What is a Corporation and the Corporate Veil?
A corporation is a type of corporate organisation that is governed by law. In that it is a different legal entity from the people who operate it, it is also distinct and separate from individuals who manage the business. It is the corporation that should be sued if a corporation incurs debts that are not paid even after repeated demands are made against them. The corporate veil is the boundary that separates the unique legal person from the human individuals. Thus, the corporate veil serves to separate the legal corporation from the human beings who operate behind the scenes of the business.
In the event that a business is founded by registration under the Companies Act, it is transformed into a corporation with features distinguishable from those of a partnerships or other unincorporated organisation. Upon incorporation by law, a corporation is recognised as a separate legal entity with its own legal personality, and the addition of “limited” to the end of its name distinguishes it as a legally recognised organisation with a distinct legal personality. As a result, incorporation creates a separate legal entity with limited responsibility for the purposes of doing business. The word “limited” is required as part of the registration process under Section 1342 of the Companies Act, 2014. Companies can be related to humans in that they are considered “artificial individuals” since they have their own legal personality, as opposed to a natural person who does not have such a legal identity. The advantage of establishing a corporation is that the persons in charge of it are wholly independent from its owners, which means that if any of them changes throughout the course of the corporation’s existence, the corporation does not have to be closed up and started again from the beginning. Companies can also profit from limited liability, which means that if the firm goes into administration, shareholders will only lose the amount of money they have placed in the company.
Salomon v. Salomon & Co. Ltd is a case that helps us comprehend the concept of independent legal personality. In this case, Mr. Salomon created a private limited company from his sole proprietorship in order to give his family an interest in the firm. Salomon’s wife and five children each had one share while he possessed 99 percent of the company’s stock and a £10000 debt. The law at the time stated that a firm needed to have seven members. Aaron Salomon sold his firm to Salomon & Co. Ltd. for about $39,000 (the price figure was $38782, but this was rounded off to $39,000 for mathematical convenience). In addition to Salomon’s £8872 down payment, the purchase price included the issuance of 20,007 $1 stock certificates, with 20,000 of those certificates going to him personally as well as six more $1 certificates going to his members of the family as nominees. Due to the fact that Salomon’s own firm owed him money, Salomon’s company issued a deed of credit in Salomon’s name in order to cover the obligation, which was backed by the company’s assets. To what extent should the company’s debt to Salomon be given precedence over that of its unsecured creditors when it went into liquidation? As a result of the company’s financial woes, it was forced to go into liquidation in 2009. Even though creditors and liquidators attempted to make Mr. Salomon accountable for the obligations of the firm, the House of Lords ruled that Mr. Salomon as well as the business were different entities because of the ‘veil of incorporation’.
Advantages and Disadvantages of Incorporation
Salomon’s case was decided on the basis of the notion that, as a legal entity, a registered corporation has a different legal identity from the human being it represents. A corporation is not automatically deemed to be an agent or trustee for its members’ financial interests or other matters. Human intentions in forming a limited liability corporation do not invalidate or diminish the legal rights and duties of such entity.
A business’s directors may draw and blur the border between its legal and human entities, such that the human person in charge of a company is unable to benefit from the protections of limited liability. For example, a director using a business for fraud would not be able to benefit from the benefits of incorporation since the curtain between legal and human beings is torn up in order to assess if limited liability protection should be granted. Lifting the corporate veil is characterised as a “lifting of the corporate veil,” which means that there is no advantage to the privilege of incorporation and hence no protection in terms of restricted liability.
Legislation and the courts both have the power to lift the corporate veil.
This occurs, according to section 517, by modifications to company law legislation in instances where directors and members of companies violate the limited responsibility principle. Through the formation of “associated corporations,” which allow for the use of one company’s assets to offset another’s obligations.
Individuals working for a firm may also be prosecuted if they were aware of tax avoidance. Gilford Motor Co. Ltd v Horne, a company’s Managing Director decided not to petition consumers on behalf of his staff. He left his job, and he started his own business, which included pleading with consumers. However, the courts determined that he was only doing so to conceal his own mismanagement at the previous firm, and he was found to be guilty of fraud.
Additionally, in Prest v Petrodel Resources Ltd, the Court decided that piercing the corporate veil was not acceptable unless there was proof that Mr Prest misused the companies’ distinct legal personality.
When a fund arrangement is made in consideration of paying any corporate debt or liability, according to Section 247 of the Companies Act 2014, it is referred to as a “fund arrangement.”
A person who, while the company is in the process of being wound up, knew or should be aware that the company was carrying on a business with the intent to defraud creditors or for any other unlawful or fraudulent purpose may be held personally responsible without limitation for the debts of the company, according to Section 610 of the Companies Act.
According to the case of Battle v Irish Art Promotion Centre Limited, the court found that, while a person an represent himself in court, a legal entity, such as a company, can only be defended by a Solicitor or Barrister.
Salomon v Salomon & Co. introduced the legal idea of the “Veil of Incorporation.” Legal restrictions are being enforced to a larger extent in order to prevent the misuse of liability protection and to guarantee that tax obligations are not evaded. The veil of incorporation may be disregarded by the court only under rare situations.
The Purpose of the Corporate Veil
Similarly, the courts might decide to remove the veil if a collection of entities should be recognised as one unit.
Specifically, this occurred in the case Holdsworth & Co. v Caddies, where Caddies served as the executive director of the Holdsworth parent corporation. It was suggested that because each subsidiary had its own board of directors, he could not be disciplined into devoting all of his time to each of them. When it comes to moratoriums, Lord Reid says, “an agreement has been reached, but it must be understood in view of the facts and circumstances of the situation.” Because their reasoning was overly technical, it was rejected. The veil may also be penetrated in the view of the court if the corporation was founded for fraudulent purposes or in order to commit an injustice towards minority shareholders.
There are several obvious advantages to creating a company, but there are also potential drawbacks. The veil only permits legal action to be brought against the corporation itself, not against the persons who work for it. Shareholders do not have ownership interests in any property that the firm regards to be a valuable asset. Limited responsibility refers to the fact that only the firm is responsible for its debts. The moment a shareholder sells his or her shares to a third party, he or she loses all control over the company. A corporation will continue to exist even if all of its members have passed away since it is a legal entity in its own right. Corporate tax is also to the company’s disadvantage because the company must ensure that certain information is accessible to the Companies Registration Office when filing returns with the office. Before deciding to create a corporation, it is important to weigh all of the advantages and disadvantages. The separation between a corporation and its shareholders and the persons in charge of operating it has been demonstrated. Incorporation creates a veil that permits the corporation to be viewed as if it were an individual in and of itself.
According to the court, this is also feasible in the event of inferred agency. The court cited the case of Jones v Lipman in this case a house sold to a newly established business in order to evade a particular performance order against him, which was avoided by selling the property to a company that he had founded himself. In his own words, Russel J defined the corporation as “a gadget and a charade, a mask that he holds before his face in an attempt to evade identification by the eye of equity.” The judge ordered the veil to be lifted.
Conclusion
Corporations’ separate identity have wide-ranging implications. As an issue element in its own right, an organisation has limited responsibility for the duties and promises it has made. The organisation has the ability to hold property in its own name and issue shares in order to raise money. Litigation against debt holders is an option, as is litigation against the company’s management. Finally, a crucial norm for corporate distinct identity would be that of interminable advancement, which results in the organization’s continued presence without regard to its parts.
References
‘Doctrine Of Separate Legal Entity And It’s Exception- Tygar Law Corporate’ (Tygar Law Corporate, 2022) <https://www.tygarlaw.com/doctrine-of-separate-legal-entity-and-its-exception/> accessed 20 April 2022
Egorov A, and Usacheva K, ‘(The Application Of The Doctrine Of Lifting The Corporate Veil)’ [2014] SSRN Electronic Journal
MARAŠ I, and GOLI? D, ‘PIERCING THE CORPORATE VEIL’ [2021] Kultura polisa
‘Personal Liability: New Challenges For VA Business Owners’ (Generalcounsellaw.com, 2018) <https://www.generalcounsellaw.com/personal-liability-for-corporate-obligations-how-to-avoid-piercing-the-corporate-veil/> accessed 20 April 2022
Waqas M, and Rehman Z, ‘Separate Legal Entity Of Corporation: The Corporate Veil’ (2016) 3 International Journal of Social Sciences and Management
Wormser I, ‘Piercing The Veil Of Corporate Entity’ (1912) 12 Columbia Law Review
Cases
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
Gilford Motor Co Ltd v Horne [1933] Ch 935
Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415
Battle v Irish Art Promotion Centre Ltd [1968] 1 IR 252
Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352
Jones v Lipman [1962] 1 WLR 832
Legislation
The Companies Act, 2014
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