Company Law and director incapacity - Case Study Example

There is no magic formula utilized by the courts in determining whether to pierce the corporate veil or not. In our present case, the directors of W&H Ltd namely Jean, Lynette, Lauren and Ryan own a quarter of the company's issued shares each. This company's main activity is providing management services to other organisations. Three of the four directors were not satisfied with the profitability index of the company and they attributed this to the incapacity of the other director. During the course of rendering management services to a foreign company, these three directors decided to form a new company.

Accordingly, Jean, Lynette and Lauren formed the new company, LJM Ltd in which they were the directors as well as the shareholders. The LJM Ltd was incorporated. W&H Ltd had the entire infrastructure such as training facilities and equipment to fulfil the prospective contract. In a board meeting of W&H Ltd, it was resolved that W&H Ltd would sell its assets and stock to LJM Ltd at less than the market value. Subsequently, W&H Ltd became insolvent and the liquidation process was initiated. The Companies' Act 1985 and the Insolvency Act of 1986 has laid down certain provisions for considering the fiduciary duties and responsibilities of Directors and the circumstances under which the courts will pierce the veil of the incorporation.

An incorporated company is a legal person or entity and the assets and liabilities of the company are not that of its shareholders or directors and the acts of the members are not the acts of the company. This fundamental principle is established in the case of Salomon v Salomon & Co1. In this case, Salomon a leather merchant formed a company in which his wife and five children were the shareholders with each of them owning a share and the remaining shares were held by him. According to the Companies Act of that time, the minimum shareholders required to form a company were seven.

After incorporating the company his liability had become limited. Subsequently the company went into liquidation. The court of Appeal held that the shareholding was not bonafide but contrived to favour Salomon. However, the House of Lords reversed this decision and held that Salomon was liable only to a limited extent and Lord Mc Naghten elaborated that the company and its promoters are different. Further, a company cannot be described as an agent of its shareholders providing clear evidence that the company is acting as an agent of its shareholders in a particular transaction.

The property of a company does not belong to its shareholders. From this, it can be concluded that a company has a separate legal existence from its members and directors. Corporate veil implies that the incorporation of a company raises a separate legal liability in the company, which is different from that of its directors and shareholders. From this, it is evident that the creditors cannot recover the debt from the directors directly because they cannot pierce the corporate veil. The application of the Salomon principle has mostly beneficial effects for