Corporate Veil: Judicial and Statutory Provisions Analysis

Verified

Added on  2020/05/16

|14
|4121
|46
Report
AI Summary
This report provides a comprehensive overview of the corporate veil, a fundamental concept in corporate law. It begins by defining the corporate veil as the legal separation between a company and its members, as established in Salomon v. Salomon & Co. Ltd. (1897). The report then delves into the circumstances under which courts may 'pierce' or lift the corporate veil, disregarding this separation to hold individuals liable for the company's actions. It explores both judicial provisions, such as those related to fraud, tax evasion, and enemy character, and statutory provisions. Key cases, including Gilford Motor Company Limited v. Horne, Jones v. Lipman, and D.H.N. Food Products Ltd. v. Tower Hamlets London Borough Council, are discussed to illustrate how courts apply these principles. The report also examines the lifting of the corporate veil in the United States. The analysis covers various scenarios, including single economic entities, agency relationships, and instances where companies are used to avoid legal obligations, providing a detailed examination of the legal and practical implications of lifting the corporate veil.
tabler-icon-diamond-filled.svg

Contribute Materials

Your contribution can guide someone’s learning journey. Share your documents today.
Document Page
Running Head: CORPORATE LAW
Corporate law
Name of the Student:
Name of the University:
Author Note
tabler-icon-diamond-filled.svg

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
1CORPORATE LAW
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Judicial provisions for lifting the corporate veil....................................................................3
Statutory Provisions for liftingthe corporate veil...................................................................8
Piercing of Corporate veil in cases of negligence and tort.....................................................9
Lifting the corporate veil in the United States.....................................................................10
Conclusion................................................................................................................................11
Bibliography:............................................................................................................................12
Document Page
2CORPORATE LAW
Introduction
It is to be stated that a company has a distinct legal entity from its members as held in
the case [Salomon v. Salomon and Co. Ltd. (1897) A.C 22]. Thus this provision of the
company having a distinct legal entity can be defined as the veil of Incorporation. The courts
consider this principle while deciding the liabilities of the company. According to this
principle it can be stated that avail exist between the company and its members. It can be said
that a company has a district legal identity and the liabilities of the company are surely the
companies and are not shared by the members of the company.
However in exceptional circumstances the courts have needed to Pierce this corporate
veil in order to reach the person, reveal his true character and assess the liability incurred by
him which are not to be borne by the company (Lam, 2015). The legal and logical Principle
behind piercing the corporate veil is that the law forbids the misuse of the corporate veil. It
can be said that in circumstances when the courts feel that the corporate veil is being misused
it will pierce through the same to reveal the true nature of the person responsible for the
breach of duty disregarding the principal as stated in the Solomon vs Solomon case. It is to be
mentioned that that the corporate veil can be lifted by Judiciary as well as statutory
provisions. Statutory provisions for lifting the corporate veil include fraudulent conduct of
business, misrepresentation of name and reduction in membership. Judicial provisions for
lifting the corporate veil include single economic entity, fraud and protection of revenue
Discussion
It is to be it is to be to be mentioned that in the English law the provision of
incorporation of a company by registration was introduced in the Year 1844 first.
In 1855 the principle of limited liability was first introduced.
Document Page
3CORPORATE LAW
However, the doctrine laid down in the aforementioned case has been analyzed by the
courts very carefully. It has been held that the on many instances members of the company
refrain from coming out and prefer to avoid the liabilities incurred by them by staying behind
the corporate veil (Mucha 2017).
Campbell v Gordon [2016] UKSC 38 is a Scottish case dealing with the provisions of
lifting the corporate veil. In this case the Supreme Court had taken into consideration whether
a company’s director could be held personally liable to pay damages to an injured employee
when the company had failed to pay adequate insurance cover to the employee. It is to be
mentioned that it was held by 3:2 majority of the court, that the Employers Liability Act 1969
cannot be interpreted in any way in order to allow the aggrieved party to claim damages from
the director. It is to be stated that the decision of the court in this case answered all the
questions about the former remarkable case Richardson v Pitt-Stanley [1995] QB 123.
It is to be mentioned that courts in general do not tend primarily the principle of
separate identity as held in the Solomon skills as discussed above. However, in modern times
courts have realised those fraudulent and mysterious activities can be done by promoters and
members of Companies hiding behind the corporate veil. It is to be stated that in the general
interest of the public and the members the courts are required to furnish the persons who
misuse and abuse the principle of corporate veil (Chen, Frankenreiter and Yeh 2015).
Judicial provisions for lifting the corporate veil
Fraud - it is to be mentioned that courts generally tend to remove the corporate veil when it
feels that any fraudulent or mysterious activity is being carried on behind the corporate veil.
Two Landmark cases where the corporate veil has been lifted by the courts in order to
identify fraudulent activities are: Gilford Motor Company Limited vs Horne and Jones vs
lipman. In the first case, Horne was employed in the of Gilford motor company. It was stated
tabler-icon-diamond-filled.svg

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
4CORPORATE LAW
in his employment contract that he was prohibited from soliciting customers of the company.
However, he incorporated a company in his wife’s name for the purpose of soliciting
customers of the Gilford motor company. The aforementioned company started proceedings
against him stating that he had violated the terms of his employment contract. The appellate
court held the de company incorporated in the name of wife of Mr Horne was primarily
formed as stratagem for the purpose of carrying on effective business by soliciting the clients
of Gilford motor company. The quote for the stated that the new Company formed in the
name of wife of Mr Horne had been formed primarily to perpetuate fraud.
In the second Jones vs lipman a man had contracted to sell his land. He however later
changed his mind and for avoiding specific performance transferred his property to a
different company.The judge well here in this case refer to the decision of the judgement of
the Gillford vs Horne case. It was held at the company formed by Mr lipman intended to hide
his face so as to avoid recognition by equity’s eye. In this case the court awarded specific
performance against Mr lipman and the Company formed by him.
For benefit of revenue- It is to be stated that courts have the power to pierce the corporate
veil and disregard the separate legal identity of the company if it assesses that such corporate
veil is being used for the purpose of tax evasion and to avoid tax obligations. In the
remarkable case of Dinshaw Maneckjee Petit (1927), it was held that Mr Dinshaw had been
enjoying income and dividend. However, he had formed four companies for the purpose of
holding a block of investment as an agent. He had devised a fraudulent scheme. His income
was shown to be credited in to the bank accounts of the four companies created by him
however, the company handed him back the income as pretended loans. It can be stated that
he had divided his income into four parts for the purpose of reducing tax liability. It was held
by the court that the companies formed did not perform any business and were formed solely
to evade tax liabilities and therefore such companies should not be regarded as separate
Document Page
5CORPORATE LAW
entities. It was also held that such companies were created for the basic purpose of ostensibly
receiving interests and dividends and handing them back to the assessee.
Enemy Character – It is to be mentioned that a company can take the form of an enemy
character the persons who are de facto responsible for handling the operations of the
company reside in an enemy country. It is to be stated that in similar situations the courts
assess the nature of the persons who are in charge of running the company for the purpose of
declaring the company to be an enemy of the country. In the remarkable case Daimler
Co.Ltd V. Continental Tyre And Rubber Co.Ltd, a company had been incorporated and
registered in England which sold tyres in England made by a German company. It can be
stated that the German company had been holding the bulk of the shares of the company
selling tyres in England. All the share holders and the directors of the English company were
Germans who were residing in Germany. During the First World War, the English company
tried to recover the debts incurred by trade. The court held that company in consideration was
a foreign company and a payment of debts to the company would result in engaging in trade
with the enemies of the country. Therefore the company was not allowed to carry on its
business.
Sham Company- It is to be mentioned that the courts have the provision to lift the veil of a
company if it considers such company to be a hoax or scam (Schall 2016).
Companies which intend to avoid legal obligations--It is to be said that when companies
are incorporated for the purpose of avoiding legal obligation, the courts have the power to lift
the corporate veil and disregard the separate identity of the companies. The courts could even
assume the non existence of the company in order to ensure that the members of the company
comply with the legal obligations.
Document Page
6CORPORATE LAW
Single Economic Entity- In consideration of liabilities of a group of enterprises the courts
have the power to not adhere with the principle of separate legal identity of a company as
held in the Salomon case and can pierce the corporate veil to assess the economic terms of
the group. In the case D.H.N.food products Ltd. V. Tower Hamlets London Borough
Council [1976] 1 WLR 852, the court held that the principle of the Salomon’s case would be
disregarded in circumstances when the court would assume equitable and justified to do so.
In the aforementioned case the appellate court assumed that lifting the corporate veil was
necessary and suitable. In this case three subsidiary companies had been treated as part of the
same economic identity and thus the court held that lifting the corporate veil was essential in
order to identify the compensation each of the subsidiaries was entitled to. It is to be
mentioned that the circumstances in which the corporate veil could be pierced depends on the
case facts. A company’s nature of shareholding would indicate whether the court can lift the
corporate veil. It can be noted that Lord Denning had remarked that companies are treated a
separate and distinct entity for effectively maintaining profit and loss accounts of such
company and preparing balance sheet. In the case Adams v Cape Industries Plc (1990) Ch
433 Cape, the English company had been formed to mine and market asbestos. It is to be
stated that it had an English company acting as its subsidiary company called Capasco. The
company in consideration had a US subsidiary company called NAAC, incorporated in
Illinois which was formed for the purpose of marketing asbestos in the markets of United
States. However in 1974, 462 people sued the subsidiaries Cape, Capasco and NAAC for
sustaining injuries for installing asbestos in its factory.
In this case the court of appeal had to pierce the corporate veil to assess whether Cape
group has to be treated as one single economic unit or whether the subsidiaries of cape were
merely the agents of the company, incorporated to act as facades. The court disregarded the
principle of separate legal entity of the company as decided in other cases. The court in
tabler-icon-diamond-filled.svg

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
7CORPORATE LAW
coming to this decision had to interpret the statute. It can be said that a company can be
regarded as a separate legal entity only in cases where the documents or statute of the
company would provide clarity about viewing the company as a single entity.
Trust or Agency- It can be stated that when companies act as agents of the shareholders of
accompany such shareholders would be considered liable personally for the actions of the
company. The question of whether the company is acting as the agent of the shareholders is
to be decided by the courts. It can be stated that there may exist an express agreement or an
implied one denoting the fact that the company acts as an agent of the shareholders. Re FG
(Films) Ltd [1953] 1 WLR 483 is a UK law case which deals with the provision of lifting the
corporate veil. In this case an American company had financed an Indian Film in a British
company’s name. It is to be noted that the American company’s president held ninety percent
of the shares of the British company. However, The Board of Trade of Britain had refused to
register the aforementioned firm. It was held by the court that the decision of the Board of
trade of Great Britain was valid as the British company had merely acted as the agent of the
American company.
Welfare Legislation- It is to be mentioned that avoidance of complying with welfare
legislation is generally treated in the same way as avoiding to pay taxes. The courts generally
consider the problems that arise out avoidance of welfare legislation in the same way as
avoidance of taxation. It can be said that it is the duty of the courts to lift the corporate veil in
order to identify whether there is ingenuity on the part of the company to avoid welfare
legislation.
Interest of the public- It is to be stated that courts may identify the need to lift the corporate
veil so as to prevent the activities of a company which are against public policy. Courts while
lifting the corporate veil can rely on the principle when there are no specific grounds for
Document Page
8CORPORATE LAW
piercing through the corporate veil. The courts can lift the corporate veil stating that it is just
to do so in order to inspect whether the functions of the company are carried on in the public
interest. Thus it is to be stated that the courts consider the substance and ignore the form
where it asses that a conflict may arise with public policy.
Statutory Provisions for liftingthe corporate veil
It is to be mentioned that the corporate veil of companies can be pierced or lifted in
certain circumstances as per the company law provisions which are express in nature. The
advantage of limited liability which arises out of the distinct entity of a company is not
always allowed to be enjoyed in every circumstance. Therefore the circumstances in which
the corporate veil can be lifted by statute are
Reduction in the number of members of a company- If a company carries on business
in spite of not having the minimum number of members as required by the provisions
of company law, the courts can lift the corporate veil in order to make the persons
who are responsible for running the company personally liable.
Miss representation of facts in the prospectus - in case of issue of a prospectus which
has misrepresented some facts the person who is liable for issuing the same will be
held liable. Search persons who have authority to issue prospectus can include the
directors and promoters of Companies. In case of misrepresentation in the prospectus
liability would be out to those individuals who have subscribed for the shares of the
company on the belief of an true statement.
Mis-description of name – In case where a member of a company puts his signature
on any document of the company such as bill of exchange, any contract or any kind of
money order on behalf of the company, such member shall be considered to be liable
if the company’s name has not been properly incorporated in the documents.
Document Page
9CORPORATE LAW
Fraudulent conduct- In a circumstance of winding up of a company if it is established
that the company had been carrying on business with the intent of defrauding its
creditors, the directors of such company would be held personally liable for any
liability incurred by such company. According to Section 214 of the insolvency Act
1986, it can be stated that when a company is wound up the directors of the company
would be held personally liable to pay the debts, if they kept the business running in
spite of knowing the fact that insolvency of the company is inevitable.
Liability for ultra-vires act –It can be stated that the offices and the directors of a
company would be considered personally liable for any liability in cured by the
company if it is established that the acts done by them on behalf of the company are
ultra-vires of the company.
Piercing of Corporate veil in cases of negligence and tort
It is to be stated that the principle of separate and different legal entity and the limited
liability of the members of a company as held in the Salomon case are not applicable in cases
where the concerned creditors are affected by the negligent actions of company. It can be
noted that company although is a distinct legal entity, it is ultimately run by some
individuals, therefore in tort cases it is necessary to lift the corporate veil to identify the
person or persons who are responsible for the negligent actions due to which the creditors of
the company suffered losses. Lifting the corporate veil can become a critical factor in cases
where a subsidiary company carries on the business of a holding company in order to avoid
the liabilities arising out of carrying on hazardous activities. This strategy is implemented by
holding companies with the view that if liabilities are incurred by any of the subsidiary
companies in the future, the other companies will not have to bear the liabilities due to the
principle of separate legal entity. It is to be mentioned that tort creditors can be considered to
be involuntary creditors as it as they are not expected to understand the complex corporate
tabler-icon-diamond-filled.svg

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
10CORPORATE LAW
structure of companies and to assess which company in the group is liable to pay them the
damages claimed by them for incurring losses or sustaining damages because of the negligent
action of the companies. The cases in which the corporate veil has been lifted by the court to
identify who directly owned a duty of care are Lee v Lee’s Air Farming Ltd [1961] AC 12,
Lubbe v Cape Plc [2000] 1 WLR 1545 and Chandler v Cape plc [2011] EWHC 951 (QB).
Lifting the corporate veil in the United States
It is to be mentioned that in the United States the provision of lifting of the Corporate
veil has been illustrated in several cases.
In the case Berkey v. Third Avenue Railway it was held by the court held that it had
no right to pierce the corporate veil of the company for the personal injury sustained by the
plaintiff. This is a leading case American case dealing with the provision of veil piercing. In
this case it was held by the New York appellate court that the company in consideration,
Third Avenue Railway Co was not liable to pay the debts incurred by its subsidiary company.
The Court held that to hold the parent company liable for the debts of its subsidiary
companies, domination of the parent company over its subsidiary company was necessary. In
this case that the subsidiary company was merely an alter ego of the parent company.
The case Minton v. Cavaney, 56 Cal. 2.d 576 (1961) is another example of a veil
piercing American case. In this case it was held by Justice Roger Traynor that it was
necessary to pierce the corporate so as to provide compensation to the girl who had drowned
in the swimming pool. It was also held that the parent companies would be held liable if they
fail to provide adequate capitalization and take active participation in the affairs of the
company.
Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545
(4th Cir. 1992) is a landmark U.S corporate law case dealing with the provision of corporate
Document Page
11CORPORATE LAW
veil piercing. It was held by the court that that it was vital economic policy to uphold the
principle of separate legal entity of corporations. Justice Wilkinson also held that the
corporate veil would be allowed to be pierced in circumstances in which the defendant has
exercised undue control and domination over the corporation and has used the same as an
instrument to hide the fraud, wrongs and conceal crimes.
In the case Taylor v. Standard Gas Co. 306 U.S. 307 (1939) in this case the court
held that insiders of a company who later become its creditors would be considered to be
subordinate to the other creditors of the company when the company becomes insolvent.
Conclusion
Thus in conclusion it can be said that the aforementioned principle of separate legal
entity and limited liability of the members of the company were first cemented into the
English law and given effect in the case Solomon vs Solomon by the House of Lords. In this
case the apex court stated that the entity of a company is separate from that of the members of
the company and thus the principle of veil of incorporation came into being. It can be said
that the chief advantage of this veil of incorporation is enjoyed by most companies. However
in reality the operations of the business of company is carried on by the members of the
company for their own personal benefits .Thus, it can be said from the legal perspective that a
company has a distinct and de facto entity where as in reality a company is nothing but an
association of people who the beneficiaries of the organizations. In the Solomon vs Solomon
case it was held by the court that in case of any dispute arising out of property acquired,
rights acquired or liabilities incurred by a company, the natural persons who are associated
with the company are to be ignored. Therefore it can be said that the corporate veil
companies can be used by the beneficiaries of the company for the purpose of committing
frauds and illegal acts.
Document Page
12CORPORATE LAW
Bibliography:
Salomon v. Salomon and Co. Ltd. (1897) A.C 22
Campbell v Gordon [2016] UKSC 38
Richardson v Pitt-Stanley [1995] QB 123.
Gilford Motor Company Limited vs Horne [1933] Ch 935
Jones vs lipman [1962] 1 WLR 832
Dinshaw Maneckjee Petit (1927)
Daimler Co.Ltd V. Continental Tyre And Rubber Co.Ltd [1916] 2 AC 307
D.H.N.food products Ltd. V. Tower Hamlets London Borough Council [1976] 1 WLR 852
Adams v Cape Industries Plc (1990) Ch 433
FG (Films) Ltd [1953] 1 WLR 483
Insolvency Act 1986
Lee v Lee’s Air Farming Ltd [1961] AC 12,
Lubbe v Cape Plc [2000] 1 WLR 1545
Chandler v Cape plc [2011] EWHC 951 (QB)
Berkey v. Third Avenue Railway 244 N.Y. 602 (1927)
Minton v. Cavaney, 56 Cal. 2.d 576 (1961)
Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 (4th Cir.
1992)
Taylor v. Standard Gas Co. 306 U.S. 307 (1939)
tabler-icon-diamond-filled.svg

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
13CORPORATE LAW
Lam, C.L., 2015. Piercing the Corporate Veil.
Mucha, A., 2017. Piercing V. Lifting the Corporate Veil: Prest Decision in the Light of the
Economic Analysis of the Company's Limited Liability.
Chen, D., Frankenreiter, J. and Yeh, S., 2015. Measuring the Effects of Legal Precedent in
US Federal Courts. ALEA, 2015.
Schall, A., 2016. The New Law of Piercing the Corporate Veil in the UK. European
Company and Financial Law Review, 13(4), pp.549-574.
chevron_up_icon
1 out of 14
circle_padding
hide_on_mobile
zoom_out_icon
logo.png

Your All-in-One AI-Powered Toolkit for Academic Success.

Available 24*7 on WhatsApp / Email

[object Object]