Distinct legal entity of a company

It is to be stated that a company has a distinct legal entity from its members as held in the case [Salomon v. Salomon and Co. Ltd. (1897) A.C 22]. Thus this provision of the company having a distinct legal entity can be defined as the veil of Incorporation. The courts consider this principle while deciding the liabilities of the company. According to this principle it can be stated that avail exist between the company and its members. It can be said that a company has a district legal identity and the liabilities of the company are surely the companies and are not shared by the members of the company.

However in exceptional circumstances the courts have needed to Pierce this corporate veil in order to  reach the person, reveal his true character and assess the liability incurred by him which are not to be borne by the company (Lam, 2015). The legal and logical Principle behind piercing the corporate veil is that the law forbids the misuse of the corporate veil. It can be said that in circumstances when the courts feel that the corporate veil is being misused it will pierce through the same to reveal the true nature of the person responsible for the breach of duty disregarding the principal as stated in the Solomon vs Solomon case. It is to be mentioned that that the corporate veil can be lifted by Judiciary as well as statutory provisions. Statutory provisions for lifting the corporate veil include fraudulent conduct of business, misrepresentation of name and reduction in membership. Judicial provisions for lifting the corporate veil include single economic entity, fraud and protection of revenue 

It is to be it is to be to be mentioned that in the English law the provision of incorporation of a company by registration was introduced in the Year 1844 first.

In 1855 the principle of limited liability was first introduced.

However, the doctrine laid down in the aforementioned case has been analyzed by the courts very carefully. It has been held that the on many instances members of the company refrain from coming out and prefer to avoid the liabilities incurred by them by staying behind the corporate veil (Mucha 2017).

Campbell v Gordon [2016] UKSC 38 is a Scottish case dealing with the provisions of lifting the corporate veil. In this case the Supreme Court had taken into consideration whether a company’s director could be held personally liable  to pay damages to an injured employee when the company had failed to pay adequate insurance cover to the employee. It is to be mentioned that it was held by 3:2 majority of the court, that the Employers Liability Act 1969 cannot be interpreted in any way in order to allow the aggrieved party to claim damages from the director. It is to be stated that the decision of the court in this case answered all the questions about the former remarkable case Richardson v Pitt-Stanley [1995] QB 123.

Exceptional circumstances when the courts pierce the corporate veil

It is to be mentioned that courts in general do not tend primarily the principle of separate identity as held in the Solomon skills as discussed above. However, in modern times courts have realised those fraudulent and mysterious activities can be done by promoters and members of Companies hiding behind the corporate veil. It is to be stated that in the general interest of the public and the members the courts are required to furnish the persons who misuse and abuse the principle of corporate veil (Chen, Frankenreiter and Yeh 2015).

Fraud – it is to be mentioned that courts generally tend to remove the corporate veil when it feels that any fraudulent or mysterious activity is being carried on behind the corporate veil. Two Landmark cases where the corporate veil has been lifted by the courts in order to identify fraudulent activities are: Gilford Motor Company Limited vs Horne and Jones vs lipman. In the first case, Horne was employed in the of Gilford motor company. It was stated in his employment contract that he was prohibited from soliciting customers of the company. However, he incorporated a company in his wife’s name for the purpose of soliciting customers of the Gilford motor company. The aforementioned company started proceedings against him stating that he had violated the terms of his employment contract. The appellate court held the de company incorporated in the name of wife of Mr Horne was primarily formed as stratagem for the purpose of carrying on effective business by soliciting the clients of Gilford motor company. The quote for the stated that the new Company formed in the name of wife of Mr Horne had been formed primarily to perpetuate fraud.

In the second Jones vs lipman a man had contracted to sell his land. He however later changed his mind and for avoiding specific performance transferred his property to a different company.The judge well here in this case refer to the decision of the judgement of the Gillford vs Horne case. It was held at the company formed by Mr lipman intended to hide his face so as to avoid recognition by equity’s eye. In this case the court awarded specific performance against Mr lipman and the Company formed by him.

For benefit of revenue- It is to be stated that courts have the power to pierce the corporate veil and disregard the separate legal identity of the company if it assesses that such corporate veil is being used for the purpose of tax evasion and to avoid tax obligations. In the remarkable case of Dinshaw Maneckjee Petit (1927), it was held that Mr Dinshaw had been enjoying income and dividend. However, he had formed four companies for the purpose of holding a block of investment as an agent. He had devised a fraudulent scheme. His income was shown to be credited in to the bank accounts of the four companies created by him however, the company handed him back the income as pretended loans. It can be stated that  he had divided his income into four parts for the purpose of reducing tax liability. It was held by the court that the companies formed did not perform any business and were formed solely to evade tax liabilities and therefore such companies should not be regarded as separate entities. It was also held that such companies were created for the basic purpose of ostensibly receiving interests and dividends and handing them back to the assessee.   

Statutory provisions for lifting the corporate veil

Enemy Character – It is to be mentioned that a company can take the form of an enemy character the persons who are de facto responsible for handling the operations of the company reside in an enemy country. It is to be stated that in similar situations the courts assess the nature of the persons who are in charge of running the company for the purpose of declaring the company to be an enemy of the country. In the remarkable case Daimler Co.Ltd V. Continental Tyre And Rubber Co.Ltd, a company had been incorporated and registered in England which sold tyres in England made by a German company. It can be stated that the German company had been holding the bulk of the shares of the company selling tyres in England. All the share holders and the directors of the English company were Germans who were residing in Germany. During the First World War, the English company tried to recover the debts incurred by trade. The court held that company in consideration was a foreign company and a payment of debts to the company would result in engaging in trade with the enemies of the country. Therefore the company was not allowed to carry on its business.

Sham Company- It is to be mentioned that the courts have the provision to lift the veil of a company if it considers such company to be a hoax or scam (Schall 2016).

Companies which intend to avoid legal obligations–It is to be said that when companies are incorporated for the purpose of avoiding legal obligation, the courts have the power to lift the corporate veil and disregard the separate identity of the companies. The courts could even assume the non existence of the company in order to ensure that the members of the company comply with the legal obligations.

Single Economic Entity- In consideration of liabilities of a group of enterprises the courts have the power to not adhere with the principle of separate legal identity of a company as held in the Salomon case and can pierce the corporate veil to assess the economic terms of the group. In the case D.H.N.food products Ltd. V. Tower Hamlets London Borough Council [1976] 1 WLR 852, the court held that the principle of the Salomon’s case would be disregarded in circumstances when the court would assume equitable and justified to do so. In the aforementioned case the appellate court assumed that lifting the corporate veil was necessary and suitable. In this case three subsidiary companies had been treated as part of the same economic identity and thus the court held that lifting the corporate veil was essential in order to identify the compensation each of the subsidiaries was entitled to. It is to be mentioned that the circumstances in which the corporate veil could be pierced depends on the case facts. A company’s nature of shareholding would indicate whether the court can lift the corporate veil. It can be noted that Lord Denning had remarked that companies are treated a separate and distinct entity for effectively maintaining profit and loss accounts of such company and preparing balance sheet. In the case Adams v Cape Industries Plc (1990) Ch 433 Cape, the English company had been formed to mine and market asbestos. It is to be stated that it had an English company acting as its subsidiary company called Capasco. The company in consideration had a US subsidiary company called NAAC, incorporated in Illinois which was formed for the purpose of marketing asbestos in the markets of United States. However in 1974, 462 people sued the subsidiaries Cape, Capasco and NAAC for sustaining injuries for installing asbestos in its factory.

Judicial provisions for lifting the corporate veil

In this case the court of appeal had to pierce the corporate veil to assess whether Cape group has to be treated as one single economic unit or whether the subsidiaries of cape were merely the agents of the company, incorporated to act as facades. The court disregarded the principle of separate legal entity of the company as decided in other cases. The court in coming to this decision had to interpret the statute. It can be said that a company can be regarded as a separate legal entity only in cases where the documents or statute of the company would provide clarity about viewing the company as a single entity.

Trust or Agency- It can be stated that when companies act as agents of the shareholders of accompany such shareholders would be considered liable personally for the actions of the company. The question of whether the company is acting as the agent of the shareholders is to be decided by the courts. It can be stated that there may exist an express agreement or an implied one denoting the fact that the company acts as an agent of the shareholders. Re FG (Films) Ltd [1953] 1 WLR 483 is a UK law case which deals with the provision of lifting the corporate veil. In this case an American company had financed an Indian Film in a British company’s name. It is to be noted that the American company’s president held ninety percent of the shares of the British company. However, The Board of Trade of Britain had refused to register the aforementioned firm. It was held by the court that the decision of the Board of trade of Great Britain was valid as the British company had merely acted as the agent of the American company.

Welfare Legislation- It is to be mentioned that avoidance of complying with welfare legislation is generally treated in the same way as avoiding to pay taxes. The courts generally consider the problems that arise out avoidance of welfare legislation in the same way as avoidance of taxation. It can be said that it is the duty of the courts to lift the corporate veil in order to identify whether there is ingenuity on the part of the company to avoid welfare legislation.

Interest of the public- It is to be stated that courts may identify the need to lift the corporate veil so as to prevent the activities of a company which are against public policy. Courts while lifting the corporate veil can rely on the principle when there are no specific grounds for piercing through the corporate veil. The courts can lift the corporate veil stating that it is just to do so in order to inspect whether the functions of the company are carried on in the public interest. Thus it is to be stated that the courts consider the substance and ignore the form where it asses that a conflict may arise with public policy. 

Application of the corporate veil in modern times

It is to be mentioned that the corporate veil of companies can be pierced or lifted in certain circumstances as per the company law provisions which are express in nature. The advantage of   limited liability which arises out of the distinct entity of a company is not always allowed to be enjoyed in every circumstance.  Therefore the circumstances in which the corporate veil can be lifted by statute are

• Reduction in the number of members of a company- If a company carries on business in spite of not having the minimum number of members as required by the provisions of company law, the courts can lift the corporate veil in order to make the persons who are responsible for running the company personally liable.
• Miss representation of facts in the prospectus – in case of issue of a prospectus which has misrepresented some facts the person who is liable for issuing the same will be held liable. Search persons who have authority to issue prospectus can include the directors and promoters of Companies. In case of misrepresentation in the prospectus liability would be out to those individuals who have subscribed for the shares of the company on the belief of an true statement.
• Mis-description of name – In case where a member of a company puts his signature on any document of the company such as bill of exchange, any contract or any kind of money order on behalf of the company, such member shall be considered to be liable if the company’s name has not been properly incorporated in the documents.
• Fraudulent conduct- In a circumstance of winding up of a company if it is established that the company had been carrying on business with the intent of defrauding its creditors, the directors of such company would be held personally liable for any liability incurred by such company. According to Section 214 of the insolvency Act 1986, it can be stated that when a company is wound up the directors of the company would be held personally liable to pay the debts, if they kept the business running in spite of knowing the fact that insolvency of the company is inevitable.
• Liability for ultra-vires act –It can be stated that the offices and the directors of a company would be considered personally liable for any liability in cured by the company if it is established that the acts done by them on behalf of the company are ultra-vires of the company. 

It is to be stated that the principle of separate and different legal entity and the limited liability of the members of a company as held in the Salomon case are not applicable in cases where the concerned creditors are affected by the negligent actions of company. It can be noted that  company although is a distinct legal entity, it is ultimately run by some individuals, therefore in tort cases it is necessary to lift the corporate veil to identify the person or persons who are responsible for the negligent actions due to which the creditors of the company suffered losses. Lifting the corporate veil can become a critical factor in cases where a subsidiary company carries on the business of a holding company in order to avoid the liabilities arising out of carrying on hazardous activities. This strategy is implemented by holding companies with the view that if liabilities are incurred by any of the subsidiary companies in the future, the other companies will not have to bear the liabilities due to the principle of separate legal entity. It is to be mentioned that tort creditors can be considered to be involuntary creditors as it as they are not expected to understand the complex corporate structure of companies and to assess which company in the group is liable to pay them the damages claimed by them for incurring losses or sustaining damages because of the negligent action of the companies. The cases in which the corporate veil has been lifted by the court to identify who directly owned a duty of care are Lee v Lee’s Air Farming Ltd [1961] AC 12, Lubbe v Cape Plc [2000] 1 WLR 1545 and Chandler v Cape plc [2011] EWHC 951 (QB).

It is to be mentioned that in the United States the provision of lifting of the Corporate veil has been illustrated in several cases.

In the case Berkey v. Third Avenue Railway it was held by the court held that it had no right to pierce the corporate veil of the company for the personal injury sustained by the plaintiff. This is a leading case American case dealing with the provision of veil piercing. In this case it was held by the New York appellate court that the company in consideration, Third Avenue Railway Co was not liable to pay the debts incurred by its subsidiary company. The Court held that to hold the parent company liable for the debts of its subsidiary companies, domination of the parent company over its subsidiary company was necessary. In this case that the subsidiary company was merely an alter ego of the parent company.

Instances when the courts have lifted the corporate veil

The case Minton v. Cavaney, 56 Cal. 2.d 576 (1961) is another example of a veil piercing American case. In this case it was held by Justice Roger Traynor that it was necessary to pierce the corporate so as to provide compensation to the girl who had drowned in the swimming pool. It was also held that the parent companies would be held liable if they fail to provide adequate capitalization and take active participation in the affairs of the company.

Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 (4th Cir. 1992) is a landmark U.S corporate law case dealing with the provision of corporate veil piercing. It was held by the court that that it was vital economic policy to uphold the principle of separate legal entity of corporations. Justice Wilkinson also held that the corporate veil would be allowed to be pierced in circumstances in which the defendant has exercised undue control and domination over the corporation and has used the same as an instrument to hide the fraud, wrongs and conceal crimes.   

In the case Taylor v. Standard Gas Co. 306 U.S. 307 (1939) in this case the court held that insiders of a company who later become its creditors would be considered to be subordinate to the other creditors of the company when the company becomes insolvent. 

Conclusion

Thus in conclusion it can be said that the aforementioned principle of separate legal entity and limited liability of the members of the company were first cemented into the English law and given effect in the case Solomon vs Solomon by the House of Lords. In this case the apex court stated that the entity of a company is separate from that of the members of the company and thus the principle of veil of incorporation came into being. It can be said that the chief advantage of this veil of incorporation is enjoyed by most companies. However in reality the operations of the business of company is carried on by the members of the company for their own personal benefits .Thus, it can be said from the legal perspective that a company has a distinct and de facto entity where as in reality a company is nothing but an association of people who the beneficiaries of the organizations. In the Solomon vs Solomon case it was held by the court that in case of any dispute arising out of property acquired, rights acquired or liabilities incurred by a company, the natural persons who are associated with the company are to be ignored. Therefore it can be said that the corporate veil companies can be used by the beneficiaries of the company for the purpose of committing frauds and illegal acts.

Salomon v. Salomon and Co. Ltd. (1897) A.C 22

Campbell v Gordon [2016] UKSC 38

Richardson v Pitt-Stanley [1995] QB 123.

Gilford Motor Company Limited vs Horne  [1933] Ch 935

Jones vs lipman [1962] 1 WLR 832

Dinshaw Maneckjee Petit (1927)

 Daimler Co.Ltd V. Continental Tyre And Rubber Co.Ltd [1916] 2 AC 307

D.H.N.food products Ltd. V. Tower Hamlets  London Borough Council [1976] 1 WLR 852

Adams v Cape Industries Plc (1990) Ch 433

FG (Films) Ltd [1953] 1 WLR 483

Insolvency Act 1986

Lee v Lee’s Air Farming Ltd [1961] AC 12,

Lubbe v Cape Plc [2000] 1 WLR 1545

Chandler v Cape plc [2011] EWHC 951 (QB)

Berkey v. Third Avenue Railway 244 N.Y. 602 (1927)

Minton v. Cavaney, 56 Cal. 2.d 576 (1961)

Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 (4th Cir. 1992)

Taylor v. Standard Gas Co. 306 U.S. 307 (1939)

Lam, C.L., 2015. Piercing the Corporate Veil.

Mucha, A., 2017. Piercing V. Lifting the Corporate Veil: Prest Decision in the Light of the Economic Analysis of the Company’s Limited Liability.

Chen, D., Frankenreiter, J. and Yeh, S., 2015. Measuring the Effects of Legal Precedent in US Federal Courts. ALEA, 2015.

Schall, A., 2016. The New Law of Piercing the Corporate Veil in the UK. European Company and Financial Law Review, 13(4), pp.549-574.