Upon there must be a distinction between the

Upon the introduction of the Insolvency Act 1986, s
74(2)(d) it was pointed out that there must be a distinction between the
shareholders and the company`s debts. 
Even if the debts run to a significant amount, under normal
circumstances shareholders cannot be asked to use their personal capital to
cover those financial obligations. Such liability helps to protect the owners
of the company, but not the customers and creditors who bear most of the losses
when a company collapses. This formulates
the concept of separate legal entity, as it makes company capable to have its
own assets and known as corporate personality1. One of the main points
why companies are treated like this is to
encourage people to start their own business, expand the existing one and
create a healthy competition in different commercial areas. It is clear, that
some dishonest and incompetent owners can use imperfections in such system and
walk away from the debts to easily start a new company, even within the similar
operational field.

All the mentioned above forms the idea, that a proper
law was required to control such processes and it was established in Salomon v Salomon & Co. Ltd 1987
AC 22 (HL). The landmark judgment was acknowledged by the House of Lords, and
it was held by Lord Herschel: “It is to be observed that both courts
treated the company as a legal entity distinct from Salomon and the members who
composed it, and, therefore, as a validly constituted corporation.”2

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There were certain outcomes after the development of
corporate personality, as limited liability was not the only one that was
established. Companies now can both, sue and be
sued on its own. Companies can operate with goods, buy and sell them freely as
well as employ staff as they can be a party to a contract. The other important point is that companies are no longer bound to
the life of a shareholder and can operate after his death. The Salomon
principle was successfully used in the case of Macaura v Northern Assurance Co. 1925 AC 619 (HL) where it was
proved that you cannot apply for an insurance if your goods are under your company`s
name. Lord Summer supported the Salomon principle: “It is clear that the appellant had no insurable interest in the
timber described. It was not his. It belonged to the company”3 Further development was
achieved in Lee v Lee`s Air Farming Ltd
1961 AC 12 (PC) as the insurers of the company claimed that Lee could not be
the employee of the company and refused to pay compensation, even though Lee
was a director of the company and owed all but one share of it.

At the same time, even though the courts are respecting the assets of the company and
member separately, there are certain exceptions where they can ignore the veil
of incorporation. This will make members of the company liable for the
company`s actions or debts. This was introduced with the Insolvency Act 1986, s
213 and this law is designed to ensure, that limited liability is not being
abused to commit fraud or any other wrongdoing. This will only be applied to
the people who are directly responsible for the situation created. It may sound
that this statute is violating the core principles of the Salomon and the idea
of the separate legal entity of the company. In practice, lifting the veil
makes the principle established in Salomon even stronger, as it ensures that
people who are not abusing the law are not shadowed by the wrongdoings of the
others.

The veil of incorporation can be lifted in cases,
where a company is committing fraud or was created for certain wrongdoings. The
case of Re Patrick Lyon Ltd 1933
All ER Rep 590 (Ch) was regulated by the Companies Act 1929 but it was already
established, that fraud actions committed by the directors of the companies
would not be tolerated gently. Wrongful trading is outlined in the Insolvency
Act 1986, s 214 and the courts are not tolerating such actions in any manner.
As they are identified relatively easy, the courts pierce the veil to ensure
that the directors would be forced to pay the company`s debts as it happened in
Re Produce Marketing Consortium 1989
BCLC 520 (Ch).

If there is a chance that company has been used to
hide another, different and dishonest purpose for any reason, the courts are
prepared to lift the veil. It has happened in the case of Jones v Lipman 1962 1 All ER 442 (Ch) as the defendant wanted to
avoid the transaction agreed with a claimant
and decided to transfer his land to a company which he owned with his partner.
It was stated by Russel J.: “The defendant company is the creature of the
first defendant, a device and a sham, a mask which he holds before his face in
an attempt to avoid recognition by the eye of equity.”4 The same principle was
applied in the case of Gilford Motor Co.
Ltd v Horne 1933 Ch 935 (CA), as the situation was relatively the same
when the defendant formed a company to abuse the knowledge and contact former
clients he used to have during his previous employment.

The separation of legal entities is not only familiar
for the relationships between a person and a company, also to take an advantage
of separate legal personalities, one company can be a holding one while the
other company can be subsidiary. This is considered as a legitimate use of corporate
personality, and it is not uncommon that a group of companies would be owned by
the same “parent company”. As the main purpose of such scheme is to
reduce the number of assets that can be
lost during a risky operation, the courts are approaching such questions in a
cautious way. In the case of Albazero
1977 AC 774 (HL) when two companies owned by the same parent company lost the
cargo as the ship sunk. The main problem was, that they have transferred the
shipment of oil from one company to another during the voyage. The ship-owners
stated, that the first company lost its rights after the transfer and the
second company cannot claim as the limitation period for such type of claims
had expired. The court held, that the separation of legal entities in such case
is valid and nothing can be done, the strict
position was adopted.

The case of Adams
v Cape Industries plc 1990 Ch 433 (CA) is another demonstration, where
the court refused to lift the veil, while
the claimants put forward a number of arguments to do so. It was held, that subsidiary in the US was a separate legal entity from the parental
company based in the UK or subsidiaries in South Africa. As a matter of fact,
Cape Industries was only represented by the subsidiaries in the US and
therefore cannot be enforced by the judgment of the US court. The Court had no
grounds to pierce the corporate veil, as Salomon allowed the usage of
subsidiaries to avoid liability.

The decisions of courts regarding groups of companies
involved in some questionable actions and manipulations, are showing us that
the courts are not quick and likely to pierce the veil of incorporation. The
number of grounds to lift the veil is
limited and the modern approach of the Salomon principle shows that the courts are likely to further limit the
grounds. The veil can be pierced by only a few
instances and only when it is necessary to do so.

One of the leading modern cases in this area is Petrodel Resources Ltd v Prest 2013
UKSC 34, as there was an attempt to redefine the whole idea of piercing the
veil. The divorce settlement where Mrs Prest
was awarded a substantial amount of Mr
Prest`s funds which were tied up to different
companies controlled by him. Courts powers were regulated by the
Matrimonial Causes Act 1973, s 24(1)(a) and the decision was appealed by Mr
Prest. It was questioned by Mr Prest, whether or not the court had the powers
to pierce the veil as that was the property of his companies. The Court of
Appeal held that there cannot be any lift of veil and the High Court had no
jurisdiction to do so. The final appeal made by Mrs Prest was allowed
unanimously, but on a different ground, as it was
stated by the Supreme Court, that for the benefit of Mr Prest his
properties were held on trust by the companies and as a result, could form part
of the divorce settlement.

The importance of Prest is vital as the impact it has
upon prior law is significant, the instances where the lifting of the veil can
be justified have been reduced gradually. Lord Sumption and Lord Neuberger were
of the opinion that the courts should not create the grounds on which to pierce
the veil.5 And this led to the
statement, that it is unlikely that the doctrine of the lifting of the veil in this field would ever be invoked properly
and successfully in the future as such tight boundaries leave no space for manoeuvres
in order to apply the law.6

The company can also be liable for wrongdoing in the areas of
criminal liability and to properly apply the mens rea requirement, the law
utilizes the “Attribution Rule” also known as “Identification
Doctrine”. This means that the knowledge of certain persons would be
regarded as the knowledge of the company and their personality would be
attributed to the company to make it liable. It is mostly used to find out
whether the company performed the action with the required mental state.
However, only the knowledge of people directly in charge of the actions of the
company who constitute “directing mind and will”7 will be attributed.

The courts are trying to find the balance between
finding out another way to pierce through the company veil and to be fair, just
and reasonable in its decisions. The limitations of attribution were
established in Lennard`s Carrying Co Ltd
v Asiatic Petroleum Co Ltd 1915 AC 705 (HL) and in the majority of cases
this principle of attributing the knowledge will be limited to the senior
officers and directors as this happened in Tesco
Supermarkets Ltd v Nattrass 1971 2 All ER 127 (HL). To find the middle point,
the courts have decided that the directors cannot use their companies to act
unlawfully, and attribute such actions to the company to use it as a defence. In such
case, the company will be considered as a victim of the illegal actions of its
directors and will not be liable as it happened in the recent case of Jetivia SA v Bilta (UK) 2015 UKSC 23.
It should be noted, that this case is not supporting the point that director`s
wrongdoing can never be identified as company`s but shows an example of finding
the balance in questionable situations.
When there is a strict liability rise,
such as licensing or pollution, there is no need to establish mens
rea as it is not important, whether it was done recklessly or
intentionally.

The main outcome the courts are seeking when piercing
the veil is to provide a fair, just and reasonable decision. It is vital
to achieving a fair balance between the
protection of the company as a separate legal entity, the shareholders and
those who manage the company and find
liability where it lays. Company law protects the company from the wrongdoings
of the those who manage it and its shareholders by the concept of
incorporation. It could be said that the ‘veil’ establishes the scope of the
protection conferred by the law to the company. 

As evidenced throughout this essay, the courts are
willing to circumvent the principle of incorporation by ‘piercing’ the veil in
order to reach those who hide their wrongdoings behind it and attach liability
to them. It is clear that the courts are not prepared to accept dishonest
actions hidden behind the veil of incorporation. And there are still critical
points to be developed, as recent cases are failing to apply the law when it is
certainly needed.8 

Needless to say, it should be the priority to keep the
Salomon principle from being abused to hide fraudulent activities of a company
so those who operate within the legal framework will know that fair and legal
business is protected by the law. While the purpose of lifting the veil should remain clear as it is extremely
important to find who is responsible for the company`s wrongdoings, the
individual or the company itself as a separate legal entity.

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