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Lifting of Corporate Veil - Assignment Example

Summary
The paper "Lifting of Corporate Veil" highlights that lifting of the corporate veil is applied for the purposes of making decisions on the exact instances for which a shareholder will be held liable for commitments made in relation to the operations of an entity…
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Extract of sample "Lifting of Corporate Veil"

Lifting of Corporate Veil & Wrongful and Fraudulent Trading Claims Analysis Student’s Name Name of Professor Date Introduction The focus of this paper is to provide an imminent discussion on such aspects as the lifting of corporate veil and what conditions; person responsible for calling out for company liquidation, wrongful and fraudulent trading in both the UK Insolvency of 1986, the aspects that need to be established before the court of law can call for liquidation; and the very last section of the paper will present the discussion related to wrongful and fraudulent trading claims as it pertains to the UAE commercial law applications. Lifting of Corporate Veil The lifting of corporate veil is a doctrine that is mostly applied for purposes of making decisions on the exact instances for which a shareholder will be held liable for commitments made in relation to operations of an entity (Saxena, n.d). It is one of the most debated doctrines that have continued to face intensive litigation within the overall field of corporate law. It is in existence for the purpose of checking on the mere principle that to a larger extent; investor should not be held accountable for the debts of their entities in a figure that surpasses the immediate value of their investment. The current rationale behind the lifting of limited liability to existing shareholders seeks to eliminate three possible forms of transaction costs that include; costs of individual shareholders that is directly linked with how the underlying creditors monitor the wealth framework of other shareholders; costs related to how creditors monitor the risks associated with the management of actions; and, the costs for which limited shareholder liability can affordably and with ease be able to diversify their investments (Saxena, n.d). It is argued that the immediate relevance and importance of being able to limit the aforementioned costs rest with the fact that limited liability certainly fosters investment-related activities and, also triggers efficient of operations of equities markets (Saxena, n.d). Another important aspect of the lift lies in the presumption that it serves direct social interests by way of assuring underlying creditors of an entity that the existing business assets will be protected from possible investor’s creditors (Saxena, n.d). In essence, it can be noted that the decision fostered by corporate law is set to facilitate shareholders, in the form of investors; to distribute a certain degree of risks of conducting businesses to third parties. It is important to note that a corporate veil is ascertained to be lifted on the ground where a court is able to overlook the entity and thereafter; focus its direction to specific activities of certain members or managers. Such protection of the investor’s from creditors is a matter that is highly dependent on the discretion offered by the courts of law and for most instances; will constitute aspects related to social; economic and moral attributes as they unfold within the operations of a corporation. The possible Grounds for which corporate veil is lifted includes; first, in the event that the courts of law have established there was a possibility of fraud that had been perpetrated behind the veil. In this case, the courts would not allow for the Solomon principal to be adopted as a facilitator of fraud. In fact, in ascertaining the fraudulent activity, courts would go a mile further to identify the motives of the fraudulent motives of the person that are relevant and visible; whether there is relevance on the part of the character in relation to legal commitments; and, whether the timing of the incorporation of the entity was indeed relevant for that matter (Saxena, n.d). Consequently, courts might invoke the lifting of the veil in the case where a group enterprise cannot be subjected to Solomon principal for purposes of analyzing the immediate economic conditions of the entire group at hand. It is further invoked in the case of agency relationship whereby the agent at hand is a limited company. Trust is the other ground for which lift of the veil can be lifted by courts especially when it seeks to define and analyze the immediate attributes of the underlying shareholders of a corporation (Saxena, n.d). Other notable grounds for which lifting of corporate veil can be invoked by courts involves cases of tort and whereby there is a need to assess enemy attributes and especially in times of war. Under the English law, the statutory provisions that are in support of the lifting of the veil include; imminent reduction of the number of members so that only members that are able to identified with a company for a period of 6 months can be held liable; fraudulent or wrongful trading claims; in cases where there is abuse of company names or even employment of directors deemed to be inadequately positioned for holding and conducting duties and also; cases of premature trading (Saxena, n.d). Wrongful & Fraudulent Trading under UK Insolvency Act of 1986 Wrongful trading refers to a specific claim that emanates under section 214 of the Insolvency Act 1986 and relates to a situation whereby a corporation has experienced insolvent liquidation; a phenomenon that arises whenever the underlying asset base of a company are deemed to be inadequate for the clear purpose of paying-off its immediate debts and other related liabilities as well as any possible costs that might come up as a result of winding up process (Insolvency Act- 1986). It is ascertained that the claim is invoked whenever it is established at some particular moment in time prior to the initializing of the entire company’s liquidation process; its underlying directors should have established that there were reasonable potentials of the entity avoiding the winding up process (Insolvency Act- 1986). It is also expected to arise in the event that from an insolvency perspective, the director of the company had indeed failed to assume possible steps that would have facilitated a clear minimization of a future loss to the company’s overall assets and creditor’s worth for that matter. It is important to comprehend the fact that the wrongful trading claim can only be initiated whenever a corporation is deemed to be in liquidation point and thus, it is only the liquidator that has the chance. However, it is expected that with the implementation of SBEE A 2015,s 117, the administrators will also be allowed the opportunity to commence the claim whatsoever (Insolvency Act- 1986). Notwithstanding, the liquidator’s capacity to commence the liquidation can never be assigned and this was confirmed in the case: Re Oasis Merchandising Services Limited (In Liquidation) [1997] I AII 1009. It is worth to note that unlike the fraudulent trading claims, the wrongful claims are only restricted to people that are currently or were in the past directors of a given company. For this case, directors can be de jure; shadow or even de facto directors. In regards to the liability of de facto director, the case of Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, Millet ascertained the perspective that that the people who assumed to be acting as directors as being those that are able to invoke their powers and discharge their duties of a director whether they were legally appointed or not and have the obligation to accept responsibilities that emanates from the office at hand (Insolvency Act- 1986). Fraudulent trading is fairly-expounded under Sec 213 of the UK Insolvency Act 1986, is a claim considered to be more serious in comparison to wrongful trading but it poses an enormous challenge for any insolvency practitioner to demonstrate at any given moment in time. It is a claim that arises whenever the winding up of a corporation is conducted in a manner that is likely to suggest that the activity was carried out in a way that there were intentions to defraud the underlying creditors or any other stakeholder for a related fraud objective (Insolvency Act- 1986). In this event, the court will, on the application of either the liquidator or administrator, rule out that the any person that were involved intentionally on the carrying on of the business for the manner for which the above-noted should be held liable to ensure that they formulate personal contributions to the corporation’s overall assets. A good example of fraudulent trading might arise when the executive management team of a company goes ahead to accept the large orders for their products and even initial deposit payments from a customer while in the real sense they know that they will likely face bankruptcy of operations in the near short term future period (Insolvency Act- 1986). For this case, they will be held liable for fraud since it is determined that they would have known that they lack production capacity to deliver these products but yet went ahead to make false promises to their customers. To protect oneself from the risk related to both wrongful and fraudulent trading, it is encouraged that a person should be able to effectively demonstrate that they acted in a much reasonable manner in their duties as directors. A person is expected to be always conscious of their imminent duties as company’s directors and ensure that for most; if not all; times one should act in their best of interests of company’s operations and its underlying creditor’s (Lexis Nexis, n.d). In fact, the perfect ways for which a director should ensure to adopt for purposes of minimising possible claims lies in always holding formal board meetings on a regular basis for purposes of discussing their performances as well as the stability position of the entity as well as its creditors at hand; make sure that there is a consistent analysis of company’s quartile and annual reports on a much regular basis and go beyond this to familiarize with the contents of these reports and consult accountants for further clarifications; document all manner of decisions that are effected and thereafter ensure to file them in the underlying company records (Lexis Nexis, n.d). In doing this, it is important that a director can easily and effectively defend all of their immediate actions towards certain operations; and, also it is emphasized that director should always seeks to assume professional advice at a very initial phase of the process. How Directors are Accused of Wrongful or Fraudulent Trading Claims First, it is noted that there should be a determination of the exact date for which a director of a company knew or even ought to have known there would be an insolvent liquidation; date of insolvency (Lexis Nexis, n.d). It is important that the directors make a conclusion that this insolvent liquidation was unavoidable at all costs. The lack of coming up with a determination for this date to the immediate satisfaction of the court; the directors can be accused of wrongful trading claims. Consequently, directors can be accused of wrongful claims after immediate assessment of their state of mind and especially in relation to the period reflecting whether or not they would have known that the company was indeed insolvent and the steps that they would have assumed (Lexis Nexis, n.d). Courts of law will accuse these directors in relation to their overall knowledge, expertise and experiences for which a reasonable person conducting similar functions; that further expands to those functions that a director fails to execute that had been entrusted with; and, also their general knowledge and skills as well as overall experiences of these directors at hand (Lexis Nexis, n.d). It can be said that this test for director accusations is indeed objective and subjective in nature. For instance, a director that is not expected to have acquired accountancy qualification skills would not be subjected to the clause of him being an accountant. In essence, the objective aspect of the analysis formulates and average standard that is to be expected for any given person within a similar position. Subjectivity of the aspect relates to testing directors on whether or not they have acquired knowledge; skills and experiences. Notably, directors can be accused whenever a court ascertains that they indeed failed to assume every required step needed for determining insolvency point. Insolvency Act of 1986, s214 stipulates that an individual director cannot be held liable under wrongful claim in the event that it is established that after the attainment of insolvency point, the director assumed all steps with an objective of minimizing possible future losses (Lexis Nexis, n.d). It thus goes without saying that a director that failed to take steps meant to minimize the possibility of future losses, they will be accused of wrongful trading. In the case of Re Produce Marketing Consortium Limited [1989] 3 AII ER 1 the company’s directors sought to use on defenses provided in s727 of Companies Act 1985 of having acted in an honest and reasonable manner. However, the court of law postulated that the defense was not applicable in wrongful claims. In the case; Re Robin Hood Center Plc (in liquidation) [2015] EWHC 2289 (Ch) it was noted that in order to effectively minimize possible future losses was taken to mean that the future losses to the creditors in their entirety and not only subjected to specific creditors (Lexis Nexis, n.d). The case was able to determine that indeed the limits associated with proving that directors were able to assume every step on their way to minimize future loss rest with the director conforming that the burden was to the liquidator. In essence, the accusation of directors is dependent in the possibility and extent of loss suffered. Courts will require the liquidator to determine the level of loss suffered due to the claims. It is ascertained that the courts of law will focus on establishing possible increase in the approximate of deficiency to creditors that existed between the insolvency point and the actual date of the liquidation process (Lexis Nexis, n.d). There is a degree of level where insufficient company accounting records; a director cannot be accused of wrongful trading claims. To accuse a director of fraudulent trading claims, a court seeks to establish the parties that relate to the conducting of the business. The application of this stipulation can be noted in s213 in the case; Morris v Bank of India [2004] EWHC 528(Ch) in which the liquidators of BCCI managed to portray that a set of a given transactions that occurred between the entity and the defendant bank were indeed fraudulent and the involved parties of the bank completely understood that they helped entity to propel fraudulent activities on its underlying creditors (Lexis Nexis, n.d). Directors are also accused of fraudulent activities in the event that it is established that individual parties had exquisite knowledge of the intention to commit the fraud. Wrongful & Fraudulent Trading Claims under UAE Commercial Company Law, 2015 Article 84-Liability of the Managers of a Company, under the UAE new company law indicates that each and every partner of a LLC will be held liable in place of a company, concerned parties and any possible third parties for possible fraudulent acts (Legal Advice Middle East, 2015). They are also to be held responsible for any given losses or even expresses that are incurred as a result of improper use of the power or even contravention of provisions laid in specific clauses on MoAs and relevant applicable laws. In essence, it is noted that subject to the underlying provisions of the LLC in regards to Company Law of 2015, the stipulations that are in application of the Director of Joint Stock Companies are set forward in this specific law and will be equally adopted for the case of managers of all limited liability entities operating within the United Arab Emirates (Legal Advice Middle East, 2015). Article 162 of the new UAE Company Law provides detailed information concerning the liabilities related to the board of directors of a company. The provision notes that all members of the board would be held liable in regards to the operations of an entity; the shareholders and, also all possible third parties for acts of fraud; misuse of power as well as possible overlook of the stipulations put forward in the Company Law 2015; AoA or in cases of errors in management; the last point vehemently expounding on wrongful trading claims against directors (Banerjee, 2016). . In fact, the directors will fully be held liable in the event that the errors arise out of their unanimous decision passed to conduct such activity as liquidation of a company. In the event that decisions passed are done by the majority of these directors; the provision will focus on holding only those members that objected to such a decision with the evidence of the meetings’ minute of that particular period (Legal Advice Middle East, 2015). Certainly, in the event that directors are absent; the courts will still hold them liable of the offence since their absence from the meeting cannot be used as a rationale for relieving them of their duties. From this analysis, it can be ascertained that accusations of directors of a company against wrongful and fraudulent under the English system and UAE Company Law of 2015 are indeed different. The application of these laws to directors are indeed different in nature the former focuses on ascertaining such attributes as the extent of knowledge and losses suffered as imminent factors of accusations while the latter only seeks to establish their ability to vote unanimously or even their absence from meetings that passed liquidation as grounds for holding them liable. To sum up the discussion above, it can be ascertained that lifting of the corporate veil is applied for purposes of making decisions on the exact instances for which a shareholder will be held liable for commitments made in relation to operations of an entity. Wrongful trading claim can only be initiated whenever a corporation is deemed to be in liquidation point and thus, it is only the liquidator that has the chance. However, it is expected that with the implementation of SBEE A 2015,s 117, the administrators will also be allowed the opportunity to commence the claim whatsoever. Fraudulent trading is a claim that arises whenever the winding up of a corporation is conducted in a manner that is likely to suggest that the activity was carried out in a way that there were intentions to defraud the underlying creditors or any other stakeholder for a related fraud objective. The paper has also successfully argued that accusations of directors of a company against wrongful and fraudulent under the English system and UAE Company Law of 2015 are indeed different. References Banerjee, N. (2016). “Directors’ Liability for Wrongful Trading- How Real is the Risk?” Jordan Publishing. Retrieved on October 30, 2016 from http://www.jordanpublishing.co.uk/practice-areas/law-for-business/news_and_comment/directors-liability-for-wrongful-trading-how-real-is-the-risk#.WBWj4qIez3A Insolvency Act 1986. (1986). Chapter 45. Retrieved on October 30, 2016 from http://www.legislation.gov.uk/ukpga/1986/45/pdfs/ukpga_19860045_en.pdf Legal Advice Middle East. (2015). Federal Law No (2) of 2015 on Commercial Companies. Retrieved on 30th October 2016 from https://legaladviceme.com/legislation/119/uae-federal-law-2-of-2015-on-commercial-companies Lexis Nexis. (n.d). Wrongful trading claims under section 214 of the Insolvency Act 1986 and the process for bringing the claim. Retrieved on October 30, 2016 from http://www.halsburyslawexchange.co.uk/wp-content/uploads/sites/8/2015/09/0815-032-Practice-Note_Wrongful-Trading-Claims.pdf Saxena, H. (n.d). Lifting the Corporate Veil. Retrieved on October 30, 2016 from http://dspace.jgu.edu.in:8080/jspui/bitstream/10739/45/1/Harshit%20Saxena%20-%20Lifting%20the%20Corporate%20Veil.pdf Read More

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