrine of veil is implied when the shareholders act for themselves camouflaged by
the identity of the company. In short, the shareholders act in their interest by the name of the
legal entity to achieve personal goals and compromise the interests of the company. In Gilford
Motor vs. Horne1, it was held that the piercing of corporate veil is an essential legal doctrine to
protect the interests of the company. Furthermore, in Trebanog Working Men’s Club and
Institute, Ltd v. MacDonald’s2, it was held that the rights and duties of a legal entity are the
1 [1933] Ch. at 943
2 [1940] 1 K.B. 576 at 582 (Eng.). In Trebanog the court did not pierce the veil to find shareholder liability, but
separate corporate personality was set aside nonetheless. Specifically, the court found that the incorporated company
was acting as an unincorporated trustee for the alcohol of its members, and therefore did not represent an illegal sale

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BUSINESS ORGANIZATION ASSESSMEMNT
rights and liabilities of its shareholders. The leading case, which first introduced the doctrine, is
the Salomon v A Salomon and Co Ltd3, wherein it was held that the rights and liabilities of the
shareholders are separate from that of the entity and the shareholders are bound only to the
limited liability as to the percent of shares held by them. The most important feature highlighting
the doctrine is that the company survives the death of its shareholders meaning that the death of a
shareholder does not imply that the company shall cease to exist, which was held in Macaura vs.
Northern Assurance Co4.
The doctrine of corporate veil has become essentially a part of law, which has emerged
from a concept where the shareholder may act fraudulently behind the veil of the corporation5.
So, the first merit of the doctrine is the concealment principle. This is equivalent to the sham or
façade where the shareholder tries to hide the sham behind the activities of the company may be
in the form of an agent, group enterprise or injustice or unfairness. In Bank of Tokyo vs.
by a distinct (incorporated) legal entity. See id.; Sealy & Worthington, supra note 3, at 59–60.
3 [1897] AC 22
4 1925 AC 619.
5 Sections 993 (fraudulent trading), 1121 (officers in default), 251 (shadow director), 399 and 409 (group reporting)
of the Companies Act 2006. Further, section 214 of the Insolvency Act attributes unlimited liability to a director of a
company in case of wrongful trading. See also, section 218(6) of the Employment Rights Act, 1996; Part 4-
Taxation, International and Other Provisions Act, 2010; and Part 3- Finance Act, 2015. Also, see HM Revenue and
Customs, Diverted Profits Tax: Interim Guidance, 30 March 2015.