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The Acknowledgment of the Legal Personality of the Company

Info: 3033 words (12 pages) Law Essay
Published: 12th Aug 2019

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Jurisdiction(s): UK Law

A company is incorporated when it receives a certificate of incorporation, thus it has a ‘separate legal personality’. In law the company will become a legal person and has its own right. The most fundamental concept to familiarise the business is getting the impression that the business has a legal personality in its own right. This is known as the concept of legal personality.

One could define the veil of incorporation as hanging between the company and its members in law, it is known as lifting the veil of incorporation as well. It appears that it could be difficult to be determined when will the judge lift the corporate veil. Keenan et al (2002) say that the power to do so is a tactic used by the judiciary in a flexible way to counter fraud, sharp practice, oppression and illegality [4] .

The courts have the discretion to lift the veil in order to get information involving the persons who control the company. Ottolenghi (1990) defines this as ‘peeping behind the corporate veil’ [5] . It construes that when the courts have obtained the information they require the ‘curtain’ will be pulled back and the company will be considered as a separate legal personality. In the case of Daimler v Continental Tyre Co [6] , The House of Lords decided that the court has a jurisdiction to pierce the corporate veil in some circumstances to see who controls of the company’s affairs are. As in this case the persons in control of the company were enemy, the company could be regarded as for the purposes relating to trading with the enemy.

It seems that the courts have started to penetrate the veil despite the decision in Salamon. The approach can be uttered as reaching through the veil and snatching the shareholders power personally. By doing this the courts can allocate responsibility upon the shareholders for their acts to the company and determine their interest in the company’s assets.

Even though it is important, however, the courts tend not to create a direct relationship between the shareholder and the company’s assets. This strict approach derives from the case of Macaura v Northern Assurance Co [7] where Lord Buckmaster dictates that, ‘no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein’ [8] . Lord Wrenbury went on by adding that ‘even if he holds all the shares is not the corporation and neither he nor the creditor of the company has any property rights legal or equitable in the assets of the corporation’ [9] . Authors have cemented that this ruling was an example of ‘carrying the logic of Salomon’s case to absurd lengths’. This strict approach has not always been followed due to different circumstances and different approaches have been adopted in different cases. Lord Halsbury suggested two orders to which the separate legal entity of the company could have been preserved devoid of any requirement to penetrate the veil.

Another approach in which the courts can penetrate the veil is by revealing that an agency relationship did exist between the shareholder and his company. The House of Lords denied such relationship exists in Salomon, however, Schmitthoff (1976) [10] and Pennington (2002) [11] both agree that agency is one of the conditions in which the court will lift the corporate veil. Agency, however, is only a way in which the courts penetrate the veil but not an aim in means to lift the veil. The true meaning regarding a relationship of agency is recognised by the judiciary with the solitary aim of assigning responsibility to the primary persons for the acts of his agent. In Smith, Stone & Knight Ltd v Birmingham [12] the court held that agency relationship must be deceptive and not only inferred merely from the control of a company or ownership of its shares. If judges could find an agency relationship from the control of a company then the veil could be lifted and this would certainly create impulsiveness within the law. Lord Denning ‘ripped’ off the veil in these following cases. The first being Littlewoods Mail Order Stores Ltd v IRC [13] . In this case Lord Denning has declined to acknowledge the subsidiary as a separate and independent entity. He went on to say that the courts often and lift the veil thus pulling off the ‘curtain’ to see what really lies behind a company. Lord Denning dictates that ‘it is the preacher, the puppet, of Littlewoods, in point of fact and it should be so regarded in point of law’ [14] . In the second case Wallersteiner v Moir [15] , even though Lord Denning agreed that the commercial issues does contributes, which were operated by Dr Wallersteiner, were definitely a separate legal entities, however, as he upheld that they were just dummies of Dr Wallersteiner and he controlled their every single movement. He goes on to say that there was evidence that agents were present and do so as he directed and the court should cast away the corporate veil. His dictum proves that the peeping behind the veil and determining the true relationship between the controlling shareholder and companies actually did penetrate the veil as of creating the agency relationship. This made the controlling shareholder responsible for the acts of the company.

Piercing the corporate veil is a ‘smart technique’ by which the courts could extend it so to do justice. It is the enterprise entity that the courts emphasis on. The provision in s399 Companies Act 2006 is the most fundamental example of the legislation relating to the economic entity theory. It is obvious that the courts have started to adopt this principle and in some cases judges have taken this approach, without accrediting too much importance to the separate entities of its various complicating components. When the court is pleased that the holding company do not have the full control over the subsidiary, hence, it would not regard them as one entity.

In DHN Food Distributors Ltd v London Borough of Tower Hamlets [16] demonstrates this point. DHN was a holding company, which ran its business through two wholly owned subsidiaries, which are Bronze and Transport. Bronze owned the buildings from which the business was conducted and Transport are responsible for the distribution. Tower Hamlets acquired the premises in Bow for the purpose of building houses under the Housing Act 1957. Compensation was payable to DHN under the Land Compensation Act 1961. From the land value, Tower Hamlets were prepared to pay £360,000, however, refused to pay DHN for their disturbance to the land as they had no equitable interest in the land. Due to the loss of the premises it caused all three companies to go into liquidation. Lord Denning dictates that there was a predisposition to ignore the separate legal entities for the companies within a group and more attention should be given to the economic background of the group as whole. He emphasised that when a parent company owns all the shares of the subsidiaries, these subsidiaries are contracted to the parent company therefore these three companies should, for present purposes, be treated as one [17] . Shaw LJ stated ‘why then should this relationship be ignored in a situation in which to do so does not prevent abuse but would on the contrary result in what appears to be a denial of justice’ [18] . Therefore, it cannot be confirmed from this case that there is a general principle of group entity so much so to depends upon the circumstances of the case.

Woolfson v Strathclyde Regional Council [19] produced doubt over the judgment in DHN as to the whether the Court of Appeal had suitably applied the principle that it is to pierce the veil only where special circumstances occur, signifying that it is a mere facade covering the true facts. Here, The House of Lords did not follow the ruling laid down in DHN Foods though the facts were similar. The reason behind this was that the subsidiaries in Woolfson were operational trading companies and not as in DHN that the subsidiaries were mere shells.

It is submitted that the English Courts have come near in adopting the ‘single economic unit’ method. Nevertheless, both DHN and Woolfson are largely regarded as having been decided on their own facts and not to be of the general rule. In light of Adams v Cape Industries plc [20] , the Court of Appeal rejected the ‘single economic unit’ test, asserting that companies were entitled to use the corporate veils to ring fence liabilities (Bromilow, 1998) [21] . In Adams, a company in the USA was alleged to be liable for causing injuries due to asbestos dust, however, the US company was insolvent at that moment. The plaintiffs therefore sued its UK parent company, Cape Industries plc. However, the claim was unsuccessful. The Court of Appeal held that Cape was eligible under the protection of the separate legal personality and limited liability rules laid down in the general rule. The subsidiary was a separate company, it is not Capes’ agent as well, and therefore, the group could not be regarded as a single economic unit. The court went further and said ‘the law will not permit the lifting of the corporate veil because the interest of justice is better served doing so’ [22] .

It seems that the courts are prepared to lift the veil in situations when the corporateness has been ill-treated for unlawful or improper use. As such, the courts are said to be disregarding the veil completely.

In Guilford Motor Co Ltd v Horne [23] , an ex-managing director was subjected to a post contract non-solicitation clause to set up a company in order to carry on a competing business. The court held that the company has bad intention and the intention was a mere cloak or sham which was a tool for him to breach his contract. Hence, the court issued an injunction against him and the new company. Another illustration can be seen in Jones v Lipman [24] . In this case, Lipman was contracted to sell a piece of land to Jones, but then changed his mind after all. Hence, he decided to set up a company which he sold the land to. He hoped that his company could act as a separate person and that would be able to keep the land from selling it to Jones. The court ordered him and the company to transfer the land as initially agreed. In his judgement, Russell J said,

‘the defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face, in an attempt to avoid recognition by the eye of equity’ [25] .

The more up-to-date decision in Creasey v Breachwood Motors Ltd [26] was seen as an important case because it established that a company can be a facade even though it was not formerly incorporated with any dishonest intent. However, Mr Southwell QC in Creasey has been specifically overruled the decision by the Court of Appeal in Ord v Belhaven Pubs Ltd [27] . Bromilow (1998) [28] believes that the misinterpretation in Creasy’s judgment led to the overruling in Ord. His key argument was being that on its appropriate interpretation in Creasy provided a practical and appropriate basis on which the courts could look behind the corporate personality. In Ord the Court of Appeal approved the appeal on the ground that there was defence to lift the veil in this particular ground, since nothing inappropriate was done by neither the companies nor their directors. There was no good evidence to advocate that the company was a mere facade or obscured the true facts. For the same ruling, the Court of Appeal has expressly rejected the ruling in Creasey. In reaching this decision the Court of Appeal cited with support in its own previous decision in Adams v Cape Industries plc [29] . However, if the Court of Appeal considered that they are bound by the decision in Adams, then they had to allow the appeal and disregard to lift the veil whatsoever.

In conclusion it is convenient to look at some of the most recent cases where the corporate veil has been measured. The case of Williams’s v Natural Life Health Foods [30] demonstrates that a director can escape the risk of personal liability by trading through a limited company as long as he does nothing evidential that he is accepting any personal liability from his actions. However, a director could not possibly hide behind the vicarious liability of his company if he committed fraud. To be more precise, in Standard Chartered Bank v Pakistan National Shipping Corporation (No.2) [31] where a director has knowledge and intentionally made a false statement in order to obtain some payment on a letter of credit. Nevertheless, the grounds adopted in Williams could not apply in this case, as this was considered as fraud. Lord Hoffman articulates that ‘no-one can escape liability for his fraud by saying I wish to make it clear that I am committing this fraud on behalf of someone else and am not to be personally liable’ [32] . Therefore, in this case the director was liable under tort law as he had personally committed a fraud. In Trustor AB v Smallbone [33] the veil of incorporation was discussed. This case is substantial because the Court of Appeal was invited to lay down a direction as to when the veil of incorporation may be lifted and vice versa. The Court of Appeal lifted the veil on the first two grounds, however, refused to lift the veil in that because it was essential that the veil should be lifted in the interests of justice. They quoted Adams v Cape Industries plc [34] as their authority which deliberately held that the veil should not be lifted merely because of legal technicalities resulted in injustice. It may be appropriate to say that the courts will now only lift the veil of incorporation if a company found to be a sham or the company is a party to a fraud or personally involved. This recent judgement has astonishingly confirmed that the courts will not tolerate any further exceptions of this fundamental principle laid down in English law.

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