Corporate Veil and Limited Liability

This assignment delves into the legal concept of the 'corporate veil' and its implications for limited liability. It examines how companies are considered separate legal entities from their owners and directors, shielding them from personal responsibility for company debts and obligations. The assignment also discusses instances where courts may 'pierce the corporate veil,' holding individuals accountable for fraudulent activities or attempts to evade legal responsibilities.

LAW OF BUSINESS
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TABLE OF CONTENTS
1. INTRODUCTION 3.
2. Concept of Incorporation 3.
3. Distinct Corporate Personality 3.
4. Consequences of Separate Legal Personality 5.
5. Roles and Responsibilities 5.
6. Piercing the Corporate Veil 6.
7. CONCLUSION 7.
8. REFERENCES 8.
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INTRODUCTION
Incorporation marks the birth of a corporate personality in legal terms, though it does
not have any physical presence. The operations and functions of a company are undertaken
only by the human minds as otherwise it is not possible for a company to operate on its own.
Hence the entire credit of all the profits and losses can be given to all the personnel who are
responsible for managing the business. However, it is important to note that all these actions
are undertaken only in their professional capacity, in the name of company. This implies that
there is no direct benefit which they are deriving out for their personal self. In addition, there
are other members in the form of shareholders who are considered as the true owners and
make investment to run to develop the capital of company. In pursuance to the same it was
held by the court that it is essential to establish a distinction between corporate personality of
company and those of all the natural persons made responsible for operating the company.
Concept of Incorporation
Incorporation is an event in the life a company which makes it come into existence
and also enable the corporate personality to come alive. Section 14 of the Company Act 2006
requires every entity to register with the concerned authority, in pursuance to which the
certificate of incorporation as stipulated in section of the Act is awarded. This is the juncture
where the company is said to have incorporated. In section 15 of the Act it has been clearly
stated that certificate of incorporation presents a conclusive evidence for valid existence of a
company. Once this certificate is issued by the authorities the body corporate is made entitled
to exercise all its functions and operate to earn profits. All the subscribers and other members
of company from this point onwards are known in the name of incorporated company as
stated in the certificate of incorporation.
Distinct Corporate Personality
Once a corporate comes into existence after receiving the certificate of incorporation,
it acquires a separate as well as distinct identity. In consequence to which an artificial person
comes into existence who undertakes all its operations or functions. Such an artificial person
also has power to sue others and be sued by others. The English law adopted the concept of
distinct legal personality which ascertains and creates separate rights and obligations for a
corporate. As observed in Mach Marketing International SA v. MacColl (1995), every
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business organization is born with its incorporation. The concept of Corporate Personality or
separate legal identity was first observed in the case of Solomon v. Solomon (1896), wherein
it was held by the court that all the actions and obligations of a corporate are in its own name
(Cheng, 2011). However, these activities are essentially being undertaken by the natural
persons attached to the company through the positions of director or other members. It is
imperative to understand the fact that though a company acquires artificial personality, it
cannot exist physically and hence, requires natural persons to operate all its activities. In such
a situation the question arises who is liable for all these actions and the resulting
consequences. In the Solomon case it was opined by the court that all the functions and
operations which are undertaken in the name of company, shall be regarded as undertaken by
the company itself (Hassan and et. al., 2012). Hence, the liability ought to arise in the name
of company, and no personal liability of such persons shall arise in such circumstances.
The legal personality of company also empowers and facilitates to formulate
contractual as well as other legal relationships to undertake all the functions in order to
operate the business and otherwise (Ireland, 2010). Moreover, this legal principle also
empowers a corporate to be able to possess assets and properties in its own name. The
evidence of this distinct identity has also been recognized by the Insolvency Act through
section 74 which provides that members of Limited Liability Company cannot be imposed
with personal liabilities for payment of creditors of the entity, subject to certain exceptions. In
the legal terminology there exists a corporate veil between the identity of a company and its
members. Thus in accordance to this general principle a corporate is responsible or liable for
its own functions. The manner in which a natural person cannot be made liable for actions of
other persons, the members can also not be made responsible for actions of another artificial
person. Further, in the case of Collins Stewart Ltd. Financial Time Ltd. (2005) it was opined
by the court that this legal relationship delineates the connection which exists between a
corporate and the respective members (Mwaura, 2012). Further, it was also stated that the
event of incorporation gives rise to a dual existence of a corporate, firstly in the nature of
association of all the members and secondly, as an artificial person distinct from its
shareholders and directors. In the Solomon case it was also held by the court that a company
can exist for an indefinite time, irrespective of the fact that its owners are changed. Therefore,
in accordance to the law a company shall be treated just like an independent person which is
entitled to enjoy all the rights and obligations which are applicable in the eyes of law.
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Consequences of Separate Corporate Personality
The legal principle has several consequences which it has on the members and other
related persons. The existence of corporate veil ensures that the company undertakes its own
business, possess assets/properties, formulate contractual relations, incur debts, sue or be
sued. The member does not have any personal responsibility for all these actions. Thus this
derives one of the most practical benefits for the members who can never be made liable for
payment of debts of the company, until and unless it is in relation to their personal investment
(Murray, 2011). It can be inferred from this that the directors as well as the shareholders does
not owe any form of duty of care to others in relation to the actions undertaken on behalf of
the corporations. Hence, in consequence to all these principles the shareholders or directors
can never be made tortuously liable for actions undertaken in the name of company.
Another concept which finds relevance in present context refers to the agency
relationship. In Solomon case it was opined by the court that there is no agency relation who
is shared between shareholders and the company. Neither does any relation of trust exist
between the two (Davies, 2010). Hence, in consequence to this association a great level of
significance can be found for group companies, wherein the parent and subsidiaries cannot be
considered as agent of each other. Therefore, the principle of legal personality or corporate
personality sought to have distinct consequences.
Roles and responsibilities of Directors and shareholders
 Directors must determine the vision of a company and set goals to make it achieve
easily.
 They should make the company policies to promote their working by the members.
 They must make the strategy to develop the mission to facilitate the actions.
 Evaluate the present the future opportunities, threats to risk relates to the company.
 They should delegate the authority to the management and implementation of the
business plans (Hammond, 2012).
 They monitor the behaviour of the shareholders with the proper information.
 They are responsible to must act in good faith with the honesty.
 Directors must give proper notice of meeting at a decide time and place.
 They empower the board to remove the chairman from the company.
 Shareholder has the power to remove from the directorship and re-elect another
person.
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 The rights of the shareholders must be decided in the general meeting of the company.
 They can take part in the meeting and discuss the agenda of the business.
 If they need to held a meeting, can also request for it and gives hid votes in the
meeting.
 They can analyse the accounts of his company and discuss about the decisions which
directors have made (Hanrahan, Ramsayand Stapledon, 2013).
 They can make voting in the ordinary resolution and special resolution on some
particular topic.
Piercing of corporate veil
A company has the separate legal entity subject to the rights and liabilities. It is a
situation where shareholders or members are personally liable for the corporate debts and no
limited liability of a company left. Where a court considers that company's business not
conducted as per the provisions of corporate policies. It may held liable the members for their
business obligations if any illegal activities done by them. This is a principle applied by the
courts for the company. Here is the case Saloman v Saloman where Mr. Aron Saloman was a
sole owner who set up a limited liability company (Hawkins, 2012). In his company A
Saloman & co. Ltd whose business is leather making process in which his family members
were the only shareholders. After a point comes and he failed in his business and many
creditors sought to Mr Saloman personally liable for the debts in his company. Court of
appeal considered that Mr Saloman using the company as a weapon to defraud the creditors.
House of Lord did not agreed that there was any fraud and held that company was a separate
legal person and therefore he was not liable for the debts of the company.
In certain circumstances court can reject the separate legal personality of a company
from the shareholders. If directors or shareholders are working in a company and mislead the
actions then liable for the amount to pay (Wagner and Armstrong, 2010). In the case of Jones
v Lipman owner of the land enters into a contract but changes his decision before completion.
Then he transfers the land to a company that is owned by him. Court ordered for specific
performance and owner had the control on company ans able to do. Order against the
company also that equal remedy is granted to him. Court has not always uses the decision of
the case in every corporate case. Court has the power to disregard the entity if they evade the
tax or any obligations. Where the company is being avoiding obligations then court can
ignore the legal separate entity and continue on the assumptions that no company existed
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(Zhao, Seibert and Lumpkin, 2010). The court may assist the veil to protect the public policy
and prevent from any contrary situations.
CONCLUSION
From the above report it has been observed that the company has the limited liability
and separated from the individuals. Directors and shareholder are not personally liable for
any debt incurred by the company. Company has the separate entity with the limited liability
of its members. The principle of corporate veil stated that any person who was involved in
any fraudulent activity then court makes him liable to pay the amount and set aside the
separate legal personality. Members or shareholders are liable for any misconduct by them in
a company if court has decided the conditions of the act
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REFRENCES
Books and Journals
Cheng, T. K., 2011. The Corporate Veil Doctrine Revisited: A Comparative Study of the
English and the US Corporate Veil Doctrines. Browser Download This Paper.
Davies, P. L., 2010. Introduction to company law. Oxford University Press.
Hammond, K. J., 2012. Case-based planning: Viewing planning as a memory task. Elsevier.
Hanrahan, P. F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company
law.
Hassan, H. and et. al., 2012. 'The myth of corporate personality': a comparative legal analysis
of the doctrine of corporate personality of Malaysian and Islamic laws. Australian
Journal of Basic and Applied Sciences. 6 (11). pp. 191-198.
Hawkins, J., 2012. Credit on Wheels: The Law and Business of Auto-Title Lending. Wash. &
Lee L. Rev. 69 p.535.
Ireland, P., 2010. Limited liability, shareholder rights and the problem of corporate
irresponsibility. Cambridge Journal of Economics. 34 (5). pp. 837-856.
Murray, O., 2011. Piercing the corporate veil: the responsibility of member states of an
international organization. International Organizations Law Review. 8 (2). pp. 291-347.
Mwaura, K., 2012. Internalization of Costs to Corporate Groups: Part-Whole Relationships,
Human Rights Norms and the Futility of the Corporate Veil. J. Int'l Bus. & L.. 11. p.
85.
Wagner, J. and Armstrong, K., 2010. Managing environmental and social risks in
international oil and gas projects: Perspectives on compliance. The Journal of World
Energy Law & Business. p. jwq002.
Zhao, H., Seibert, S. E. and Lumpkin, G.T., 2010. The relationship of personality to
entrepreneurial intentions and performance: A meta-analytic review. Journal of
management. 36 (2). pp. 381-404.
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