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Lecture 2 - Doctrine of Corporate Personality

The document discusses the doctrine of corporate personality and lifting the corporate veil. It provides background on key cases like Salomon v Salomon that established the separate legal identity of a company. The effects of corporate personality are described, including a company's ability to own assets, sue/be sued, and continue after a shareholder's death. Statutory provisions and judicial interpretations for lifting the veil are outlined, such as fraudulent trading, wrong company descriptions, establishing holding/subsidiary relationships, and investigations into company affairs.

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Manjare Hassin Raad
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1K views

Lecture 2 - Doctrine of Corporate Personality

The document discusses the doctrine of corporate personality and lifting the corporate veil. It provides background on key cases like Salomon v Salomon that established the separate legal identity of a company. The effects of corporate personality are described, including a company's ability to own assets, sue/be sued, and continue after a shareholder's death. Statutory provisions and judicial interpretations for lifting the veil are outlined, such as fraudulent trading, wrong company descriptions, establishing holding/subsidiary relationships, and investigations into company affairs.

Uploaded by

Manjare Hassin Raad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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THE DOCTRINE OF

CORPORATE PERSONALITY
Farzana Yeasmin Mehanaz
Faculty of Law
Eastern University
Lecture Outline

■ Corporate Personality
■ Effects of corporate personality
■ The ‘veil of incorporation’
■ Lifting the veil of incorporation
I. The statutory provisions of lifting the corporate veil
II. Lifting the veil of incorporation under judicial interpretation
Corporate Personality
■ The concept of limited liability requires a
distinction to be made between the assets of the
individual shareholder and the assets of the
company itself.
■ For the company to be able to own its own assets it
must have a legal capacity separate from its
owners.
Corporate Personality
■ Corporate Personality is the separate legal status of a
registered company which provides it with an identity
which is separate from that of its members, shareholders
and employees.
■ The principle of a separate corporate personality was
acknowledged by the House of Lords, (now the Supreme
Court) of England and Wales in the landmark judgment of
Salomon v Salomon & Co. Ltd.
Salomon v Salomon & Co. Ltd [1897] AC 22 (HL)

■ Facts:
■ Salomon had for many years made boots and shoes as a sole trader before deciding to register
the business as a limited company. The vast majority of the shares was held by Salomon and
one share each held by six other members of his family. He then sold his business to the
company. This was paid for by the company paying cash to Salomon personally. When the
company failed, the liquidators argued that the debenture ( which would take priority over the
other debts) was invalid as Salomon and the company were effectively one and the same and
so the debenture represented a debt to himself, which was impossible in law.
■ Legal Principle:
■ The House of Lords held that the debenture (a long-term security yielding a fixed rate of
interest, issued by a company and secured against assets) still took priority over the other
debts of the company as it was a separate legal entity, completely distinct from its members.
Therefore, it could owe money to its members and, accordingly, the debenture in favor of
salomon was valid.
Effects of corporate
personality
■ Although limited liability is the most important consequence of
corporate personality, there are other effects of the doctrine of
corporate personality. These are:
■ The company can sue and be sued in its own right.
■ The company can be a party to contracts (e.g. To buy and sell
goods and to employ staff)
■ The company can continue to function after the death of a
shareholder.
Macaura v Northern Assurance Co. [1925] AC
619 (HL)
■ Facts:
■ Macaura sold all of the timber on his estate to a company. He owned
almost all of the shares in the company. He insured the timber in his own
name but, when the timber was destroyed in a fire, the insurance company
refused to pay him, claiming that the timber belonged, not to him, but to
the company.
■ Legal principle:
■ The Hose of lords held that the insurance company was correct. The
policy would only be valid if the timber belonged to Macaura. However,
as it belonged to the company, only the company could insure it.
Lee v Lee’s Air Farming Ltd [1961] AC 12 (PC)
■ Facts:
■ Lee owned all of the company’s shares and was a director. He was killed
in a work-related accident but the company’s insurers refused to pay
compensation as they claimed he would not be an employee of the
company, as he owned so much of the company that this would amount to
him making a contract with himself.
■ Legal Principle:
■ The House of lords held that on the basis of Salomon, there was nothing
to prevent the company ( as a separate legal entity) from employing Lee.
Therefore, his estate was entitled to compensation.
THE ‘VEIL OF INCORPORATION’
■ When the company performs any function or enters into any contract,
the outsiders are not required to see who are its owners, directors etc.
■ The concerned parties should see whether it is done under the
company’s name or whether it is an ultra virus (illegally) or not.
■ So there is a veil between the company and the people exercising
power on behalf of the company.
■ The law recognizes a separation between the assets of the company
and those of the members and this barrier between the two has
become known as the veil of incorporation.
LIFTING THE VEIL OF
INCORPORATION
■ There are a number of instances where the courts are prepared to
ignore the veil of incorporation and hold the members personally liable
for the debts of the company, in order to uphold justice.

■ The courts may lift the veil of incorporation to see who the actual the
promoters, directors of the company are in order to assess whether they
are abusing the doctrine of limited liability to perpetrate fraud or
other wrongdoing.

■ Such exception to the general principle in Salomon are known as ‘lifting


the veil’ and can found in both I) statute and in II) common law.
I. The Statutory Provisions of Lifting the Corporate Veil

a) Reduction of Members Below the Statutory Minimum


[S.222]:
■ Pursuant to S.222 of the CA 1994, when a company carries out
its business with a number of members less than what is
stipulated as per the law, for a period of more than six months, in
this case the veil of incorporation may be lifted.
■ Thus, in this situation, the members of the company (who in
total are below the statutory requirement) shall be held liable for
all debts of the company contracted after the period of 6 months.
Cont…
b) Fraudulent Trading [S.259]:
■ In the event of winding up, if it appears that the business had
been carried on fraudulently to defraud the official
liquidator or any creditor the court may find the real
personality controlled the business and hold him/them liable.
■ Court’s policy is always to protect the innocent third-party.
Cont…
c) Wrong Description of the Companies [S.225]:
■ Section 225 of the CA 1994 requires authentication of
documents. The mandate of law is that in all the documents of
the transaction, the name of the company shall be mentioned
specifically.
■ If any director or any person enters into contract with third
parties without referring the name of company shall be
personally liable.
■ Thus, on the application of aggrieved person, the court may lift
the corporate veil.
Cont…
d) For Establishing the Relationship of Holding and Subsidiary
Company:
■ Between two companies when one holds the majority of shares of
another company and also holds the controlling power of that
company, the company holding the majority of shares and
dominating position in terms of control is called the holding
company and the company whose maximum share is held by the
holding company is known as the subsidiary company.
■ Generally, following the principle of corporate personality, in the
eyes of law, both the holding and subsidiary companies have
separate legal entity so, each is liable only for its acts.
Cont…
■ On the same ground, a holding company can not sue to enforce rights
which belong to its subsidiary.
■ However, in some cases, when the Court smells fraud on the facts of the
case, it may lift the corporate veil, and refuse to grant an independent
status to the subsidiary company and treat it as only a branch of the
holding company.
■ Ebbew value Urban Are Distt. Council-vs-South Wales Trafiic Area
Licensing Authority (1951) 2 K.B 356
■ Bell v Lever Brothers Ltd. (1932) 2 A.C. 161
■ Freewheel (India) Ltd v veda Mitra, Air (1969) Delhi 258
Ebbw Vale Urban District Council v South Wales Traffic Area
Licencing Authority CA 1951) [1951]2 KB 366
 Agency Principle
■ Lord Cohen stated:
‘’Under the ordinary rules of law a parent company and a subsidiary
company even a 100% subsidiary company are distinct legal entities, and in
the absence of an agency contract between the two companies, one cannot
be said to be the agent of another. This seems to me to be clearly established
by Salomon v Salomon & Co Ltd.’’
  From this statement, it can be inferred that if a court held that a company
in a particular instance acted as an agent of its holding company, the veil
of incorporation would have been lifted.
Bell v Lever Brothers Ltd. (1932) 2 A.C. 161
■ Facts:
Mr Bell was the managing director for five years of a company that was owned by Lever Bros Ltd. Mr Bell
had traded for personal profit during his employment, which was contrary to his contract with the company.
Without knowledge of this, Lever Bros Ltd made an offer of redundancy to Mr Bell, terminating his contract
and offering a £30,000 payment as compensation.
■ Issues:
The main issue in this case was whether the redundancy contract that was created and accepted by Mr Bell,
could be void by common mistake, due to later finding out about his personal trading. Lever Bros Ltd argued
that this concealment and misconduct was a breach of his duty that was detailed in his employment contract.
■ Held:
The court held that the contract was not void, as the mistake was not an ‘essential and integral’ part of the
contract. The personal trading that had happened during the employment was not related to the subject matter
of the contract and was said to be minor compared to the profits Mr Bell had made for Lever Bros Ltd. Only a
mistake to the identity of the parties or of subject matter to the contract, as well as an item’s quality, would be
able to successfully negate consent and therefore void a contract, as if it had never existed. The mistake must
be essential to the identity of the contract.
Cont…
e) In Case of an Investigation of the Affairs of the Company
[S.199]:
■ Under S.199 of the CA 1994 an inspector appointed for the
purpose of investigating the affairs of a company shall have the
power to investigate the affairs of another company, if necessary
for the investigation.
■ Hence, in these circumstances, the corporate veil may be lifted.
Cont…
f) In Case of an Investigation of the Ownership of a Company:
[Ss.195, 197 and 199]:
■ If the government wishes, it may appoint one or more inspectors
for the purpose of
i) determining who are the real owners;
ii) who are financially interested in the company;
iii) who holds the controlling power of the management of the company
etc.
■ The inspector, for investigating the above matters, may look
behind the corporate veil.
II. Lifting the Veil of Incorporation under Judicial
Interpretation
a) To Determine the Character of the Company:
■ When it is suspected that a company is controlled and managed
by the enemy subject, the court may lift the corporate veil.
■ The court, for example, in Daimler Co. Ltd v Continental Tyre
and Rubber Co ( Great Britain) Ltd (1916) lifted the veil to
determine whether the company was an ‘enemy’ during the First
World War. As the shareholders were German, the court
determined the company was indeed an ‘enemy’.
Cont..
b) In Case of Fraud or Misconduct:
■ The corporate veil shall be lifted by the court where it is
found that the incorporation of a company was for
defrauding the creditors of the company or for any other
fraudulent purpose.
■ As exemplified by the case of Gilford Motor Co. ltd v
Horne.
Gilford Motor Co. ltd v Horne [1933] Ch 935 (CA)
Concerning sham/façade companies
■ Facts:
■ The defendant was formerly managing director of the claimant company and was
subject to a covenant not to approach clients of the company after his employment
had ended. After leaving the company, he incorporated a company with his wife and
used the company to approach the customers of his former company.
■ Legal Principle:
■ The defendant had set up the company, not as a genuine business, but rather as a
‘sham or façade’ as an abuse of corporate personality, to hide his intention to break
the covenant with his former employers. This was an abuse of corporate personality.
Jones v Lipman
Concerning: sham/ façade companies
■ Facts:
■ The defendant, Mr. Lipman had entered into a contarct with the claimant, Mr.
Jones to sell a plot of land. Mr. Lipman then changed his mind and did not want
to complete the sale. He hence formed a company of which he and a partner
were sole shareholders and directors and transferred the land to this company
instead. He claimed to be unable to complete the original sale and thus comply
with the contract on the basis that he no longer owned the land as it belonged to
the company as a result of the transfer.
■ Legal principle:
■ The company was a ‘sham’ or ‘façade’ to prevent having to honour the
agreement to transfer the land.
Cont…
c) For the Benefit of Revenue:

■ Tax is a public demand. So, it is the duty of a company to pay taxes. But if it is found
that any company has been formed for the purpose of evading taxes, the court may lift
the corporate veil. And in this case, the individual shareholder may be held liable to
pay taxes.

■ However, the court shall not lift the corporate veil if it only causes the loss of revenue
of the government.

■ So from the above observation, it may be said that as a general principle of law, a
company has distinct legal entity as enunciated in Salomon v Salomon Co. Ltd.
For the Benefit of Revenue

■ Hence, the court only considers whether the company has acted
within its legal rights and does not generally look to see who are
the shareholders and directors of the company.
■ Nevertheless, in certain exceptional circumstances, the court
may make an exception the general rule to prevent fraud or to
uphold justice and hence lift the corporate veil.

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