The Concepts of the Separate Legal Personality as an Underlying Rock in the UK Corporate Law - Research Paper Example

The separate legal personality is an unyielding rock in corporate law following the House of Lords decision in Salomon v A. Salomon & Co Ltd. . Rationalising the common law principles on the separate entity doctrine on legal personality is entirely dependent on the case such as it might lead to the setting aside of the case that is using it as a shield, enabling creditors to seek recourse against the personal assets of the owners of the company or setting aside the veil of incorporation strict sense to attain certain objectives.

In the recent decision in the United Kingdom (UK), the court in the decision of Prest v Petrodel Resources Ltd recognizes the statutory, common law, and equitable remedies that is what the court should consider before lifting the veil of incorporation. This implies that the courts must go beyond the evasion exception in considering whether to lift the veil or not. There are also instances where scholars have sought to apply it as a backstop remedy so that there are no uncertainties in its interpretations. The necessity of the doctrine is to ensure that in modern company law, it is an important component in the prohibition of fraudulent behavior. The changes seen in the application of the doctrine simply imply that the courts have been willing to exercise wide discretions in applying the separate legal personality principle in favor of the courts. The courts have also been liberal in applying the principles to cases.

The courts in the application of the separate legal entity have not departed from it and have only varied its application in instances where the courts deem it fit, fair, and just to do so. Most common law jurisdictions such as Australia and South Africa have applied the separate legal entity test in delineating the instances when the veil of incorporation is lifted, pierced, disregarded, or ignored. It discusses the instances in which the courts are allowed to depart from the strict application of the separate legal entity doctrine and pierce the veil of incorporation and consider the interests of the creditors and the shareholders. The exceptions herein discussed include fraud, the corporate structure as a mere facade, evading obligations and taxation, agency relationship, and group entities.

• Concept of Limited Liability

In corporate law, limited liability implies that the liability of the shareholders is limited depending on the amounts unpaid on their shares. Limited liability in corporate law is necessary as a basis for which a company minimizes its entrepreneurial risks from its shareholders to its creditors. However, when a company becomes insolvent or fails the risk is borne by the creditors and this means that in consideration of the decision in Salomon, creditors will need to minimize their risk of defaults. This means assessment of the creditworthiness of the company and at the same time requiring the debtor company to provide security or personal guarantees before giving any financial assistance.