Common Law Case and Civil Case - Essay Example

Order 168280 Topic: Company Law comparative analysis between Common law case and civil case The veil of incorporation: "The fact that the separate corporate personality of a company prevents outsider from taking action against its members (even though the outsider can find out who they are and how many shares they hold.) has led to comparison with a veil. The corporate personality is the veil, and the members are shielded behind this 'veil of incorporation'.However, the internal affairs of the company are never concealed from view since publicity has always accompanied incorporation. In addition there are several situations when the law is prepare to lift the veil of incorporation either to go behind the corporate personality to the individual members or to ignore the separate personality of several companies in a group in favour of the economic entintyconstituted by the group as a whole 1 "Undoubtedly, the theory of corporate entity of a company is still the basic principle on which the whole law of corporation is still based. But the separate personality of the company, being a statutory privilege, it must always be used for legimate business purposes only. Where the legal entity of a corporate body is misused for fraudulent and dishonest purposes, the individuals' concerned will not be allowed to take shelter behind the corporate personality. In such cases the court will break through _____________ 1. Abbott, Norman Pendebury, Keivn Wardman, Business Law, 7th edition 2001, Oxford University Press the corporate veil. That is, the court will look behind the corporate entity " 2 GILFORD MOTOR CO.LTD.VS.HORNE In this case Mr. Horne was appointed as a managing director of the plaintiff company on the condition that not at anytime while he shall hold office of the managing director or afterwards, solicit or entice the customers of the company. Horne's employment was terminated under an agreement. Thereafter he started a new company to carry on business of solicitation and solicited plaintiffs' customers. The court held that the defendant company was a mere clock or sham and channels used by the defendant to obtain advantage of the customers of the plaintiff company for his own benefit and therefore it might to be restrained from carrying on the business3 . "The court lifted the veil of the incorporation, granting an injunction which prevented oh the former employee and his company from distributing the circulars even though the company was not a party to the covenant.4 IF GILFORD MOTOR CO. WAS DECIDED NOW, WOULD IT BE POSSIBLE TO SOLVE THE PROBLEM WITHOUT LIFTING THE VEIL. In recent cases the courts strong support for Solomon's principle. The principle in Solomon is about the separate legal entity from its members and directors, even where there might be some evidence of the apparent wrong doing was slow in the court of appeal decision; ORD & ANOR V. BELHAVEN _______________ 3. Ibid 4. Ibid PUBS (1998). In the case a defendant company pending legal action transferred its assets remained to meet any for the award of compensation, applied to have the associate company substituted as the new defendant. The court refused stating that in the absence of evidence indicating some fraud or sham. The principle or separate legal existence as laid down in SOLOMON vs. SALOMON 5 must be held. On the basis, the principle of separate could have been applied without actually lifting the corporate veil. This could have ensured that the independent existence of a company from the director. GREEN VS.BESTOBELL INDUSTRIES CO.LTD "Company directors and senior employees to whom the board of directors has delegated managerial duties have a fiduciary relationship with the company. All directors and any person occupying the position of director by whatever name called or persons who purport to act as such are still regarded as directors, whether or not they are designated or otherwise described as a company director, are required to act in good faith in the interests of the company, to act for proper purposes and to avoid conflicts of interest ad duties and also not to delegate powers except with proper authorisation.They also have the duty of care ad still 6". To some extent, the case of Green vs.Bestobell Industries Ltd can be said to that one of lifting the corporate veil. The company's operation and its corporate entity were not considered simply cause of the acts of directors who acted arbitrarily. The principle of separate entity was not aptly taken into consideration in order to safeguard the interests of the company. A director who acts even though for the _________________ 5. A. Saleemi, General principles of Law, 3rd edition, 2001. Saleemi publishers. 6. www. Business and law.vu.edu interest of the company but then without the powers bestowed upon him, the principle of separate entity need to be invoked for the sole purpose of protecting the corporate. Difference in Gilford Motor Co.Ltd vs. Horne and Shangai Kiangdong Equipment Ltd vs. Xu In Gilford Motor Company the director signed an agreement with the company Gilford Motor that while an employment and after employment that he shall not solicit the customers of the company. But upon exit from the company, the former director went as far dishonoring in agreement with the company. The court ruled the he was bound by the agreement. Even though the doctrine of separate legal entity was not properly followed because an individual and the company are different people as long as Mr. Horne was operating for the interest of the company, there was an apparent need for the honorable court to lift the corporate veil and observe behind the veil in order to have the directors answerable for the acts done allegedly on behalf of the company. Evaluation of Cases Daimler Co. Ltd V. Continental Tyre & Rubber Co. There are situations when the courts will be forced to lift or pierce the corporate veil for the purpose of determining the real character of the company." In times of war, it may become necessary to lift the corporate veil of a company to determine whether the company has an enemy character. In such cases the court may in their discretion examine the character of persons who in real control of the corporate affairs of the company 7." ________________ 7. Dr. V.N. Paranjape, Company Law, 2nd edition, 2000, Central law agency "In a company incorporated in England for the purpose of selling tyre manufactured in Germany by a Germany company, all the shares except one were held by the German subjects residing in Germany. The remaining one share was held by a British subject who was the secretary of the company was in German hands. During World War 1, the company commenced an action to recover trade debts. The question therefore was whether company had become an enemy character consequent to World War 8." House of Lords Observation "A company incorporated in United Kingdom is a legal entity creature of law status and capacity which the law confers. It is not a natural person with mind or conscience. It can neither be loyal nor disloyal. It can neither be friend nor enemy. But it can assume enemy character when person in defacto control of its affairs are residents in any enemy country or, wherever resident, are acting under the control of enemies". Their Lordships therefore held that the company was an enemy company for purposes of trading and therefore it was barred form maintaining the action 9 The opinion of the court totally disregarded the principle of separate legal entity and lifted the veil to examine the real holders behind the company. In the same spirit, the Supreme Court of India in Re Sir Dinshaw Meneekjee Petit Case, in dismissing the petition where he was accused of tax evasion, it observed: "The company was formed by the assessee purely as a means of avoiding super-tax and the company was nothing more than the assessee himself. It did no business, but was created simply as legal entity to ostensibly receive the dividends and interests and to hand them over to the assessee as _______________ 8. Ibid 9. Dr. V.N. Paranjape, Company Law, 2nd edition, 2000, Central law agency pretended loan 10 Robert South well QC, sitting as deputy High Court Judge in the case of Creast V. Breach wood Motors Ltd (1992) BCC, 638, held and laid down the following when lifting the corporate veil. "The veil of incorporation was sacrosanct and should only be lifted in the mostexceptionalcircumstances.A director of a limited company will only become personally liable for loss suffered as a result of negligent advice he assumes personal liability for that advice and the plaintiff relies on the presumption of liability. In case, there was no evidence that the plaintiff believed that the one man was accepting any personal liability. In these circumstances there could be no imposition of personal liability11" Economic Point In a wider sense the courts have interpreted some cases where the interest of the public is well existing and at risk. Public in general may be referred as the shareholders and customers in general. "Agency cost is the cost incurred by an organization with problems such as divergent management-shareholder objectives and information asymmetry. The information asymmetry that exists between shareholders and the Chief Executive officer is generally considered as classical example of principal0agent problem. The agent (the manager) is working on behalf of the principal (the shareholders), who does not observe the action of the agent.12. The management can pursue their own objectives which may later be outright fraud and end up eroding the shareholder's value. In P.N Finance Ltd V.Shri.Sirla Prasad Jain, the Delhi High Court _____________________ 10. Ibid 11. www.ucl.ac.uk 12. www.wikipedia.org. held, "the doctrine of piercing the corporate veil may be invoked whenever necessary by the court in the interest of justice, to prevent the corporate entity from being used as an instrument of fraud, and the fundamental principle o corporate personality itself may be disregarded having regard to the exigencies of the situation and for the ends of justice 13 In other words the courts have always regarded and taken into consideration fraudulent activities which can add up unnecessary agency cost on the company. Monitoring cost is that cost which incurred to ensure that the operations of the company are well run. Incidences where activities of the management tend to stretch the costs of monitoring have also been censured by the courts in order to examine properly the actions of those who are left to ensure that the operations of the company are well run.g personnel,travelexpenses etc. "In state of U.P V.Renusugar Power Co.Ltd,the supreme Court of India held "the veil of the corporate personality even though lifted sometimes is becoming transparent in modern jurisprudence" The court further held the lifting of the veil is invoked when the corporate personality is found opposed to jusitice,convenience,or interest of revenue 14. "Transaction cost is incurred in making an economic exchange.e.g when buying a stock, most pay commission to the broker. That commission is a transaction cost of doing the stock deal"15 __________________________ 13. Dr. V.N. Paranjape, Company Law, 2nd edition, 2000, Central law agency 14. Ibid 15. www.wikipedia.org. Courts have also gone deeper to ascertain the intention behind whenever the agents of the company misuse the property and fund of the company by virtue of the position they hold to further personal ambitions. "In ones V.Lipman the court held that the company was a mask and Lipman cannot escape liability. The Court passed an order of specific performance against both Lipman and the Company to compel the conveyance of the house to the plaintiff 16 ______________________ 16. Dr. V.N. Paranjape, Company Law, 2nd edition, 2000, Central law agency Bibliography 1. Dr. V.N. Paranjape, Company Law, 2nd edition, 2000, Central law agency 2. www.wikipedia.org 3. www.ucla.uk 4. www.businesslaw.vu.edu 5. www.federationpress.com 6 Abbott, Norman Pendebury, Keivn Wardman, Business Law, 7th edition 2001, Oxford University Press 7. A. Saleemi, General principles of Law, 3rd edition, 2001. Saleemi publishers 8.www.amazon.com Read More