Assignment On Law Of Business Organisation

LAW OF BUSINESS
ORGANISATION
STUDENT ID:
[Pick the date]

Issue
The key issue is to ascertain if the director of a company can be personally held liable for
negligent actions when employed by a company and also the outline the conditions under
which this is permissible. Additionally, the concept of piercing the veil also needs to be
discussed to determine if the shareholders can be personally held liable for the negligent
actions done under the name of the company. In wake of the above issues, the key objective
is to ascertain if ABL (Abe’s Farms Limited) can sue LCL (Lex Consulting Limited) or Lex
in wake of the damage caused to the crop on account of his negligent actions.
Law
A company is a business structure which is unlike other business structures such as
partnership owing to the fact that it has separate legal entity separate from the shareholders or
owners. This position is acceptable in common law for more than a century. A landmark case
in this regards is Salomon v A Salomon & Co Ltd1 where it was highlighted that the
outstanding liabilities of the company cannot be settled by liquidating the personal assets of
the shareholders as the two are separate legal entities. This position is also upheld by Section
15 of New Zealand Companies Act 19932.
As per the relevant facts of the Salomon v Salomon case, Salomon has a leather shoe
business which was carried out as a sole proprietor. However, since his sons wanted stake in
the business, hence he established a new company (i.e. A Salomon & Co Ltd) where more
than 99% of the shares were held by Mr.Salomon and each of his sons had only 1 share. This
company purchased the shoe business of Mr. Salomon by paying a premium to the market
value of the business. Mr. Salomon provided some debt to the company owing to which
debentures were issued. The business received significant orders from the government and
had to face financial difficult when the government decided to diversify the suppliers. As a
result, the financial situation of the company worsened and it eventually became unable to
service the outstanding creditors. Before the bankruptcy, Mr, Salomon was able to sell the
debentures. The outstanding creditors accused Mr; Salomon of using the company as a means
to escape liability and hence demanded that Mr. Salomon should settle the unsettled creditors.
However, it was ruled that company is a separate entity from the owner and irrespective of
1
Salomon v A Salomon & Co Ltd [1897] AC 22
2 Walker, Pekmezovic et al,
Commercial Applications of Company Law in New Zealand (5th
edition, CCH, Auckland 2015)

the ability of the shareholder to settle the outstanding liabilities of the company, this is not
legally binding on the shareholder.
Clearly, the above protection extended by the company structure can potentially be abused by
various unscrupulous agents who may register a company for conducting fraudulent
activities. To address this issue, the concept of piercing the corporate veil has been since
introduced whereby under some circumstances the court removes the protection offered by
the company structure in order to indicate the true controller. A relevant case in this regards
is Prest v Petrodel Resources Ltd3 . Lord Sumption indicated that the corporate veil may be
pierced only when the objective is to derive the company or the underlying controller of the
advantage that is obtained from the doctrine of separate personality of company. The
corporate veil is typically pierced when fraudulent activities or conduct is displayed and the
company structure has been formed with the purpose of escaping liability arising from such
actions. This has been indicated in the Lazarus Estates Ltd v Beasley4 through the following
statement made by Denning LJ.
"No court in this land will allow a person to keep an advantage which he has obtained by
fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been
obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it
is distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all
transactions whatsoever.”5
Another pivotal aspect to be discussed is whether directors can be held personally liable in a
one person company structure on account of negligent actions. The relevant case in this
regards is Trevor Ivory Ltd v Anderson6. In this case, the defendant (i.e. Trevor Ivory)
provided negligent advice to a client in the course of normal business which caused loss to
the client in the form of damaged crops. The court ruled that despite the negligent advice
provided by the director (also the shareholders), he was not personally liable for the damages
incurred by the client. It was indicated that if the underlying director would be made
personally liable for all the actions under the name of the company, then the doctrine of
limited liability would be violated in case of one man company. However, it was indicated
that in certain cases, it is possible to hold the director personally responsible. This would
include a situation where the visibility of the concerned person who is the director and
3
Prest v Petrodel Resources Ltd [2013] UKSC 34.
4 Lazarus Estates Ltd v Beasley [1956] 1QB 702
5 Ibid. 4 at [36]
6
Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517