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Abuse of Separate Entity lifting the corporate veil - Essay Example

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A company incorporated under the Companies Act has invariably been regarded as a separate entity as distinct from its shareholder. Though several legal pronouncements had reiterated this point, the decision in the case of Salomon V Salomon & Co [1897] AC 22 had been a landmark decision to stress this point…
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Abuse of Separate Entity lifting the corporate veil
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Download file to see previous pages the liabilities contracted on behalf of the company. Under normal circumstances the creditors of the company can have recourse for their dues against the assets of the company and they cannot attach the liability to the personal assets of the shareholders. Under certain circumstances it may become necessary for the company to fix up the responsibility on individuals in respect of some liabilities contracted by them on behalf of the company. The exact circumstances under which the courts will 'pierce the corporate veil' as it is technically known, depends on the state laws. However in general under the following circumstances the courts will look beyond the corporate veil phenomenon and provide a remedy to the creditors.
Where the circumstances are such that the shareholder has lost the privilege of limited liability and has become liable personally to the creditors. This situation may arise when the company continued to carry on the business for a period of six months after the number of its members was reduced below the minimum as prescribed by law with the knowledge of the shareholder
Under the common law courts would allow the lifting of the corporate veil only in cases where the company is a 'mere facade concealing the true facts', or, in the parlance of earlier cases, a mere 'sham', Gower,LCB (1992)
However the circumstances under which the courts will find such a 'faade' or 'sham' are considered to be very rare. In the case of
Woolfson v StratchclydeRegional Council, 1978 SLT 159 at 161:the House of Lords observed that the corporate veil can be pierced only where special circumstances exist to indicate that the company is a mere faade concealing true facts. "The recent decision of the Court of Appeal in China Ocean Shipping Co v Mitrans Shipping Co Ltd, (1995) 3 HKC 123appears to have narrowed the already limited circumstances in which a court will lift the corporate veil." Following the ruling of this case if a person uses the corporate veil to protect him from legal obligation prior to the arising of the legal obligation then the corporate veil will not be pierced. On the contrary if the person uses the corporate veil to protect him after the legal obligation is established then the corporat ...Download file to see next pagesRead More
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