What is Company Registration and Formation?
Companies must be formed in order to conduct business, which is referred to as the company registration. It is the process of obtaining a state charter that authorises a company to operate as a corporate business. This is referred to as the company’s formation. And it is at this point that a corporation entity acquires the status of being independent of its members and owners, which is referred to as the separate legal entity status of a company. And being the artificial person and due to the separate legal entity status, a corporation becomes entitled to enter the transactions in its name, purchase property in its name, and bring a suit or be sued in its name, just like a person. In this way, the company retains a different legal standing from its members and owners, resulting in limited liability, where the company’s members and owners are not personally accountable for the company’s losses and liabilities. This feature was established in the provisions of the corporation law to provide benefit to the members or owners of the corporation, but misuse of this provision was started by the people, so keeping this in mind, the provision of the corporate veil was introduced, where this provision of a separate legal entity is set aside by the court and makes the people liable for their conduct of violating the limited liability provision. As a result, this paper will analyse the legal mechanism for forming a separate legal company, as well as case law, to better understand how this procedure is being abused by people, as well as the concert of lifting the corporate veil. Information on the history of this philosophy of limited liability, which identifies work as the bedrock of capitalism.
The notion of different legal entities is based on the concept of a separate legal entity. This transforms a corporation into a legal entity separate from its owner. It indicates that the owner of a company or corporation and the company itself are considered two independent legal entities, which means that anyone who commits an offence linked to a breach of company law is personally accountable. The company will not be held responsible for the activities of its members. The company and the individual who owns the company, according to this idea, have independent legal rights and duties. For a company to obtain the legal status of a separate legal entity, it must be properly incorporated or registered. If the company is correctly established, it will have a separate legal existence from its directors, who govern the company’s operations, from its members, who are the company’s true owners, and from the shareholders, who have put their money in the company’s shares. The reason for the separate legal entity status has been discussed in the case of HL Bolton Engineering Co Ltd v TJ Graham Sons Ltd, where the court clearly stated that just as a human being has its brain or neurological system to decide the working of his or her body, the working of a company is managed by the company’s directors. The majority of personnel in the organisation are employees and representatives who are in the company’s hands, who do the job, and who cannot be proved to represent the company’s thoughts or will. Others are executives and supervisors, who embody the company’s fundamental organisational ideas and oversee its operations. These executives’ thoughts are the thoughts of the corporation, and the law treats them as such.
Understanding the Legal Concept of Separate Legal Entity
The concept of limited liability is established as a continuation of the independent legal principle. And, most importantly, this condition of limited liability is important for the economic purpose of stating that the company’s owners are not accountable for the company’s obligations. Furthermore, the scope of the obligation is determined by the company’s type. In terms of economic reasoning, the limited liability idea reduces the need for shareholders to oversee the managers of the company in which they have invested. Second, limited liability allows for effective diversification, which aids shareholders in lowering their risk. This principle of limited liability is vital because if it is not followed, shareholders of a company could lose their entire wealth due to the corporation in which they own equity. As a result, the notion of limited liability has become part of company law to provide a benefit in carrying out corporate social responsibility, but it is not an intrinsic corporate right. It is especially useful in high-risk projects.
So, after considering all of the purposes of a separate legal entity concerning a corporation, it is necessary to state that this concept of a separate legal entity provides many benefits to the company, the most important of which is that the liability for any offence is borne by the company rather than its owner, shareholders, or directors. And the members’ and founders’ responsibility will be limited to the extent of their involvement in the business. This means that the company’s stockholders are not entirely liable for any commercial loans, and lenders cannot seize their personal property to satisfy financial obligations. Similarly, a company’s shareholder is only liable to pay tax on earnings that are compensated to them by the company in the form of salary, gratuity, or awards. Furthermore, the corporation must pay company tax, which is levied on earnings or any additional profits at a lower corporate rate. After studying the advantages of the separate legal entity principle, it can be concluded that this idea is the basis of capitalism or beneficial to the company’s smooth operation.
But if the separate legal entity status is not provided to the company, then certain things are there that can be happen in the business of the company. Such as-
- Any person who is the company’s owner or who works for the company on behalf of the company might have been held accountable for the offence committed by anyone.
- A corporation may have entered into an agreement that makes both the person and the company accountable.
- In the case of a group of enterprises, there is a significant likelihood of erroneous commercial agreements.
- The corporation would have to go through a lot of unneeded court actions. Hearings in court may be held for a variety of reasons, including breach of fiduciary duty, criminal misappropriation, a demand for civil penalties, or any other cause of action in which a person or company other than the Legal party is involved.
As a result of witnessing all of these events and scenarios, it is reasonable to conclude that the notion of distinct legal should exist in the organisation; otherwise, many misappropriations may occur, resulting in several court cases. However, it is also necessary to ensure that no one gains an undue advantage by ignoring the restrictions of the notion of an independent legal entity. However, this has not happened, and corporate parties have begun to use this philosophy for personal gain by defrauding the company’s stakeholders. Many lawsuits have arisen as a result of this, one of the most well-known being Salomon v Salomon.
This idea of a separate legal entity’s applicability was decided in the case of Salomon v Salomon, in which the company’s director, Salomon, misapplied the doctrine. As in this instance, Salomon registered the corporation under the name Salomon v Salomon & Co. Ltd. in the Companies Act. The fact that the Aron Saloon, the owner of the leather boot business, sold his business to a company. And that company has made a memorandum of association that have been signed by by the appellant, his wife, daughter, and four sons. The business was sold for £38,782 in this case. The sum of £ 16,000 was determined to be paid by the issuance of cash and debentures. Later on, £ 10,000 debentures were issued. Later, when the company went into liquidation, the unsecured creditors were owed £ 7,773 by the corporation. When the case reached the liquidator, he claimed and alleged that the company was a fake and was only formed to defraud the company’s creditors.
Importance of Limited Liability for Companies
When the matter was brought before the court, the judge ruled that, while the company was founded following all of the Corporations Act’s criteria, the reason for its formation was not honest. However, when the company fell into insolvency and it was time to pay the creditors, Salomon stepped forward and opted to take the money as a creditor of the company. He has also violated the provision of a separate legal entity by being a director at this moment. The court ruled that the company’s business was Salomon’s own business and the signatories of the memorandum are dummies. And the business of the corporation is working like an agency of Salomon. And hence being the owner of the business, Salomon is liable to pay the debt amount to company’s other creditor. As a result, the court has put aside the principle of a separate legal entity, lifted the veil between the company and creditors, and declared that the company is Salomon’s liability by ignoring the corporation as a separate legal existence.
So, in this situation, the concept of removing the corporate veil has been developed to protect the doctrine of separate legal entity, because this doctrine introduces the concept of limited liability, which is the backbone of capitalism in the corporate sector. However, when a situation of fraud arises, the company’s system deteriorates, which is bad for a corporation’s profitability. As a result, to fully comprehend the notion of limited liability, it is also necessary to comprehend the concept of corporate veil lifting.
In general, the corporation benefits from limited liability as a result of its independent legal entity status. ‘Corporate veil’ is the term used to describe the benefit of limited liability. In other terms, the corporation veil refers to the benefit of limited liability. In this sense, the corporate veil acts as a shield for the company’s members and directors. The court can hold the company’s directors and owner liable for company law violations committed in the company’s name by penetrating the corporate veil. As a result, the creditors and the entitled person have full control over the personal assets of the directors and members. According to the provisions of the Company law, the court can lift the corporation veil in certain circumstances. In this regard, three features have been provided:
- When the company engages in any type of deceptive activity.
- When a company is used as a sham.
- And when the board of directors deliberately and willfully fail to fulfil their fiduciary responsibilities.
If any of the aforementioned events occur, the court has the authority to lift the corporate veil and restrict the corporation from claiming separate legal entity status. The directors, members, or agents will then be held personally accountable for the crimes committed in the company’s name.
- Directors of the company are engaged in insolvent trading.
- Or the directors failed to prevent the insolvent trading means the director had not put the efforts to prevent the insolvent trading in the company.
So, if the director works in any of the above-mentioned ways, the director will not be protected or immune, and the director will be liable for the repercussions of his or her actions. Fraud is defined as when a company is formed with the intent of taking advantage of the corporate veil laws, which is most often the case when a company is formed with the intention of not trading. Furthermore, if the company engages in any action to avoid its legal duties, the court will lift the veil and hold the responsible individual guilty. The Court can lift the veil if, for example, if corporation has the obligation to pay the amount to creditors but intentionally does not pay the same. So, in the end, the corporate veil’s objective is to strike a compromise between competing interests, such as supporting economic expansion while sheltering individuals from undue potential harm resulting from legitimate, calculated business risks. Lee v Lee’s Air Farming Ltd is another important case to understand the concept of the corporate veil. Geoffrey Lee, in this case. According to Article 33 of the Articles of Association, Lee was the sole governing director of the corporation and was also engaged as the main pilot on a salary basis. And because the organisation was an air-farming enterprise, Lee died in a plane crash one day while performing his duties. And, as a corporation employee, his wife filed a claim for compensation. after his death. When the claim reached the court, the judge ruled in favour of the plaintiff, saying that it was unclear what position he was in while doing his duties when he died, but it was done at the request of the farmers whose contractual rights and obligations were with the respondent company. Furthermore, the position of the deceased cannot outweigh the fact that a legal relationship can only be formed between two separate legal entities that have already been demonstrated. As a result of the service contract between the employer and the worker, the appellant was allowed to claim compensation.
Benefits of Separate Legal Entity for Companies
After reviewing the facts and legal laws surrounding the provisions of corporate veil lifting, Dignam and Lowry’s assessment that “conflict buried behind seeming clarity has become a feature of key judgments” is correct. This remark refers to a case in which there is a question as to whether the provision of Corporation Law relating to the lifting of the corporate veil should be applied or not in a particular situation. In the case of Prest v Petrodel Resources Ltd & Others, this ambiguity was resolved. This was a divorce case involving Mr and Mrs Prest. Both couples were well-off, with a substantial matrimonial home in the United Kingdom and a second property in Nevis. The problem, in this case, was the allocation of the couple’s assets. And there were concerns made about the fact that company law could not be used to hide assets or avoid liabilities in connection to assets that would be divided between the couple in the event of a divorce. As a result, the Supreme Court issued decisions concluding that the provisions of the corporate veil cannot be used in cases of divorcing spouses and single-man companies because the provisions of lifting the corporate veil can only be used when the provisions of the corporate law have been used improperly to evade liability. But there was nothing like that in this situation, thus a different remedy from other legal provisions might be employed to distribute assets to Mrs Prest. Finally, by issuing a decision, in this case, it has been clarified that the provisions of the Corporations Act relating to the lifting of the corporate veil can be used only when there is an evasion of liability or when the owner or members of the company use this provision for personal gain and there is no other remedy available under the law. But not in circumstances involving personal welfare.
Conclusion
As a result of the discussion, it may be concluded that the concept of a separate legal entity has been added to the Company Act 2006 regulations to provide benefits to the members and owners of the company from the company’s liability or obligation. However, in the business sector, it has been discovered that those who benefit from this provision have begun to use this principle for their gain, bringing harm to the interests of others, such as the corporation’s stakeholders. The concept of lifting the corporate veil was then introduced by interpreting the law related to the separate legal entity, where the right of corporations to use the benefit of a separate legal entity is snatched from a corporation or company to provide benefit to the corporation’s various stakeholders. The court has clarified that there are some scenarios or circumstances when the idea of lifting the corporate veil is applied, such as fraud, insolvent trading by the directors, construction of a sham company, and intentional breach of fiduciary responsibilities by the directors. Apart from that, if there is a dispute between the parties over any fraudulent acts, the terms of the lifting of the corporate veil cannot be applied because to exercise this right, the corporation law laws must be violated. In some circumstances, the court has adopted this rule to clear up any confusion regarding the employment of the corporate veil rule. As a result, Dignam and Lowry’s assertion that “conflict disguised behind seeming clarity has become a feature of key decisions” is correct, because once the ambiguity surrounding the use of the corporate veil clause is resolved, the right choices in cases of corporate fraud will emerge.
References
HL Bolton Engineering Co Ltd v TJ Graham Sons Ltd, [1957] 1 QB 159, [1956] 3 All ER 624
Salomon v Salomon & Co. Ltd. [1896] UKHL 1, [1897] AC 22
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Prest v Petrodel Resources Ltd & Others [2013] UKSC 34, [2013] 2 AC 415
Journals/Books/Articles
Blankenburg S, ‘Limited Liability’ [2012] In Handbook of Critical Issues in Finance
Dahal R, ‘Salomon V Salomon: Its Impact On Modern Laws On Corporations’
Davies P, Introduction To Company Law. (2020)
Dignam A, and Lowry J, Company Law (2014)
Grantham R, ‘The Corporate Veil: An Ingenious Device’ (2013) 32 University of Queensland Law Journal
Hiller J, ‘The Benefit Corporation And Corporate Social Responsibility’ (2012) 118 Journal of Business Ethics
Kraakman R, The Anatomy Of Corporate Law: A Comparative And Functional Approach (2017)
Lewis M, Lloyd-Jones R, and Matthews M, Personal Capitalism And Corporate Governance: British Manufacturing In The First Half Of The Twentieth Century. (2016)
McCall B, ‘”The Corporation As Imperfect Society.”‘ (2011) 36 Del. J. Corp. L.
Macey J, and Mitts J, ‘The Three Justifications For Piercing The Corporate Veil’
Tan C, Wang J, and Hofmann C, ‘Piercing The Corporate Veil: Historical, Theoretical And Comparative Perspectives’
UDEMEZUE S, ‘Does Salomon V. Salomon Still Reign? A Disquisition On Recent Case Law On Corporate Legal Personality And Lifting The Veil’
MURRAY J, ‘How To Set Up Your Business As A Separate Entity’ (2021) <https://www.thebalancesmb.com/how-to-and-why-you-should-establish-a-separate-entity-4582770#:~:text=You%20can%20legally%20set%20up,for%20negligence%20or%20illegal%20actions.> accessed 24 April 2022
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
