Corporate Veil and Limited Liability in International Business Law

International business law

A company is considered to be a separate legal entity because it is distinct from its
shareholders. When an organization comes under the corporation act then it becomes a
separate legal personality. Thus, an organization has many rights as per the law. The
company has the right to purchase immovable and movable properties, enter into contracts,
have its own nationality, domicile and name and be sued and to sue. The change in the
directors or shareholders will not affect the existence of the company. The shareholders will
not be accountable for the debts of the company which is known as “limited liability”1In the
case of partnerships, it is different as the partners would be liable for their debts if the
partnership assets are not sufficient in covering the debts. A company has a separate legal
personality which is different from its shareholders. It is found that the legal personality can
be ignored in order to make the shareholders liable for the debts of the company. The process
is known as "lifting corporate veil”.
The veil of incorporation ensures a separate legal personality of the company remains intact.
It provides inconsistent protection to the organization and its members. The case Salomon v
Salomon has established this doctrine. The principle assists to encourage investments as the
investors are stimulated to invest in financial markets, commerce and trade industries,
although being aware of the commercial risk. The corporate veil is considered to be a
situation where the shareholders are allowed to be a spate legal entity in a newly incorporated
organization. In other words, the shareholders would enjoy the limited liability. The
introduction of the Limited Liability Act in the year 1855 leads to the formation of limited
liability rule. The Joint Act Stock Companies Act 1856 replaced the Limited Liability Act in
the year 1856. A company till 1855 Act was needed to include Ltd or limited to its name.
The rule of incorporating the corporate veil has affected the “limited liability principle” is
still considered to be a controversial topic where the corporate veil is being lifted by the court
and directly looking into the shareholders. Salomon v Salomon introduced limited liability in
which members have a separate legal entity in which they are not liable for the company's
debts and also not responsible for paying the debt amount to the creditors. The corporate veil
in some circumstances is pierced. It can be examined with the help of cases in which sets of
evidence and facts is almost similar to the principle.
1 Keith Abbott, N Pendlebury and Kevin Wardman, Business Law (Cengage Learning 2013).
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The corporate veil is being lifted in some circumstances by the courts but they are set of rules
which are not included in code or unified to provide a clearance for the occurrence of
boosting the corporate veil. The limited liability provides benefits to the shareholders of
obtaining profits from the commercial dealings of the company and they would not be liable
for the debt incurred by the company2. However, the interests of the creditors can be put at
risk were the personal guarantees are not provided by the company. The corporate veil
provides protection does not mean that the dealing of the company cannot be examined by
the public. The public is also allowed to see sales, budgets and accounts.
Mr Salomon in Salomon v Salomon case was required to include seven members on the
company's board as per the law. He allocated six shares to his six family members consisting
of his wife. The business consequently sold by him to a new corporate organization where he
has 20001 out of 20007 shares3. He was the managing director and he had full control over
the company because he owned the majority of shares. The company after sometime wound
up and the company were sued by the creditors who owed money and claim to return their
money from Mr Salomon. The arguments were considered to be valid by the court but in
contrary to the appeal, House of Lords stated that the creditors have no right to seek into who
and what is behind the organization which means Mr Salomon. The company has all the right
to carry out its affairs as per the needs and goals. The House of Lords, in this case, applied
strictly the “limited liability" principle by not taking a decision on piercing the corporate veil.
“Wood v Dummer” also depicted the court in the United States approved the limited liability
principle. The shareholders, in this case, are liable for the debts which are being incurred by
the bank to the creditors4.
It must be stated that a line may be drawn between privacy case and avoidance case. The case
low must be outlined clearly to demonstrate where the case came from. The case of Gilford
Motor Co Ltd v Horne is a famous case, in which a worker defending himself. He was
working with the company and was on a contractual agreement that he will not engage in any
competition against the employer5. But later he resigned from his post and set up his own
company and started offering the same services which he used to offer while working with
2 John Robert Allison and Robert A Prentice, Business Law (University Co-Op 2009).
3 Salomon v. Salomon, 'Salomon V. Salomon & Co Ltd [1897] AC 22 | Trans-Lex.Org' (Trans-lex.org, 1897)
<https://www.trans-lex.org/310810/_/salomon-v-salomon-co-ltd-%5B1897%5D-ac-22/> accessed 5 December
2018.
4 Wood v. Dummer, 'Wood V. Dummer, 30 F. Cas. 435 | Casetext' (Casetext.com, 1824)
<https://casetext.com/case/wood-v-dummer> accessed 5 December 2018.
5 Gilford Motor Co Ltd v Horne, '"Gilford Motor Co Ltd V Horne" On Revolvy.Com' (Revolvy.com, 1933)
<https://www.revolvy.com/page/Gilford-Motor-Co-Ltd-v-Horne> accessed 5 December 2018.
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the previous company. It was done purposively to avoid the duties which were agreed and
signed by Horne under an agreement. The Court needs to decide whether the company was
legitimate of shame. The court had given an order to Horn and his company and the decision
was Horn would not compete as he breached the contract which was signed between Gilford
Motor Co Ltd and him.
The case of Jones v Lipman has clarified the circumstances that can be considered under the
act of "concealment" in regards to concealment case. According to this case, it was agreed by
the Lipman to sell a property even though he did not want to. Later a company was bought by
him, which was off-shelf. The property owner was being transferred to the company which he
formally intended to sell. A specific performance was ordered by the Court of Appeal6. The
decision which was taken by the Court against the company faced disagreement between the
justices. It was being argued by some people that the principles had been engaged in did not
require piercing the veil. It was also being argued Lipman should have been ordered to
transfer back the property ownership without any involvement on the company.
It the case of Adams v Cape Industry the various arguments were rejected by the court
presented by the defendants. It was against the English present company Cape Industry Plc.
and for claiming the damage or compensate. Cape Industry Plc. was an English company and
at the same times, a holding company as well to many other subsidiaries7. The person who
claimed become successful in this case and was being awarded the damages by the court of
Texas for the personal injuries. But the decision was not enforced to the English parent
company as per the Court of Appeal. The argument of the defendants was rejected by the
Court. It was present in the following manner, (i) the subsidiaries and the company itself
Cape Industry Plc. should be managed as "singe economic units, (ii) a "façade" was being
used to hide the true facts, (iii) A relationship of agency was presented between cape and its
subsidiaries. All these three arguments were fixed. On the basis of these three scenarios, the
fourth one was piercing the veil is justifiable.
The three arguments that were presented in the Court were being dealt with separately. It was
also explained by the court that way all these three arguments were rejected. In detail, the
reason of rejection of the first argument was "indisputable" as every company had their own
separate legal entity, and this is what justice requires for8. The definition of fundamental
6 Denise Collins, Business Law (Oxford University Press 2009).
7 Malcolm D Evans, International Law (Oxford University Press 2018).
8 Franklin A Gevurtz, Global Issues In Corporate Law (Thomson West 2006).
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