Lifting the Corporate Veil - Essay Example

Author’s Name Instructor’s Name Course Date Lifting the Corporate Veil Introduction The following paper discusses the reluctance of courts to ignore the corporate veil or the lifting of the corporate veil, as well as the limited liability principles and the personality of the corporate identity. There are varying circumstances under which courts can pierce the veil of incorporation which making of some decisions on the same. It should be noted that companies in the UK need to be registered as well as being integrated according to the Companies Act. This act determines the limited liability principle and therefore offering the shareholders and the owners a shield, which is, does not go in line with a liability from company’s creditors. This is helpful especially when the company falls into troubles related to finances. After this curtain has been created, the company is given a separate legal personality (Rudorfer 2009). This ensures the company’s ability to sue as well as being been sued. In this case, the loss that the company’s shareholders and creditors can go through is by the shares which being held in the corporation based on the liquidation but without any impact on the assets held individually. The distinct separation that involves the owners as well as the shareholders of accompanies and the limited company itself is what is considered as the ‘corporate veil' or the ‘veil of incorporation' (Walston-Dunham 2009). In this connection, the paper brings the reality is that the courts in the UK should lift the corporate veil or pierce it to a considerable and greater level in order to hold erring those shareholders or directors of a company liable and accountable for the liabilities as well as debts in the company. This is against the widely considered principle that guarantees limited liability to a company that if it does not have enough assets to arable it to offset its creditor liabilities. The limited liability and corporate personality principles are critical in the company law in the United Kingdom. This is based on the 1844 Act on Joint Stock Companies, which was consolidated in 1856, as well as the enactment of the 1855 Limited Liability Act. From this period, the two principles have been protected by the courts in the UK as they play crucial role in the current company laws through the upholding of the corporate entity of the separate legal personality. However, while the main objective of this regulation was in assisting companies to raise the capital by selling shares with no exposure of the shareholders in risking beyond the shares that they hold, the current attraction in the integration of a corporation is the benefit of protecting these players behind the shields of limited liability. As a result, some business people could as well abuse. As mentioned above, the limited liability’s doctrine was brought forward by the 1855 Act on Limited Liability in order that companies could be able to get capital through issuing of shares. This is without any exposure of the shareholders or creditors to unlimited liability. Further, the principle of limited liability protects the company shareholders, owners, as well as directors , including managers against any personal liability in case the company is planning to wind up or in the event of it becoming insolvent (Eroglu 2008). Therefore, in such events the shareholders’ liability as well as of the owners is limited to the personal shareholding, which is held based on the Companies Act 2006 as well as the Insolvency Act 1986. Thus, the company’s members do not have to contribute individual assets to the company in meeting the company roles to the shareholders on the liquidation instead have to make sure they contribute the entire nominal value of those shares which are held by personal shareholders. again, it is good to note that limited liability such as that, do not protect the limited corporation from liability until the debts and assets are all exhausted. A good example is the ruling in the Solomon case by House of Lords that made this principle to be been held. It was observed that the motives behind the development of a corporation were not necessary when determining rights as well as the liabilities (Schneeman 2010). This is dependent on the fact that all registration requirements are complied with and that the corporation is not established on for an unlawful way. In addition, despite the fact that limited companies enjoy personality of a separate legal entity , the decisions by managers as well as directors who are expected to utilize powers given to them by the directors or members of the board including articles of association and the memorandum, any misuse of the same will involve personal liability. This affects any official who may be involved in one way or another. Further, limited liability covers both the small enterprises such as one-man companies as well as big companies thus bringing limitation on the liabilities to the company assets but not on t personal assets. There are a number of cases that this view has been considered, such as through numerous occasions as illustrated in Lee's Air Farming. This is a one-man company where Lee happened to be the majority shareholder as well as the director of the company. He was also the employee in the same company. Lee died while on duty through air accident. In this case, the court maintained that Lee and the company were separate entities and therefore entitled to compensation. However, the UK courts can only act differently in an exceptional circumstance for instance in fraud, abuse or where a company has been used as an agent. This can also be the case where the company’s owner disregards the limited liability doctrine and holding shareholders, directors or members, individually responsible for the debts as well as other issues of company to the creditors (lifting of the "veil of incorporation"). In addition, there are some statutory laws that make ensures that limited liability principle is ignored. This could be in situations such as in the issuing reports on financial statements of corporate crime, group of companies or on insolvency. On the other side, it should be noted that a limited company is considered as a legal person having a separate existence and independent from the members (Lutter 2006). This depends on if all registration formalities are complied with and in accordance with the Act. In addition, the identity of corporation involves the fact that the company can be sued in its own right or sue, without an effect on the shareholders' or its owners’ rights. It is only illegal in situations where there is a fraud against shareholders or where the actions, which are complained of. However, the only plaintiff to a wrong, which is done to a company, is prima facie company itself. A good example where the corporation is considered to have an independent legal corporate personality is in the case of Solomon vs. Solomon & Co Ltd. In his own words, Lord Macnaghten emphasized that it was not possible “to dispute that once the company is legally incorporated, it must be treated like any other independent person, with its rights and liabilities appropriate to it. The motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are". In the example above, Solomon’s company was registered as a limited company, which was under the Companies Act. It was thus required to have a minimum of seven members for its integration. together with Solomon’s wife and his children, he then became the company’s major shareholder where they held shares each. Later the company would run into problems with finances, where no assets were left for the creditors who were unsecured on liquidation. The court of appeal maintained the company as being ‘an alias and a sham', the ‘‘nominee or trustee for Solomon’’. it also held that this transaction was against the true intention of the Companies Act. However, despite the decision by the court of appeal, the House of Lords was quick to reverse the decision and maintained held that this company was legally registered as needed by the Act (Rickett 1998). Therefore, the company was entitled to a separate legal personality from the shareholders. In order to arrive with this decision , Lord Macnaghten noted that, “The company is at law a different person altogether from the subscribers…….Nor are the subscribers, as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” The decision on this case illustrates that the House of Lords saw the important point was to observe of the requirements as well as the formalities of the Act that safeguards the limited liability principles and corporate personality. Since then, this has been the correct interpretation of the Company's Act (Gillooly 1993). It is therefore crucial that the principle is maintained for advancement and development of commerce. In addition, it is good to note that largely, the corporate personality principle does not affect the company shareholders or creditors about the recovery of the debts. According to Mitchell (1996), the corporate veil refers to the ‘‘curtain that legally separates the company from its shareholders hence holding the company as having a separate legal personality and limited liability’’. Finally, when a court is faced with a determination of piercing the corporate veil, it is prudent to take time to do so since there is enough legislation to solve such issues. On this note, it has been made clear by the court that it has no general discretion in just piercing the corporate veil “in the interest of justice”. Currently, the courts are readily wishing to lift the veil of incorporation in situations where the plaintiff is not able to get another solution through a statute and in cases where the same would suffer a considerable massive loss or injustice. References Eroglu, M. (2008). Multinational enterprises and tort liabilities an interdisciplinary and comparative examination. Cheltenham, UK, Edward Elgar. Gillooly, M. (1993). The law relating to corporate groups. Sydney, The Federation Press. Lutter, M. (2006). Legal capital in Europe. Berlin, de Gruyter Recht. Mitchell, C. (1996). Lifting the corporate veil in the English courts: an empirical study. Oxford, Mansfield Press in association with Hart Pub. Rudorfer, M. (2009). Piercing the Corporate Veil: A Sound Concept. München: GRIN Verlag GmbH, Internet resource. Rickett, C. E. F. (1998). Corporate personality in the 20th century. Oxford, Hart. Schneeman, A. (2010). The law of corporations and other business organizations. Clifton Park, NY, Delmar Cengage Learning. Walston-Dunham, B. (2009). Introduction to law. Clifton Park, NY, Delmar Cengage Learning. Read More