University Company Law Report: Corporate Veil and its Exceptions

This report delves into the core principles of company law, specifically focusing on the doctrine of corporate personality and the corporate veil, as established by the Salomon v Salomon & Co Ltd case. It explores the concept of separate legal entity and the implications of limited liability for shareholders. The report further examines the exceptions to the corporate veil, where courts may lift the veil to address fraud, dishonest intentions, or the evasion of legal obligations, as seen in cases such as Re Darby, ex parte Brougham, Creasey v Breachwood Motors Ltd, and Sharrment Pty. Ltd. v Official Trustee in Bankruptcy. The analysis covers scenarios like illegal phoenixing and the creation of new companies to avoid debts or legal liabilities. The report provides a comprehensive overview of the legal principles, case law, and practical applications related to corporate law.

Running head: COMPANY LAW
COMPANY LAW
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Author Note

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1.
The decision given under the Salomon v Salomon & Co Ltd [1897] AC 22 case
serves as a precedent for the doctrine of corporate personality as given under the Company
Act of UK. The decision given in this case provides protection to the shareholders of the
company such that they cannot be sued for paying the unpaid debts of the company in case
the company turns insolvent. The decision of the case also served the doctrine of limited
liability which states that the company being a separate entity can sue as well as be sued in
the company’s name only and thus the members belonging to the company cannot held liable
personally for the any act committed by the company or for the debts incurred by the
company. From these two doctrines, the principle of corporate veil that separates the identity
of the company from that of its members has evolved.
However, with passing time, in many cases, it is observed that the courts have not
strictly followed it instead have diverged from it. In many cases where the court finds that the
members of the company have not acted in good faith but with malafide intention then the
courts have uplifted the veil and make those accountable for their actions due to which loss
has caused or debt incurred. This is done when it is seen that if the decision is applied,
discharge of justice will be at stake.
2.
The Separate Entity rule is one of the fundamental principles of the company law that
has been applied globally. In the light of this principle, the company holds a separate identity
from its members. This rule was first identified in the R v Arnaud (1846) 9 QB 806, but the
decision given in the Salomon case provides the landmark case confirming the separate legal
identity of the company separated from its members. The arguments in favour of the separate
legal entity are that the management of the company is separated from the investment due to

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which the public making investment can enjoy profit shares without getting involved in
company’s management. Moreover, the company enjoys immortal life such that it will live as
long as it want unless wound up or liquidated by the operation of law not considering the
biological death of its members. Finally, the investors are liable as per the shares contributed
by them such that their risk is also reduced.
The negative arguments are that the separate legal entity principle cannot suitably to
the interest of the external creditors. Moreover, the interest of the subsidiaries are also abused
and affected for avoiding the debts which is affected by moving assets among the parent
company and its subsidiaries. Secondly, the separate legal entity encourages fraud to be
committed as due to the separate identity the members can protect themselves after
committing any kind of anti social or fraudulent act.
5.
The companies in the corporate groups can be considered as a single entity in the eyes
of law during phoenixing and during the creation of a new company to give effect to a
dishonest intention.
Illegal phoenixing act occurs when a company is being newly created with the aim of
continuing company’s business that has been liquidated in a deliberate manner for avoiding
the payment of debts comprising of taxes, entitlements of employees and creditors. It is
actually the giving rebirth of a new company by removing assets of one company to the new
one and such new company is actually the same older one with a new name. This type of
event of illegal phoenixing is seen in Sharrment Pty. Ltd. v Official Trustee in Bankruptcy
(1988) 18 FCR 449 where a new company is created to transfer the assets of another
previously existing company to it with the aim of avoiding the duty to pay damages to the
plaintiffs.

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Similarly, companies in the corporate groups can be considered as a single entity in
the eyes of law during the creation of a new company to give effect to a dishonest intention.
This was observed in Creasey v Breachwood Motors Ltd [1993] BCLC 480 where it is
necessary to identify the malafide objective of the members of the company in order to avoid
their legal obligation. In this case, the court held that the directors belonging to the defendant
company was misusing the advantage of the single entity by transferring its assets to other.
6.
Generally, the members of the company are protected by means of the corporate veil.
But such veil of the company can be lifted in certain situations. If it is seen that a company is
being used with the aim of furthering an improper or dishonest reason as a sham as in Re
Darby, ex parte Brougham [1911] 1 KB 95 or with the aim avoiding any current legal
liability of the company, then the court cause unveiling. In this case, the court lifted the veil
for determining the fraud committed in the name of the company.
Thus the court may make an order to pierce the veil when the members are found to
use the company for not effecting the transactions entered by it such that debts cannot be paid
by the parties.
Similarly, court can order to pierce the veil such that company can avoid any of its
existing duty. The company has a duty to pay off its taxes. If it is seen that a company is
created with an aim to avoid the payment of the tax accrued to it, then the court may order to
cause the veil to be lifted. This was seen in Sharrment Pty. Ltd. v Official Trustee in
Bankruptcy (1988) 18 FCR 449. Here the court held that the new company was created with
the aim of avoiding the payment of revenue.

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In the same way, such corporate veil can be waived if the company commits fraud by
taking the advantage of the corporate veil as seen in the judgment given in Creasey v
Breachwood Motors Ltd [1993] BCLC 480.

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References:
Creasey v Breachwood Motors Ltd [1993] BCLC 480
R v Arnaud (1846) 9 QB 806
Re Darby, ex parte Brougham [1911] 1 KB 95
Salomon v Salomon & Co Ltd [1897] AC 22
Sharrment Pty. Ltd. v Official Trustee in Bankruptcy (1988) 18 FCR 449