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The Proposition that a Company has a Separate Legal Personality

Info: 2007 words (8 pages) Essay
Published: 15th Aug 2019

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Jurisdiction / Tag(s): UK Law

*per Rogers AJA in Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549, 576

The doctrine of corporate personality offers businesses a way of limit the liability of those running it and securing investment from others. This done via making the company a separate legal entity, as established in Salomon v Salomon & Co Ltd [1897] A.C. 22 this gives the company the rights to enter into contracts, the right to sue or be sued, take out loans and own land. Lord Summers in Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723 at 740 – 741 said that ‘Between the investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though artificial, the company itself, and the business carried on is the business of that company.’

By limiting liability they encourage people to take risks and invest money in the economy though the larger the membership of company grows the less control those running the business have. Obviously this passes the risk onto creditors who bear the brunt of the losses if a company fails whereas the owners can just walk away.

Though there are exceptions, such as pre-incorporation contracts, most of these exist to prevent the doctrine from being misused or to protect a fraud. The most novel and somewhat out of place exception exists within the rules surrounding corporate groups. The English courts have been very unwilling to put aside the corporate personality doctrine, even in instances of fraud, and some these exceptions are statutory which makes the corporate group exceptions even more interesting. According to (Ian Ramsay and David Noaks, Piercing the Corporate Veil in Australia (2001) at 252) ‘a court may also pierce the corporate veil where requested to do so by the company itself or shareholders in the company in order to afford a remedy that would otherwise be denied, create an enforceable right, or lessen a penalty.’

If individuals can take advantage of the Corporate Personality so to can companies because as legal entities have the right to set up, own and run subsidiary companies thus reducing their liability on certain business ventures. Were we to strictly apply the principle in Salomon then this particularly novel exception would not exist because the veil of incorporation would prevent two companies being perceived as one however the courts have been willing in some instances where it can be shown that the groups of companies are a single economic entity to put aside the separate legal personality. Rogers AJA stated in Briggs v James Hardie & Co Pty Ltd (1989) 16 N.S.W.L.R as cite by Amin, G, Forji, in The Veil Doctrine in Company Law that ‘There is no common, unifying principle, which underlies the occasional decision of the courts to pierce the corporate veil… There is no principled approach to be derived from the authorities.’

The courts have approached corporate groups without an apparent pattern causing considerable confusion, in some instances they have pierced the veil of incorporation and other instances have refused to break the principle found in Salomon. This particular exception seems the most out of step with the principle of Salomon and though apparently without pattern the courts have been willing to pierce the veil to protect companies. As can be demonstrated in The Albezero [1977] A.C 774 where Lord Justice Roskill strictly applied Salomon as to be that each separate company in a corporate group ‘is a separate entity possess of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group even though the ultimate benefit… be to the same person or corporate body.’

The principle in Salomon, as evidence in the Albezero, is the stating point for such cases however the courts have in some instances allowed the piercing of corporate veil where it can be demonstrated that the companies are single economic entity. In the case of Smith, Stone and Knight ltd v Birmingham Corporation [1939] 4 All ER 116 it was held that possession of subsidiary by a parent company was not enough to ‘pierce the veil’ but if it could be shown that the subsidiary was operating on behalf of the parent company. The case concerned a subsidiary waste paper business operating on behalf of paper manufacturing company whom owned all but five shares (owned by the directors.) The local authority compulsory purchase to take the subsidiary companies land and the courts allowed the parent company to claim compensation for disruption to their business.

F.G Rixon, in (Lifting the veil between holding and subsidiary companies [1986] at 423), points out that whilst case authority does exist that supports the strictest application of the Salomon principle, (lifting the veil only to prevent abuse of the doctrine), but are not clear enough to prevent it use in these instances. In Tunstall v. Steigmann [1962] 2 Q.B. 593 at 602 Lord Justice Ormerod calls for protection of the veil to be pierced only in instances where the company is a ‘mere facade’ but doesn’t expand on what he means by facade. In theory the possession and control of a subsidiary company could be seen as a facade, that they are in fact one company, and such a principle would cause little confusion however the approach of the courts has been less than consistent.

In a way these cases are an extension of the legal fiction, which allows them to operate as separate legal entities. Lord Denning in DHN Food Distributor’s Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 (CA) declared that ‘this group is virtually the same as a partnership in which all the three companies are partners. They should not be treated separately so as to be defeated on a technical point.’ It’s worth remembering at this point that Lord Denning was famous for deciding on the facts of the case to the more just action than applying the actual law. The case itself concerned a parent company, which owned two subsidiaries; one owned a plot of land that the company operated on and another to act as a distributor of the company’s goods and running a fleet of Lorries. This is another case concerning the compulsory purchase of the subsidiaries land, and attempt by the parent company to claim compensation, which was allowed.

The decisions in DHN and SSK can be contrasted with the decision in Woolfson v Strathclyde Regional Council [1978] 2 EGLR 19 (HL), in which the parent company owned by W ran a retail business comprising of five premises split between the parent and subsidiary company. Woolfson owned majority shares in both companies, the remaining shares owned by W wife, in spite of the fact that materially this is similar to DHN and SSK Company A could not claim compensation when the Local Authority compulsorily purchased the land. It was distinguished because company B engaged in business according to its memorandum and company A did not have sufficient control over the land. Lord Keith made distinguished between the companies and Woolfson, ‘any direct loss consequent on disturbance would fall upon Campbell… In so far as Woolfson would suffer any loss, that loss would be suffered by virtue of his position as principal shareholder in Campbell’.

The case of Adams v Cape Industries plc [1990] Ch 443, concerns a parent company trying to avoid liability from the negligent exposure of asbestos by a subsidiary company rather then enforce a personal right. The court was quick to dismiss references to the subsidiary as the ‘alter ego’ of Cape industries, Scott J pointed to the facts that the subsidiaries ‘debtors were its debtors, not Cape’s debtors. Its creditors were its creditors, not Cape’s creditors,’ and that ‘Cape was not taxed in the United Kingdom or in the United States on profits’ made by the subsidiary.

Marc Moore, in (“A temple built on faulty foundations”: piercing the corporate veil and the legacy of Salomon v Salomon [2006] at 195 to 201), to the courts contradictory and confused approach to piercing the corporate veil however he argues for a move away from established principles. He favours a test which examines the ‘genuine purpose of that business,’ defining it as ‘a strategy determining the general direction of the business, the existence of which both precedes and also exists independently of the specific activity that gave rise to the dispute at hand.’ The test he suggests, calling it the genuine ultimate purpose, seems more complicated than is necessary and simpler checklist based test already exists in the Single Economic Entity.

The argument has been made that there is a growing ‘general principle that all companies in a group of companies will be treated as a single entity,’ (Palmers Company Law, Part 2 Formation of Companies, at 2.1538) However the more recent case law suggests that this general principle is now less popular and being tightened, as Marc Moore, in (“A temple built on faulty foundations”: piercing the corporate veil and the legacy of Salomon v Salomon [2006] at 195), phrased it the English courts have become ‘primarily concerned with policing the boundaries of any established exceptions to the principle in Salomon.’

DHN, SSK, The Albezero and Woolfson concerned parent companies trying to enforce their rights and thus avoid loosing out as result of the doctrine of corporate personality. What differentiates DHN and SSK from Woolfson and The Albezero is that the subsidiary of Woolfson operated as its own separate business and not as an extension of the parent company. It would appear that Single Economic Entity test only applies to parent companies and not to individuals thus block Woolfson’s attempt to claim compensation from the compulsory purchase.

DHN and SSK could both show that there subsidiaries operated with no independence, and that the directors of the subsidiaries where not running independently of the parents board of directors. In SSK the profits of the subsidiary where treated as the profits of the parent whilst in DHN the three companies operated toward the same goal as if in a partnership. Whereas in the Albezero, Cape and Woolfson the subsidiaries where given substantial freedom of operation and in no way can they be declared Facade Companies without weakening the principle in Salomon. In addition to this Cape can be further distinguished because it represented the breakdown of protection that the doctrine of corporate personality offers and the courts are very unwilling to discourage entrepreneurship and limited liability represents, to both companies and individuals, one of the most potent incentives to that end.

A strict application to the cases in this area would see each company being treated as separate legal entities oftentimes arbitrarily however the liberal application could see companies pick and choose what they are responsible for. The middle ground is to employ a test which can demonstrate which companies are Facades and which are genuinely operating independently.

The Test offered by Moore is wider and more conceptual and would possibly be inclusive of companies, which are subsidiary business ventures like in Cape and thus weaken the concept of limited liability. Whereas the existing Single Economic Entity tests is more factual and it simply needs to be ‘established that a parent company has exercised complete domination and control over the affairs and activities of a subsidiary’ (Anil Hargovan, Jason Harris, Piercing the corporate veil in Canada: a comparative analysis [2007].)

Though currently the doctrine is being steered toward a more strict legal approach, common theme of development in the doctrines developed by Denning, it is not yet clear if the liberal approach is being dismissed.

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