Why is the business regarded as an entity separate and distinct from the owner?

Info: 1380 words (6 pages) Essay
Published: 20th Sep 2021

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Jurisdiction / Tag(s): UK Law

A company is a separate legal entity as distinct from its members, therefore it is separate at law from its shareholders, directors, promoters etc. and as such is conferred with rights and is subject to certain duties and obligations.

These central principles of company law were first laid down in very clear terms by the House of Lords in the case Salomon v Salomon & Company Ltd [1897] AC 2.

The ruling outlined in part in the quoted text of the assignment from Lord Macnaghten’s ruling has several important consequences, not least that where the liability of the members is limited, they cannot, only in exceptional circumstances be held liable for the companies debts.

Under the concept of Limited liability the owners of the company under normal circumstances, are not answerable or responsible for the obligations of the company therefore making the owners/ shareholders liable only for the amount of their unpaid shares and not the obligations of the company.

The principle from the Salamons case firmly established that a company has a separate legal identity to that of its shareholders and has been applied over a wide range of cases.

Roundabout Ltd v. Byrne [1959] IR 423

The owners of a public house when in dispute with its employees, who had placed a picket on the premises transferred the pub to a company. The court held that the picket must be lifted as there was no dispute between the employees and the new owner , despite the fact that the ownership of the company was vested in the original owners of the pub.

Battle v Irish Art Promotion Centre Limited [1968] IR 252

The court held that while a human person can represent himself in Court , a legal person such as a company can only be represented by a Solicitor or Barrister.

The principle set down in Salomon v Salomon & Co is known as the Veil of Incorporation. However it is now been increasingly restricted in its application to an increased extent by leglislation in order to prevent the abuse of limited liability protection and to ensure that liability for tax is not being avoided.

The veil of incorporation may only be disregarded by the court in certain circumstances.

Re a Company(1985)[1985] BCLC 333

The court held that it would use its powers to pierce the corporate veil if it felt it was necessary to prevent an injustice.

The 3 main reasons why the veil may be lifted are:

1. To enforce the provisions of the companies act
2. To avoid fraud, and
3. To deal with a group of companies

The corporate veil can be lifted in two ways:

1. By a specific provision in leglislation
2. By the discretion of the Courts

1) Lifting the Veil by Leglislation

There are a number of Statutory provisions that have the effect of ignoring the separate legal existence of the company by attaching responsibility for the companies oblgations to its members, or in extreme cases, the Directors,

Personal liability for the number of members –

Under Section 36 Companies Act 1963 a reduction in the number of members of a company below the legal minimum – two in the case of a private company and seven in the case of a public company for a period of more than 6 months , then every person who is a member during that time who was aware of the definite will be held liable for the debts incurred by the company in that period.

Personal Liability for Taxation Offences –

Section 94 of the Finance Act provides that when a tax offence is committed by a company with the consent of a person within that company, that person may be subject to legal proceedings

Personal Liability for Fraudulent Trading

Section 297 Companies Act 1963 states that if in the course of liquidation a person knowingly was a party to carrying on any business of the company with the intention to defraud creditors or any other fraudulent purpose that they may be held personally liable without limit for the debts of the company .

Re Hunting Lodges Limited [1985] ILRM 75 - The High Court held the directors and the purchaser of the main asset liable for the company’s debt after it transpired , the purchaser paid for the asset by way of 3 bank drafts payable to fictitious persons which were then deposited by one director in a building society.

Personal Liability for Reckless Trading

Section 297 Companies Act 1963 states that any person who was knowingly a party to carrying on any business of the company in a reckless manner ( it is a defence to have acted honestly and reasonably) they may be held personally liable without limit for the debts of the company

To recognise the existence of groups of companies

Under section 150 Companies Act 1963 if a company has subsidiary undertakings then consolidated group accounts must be prepared showing the profits and losses and assets/liabilities of the group. The corporate veil may be lifted to identify a holding/subsidiary company relatonship .

2) Lifting the Veil by the Courts

The Courts have a wide gambit in deciding whether to lift the corporate veil and it is not easy to extract a general principle ,however it is established that the Courts will not permit the Veil of Incorporation to be used for fraudulent purposes. In past decisions the Veil has been lifted in the following situstions

Implied Agency - where an agency relationship exists

Gilford Motor Company v Horne [1933] Ch 935 – the defendant entered into a non – compete agreement with the company in the event of his leaving. He sought to evade this agreement on leaving by forming a company with family members as directors and him as an employee. The courts lifted the veil.

Jones v Lipman [1962] 1 All ER 442, a house was sold to a newly formed company to avoid an order for specific performance given against him by selling the house to a company formed by by him . Russel J described the company as “ a device and a sham, a mask which he holds before his face in attempt to avoid recognition by the eye of equity.” The court lifted the veil.

Single Economic Entity -

Where the parent subsidiary relationship between companies in the same group is so interlinked that they should be treated as a single economic entity. The courts will lift the veil to relect the economic and commercial realities of the situation.

Powers Supermarkets v Crumlin Investments Ltd ( Unreported 22nd of June I981) -

A company held a lease with a restrictive covenant from a shopping centre company which precluded it from granting a lease to a competitor. The shopping centre was subsequently sold to a subsidiary of a rival business who then sold part of the freehold ( no longer leasehold) of the shopping centre to another subsidiary to allow it to trade on the site. The court held that although the newly formed subsidiary was not party to the contract with the restrictive covenant it was bound by the covenant because the court may “treat two or more related companies as a single entity…… if this conforms o economic and commercial realities of the situation”.

Where the company was formed for fraudulent or illegal purposes, or for the avoidance of legal duties.

Where the company is being used to perpetrate a fraud or an injustice against the minority shareholders.

Re Bugle Press Limited [1961] 1 CH 270

To establish the true residency of the company

Daimler v. Continental Tyre Company [1916] 2 ac 307

Under British wartime laws trading with the enemy was forbidden. The defendant owned monies to the plaintiff a British registered company, whose directors and shareholders were German. The court lifted the Veil and concluded that the Plaintiff was not obliged to pay the debt as this would constitute trading with the enemy.