Corporate Veil and Lifting of the same

Corp/Business Law
4/3/2019
Student’s Name

Commercial Law 1
Corporate Veil and Lifting of the same
Similar to any other business entity, the corporation is also a form of business structure. This, the
business structure has its own features, advantages, and disadvantages. One of the features of
corporations is that the same is an artificial person. This is the reason that the same cannot do its
business at its own and humans are required to be there to manage the affairs of the company.
Boards of directors are people responsible for the operation of a corporation. They are people
who take the decision and execute the documents/contracts on behalf of the company.
Nevertheless, another feature of the company is also required to be mentioned here which is its
separate legal personality. A corporation is a legal person in the eyes of law. Law provides all the
rights to a corporation similar to a natural person. It means a corporation can run a business in its
name, can sue other parties, and can be sued by other parties. Contracts that director sign on
behalf of a corporation are developed on the name of the corporation. As the company has a
separate legal identity from its members as well as from its directors. In this manner, neither
directors nor members can be held responsible for the act of the corporation. This rule is known
as the corporate veil. This is one of the significant advantages of corporation structure, which is
available to parties involved in the dealing. The rule has been set out in the case of Salomon v A
Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22. In the provided case, a person, Salomon
transferred his current business to a company, which was found by him. In this company, the
shareholding of the company was wholly owned by Salomon and his family members and the
ultimate control on the affairs of the company was with Salomon only. In consideration of the
transfer of business property to a new company, he took secured debenture of the same. At the
time of liquidation of the company, Salomon asked his claim before all other creditors of the

Commercial Law 2
company, as he was the secured creditor. In such situation, the other creditors presented their
disagreement and stated that Salomon has no right to claim his share as secured debenture as he
is the person who controlled the company and company and Salomon is the same person. In this
case, the House of Lord provided the decision in the favor of Salomon and held that due to
separate legal entity rule, Salomon has a different identity from the company (Lezcano, 2015).
The similar kind of decision has been provided in the case of Lee v Lee’s Air Farming Ltd [1960]
UKPC 33.
After the decision of these cases, it has been seen that people started taking unfair advantage of
separate entity rule, especially in the cases of insolvency of the companies and hence the remedy
to prevent such cases have been identified. This remedy is known as “Lifting of Corporate Veil.”
According to this remedy, the court may deny the existence of the corporate veil and may lift the
same. In such a situation, the court held liable to the person who has done a transaction on behalf
of the corporation. The corporate veil may be lifted either by applying general principles of law
or by specific statutory provisions. Sometimes nowhere in the law, it is written but it becomes
necessary for the courts to lift the corporate veil in order to provide justice. Gilford Motor Co Ltd
v Horne [1933] Ch 935 is one of such case. In this case, a person incorporated a company and
started his business. This person was restricted to conduct a similar kind of business under the
trade contract developed with a former employer. In the company formed by him, his wife and
another person was a shareholder. In the decision given of this case, the court held that no matter
who is a shareholder of the company, the defendant is the person who incorporated the company
and in this manner, the company cannot be seen as a separate entity from him. Defendant held
liable for the breach of restraint. Jones Re Darby; Ex parte Brougham [1911] 1 KB 95 is another
important case to study in this sector. In this case, individuals incorporated the company with a