Legal Personality and Limited Liability - Essay Example

The law is prepared sometimes to examine the company faade and this process is described as piercing or lifting the corporate veil. The fact that a company is a unit that is thought as legal and free from its owners can sometimes produce undesirable results. For instance, shareholders can obtain funds illegally and then be regarded as not liable to repay or in a case where the directors are liable of fraudulent activities. The courts have been forced to intervene in some circumstances and disregard the doctrine of limited liability and corporate personality especially the case of group companies and their subsidiaries where the entity form is being manipulated as a tool to commit fraud.

The case of Salomon Vs Salomon & Co. Ltd in 1987 established the irrevocability position in common law of legal personality and limited liability of companies (Butterworth, 1960, p.6). Some of the circumstances that lead to court intervention include the following: trading with an enemy, the case for sham companies, failure to comply with the legislation laws, fraudulent and wrongful trading, disqualified director's actions and statutory power abuse. For instance if a company is a sham one i.e. formed to enable one avoid obligations such as tax, the court may act to ignore the company's existence.

In case the court discovers that a fraud is committed, it is prep. The fraud will notably be a case where a company owner used the company intentionally to deny his creditors their legal rights. It discourages Solomon principle to act as a vehicle of fraud. The exemption which illustrates fraud are found in Gilford Motor Ltd Vs Jones Lipman. In this case, Mr. Horne who was as ex -employee of the company incorporated another limited company in his spouse's name. In so doing, he solicited the clients of Gilford Motor ltd as his employment contract held it clear that he cannot solicit customers of the organization.

The court held that the company's idea behind its formation was to commit fraud and to mask Mr. Hornes' effective continuation of the business. The court held that it was a sham to mask his wrongdoings as it was very clear that the objective of incorporating that company was to commit fraud. The court at it discretion may impose liability on people liable for carrying out the business with an intention of defrauding the creditors at the winding up of the business. The directors are also liable if they sign a cherub or a bill of exchange on company's behalf and fail to include the company's name, omits a word or writes it incomplete (Oliver, 1971, p.66). Common law provides for separate legal entity of a company and the court disregarded this legal personality and instead has investigated the shareholders personal quality or those who usually controls the company.

The reason behind this is because it is the public interest to make sure that the company is not run by an undesirable person and that it is not under any criminal element. Trading with an enemy especially during the time of war is another instance that leads to lifting of the veil of incorporation. In Daimler Company