The Concept of Separate Corporate Personality - Essay Example

?Introduction The concept of separate corporate personality is of great importance in company law. In most cases, it is used to protect the interestsof people involved in the running of the company. There are certain sections of this legal piece of law that are specifically designed to protect the interests of the company owners. However, some sections of the low can be revoked if they are purely intended to suppress other people. This is mainly regarded as lifting the corporate veil. As such, this essay has been designed to advice John of the law on separate corporate personality and the relevant areas where the corporate veil can be lifted. The essay starts by outlining the essence of the law of separate corporate personality. This will be followed by an outline of the case of John who is an employee of Diamond Car Sales as well as application of this law to the case. The essay will also look at the circumstances under which the corporate veil can be pierced. The main body of the paper will give a critical analysis of the facts that can lead the court to pierce the issue of corporate veil in certain instance. Essence of separate corporate personality Cillers et al (2004), state that an association of persons or an organised body can acquire legal personality by way of separate Act. Thus, when the company is formed as a separate entity, it acquires the capacity and authority to have its own rights and duties (Gibson, 1988). Thus, once the company has been incorporated, it can be viewed as a separate or independent person with rights and liabilities that it chooses for itself. This is reflected by the case of Salomon v Salomon& Co [1897] AC 22 (Hl). Salomon is the sole owner of the once glamorous company and he decides to turn the business venture into a limited company having realised that it had great potential. As such, Salomon got ?10 000 in debentures from the shareholders which were acquired through a bond of the company’s assets. Unfortunately, the deal did not go down well since the company was later liquidated and the assets were sold. The shareholders were left out when the assets were sold and the court upheld that the company was just like Salomon since it was treated just like an individual person. Basically, it can be noted that the concept of corporate personality is mainly concerned about establishing and maintaining the identity of a company (Gibson, 1988). This may involve creating a brand name for the company that is used as a source of identity which makes the company different from other enterprises. In as far as the aspect of corporate personality is concerned, it can be noted that the aim of the law is concerned with protecting the interests of the company since it is treated like an individual person with legal rights. For instance, Diamond Car sales built a strong corporate personality where it even went on to categorically state that there was no person who would directly compete with it after leaving the company within the first six months of termination of the contract. Situational analysis John is works for Diamond Car Sales and his contract states that upon termination of his employment, he cannot start a business that directly competes with Diamond Car Sales for a period of six months after the termination of his contract. Apparently, John’s contract is terminated and he decides to go into business straight away despite the provisions of his contract. Fearful of the provisions of the principle of "Separate Corporate Personality" John wants to know if he can operate a business. John decides to set up a company with his son and it competes with Diamond Car Sales. However, John is neither a director nor shareholder of the new company, but he runs the business and everyone refers to him as "the boss." Against this background, this paper seeks to critically analyse the authenticity of Diamond Car Sales’ warning to John to cease trading or they will opt for legal action in order to stop him from trading in direct competition with the company. Case analysis In this particular case, the bottom line is that separate corporate personality does not apply as a result of many reasons going to be outlined below. As such, the corporate veil can be lifted as a result of the fact that John though he opened a business venture with his son, he is neither a director nor shareholder of the company. Therefore, it becomes difficult to sue John as an offender since it may be difficult for the car sales company to prove that John has breached the contract at Diamond Car Sales though his contract has been terminated. In this case, John can argue in court that he has not opened any business but he is just helping his son to run the enterprise for his upkeep though the business is competing with his previous company. Indeed, Diamond Car Sales ought to prove to the court beyond any reasonable doubt that John has opened a company and this can be proved through its trademark. As stated in the case study, John is neither a director nor a shareholder in the new company so there is no need for him to panic. When a company is formed as noted above, it creates legal personality of the appropriators. In such a scenario, the company trademark should show that John is directly involved in the organization as claimed by Diamond Car Sales. It can also be argued that there are several instances where the aspect of corporate veil can be pierced or lifted by the court if it is discovered that it unfavourably protects the interests of the company as a legal entity which apparently can disadvantage the other people involved. According to Benade (2000), there are certain aspects that can involve criminal activities by the company directors under the guise of corporate personality but the courts can decide to lift the veil in such a situation. In some cases, if the concept of corporate personality unjustifiably suppresses other people, it can be lifted by the courts so as to promote the prevalence of justice among the parties involved in a certain case. In Daimler Co Ltd v Continental Tyre and Rubber Co, the House of the Lords resolved that in spite of the decision that made in the case involving Salmon and Salmon, it was tasked with looking for the personality of company members to establish if they were alien or not during First World War. The court pierced the veil of the corporate personality since the originality of the members could not be ascertained hence it was deemed to be contravening the statutory regulations. As seen above, John is neither a shareholder nor a director in the new company that is being challenged for competing with Diamond Car Sales after the termination of John’s contract. Therefore the corporate veil can be lifted if it is used to avoid a legal obligation. As noted, John might have no legal obligation to be answerable to Diamond car sales since he is neither a shareholder nor a director in the new company. The other reason why John should not worry is that his contract at Diamond Car Sales does not involve his son or family members. Therefore, his son cannot be barred from operating a garage because John has left Diamond Car Sales which states that he should not run a business in direct competition with it. The contract at Diamond Motor Sales clearly states that John should not directly compete with his former employer. Fair and fine but the contract does not include his son or his family. Either his son or any member of the family is liable to open business in this particular sector since they are not affected by the contractual obligations characterising John’s employment at Diamond Car Sales. The contract does not mention any third part hence John should relax since he may not be found guilty of breaching corporate personality by virtue of the ownership structure of the company he is alleged to be operating in contravention of his contractual obligation at Diamond Car Sales. This must be an issue between John and Diamond Car Sales and no one else should be sucked in this particular case. In such a scenario, it can be seen that it may be difficult for the court to prove the real owners of the company being run by John. Another major challenge that can be faced by the court in this particular case is that the assets of the company may belong to other stakeholders registered as shareholders. The assets in such a case may not belong to an identifiable group of people so it may be difficult for the court to prove a prima case against John whose contract of employment has just been terminated. Indeed, Diamond Car Sales can keep its separate corporate personality intact in its endeavour to sue John but the problem that is likely to be encountered is that the authenticity of the company John is being alleged to run is not known. Company law is primarily to protect the interests of registered companies in their operations. John cannot operate as an individual without a company since this will be in violation of company law. If the assets of the company are registered in a different name, John may not be liable for an offence with regards to the aspect of separate corporate personality. The other area of interest is that the principle of separate corporate personality in the case of John is that it is silent about the situation where John can look for work in a company that directly competes with Diamond Car Sales. The provision of the contract states that John should not directly compete with Diamond Car Sales but it never says that he should not seek employment in an organization that offers the same service. John’s former company cannot bar him from seeking employment from a company of his own choice since he is entitled to fend for his family. This is another reason why John should not worry about the lawsuit even if it is filed against him. He has the right to look for employment like any other person which renders the case of Diamond Car Sales weak. The court can prove that the contract is silent about the occupation that can be taken by John when he leaves the car sale. In such a situation, the corporate veil can be pierced since it would disadvantage John if it is implemented by the court. However, Diamond Car Sales can argue in court that John’s company is being used to avoid a legal obligation. Since John argues that he is the boss of the company, it can be seen that Diamond Car Sales can succeed if they can prove that the aim of John’s company is to compete directly with their company. It can be seen that the issue of separate corporate personality is not worked in John’s case because the company probably intends to compete with Diamond Car Sales. In such a situation, it can be noted that John has violated her employment contract with Diamond Car Sales. In case of employment contracts, it has to be written and agreed by both parties involved since they are bound by the agreement which is enforceable in court. An employer offers a job and he states the terms and conditions of the contract which become enforceable once the contract has been signed. This can be illustrated using the case of Louise Caroline Nursing Home, Inc. v. Dix Constr. Corp. (1972). This construction company did not finish the job on time. Once a contract has been breached, it becomes the court’s obligation to prove that a legally binding contract has been breached. Conclusion Over and above, it can be noted that the aspect of separate corporate personality is a very important piece of law that is specifically designed to protect the interests of the company in particular. A critical analysis of the case involving Diamond Car Sales and John shows that there is no need for John to panic in the event that his former company carries out its threat to sue him because he is running a garage that competes with it. According to his contractual obligation, John is not entitled to compete directly with the company within the first six after leaving work. However, John finds himself running a garage that directly competes with his former company but of notable concern is the fact that he is neither the director nor a shareholder in this new company. Therefore, it may be difficult for Diamond Car Sales to prove the authenticity of their case since it may be difficult to prove if John is involved in the ownership structure of the company he is alleged to be running. In such a scenario, the corporate veil can be pierced in order to protect the interests of John who also has the right to work for his family in any company of his choice. However, Diamond Car Sales can be successful in the court if it can prove that John the “boss” of the new company competing with has violated his contractual obligation. In such a case, John will be liable to pay the legal costs and he has to stop business till the legal contract terminates References Benade, ML 2000, Corporate Law, 2nd Edition, Butterworth Publishers, London. Cillers,HL & Benade ML 2004, Corporate Law, 3rd Edition, Butterworth Publishers, London. Contract cases ND, Viewed 07 March 3013: From . Gibson, GTR 1988, Mercantile & Company Law, 6th Edition, JUTA & Company Ltd, CT. Kleyn, D & Viljoen, F 2002, Beginner’s guide for law students, 3rd Edition, JUTA. CT. McGregor, L 2000, The human face of corporate governance, Palgrave, London. Read More