Separate Legal Personality and Limited Liability - Term Paper Example

Introduction A Company can be considered as a legal person and laws associated with an individual can be applied to the company as well. It is not possible to formulate laws for the functioning of a company by considering it as a separate entity. A company is controlled and directed by the human beings and human laws are applicable to company as well. Just like an American needs to obey the American laws the company also should obey the laws of the society in which it operates. For example, an American company cannot function in China or India following the American laws. Even in America itself, it is not possible for a company to function with a unique law in to different states. In other words, companies need to function with respect to the laws prevailing in the location where they operate. Separate legal personality and limited liability are two common terms associated with company law. Wiss (2010) describes separate legal personality as an incorporated company, “united or combined into an organised body” having rights and liabilities. In her opinion a company is a fictitious person who can enter into contracts, own property and even commit crimes. At the same time when a private company limited by shares, the creditors deal with the company, not with the individuals and it can be termed as a limited liability company. In such cases, if the company become bankrupt, the creditors or the investors do not get paid regardless of the personal financial capabilities of its memebrs (Wiss 2010). Separate legal personality and limited liability are two advantages of corporate status. But under certain circumstances these advantages will become invalid and this paper briefly explains such circumstances in which separate legal personality and limited liability will become invalid. Invalidity of separate legal personality and limited liability It is not possible for a company to take undue advantages in the name of limited liability or separate legal personality. Corporate law has mainly identified seven instances in which the corporate veil (law that protect the members or founders of a company in case a problem arises) can be lifted; fraud, agency, trust, group enterprise, tort enemy character, tax (Sadhu, n. d) Fraud Richard Wachman (2005) has mentioned that fraud is costing British business £72 billion a year, 6% of the annual revenue of British businesses (Wachman, 2005). The recent corporate scandals involving Enron, WorldCom, Parmalat and Refco, have not taught any lessons to the authorities or the investors. Fraud can attain many forms; some companies may overstate their profits, some other companies may transfer the corporate asset to overseas or offshore accounts, money laundering etc. Some interesting statistics about company fraud cases in UK are given below; Over 40 million is lost every day to fraud in the UK 80%of corporate fraud involves the collusion of an employee 90% of fraudulent employees have been with their employer for over a year 20% of fraudulent employees have been with their employer for over 10 years (Corporate fraud solutions, n. d) In most of the fraud cases, the victim may not be aware that they are victims until the last moment. Fraud people are so clever that they can hide very thing from the public eyes till the last moment of the successful execution of their plan. They use the loopholes in the company laws to make the investors fools. If the fraud cases against the members or the owners of the company established, they cannot escape from the punishments. But in most cases, it is difficult to establish the company fraud crimes because of the immense attention these people given to execute their plans. Police authorities are not much keen in investigating company fraud cases. Moreover, the police investigation may take years of time to complete and the news about the company fraud will come out which will damage the reputation of the company and which may lead to the destruction of the company. Moreover, in most cases, police may not be able to recover the money stolen. On the other hand, if the company fraud cases filed in civil courts, not only majority of the money stolen can be recovered in quick time, but the news may not leak out also. Larson (2004) has pointed out that a court can pierce the corporate veil to prevent a fraud, where the corporation is found to be a "sham" meant to facilitate fraud against third parties (Larson, 2004). But in order to lift the veil, the motives of the fraudulent person to cheat the investors should be proved beyond doubt. The court will also consider the legal obligation of the company for lifting the veil if the fraud cases have been established. Incorporation of a fraud company is another way of cheating the investors. In such cases, the court shall examine the motives and the timing of the incorporation of the sham company before lifting the veil. Agency A company cannot become an agent of the shareholder even if it was a one man company. In case if a company has the legal authority to act as an agent, may do so for its parent company. In such cases, the parent company or the members of the parent company will be bound by the acts within legal frameworks. Cases in which the agency agreement holds good and the parties concerned have agreed to such a agreement, the corporate veil can be lifted and the principal shall be liable for the a acts of the agent (Sadhu, n. d) Group enterprises In some cases, the court may look into the economic realities of the group of companies for lifting the veil. Most of the big companies may have different groups based on the nature of the operations. For example, Sony Corporation has different products such as televisions, video games, mobile phones, DVD players etc. Each product may work under different groups even though the parent company remains same. It is not possible to take actions against only a particular group instead of the parent company. “Here the subsidiary companies were treated as a part of the same economic entity or group and were entitled to compensation” (Sadhu, n. d). In other words, if the mobile phone division of Sony Corporation found guilty of something, the court can lift the veil of Sony Corporation not the mobile division alone. Trust In some cases, an institution may run like a company, but the shares will be held by some trustees in the name of charitable trust. People will visualize the institution as a company and will invest in such trusts unknowingly. In such cases also if the investor registers complaints, the court can lift the veil. Tort Tort is the negligent or intentional civil wrong not arising out of a contract or statute. It include "intentional torts" such as battery or defamation, and torts for negligence (The 'Lectric Law Library's Lexicon On Tort, n. d). English courts usually will not lift the veil on tort grounds whereas in some other countries like Canada, tort is a reason for lifting for veil Enemy Character The above reason will also very rarely happen for lifting the veil. Such cases happen when two countries are engage in war and the citizens of one country held shares in a company belongs to the enemy country. Tax Tax considerations also results in lifting the veil on rare occasions. “The courts are prepared to disregard the separate legal personality of companies in case of tax evasions or liberal schemes of tax avoidance without any necessary legislative authority” (Sadhu, n. d). Advantages of the team work The major advantage of teamwork is the combinational effect of skills. Individual skills may have some disadvantages or deficiencies which can be overcame using the collective strength of a team. Team members often engage in activities after discussions. The discrepancy in the functioning of a team member can be rectified with the assistance of other members in the team. Team work can ensure increased productivity, competence and increased profit (Romando, 2010). Individual responsibility will be less while working as part of a team and hence a team member can work with less stress which will increase his performance or productivity also. Conclusions In short, separate legal personality and limited liability are some of the advantages a company possess. Some of the cases in which this advantage can be lifted are issues related to; fraud, agency, trust, group enterprise, tort enemy character, tax etc. References 1. Corporate fraud solutions, (n. d), Retrieved on 11 January 2010 from http://www.corporatefraudsolutions.co.uk/ 2. Larson Aaron, (2004), Piercing the Corporate Veil, Retrieved on 11 January 2010 from http://www.expertlaw.com/library/business/corporate_veil.html 3. Romando Richard, (2010), Advantages of Corporate Team Building, Retrieved on 11 January 2010 from http://ezinearticles.com/?Advantages-of-Corporate-Team-Building&id=352961 4. Sadhu Anusuya, (n. d), Lifting The Corporate Veil, Retrieved on 11 January 2010 From http://www.legalserviceindia.com/articles/corporate.htm 5. The 'Lectric Law Library's Lexicon On Tort, (n. d), Retrieved on 11 January 2010 From http://www.lectlaw.com/def2/t032.htm 6. Wiss Jennifer (2010), Separate Legal Personality of a Company, Retrieved on 11 January 2010 from http://ezinearticles.com/?Separate-Legal-Personality-of-a-Company&id=1451451 Read More