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Published: Fri, 02 Feb 2018

Company
Law Assessed Essay

By
virtue of s.1[1], a company means a company formed and registered under the Act. A company
is said to be regarded as a limited liability company if the liability of its
members is restricted to the amount of shares or guarantee held by its members.
And such liability is said to be limited to the amount left unpaid if any by
the member (if limited by shares) or limited to the amount the member has
agreed to contribute in the event the company is been wound up.

A
company is either private[2] or public. Section 4 of the Companies Act 2006, defines a “public
company” as a company whose liability is limited by either shares or
guarantee and also having a share capital. Furthermore, a company is formed
by meeting the requirements that has been set out in the Companies Act 2006[3] on the
registration of a company subject to the satisfaction of the Registrar. A
certificate of incorporation is then issued to the company and it then becomes a
separate legal[4] entity distinct from its members.

Upon
incorporation, the subscribers to the memorandum and any other person(s) who
might subscribe to the company’s memorandum later on are regard as a corporate
body as stated in the certificate of incorporation. The company can sue and
also be sued and can also acquire property in its name. The most important
thing about the concept of separateness is that it makes the subscribers to the
company immune from any liability in excess of the contribution to the company[5]. The
concept of separate personality was established in the case of Salomon v
Salomon & Co[6] where the court held that the company was duly registered and was not an agent
or trustee for the vendor. In the words of Lord Macnaghten, “The
company is at law a different person altogether from its subscribers to the
memorandum; and, though it may be that after incorporation the business is
precisely the same as it was before, and the same persons are managers, and the
same hands receive the profits, the company is not in law the agent of the subscribers
or trustee for them. Nor are the subscribers as members liable, in any shape or
form, except to the extent and in the manner provided by the Act”[7]. It should
be noted that the compliance with the provision of the statute granted the
company its separate legal status and not the circumstance surrounding the
case.

The
shareholders of the company do not have any propriety right over the property
of the company regardless of the amount of shares held by them. They are only
entitled to the bundle of rights attached to their shares[8]. In the
case of Bowman v Secular[9],
it was held that the company owns its property and not the individual members
of the company. Also in Lee v Lee’s Air Farming[10], the
court was faced with the question whether the company and Mr. Lee were two
separate legal entities and thus enables them to enter a valid relationship
with one other. It was held that there exist a master and servant relationship
between the two and the widow was entitled to compensation. While in Macaura
v Northern Assurance Co Ltd[11],
the House of Lords decided that the Timber was the property of the company and
Mr. Macaura even though he was the sole owner of the shares of the company had
no insurable interest in the company’s property.

It
is important at this juncture to note that the concept of separateness and the
limitation on the liabilities of members could be likened to that of Siamese
twins. Limited liability is the logical
consequence of the existence of a separate personality

Also,
it should be noted that the members and directors are separate from the
company. The directors are agents of the company and never that of the members
even though they were appointed by the members[12].

Having
considered the concept of separateness of the company from its members and the
limitation of liabilities it affords its subscribers, we would now look at the
circumstances whereby the courts or legislature have disregard the separation
of the personality of the company and the members on the ground that it has not
been maintained. This is widely referred to as the “doctrine of lifting the
veil of incorporation”.

The
Post-Salomon’s era has seen several circumstances whereby courts have been
called upon to apply the corporate personality concept. The Salomon’s case is
regarded as the fountain for the concept of separate legal personality and also
serves as a referencing tool for courts in lifting the veil of incorporation.

According
to Ottolenghi[13],
veil lifting is categorised into: ‘peeping’, where the veil is lifted to get
member information; ‘penetrating’, where the veil is disregarded and liability
is attributed to the members; ‘extending’, where a group of companies is
treated as one legal entity and; ‘ignoring’, where the company is not
recognised at all. In Atlas Maritime Co SA v Avalon Maritime Ltd[14], Staughton
LJ defined ‘piercing the veil’ as:

“…an
expression that I would reserve for treating the rights and liabilities or
activities of a company as the rights or liabilities or activities of its
shareholders. To lift the corporate veil or look behind it, therefore should
mean to have regard to the shareholding in a company for some legal purpose”.

This
doctrine which allows the court to peep, penetrate or ignoring the principle of
separate legal personality has been one of the most litigated issues in company
law and has also been heavily criticized as
sacrificing substance for form. Thus, in Gorton v Federal Commissioner of
Taxation[15], Windeyer J commented
on the strict application of the doctrine of veil lifting by courts has brought
the law into “unreality and formalism.”

We
will take a look at the situations where the judiciary or legislature is
prepared to disregard the separate legal personality of a company and lift the
veil of incorporation. These are said to be exceptions to the concept of legal
personality.

The
court would not hesitate to pierce the veil of incorporation where a company
was formed to perpetrate a fraud or used in other to evade other legal
obligations. In Jones v Lipman [1962] 1 WLR 832[16],
it was held that the defendant formed the company in other evade the sale of
the land and the judge regarded the company has a facade. While in Daimler
Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd[17], the court had to determine whether the company was an ‘enemy’ during the First
World War. It was decided in the case that the company was indeed an ‘enemy’.

The
importance given to fraud tends to differ from jurisdiction to jurisdiction.
For instance, under the United States law, courts would not disregard the
concept of separate legal personality without the proof of fraud.[18] But all
that is required under the English law for courts to lift the veil is special circumstances exist indicating that it is a mere facade
concealing true facts.

Another
category to be considered is a situation where there exists an agency
relationship. This occurs mainly between parent companies and its subsidiaries.
The courts always try to see if there was an express agency agreement between
the subsidiary and the parent company. In Smith, Stone and Knight v Birmingham Corporation[19], the court laid down six requirements that needs to
be satisfied to empower the court to pierce the veil. The following are the six
requirements:

1. Are
profits of the subsidiary treated as profits of the parent?

2. Were
persons conducting the business of the subsidiary appointed by the parent?

3. Was
the parent the “head and brains” of the trading venture?

4. Did
the parent govern the venture?

5. Were
the subsidiary company’s profits made by the skill and direction of the parent?

6. Was
the parent in effective and constant control of the subsidiary?

While
in Adams v Cape Industries Plc[20], the court had to
consider whether a group of companies could be treated as a single economic
entity. The court found that the business activities of the subsidiary were
free from the control of the parent’s company. But in Samengo-Turner v
J&H McLennan (Services) Ltd[21], where a group of
companies was treated as a single entity on the basis of their single economic
interest.

Another
approach in which courts will lift the veil is in the interest of justice. To do
this, there must be an existence of special circumstances which indicate that
company is a mere facade concealing the true facts[22]. In D.H.N. Food Distributors Ltd v Tower Hamlets London Borough Council[23], the claim
was allowed on the grounds that the appellant was capable of controlling its
subsidiary in all forms. But the decision was challenged by the House of Lords
in Woolfson’s case. In succeeding on this approach, one must prove that some
fraudulent act had being committed by persons acting for the company. In Creasey
v Breachwood Motors Ltd[24],
the court applied the interest of justice approach in lifting the veil of incorporation
and finding Breachwood Motors Ltd as liable for the liability owed to Mr. Creasey
by Breachwood Welwyn Ltd whose assets were transferred to Breachwood Motors
Ltd. But the Court of Appeal had to overrule the lower court on the grounds
that not only is the motives of those behind the alleged facade that may be
relevant but also whether they have breached their duties as directors[25].

Considerations
must be given to the relevant statutory exceptions to the doctrine of piercing
the veil of incorporation as contained in the Insolvency Act 1986. The provision
of s.212[26] creates room for the veil of incorporation to be lifted and allows the court to
compel a delinquent director or liquidator to contribute to the towards the
company’s assets. In Re Purpoint Ltd[27], the proprietor of a company was ordered under the provision of s.212 of the
Insolvency Act 1986 to contribute towards the assets of the company which was
in the process of liquidation. Furthermore, the veil could also be lifted in
instances where the director is found liable of wrongful trading or fraudulent
trading (s.213 and 214 of Insolvency Act 1986).

The important thing to note however is that although a separate
legal entity, a company or corporation can only act through human agents that
compose it. As a result, there are two main ways through which a company
becomes liable in company or corporate law to wit: through direct liability
(for direct infringement) and through secondary liability (for acts of its
human agents acting in the course of their employment)[28].

Upon
incorporation, a company is said to be regarded as an artificial human being
capable of several rights such as instituting legal proceedings against anyone
and also being opened to legal suits. The decision-making of the activities of
the company is left in the hand of human beings i.e. the directors. They are
regarded as agent of the company and thus have created a concept of agency
between the Company (being the Principal) and the directors (being the Agent).
The board of directors are said to be the mind of the company, thus has the authority
to bind the company[29].
This is referred to as the “alter ego doctrine” or the “Organic Theory” which
is an opposite of the doctrine of separate legal entity.

In
the past courts were experiencing difficulties in finding companies liable for
vicarious liability. It was not until the case of Campbell v Paddington[30] that the
court had to rule that companies could be liable of tortuous act. Thus a
company can be vicariously liable for the act of its agent (the employee). The
doctrine was established in Lennards Carrying Co. V Asiatic Petroleum[31], where the
House of Lords held that L was the alter ego of the company
and not merely a servant or agent as his was the directing mind and will of the
company, and there was a presumption that his action was the action of the
company itself within s.502of
the Merchant Shipping Act. Consideration will be given to the words of Viscount
Haldane LC:

“A corporation is an
abstraction. It has no mind of its own any more than it has a body of its own;
its active and directing will must consequently be sought in the person of
somebody who for some purposes may be called an agent, but who is really the
directing mind and will of the corporation, the very ego and centre of the
personality of the corporation… somebody who is not merely an agent or
servant for whom the company is liable upon the footing respondeat superior,
but somebody for whom the company is liable because his action is the very
action of the company itself”[32].

To establish a
successful claim against a company, all that needs to be done is to pinpoint an
individual who could be said to be the ‘brain and mind’ behind the company and
that such individual has the authority of the company to do so.

Lord Denning in Bolton (Engineering) Co Ltd v Graham & Sons[33], drew
a distinction between the major decision makers in the company and those that
simply carry out the decision. In Tesco Supermarkets Ltd v Nattrass[34], Tesco
was faced with prosecution for the act of a manager of a particular branch of
the supermarket had failed to check the stock for the proper pricing of some
goods which were advertised at a reduced price but was sold at a higher price.
The court was faced with deciding whether a manager of a particular branch
could be said to be the directing mind which could lead to finding Tesco liable
for such a person’s action. Whereas in Re Supply of Ready Mixed Concrete[35], the court held that the a company was only capable of
acting by its agents and, for the purposes of the 1976 Act, in its capacity as
a supplier of goods it was to be judged by its actions and not its statements.
The decision was based on the fact the employee was acting within the course of
his employment.

Who are those that
could be said to be the directing mind of the will of the company? These include
persons who hold senior positions in the general management of the company and
they are directors, managers, secretary etc.

A modern approach to
vicarious liability was established by Lord Hoffman in Meridian
Global Funds Management Asia Ltd v Securities Commission[36],
the question before the court was who were the directing mind of the company
with regards to attribution. This approach was seen to support the principle of
separate legal personality. What this simply means is that the company could
actually be held liable for the acts of those who are entrusted with carrying
out the decisions of the senior officers in the company. In McNicholas
Construction Co Ltd v Customs Excise Commissioners[37], the
acts of the employees of a company who were engaged in VAT arrangements, were
held to be render the company liable. The approach of Lord Hoffman was
equally applied with some success in the case. Also, in Morris v Bank of
India[38], the issue before the court was to determine
whether Mr. Samant was to be found
to have knowledge of the fraud and the court held that Mr. Samant’s Knowledge
of the five transactions could be attributed to the company since he (Samant)
had been given the ultimate authority to supervise the transaction. But in
cases where by the individual entrusted with the responsibility of directing
the affairs of the company has ceased to do so any act of such an individual
would not be attributed to the company. For this we could see the Canadian
landmark case of Canadian Dredge & Dock Co Ltd v The Queen[39] where the Supreme Court that liability could only be
imputed on the company if and only the acts of the basis of directing the will
of the company.

It should be noted that
cases of embezzlement does
not apply to the doctrine of attribution. For instance, where a director had misappropriated company money to his own use
as it was in the case of Stephens (Inspector of
Taxes) v T Pittas Ltd[40], where it was decided that the company could not be said
to have authorized any loan to the director since there was never an agreement
between the two parties.

Another issue to
consider is who should be held responsible for accidents, injuries and death at
workplace. Can we accuse an inanimate thing such as a corporate entity of such
a crime? The answer to this was NO[41] due to that fact that it was difficult to identify the alter ego responsible
for the mens rea of such a corporate entity. It was not until the
promulgation of the Corporate Manslaughter and
Corporate Homicide Act 2007[42] which makes provision for companies to be guilty for the offence of ‘corporate
manslaughter’. The law makes companies to be held accountable for any lapses in
the maintenance of health and safety at workplace. To succeed in an action for
corporate manslaughter, one needs to prove “gross breach” of duty of care on
the part of the management of the company.

The veil of
incorporation could also be said to be lifted in cases of finding who is liable
for a tort which was committed by a shareholder (who in most cases happens to
be a director) in the course of carrying out the company’s business activity.
Recourse would now be made to the case of Williams v Natural life Health
Foods Ltd[43], where a negligent misstatement claim made by a majority shareholder of the
company was the issue in contention. It was held that to hold a director
personally liable for negligent misstatement, the claimant must have been made
to believe that the director was going to be personally liable. Thus the action
of the claimant failed because there was no evidence of such in the case. While
in Standard Chartered Bank v Pakistan National Shipping Corp[44],
the House of Lords found a director to be personally liable in tort of deceit.

Another situation to
consider is when can a director and a majority shareholder be said to be liable
as a joint tortfeasor. To answer this question, we would take a look at the
case of MCA Records Inc v Charly Records Ltd[45],
where it held that for director to held personally liable for the copyright
breach, it must proven that he actually procured or instigated the breach.

In
conclusion, I will suggest that the veil of a company should only be pierced in
the event of some people using the company to perpetrate fraudulent act.

[1] Companies Act 2006

[2] Said to be any company other than a public company

[3] See Ss. 7-16

[4] Some refer to it as a Corporate Personality

[5] Ben C. Ball, Jr., Matthew S. Miller & Christine S. Nelson. The Corporate
Veil. When is a subsidiary separate and different from it’s parent? Cornerstone
Research Foundation (Online) 1997. (Accessed 15.12.2008)

[6] [1897] AC 22,

[7] Salomon (n 5) 51

[8] Such as right to vote and participate in the dividends

[9] [1917] AC 406

[10] [1961] AC 12

[11] [1925] AC 619

[12] Automatic Self-Cleansing Filter v Cuninghame [1906] 2 Ch. 34, CA, where it was
held that it is impossible for the decision of a mere majority members at a
meeting to override the views of the directors

[13] Ottolenghi ‘From Peeping Behind the Corporate Veil to Ignoring
It Completely’ [1990] MLR 338

[14] (No 1) [1991] 4 All ER 769

[15] (1965) 113 CLR 604

[16] See also Bugle Press, Re Houses and Estates Ltd [1961] Ch 270, CA, Gilford
Motor Co Ltd v Horne [1933] Ch 935, CA;

[17] [1916] 2 AC 307, HL

[18] Publiker
Industries v. Roman Ceremics, 603 F. 2d 1065 (1979

[19] [1939] All ER 116

[20] [1990] 1 Ch 433

[21] [2007] EWCA Civ 723. See also Beckett Investment Management Group Ltd v Hall
[2007] EWCA Civ 613

[22] Woolfson v Strathclyde Regional Council 1978 S.C. HL 90

[23] [1976] 1 W.L.R. 852, CA

[24] [1993] B.C.L.C. 480

[25] See also Ord v Belhaven Pubs Ltd [1998] 2 B.C.L.C. 447, CA

[26] Insolvency Act 1986

[27] [1991] BCC 121, see also Re DKG Contractors Ltd [1990] BCC 903

[28] Amin
George Forji, The
Veil Doctrine in Company, Doctoral Research
Fellow, International Law, University of Kent and Helsinki University Law. Published on September 28,
2007(Online). ( Accessed 15.12.2008) http://www.llrx.com/authors/1124

[29] s.40 of the Companies Act 2006

[30] [1911] 1 KB 869

[31] [1915] AC 705, HL

[32]

[33] [1957] 1 QB 159, CA

[34] [1972] AC 153

[35] [1995] 1 B.C.L.C. 613, HL

[36] [1995] 2 AC. 500

[37] [2000] STC 553

[38] [2005] EWCA Civ 693

[39] [1985] 1 S.R.C. 662

[40] [1983] STC 576

[41] [1991] 1 ICR 652

[42] Which came into law on the 6th of April 2008

[43] [1998] 2 All ER 577, See also Noel v Poland [2002] Lloyd’s
Rep. IR 30

[44] [2002] All ER (D) 67

[45] [2003] 1 BCLC 93


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