Lifting the Corporate Veil - Coursework Example

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Lifting the Corporate Veil: An Unpredictable Practice? The decision of Salomon1 brought important and landmark statements such as “the company is ex hypothesi a distinct legal personal”.2 The dicta of Salomon brought a large amount of novel consequences…
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Lifting the Corporate Veil
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Download file to see previous pages In addition, the Salomon decision entrenched the notion of advantageous benefits which are granted to shareholders in the form of limited liability. The dicta of Salomon has been endlessly restated and quoted in many cases; it appears to exist as an “unyielding rock”4; especially since it has now been incorporated into the Companies Act 20006. The courts have endlessly been faced with circumstances under which certain exceptions to the Salomon rule have been necessary and thus permitted. However, the courts have taken care to retain the power to ignore the Salomon principle in order that its flexibility be preserved and in most cases this has led to the preservation of the corporate veil. The narrow approach which is contained in the Companies Act embodies the view that the company’s rights, property and liabilities belong to the company only. The wider view claims that the company’s members are prohibited from having any effect on or being counted in relation to the legal obligations and obligations of the company.5 The existing statutory exceptions to the lifting of the veil are rather difficult to determine with a great amount of certainty;6 the concept that Salomon is a fundamental principle results in it being set aside with difficulty and even some reluctance on the part of the courts.7 As Lord Diplock claims, the statutory basis of the corporate veil is preserved, so that “any Parliamentary intention to pierce the corporate veil would be expressed in clear and unequivocal language”, however the lack of such clear language could still have the potential to allow the courts to pierce the veil in specific circumstances by way of a “purposive construction’ of Parliament’s intention”.8 However, the case of Tunstall iterates that it is important to remember that the “purposive instruction” must be evident, because it is not readily implied (542). 9 Other additional statutory provisions also provide the opportunity to lift the veil under specific circumstances, such as the taxation of group companies. It is often argued that such provisions do not lift the veil exactly; they instead impose supplementary obligations on subsidiaries and are termed ‘piercing’ the veil rather than ‘lifting’ the veil. Alleged fraud additionally grants the justification to lift the veil – this is indeed understandable. The Insolvency Act 1986 operates to allocate personal liability to directors or shareholders if it appears that the company has been formed for fraudulent activities,10 if evidence of director misconduct is evident, or if the company directors have been negligent by not winding up the company if it has little or no prospect of carrying on. Such provisions contain the potential to be defined and applied broadly, yet the danger of this is arguably small under the circumstances. The existence of such statutory provisions emphasize the major temptation and potential of company members abusing of the corporate veil, and the courts have appropriately recognised and established the need to eliminate as far as necessary this possibility, and thus temptation. In the decision of Merchandise Transport,11 the court declined to retain the corporate personality of the company separate from its members where it had been discovered that the subsidiary company had been formed as a mechanism to avoid specific formalities when acquiring a favourable licence. Additionally, a facade has been revealed where a company had ...Download file to see next pagesRead More
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