Commercial and Corporation Law

Commercial and
Corporation Law
Running head: Commercial and Corporation Law
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Corporations are a legal entity. It means in the opinion of the law, this business structure has a
different legal identity. A corporation can do any commercial act similar to a natural person. The
same can enter into a transaction by its own name and can enter into a contract with a third party.
The third party in such a situation gets the same right they would have to get in against a natural
person. Further, a company can also sue another party by its name and similarly a third party can
sue a company. In a summaries way, this is to state that a corporation may conduct a whole
business alike an individual. Nevertheless, the same has certain limitations. As mentioned above
that a corporation is not an individual person, a corporation cannot perform its functions by its
own. Therefore, to perform the activities on behalf of the corporation, the board of directors is
there. These people are responsible to conduct all the business activities in the name of the
corporation. The important point to discuss here is that in addition to being a legal entity,
corporations are separate legal personality too. A company has a separate identity from its
members and directors/officers and the only company itself is liable for its conducts. In actual
these are directors and officers of the company who take decision for the company and perform
the transactions but they cannot be held liable for their conduct because of the separate legal
status of the company. In this manner, it will not be wrong to state that there is a virtual veil
between members/directors and company. This veil is known as the corporate veil.
Salomon v A Salomon & Co Ltd1 is the landmark case in which court accepted the presence of
the corporate veil. In the decision of this case, the court provides debenture rights to a person
who was the whole controller of the company and stated that no matter who is responsible to
control the business, a company will also be a separate person and nobody can be held liable for
the acts conducted in the name of the company. Similar kind of decision has been provided by
1 Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22

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the courts in the case of Lee v Lee’s Air Farming Ltd2. In this case, a person named Geoffrey Lee
formed a company in which he owned 2999 shares out of total 3000. He was the sole director
and was also working as chief pilot of the subjective company. On the event of his death in a
plane crash, his wife asked compensation under the Workers’ Compensation Act 1922. Privy
Council held the claim of his wife justified. It has been held that his husband was working as a
pilot and the company formed by him had separate legal status from him.
In many of the subsequent cases, people misused this virtual veil. They knew that they could not
be held liable for the acts done on behalf of the company. To prevent such cases, another rule
came into existence, which is termed as the lifting of the corporate veil. This rule says that the
court may held directors/members of the company personally liable in those cases where the
separate legal personality of the company been misused. Whenever courts lift the virtual veil, the
person behind the respective transactions becomes personally liable. Courts may lift this veil
under the provisions of the statue as well as under the virtue of common law. Firstly talking
about statutory provisions, this is to state that Corporations Act 20013 is applicable throughout
Australia. Provisions related to insolvent trading are one such area. When a company suspects to
be insolvent, the same should stop trade if the same does not have the capacity to repay debts.
However, sometimes companies keep its business carries on even when the same has no capacity
to repay the loan and there are enough reasonable grounds to suspect insolvency of the same.
Judges in such a situation have the right to lift the corporate veil and to held directors liable
under section 588G-588M. In addition to this, the court may also held members personally liable
under section 588V-588X. Further, when a company does the certain transaction in order to
defeat the entitlements of employees, the court may have company’s directors personally liable
2 Lee v Lee’s Air Farming Ltd [1960] UKPC 33
3 Corporations Act 2001 (Cth)