The Concept of Incorporation of a Company - Essay Example

Introduction: From the legal point of view, Cheffins and Bank (2007) de s that a company is regarded as a legal person, and it is different from its members. This principle was established in the 1897 case of Salomon against Salomon. Prentice and Reisberg (2011) explains that this principle is always regarded as the veil of incorporation. The major impact of this standard is that there is an enactment of a fictional veil between the members of the company, and the company itself. In other words, the institution has a personality which is different from that of its members. The courts are always bound by this principle; however, there is a possibility and exemptions when the courts can lift the corporation veil in order to reveal the true identity and character of the company under consideration. The main reason of this approach is that the law will seek to prevent a corporate organization from being misused or even abused (Prentice and Reisberg, 2011). In circumstances when the court is aware that the corporation is abusing its form, then the courts would rip off the corporate veil, and disregard the principles established by the House of Lords in Salomon vs. Salomon. On this basis, the assertions by Lord Denning in the case Little Woods Mail order, against Inland Revenue Commissioner is correct, and the courts have applied the principles established in this case, while lifting the corporate veil of companies whose cases are before the court. This paper critically looks at the concept of incorporation of the company, and its effects. It further on analyzes this concept of separate legal personality, and the principles contained in Salomon vs. Salomon (Prentice and Reisberg, 2011). This paper also relies on the 1985 companies act in supporting some of the facts identified in it. This paper also defines the concept of lifting the corporate veil, and instances when the courts can lift the corporate veil. This paper also has an analysis and evaluation section. This section is an analysis of the various concepts introduced into the paper. In meeting these objectives, this paper will use relevant case laws and authority. The conclusion of this paper is a summary of the various points addressed in it. Incorporation of Companies: The concept of incorporation of a company refers to the formation of new companies, that is given a legal benefit, and it is recognized as a personality under the law. The corporation under consideration can either be a business organization, a governmental institution, a sports club, a non-profit making organization, etc. A company that is incorporated under the British law enjoys the principles that are established under the 1897 case statute of Salomon vs. Salomon. Under this principle, an incorporated company is a separate organization from the founders of the company. On this note, Cahn and Donald (2010) explain that the rights and obligations of a corporation are totally different from the rights and obligations of its owners and shareholders. The company under consideration has its own personality. This notion of incorporation of a company is supported in Macaura vs. Northern Assurance. Under this case law, Macaura owned a company, the Killymoon estate and transferred his timber there. Unfortunately, there was a fire breakout, and when Macaura sought for compensation, Northern Assurance refused to pay, denoting that the company, Killymoon, was a separate entity from Macaura (Cahn and Donald, 2010). The House of Lords supported this argument by Northern Assurance Company. Based on these case laws, it is possible to denote that incorporation involves establishing a company, and giving a personal identity. A company that is incorporated is liable under the law, for its own activities. For instance, in case of breaches of law and bankruptcy, it is the company that will be held responsible, and not the owners of the company under consideration. Cahn and Donald (2010) explains that the major advantage of incorporation is that it makes a company to be a separate legal entity. Boch (2000) explains that in reality, the business of the organization under consideration is always carried out for the benefit of its owners or certain individuals. It is the human beings that are the real beneficiaries of the advantages of the corporate organization. However, under the principles established in Salomon vs. Salomon, the House of Lords denoted that the personality of natural members ought to be ignored in circumstances when it involves the liabilities acquired by the company, the property of the company, and the various transactions of the company. Separate Legal Personality and Lifting the Corporate Veil: The case law of Adams vs. Cape Industries effectively explains this concept of a separate legal personality. This case is amongst the leading cases in the United Kingdom concerning the limited liability of a company shareholder, and the concept of a separate legal personality. Under this case, the court refused a UK parent company, the same as its US subsidiary. Under this case, Cape Company formed another company in America, through which it could market asbestos. The court ruled that the subsidiary company of Cape in the US has a separate legal entity as Cape, on this note; Cape could not be held liable for its activities in the US (Cahn and Donald, 2010). The complainants were seeking for damage against Cape, based on their exposure to asbestos. Based on the results of this case, it is therefore possible to denote that a separate legal entity is just a concept that makes it possible to protect the owners of a company, from liability that arise from the activities of the company under consideration. Furthermore, the courts under this case also denoted that it is possible to lift the corporate veil and hold the shareholders and owners of the company responsible for the activities of the company (Villiers, 2006). This is a concept and notion that Lord Denning supports in the case Little Mail Order vs. McGregor. In this case, Lord Denning denotes that the principles established in Salomon must be scrutinized carefully; this is because it is putting a veil over the personality of an incorporated company, in which the court under consideration cannot see, however, this situation is not true, mainly because the courts have the ability to lift off the corporate veil for purposes of seeing what lies behind (Cahn and Donald, 2010). In a recent case, Trustor vs. Introcom and Smallbone; Smallbone was a director of the company Trustor AB. Without consulting other directors, Smallbone made a transfer of large volumes of corporate funds to a company that is controlled by him, that is Introcom (Villiers, 2006). Furthermore, he removed these funds from the accounts of Introcom, to his personal account. Based on these facts, the court held that Smallbone was personally liable for these transactions. On this basis, the courts were able to lift the corporate veil that protected the transactions of Introcom, by making its directors liable to the activities performed by the company. The arguments of the courts in this circumstance was based on the fact that using a company as a ploy to receive money would force the courts to lift the corporate veil for purposes of achieving justice. Furthermore, Bell (2002) explains that section 24 of the 1985 companies act establishes circumstances when the corporate veil can be lifted. This section seeks to allow the courts to uplift the corporate veil by imposing other liabilities to the shareholders and owners of the company. This law denotes that in case a public company operates for more than six months, and has less than two members, then this people are liable to the operations and activities of the company during the time in which they were directors or its owners. Furthermore, section 117 of the 1985 companies act lifts the corporate veil by making the directors and owners of the company liable in case it fails to obtain a trading certificate. Furthermore, section 349 subsection 4 of the 1985 companies act is a provision whereby the directors of the company are liable for the activities and transactions of the company, in case they provide inaccurate information on the financial position of the company (Riley, 2010). Other instance where the corporate veil may be lifted includes instances where the company acts as an agency, and as a single economic unit. Under agency, when a company is acting as an agent of the shareholders, then the shareholders will be liable for the activities and actions of the company (Arcot and Faure-Grimaud, 2010). A good case that depicts this situation is F.G films. Under this case, an American company was able to finance the production of a film under the name of a British company. However, the owner of the American Company had 90% shares of the company. Based on these facts, the Britain refused to register the company citing that it was an American company, operating under the laws of agency. On this note therefore, the courts can lift up the corporate veil, in case of an agency. Analysis and Evaluation: It is therefore important to understand that the case of Salomon vs. Salomon created a standard upon which the courts in the United Kingdom established the principles of corporate veil. It is important to understand that most corporations have a separate legal personality. On this basis, corporations will be liable for their actions and activities. This corporate veil is aimed at protecting their shareholders and directors of the company (Rodger and MacCulloch, 2004). However, the courts can lift this corporate veil in case the company under consideration engages in illegal activities that are against the law. The principles established by this case continue to guard the courts decisions concerning the activities of the companies and corporations. However, the Companies Act of 1985 establishes circumstances when the courts can uplift the principles and standards established by Salomon vs. Salomon. Lord Denning therefore is right when he explains that there are circumstances when the corporate veil has to be broken for purposes of achieving justice. Conclusion: In conclusion, an incorporated company is a legal person, and its activities are distinct from its owners. On this basis, it is possible to sue a company and be sued by the same company. This is the principle that Salomon vs. Salomon advocates for. On this note, the directors of the company are not always liable for their policies regarding the company. This is the concept of the corporate veil. However, the courts can remove the corporate veil, in case they suspect that the managers of the company are engaging in illegal activities, as well as if the company is an agency. The companies act of 1985 identifies instances when the courts can remove the veil,. And hold directors and shareholders responsible for the activities of the company. References: Arcot, S., Bruno, V., & Faure-Grimaud, A. (2010). Corporate governance in the UK: Is the comply or explain approach working?. International Review of Law and Economics, 30(2), 193-201. Bell, J. (2002). Studies in UK law 2002. London: United Kingdom National Committee of Comparative Law. Boch, C. (2000). EC law in the UK. Harlow, England: Longman. Cahn, A., & Donald, D. C. (2010). 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