Companies are enterprises, also the legal person, so companies are business entity. Company as the business entity, different with other nonbusiness legal person in sociality, for instance: Swansea University, Morrison Hospital, also guild, government organs, and other social organisations, etc. Company as business entity, the distinction with nonbusiness legal person is business is profitable legal person, in the other hand, nonbusiness legal person is non—profit legal person. The reason of why that business is profitable legal person is company as the business entity who conduct business operations and gain profit, they are seeking for maximise profit for survive and development.
According to Pettet (2005), he suggested that “the nature of the corporation, particularly its corporate personality, became the focus of thought." He identified two main theories: the fiction theory and the real entity theory.
The fiction theory, also named natural entity theory or organic theory, describes that the legal person has no actual reality, no mind, no willing, the legal person exists only in law. John Marshall who is the Chief Justice of the United States Supreme Court from 1801 to 1835, described the corporation: it is “an artificial being, invisible, intangible, and existing only in contemplation of law" (Schane, 2006). Pettet (2005) stated in Dewey’s (1926) theory, which asserted the corporate body is the creature of intelligent.
On the other hand, the Real entity theory universally seems as 19th century German realists’ work. Gierke (1900) viewed corporate personality not only as a legal conception, but also as a social fact with a substantial nature. Corporate personality is a living organism, it allows one or more natural persons associate together arises a single entity, a new personality.
The Veil of Incorporation
A business once incorporated, it gains a separate corporate personality from its members. As a separate legal person, the company has the power to: Entering contract in its own name; Sue and be sued; Purchasing and owning property under its own name; Incurring debts; and Perpetual succession. Thanks to the separate legal identity of incorporated enterprises, their members take limited liability for their entities’ debts. The limited liabilities of members is called as “veil of incorporation."
However, there are differences between corporate personality and limited liability. Chigbo (2006) said “Limited liability is the logical consequence of the existence of a separate personality", however, limited liability merely as humans can have restrictions imposed on their corporate personality (e.g. children), so a company may have corporate personality without limited liability. Chigbo (2006) described according to Companies Act 1992, “two or more persons may incorporate a company with or without limited liability by signing a memorandum and submitting it to the Registrar of Companies"
The famouse case of Salomon v Salomon & Co. (1897) AC 22 is the classical judgment of limited liability, also is the foundational decision of the House of Lords in the area of Company Law. Basically, Aron Salomon was a successful leather merchant in manufacturing leather boots. In 1892, he formed Salomon & Co. Ltd. There were at least seven shareholders: Mr. Salomon, his wife, daughter and four sons. Mr. Salomon owned 20,001 of totally 20,007 company shares, the remaining six shares were shared among other six shareholders. He sold his business to Salomon Ltd for £39,000, of which £10,000 secured debenture loan which entitled Solomon. When the company went into liquidation, the liquidator claimed the debentures used by Mr. Salomon as security for the debt were invalid, on the ground of defraud. Mr. Salomon disputed this as the company was in reality his agent and he as principal was liable for debts to unsecured creditors, should be paid off before unsecured debts (CL&Co, 2010). The House of Lords rejected the arguments from fraud. Described by Smith (1999), House of Lords viewed “as Solomon Ltd been formed as an legal person entirely separate from those who had created it – Mr. Solomon. He would be allowed to claim the part of his debenture loan." The decision also confirmed that the use of debentures instead of shares could further protect investor (Chigbo, 2006).
In Puig’s (2000) work, he argued that Salomon’s case and the separate legal entity is a two-edged sword. In the one hand, the decision was good to establishing the corporations are separate legal entities, he stated “Salomo’s case endowed the company with all the requisite attributes with which to become the powerhouse of capitalism" (Puig, 2000). In the other hand, the decision was bad as Salomon’s case has encouraged defraud of legal obligations.
The case of Macaura v. Northern Assurance Co. (1925) A.C. 619 made it clear that “corporate personality facilitates limited liability by making the debts belong to the corporation, it also means that the company’s asset belong to company but the shareholders" (Chigbo, 2006). Private companies’ shareholders easily tend to think that company is belongs to themselves. They may act on this wrong belief.
According to David (n.d.), he stated that the common law of England does not clothe its partnerships with corporate personality. However, Civilian systems in Scotland, some Roman law based countries and some states of America, seem universally to clothe their partnerships with separate corporate personality.
Lift the Veil of Incorporation
In some particular circumstances of abusing in purpose of the separate legal identity of the company and members’ limited liabilities, to protect parties associated with the company especially the creditors, the court may have the power to ignore the separate corporate personality, in other word, the court may “lift the veil of incorporation", therefore to hold the members personally responsible for the actions of the company.
The veil is lifted under the exceptional situation, it includes: Statutory exceptions and judicial exceptions.
Under the Companies Act, in some situations of liability for the company’s debts are imposed upon other parties who is not normally responsible for the company’s debt. The situations are:
Where a public limited company acts before it has received a trading certificate, the individuals who carry out the acts is liable for the debts. This provision Companies Act 1985, s.117 (8) has been retained in the 2006 Act. See CA 2006 s767 (3)
Where a person signs, issues or authorizes the signing or issue of certain instruments on which the company’s name does not appear properly. This provision Companies Act 1985 Section 349(4).
Fraudulent trading and Wrongful trading: Section 213 of the Insolvency Act 1986 describes the fraudulent trading.
The statutory exceptions are not exhaustive, and some judicial precedents provide the court wider possibilities in disregarding the veil of incorporation. The veil might be lifted in some situations:
When a company is formed as a deliberate means to perpetrate a fraud: Guide and Re FG (Film) Ltd (1953)
Where it is used by individuals in avoidance of contractual obligation: Gifford Motor Co Ltd (1933) Ch935
In some exceptional situations, the veil is lifted to allow a group of companies to be treated as a single one, although the general rule is that each company within a group is different: DHN Food Distributor Ltd v. Tower Hamlets (1976) WLR 852 and Woolfson v. Strathclyde RC (1978) SLT 159
Extinctions of corporate personality
Termination of corporations means extinctions of corporate personality, and the end of corporate entrepreneurship. It happens under two kind of situation: one is company bankruptcy; another is dissolution of a company.
Whether the company is extinction by bankrupt or dissolution, the following issue will be liquidation. When the company is put into liquidation, the corporate personality will not immediately vanished. The company, however, have limited capacity in the process of liquidation. In other word, the company cannot conduct business operations within the range as approved and registered before liquidation, only the liquidation team can represent company conduct business operations within the range. After the company process the nullification of registration by the registration organ, the corporate personality is to completely extinction.
The essay mainly introduced the corporate personality, around this topic, the “Veil of Incorporation" has been defined, there was a famous case of Salomon v Salomon & Co. (1897) AC 22 which recognised of the separate identity and member’s limited liability. However, in some particular circumstances of abusing separate legal identity of the company and member’ limited liabilities, in this context, the court may have the power “lift the veil of incorporation". Afterward, this creature been used by Germany, Japan, and other countries. But when he Companies Act has been used in China since 1994, the argument about whether or not introduce “lift the veil of incorporation"into China never stopped. The main reason is many state-owned enterprise’ s owner is government, if these enterprises repudiate a debt, the foreign court might be adjudge Chinese government take the responsibility. Indeed, the principal of “lift the veil of incorporation" able to ensure the transaction security, as well as make you go bankrupt.Reference:
Dewey, J., (1926). The Historic Background of Corporate Legal Personality. Yale Law Journal. p669
Douglas Smith, (1999). Company Law. Oxford: Reed educational and professional publishing Ltd. p 20
Gierke, O., (1900). Political Theories of the Middle Age, translated by F.
W. Maitland. (1987) Cambridge: Cambridge University Press. p62
Pettet, B. G., (2005). Company Law 2nd edition. England: Pearson Education Limited. p48
Puig, Villalta. Gonzalo., (2000) A two-edged sword: Salomon and the separate legal entity, Corporation Law, Volime 7, Number 3. Murdoch Anonymous. (n.d). Roman Law: The Law of Persons. Available from: www.law.cam.ac.uk/faculty-resources/10006531.doc. Accessed October 23rd 2010
Schane, Sanford A., and Foreword, Shuy, R. W., (2006). Language and Law. Great Britain: MPG Books, Cornwall
Chigbo Clement, (2006). Corporate personality and limited liability. Jonesbahamas. Available from: http://www.jonesbahamas.com/?c=135&a=7866. Accessed October 23rd 2010
Goldberg QC David. (n.d.). Entity Classification. Available from: www.law.cam.ac.uk/faculty-resources/10006531.doc. Accessed October 23rd 2010
Salomon v. Salomon & Co. (1896). (1897) A.C. 22 (H.L.). (2010). CL&Co Ltd Website: Legal Briefing. Available from: http://www.cl-co.cn/en/articledetail.asp?id=387. Accessed October 23rd 2010
University Electronic Journal of Law. Available from: http://www.murdoch.edu.au/elaw/issues/v7n3/puig73a_text.html. Accessed October 23rd 2010