Separation of Legal Personality and Lifting the Corporate Veil

This report covers the separation of legal personality and the lifting of the corporate veil from the cases of Salomon v A Salomon co ltd (1897), Catherine lee v Lee’s Air farming ltd (1960). Salomon v Salomon was the first principle case of its kind and its principle was that a limited company is a separate legal entity, in catherine lee v lee this case was reaffirmed, and Gilford Motors v Horne was the first law case to ‘pierce the corporate veil.

WHAT IS THE PRINCIPLE OF separate CORPORATE PERSONALITY?

There are 3 types of ownership generally speaking in the law context. There are sole traders, partnerships and companies. Sole traders are the sole owners to a business entity in which there is no legal distinction between the business and the owner. The owner receives all profits and is responsible for its debts as well. A partnership is when 2 or more parties agree to advance their interests. There are 2 types of partnership, which are the general partners and limited partners. General partners are liable for all debts and obligations whereas the limited partners contribute working capital and are not liable for the debts of the business entity. There are 2 types of companies:

Private limited company (LTD) & Public limited company (PLC)

Private limited companies is usually owned by fewer people and usually are smaller businesses who do not trade in the stock exchange, their business accounts don’t need to be audited and their statements are also private, whereas public limited companies need to public their financial statements and get audited. The advantage of this type of ownership over others is that there is a limited liability of the owners of business as the business is a separate legal personality. meaning of limited liability?

Limited liability is referring to the legal protection to shareholders, whether it be private or public limited companies in which the financial liability of every shareholder of the business entities is limited to the value of their fully paid shares, in short shareholders will not lose more than they put in, into the business. This is because the business itself is a legal entity on its own. Creditors can only sue the company for its assets, any unpaid capital and guaranteed capital. The company must declare its limited liability in its name and must provide financial information for the public inspection. the concept of separate legal personality.

The contractual capacity is that a company can enter into any contract under its name and is also liable for such contracts. The separate business entity also has some legal powers, for example to sue on its own behalf and even suing its own members. It is a separate property and does not belong to any of its members. The company will still continue as normal even in the event of death to any of the owners or any transfer of any stock. The shares of the business entity are completely transferable and approvals are not required unless stated or agreed. The first principle case to arise is Salomon v A Salomon,

Mr. A Salomon was a sole trader and was doing well as a sole trader. Mr. Salomon’s sons became interested in joining the business, so he incorporated his business to a limited liability company. Mr. Salomon sold his business for £39,000 of which £10,000 was debt to him; He kept 20,001 of the 20,007 shares, so he was principle shareholder and principle creditor. The company then went into liquidation and the liquidator then accused Mr. A Salomon of fraud and stated that the debentures used as a security of the debt is invalid.

The judge Vaughn Williams accepted his argument saying that “Mr. Salomon had created the company solely to transfer his business to it, the company in reality was his agent and he as principle was liable to debts.” The House of Lords ruling was to hold firmly the doctrine of corporate personality as is mentioned in the companies’ act 1862, it is so that creditors of a failing company cannot take the shareholders to courts over an outstanding debt because the company is a separate legal entity. Another case that reaffirmed Salomon v Salomon is Catherine Lee v Lee Farming co. Geoffrey Lee had a farming company and held 2999 shares of the 3000, he was the sole director and chief pilot and unfortunately died in a plane crash.

Mrs. Lee tried to claim for damages of £2340 under the Workers Compensation Act (1922) for the death of her husband. The Privy Council advised Mrs. Lee that she is entitled to compensation, since it is possible Mr. Lee can have a contract with the company he owned. The company is a separate legal entity.

It is generally the rule regarding limited companies that the entity is a separate legal personality. There are exceptions to this rule when the courts will not treat it as a separate legal entity, this is known as ‘lifting the corporate veil’. The courts will ignore the separate personality when there is fraud, or by statute, or whether it’s an enemy during wartime, or if there is an agency involved with complications or when there is a ‘tort’. The case of Gilford Motors v Horne where Mr. Horne was a former managing director at the Gilford motors, his employment contract clause 9 said he cannot solicit customers of the company if he were to leave employment.

Mr. Horne was later fired, after that he set up his own business and undercut Gilford Motors prices, later being told he was possibly in breach of contract; he decided to set up a company in which his wife and friend are directors and only shareholders. Mr. Horne later sent out fliers which read “Spares and service for all models of Gilford vehicles. 170 Hornsey Lane, Highgate, N. 6. Opposite Crouch End Lane… No connection with any other firm”. This company had no contract with Gilford Motors about not competing but Gilford Motors did bring up actions that needed attention from the courts, Which was that the company was being used as an instrument of fraud.

The Court of appeal did grant the injunction and Lord Hanworth mentioned “the purpose of it was to enable him, under the cloak or sham, to engage business on consideration of agreement, was one the former employees would object to”. Since the Adams v Cape indsutries case courts have changed their attitude and made the salomon principle a lot stronger. Courts will be more likely to lift the corporate veil when the court is having a look at a statute, or contracts. The court must be satisfied that the company is a façade and which should show abuse of the corporate form. Another way the courts will decide to lift the veil is if it can be proven that the company is an authorized agent of its controllers or members.