Professional Documents
Culture Documents
When a company is incorporated it is treated as a separate legal entity distinct from its
promoters, directors, members, and employees and hence the concept of the corporate veil,
separating those parties from the corporate body, has arisen. The issue of "lifting the corporate
veil" has been considered by courts and commentators for many years. A company is considered
as a legal entity or a legal which has the capacity to survive beyond the lives of its members.
This extraordinary feature of company is known as perpetual succession which simply means
members may come and members may go but the company remains the same until it is properly
winded up. The basic principle is that there is a veil or a screen in between the company and its
members. The members of the company may use the corporate veil and get protection from legal
proceedings which has been imitated against the member for any mischief done. In order to
prevent the misuse of corporate veil for fraudulent activities by the members the court will break
through the corporate veil and find out the wrong doer who has taken shelter behind the
corporate veil. In this context we will discuss the means by which the corporate veil may be
lifted making reference to appropriate cases.
Corporate personality has been described has one of the most important fundamental
principle of company law in almost all the countries in the world. It constitutes a most important
principle because of which a company is considered a distinct legal entity from the shareholders
of the same. Once a company has been fully in incorporated it will be considered as a separate
legal entity distinct from their shareholders and it has an independent existence which is the most
extraordinary feature of the company. Company will be regarded as a separate legal entity and is
different from its promoters, shareholders, directors, members and the concept of corporate veil
separating the company form the promoters and other members of the company. For instance, a
company being a legal entity has the capacity to purchase a property. The owner of such property
will be the company itself and not the directors or any other members of the company. The
problem of lifting of corporate veil has been considered by the judiciary and commented for
many years and there are examples in cases where the courts have meted strict application of
doctrine of lifting up of corporate veil. The doctrine of lifting up of corporate veil has been
established to maintain efficacy in business. The law goes behind the veil or screen in between
the company and its members in order to find out the person behind the mask for the sole reason
that is to make the wrongdoer personally liable by applying the doctrine of lifting up of corporate
veil.
The company as separate legal entity was first established in the case of Salomon Vs. Salomon
Company Ltd. Salomon who was a sole trader sold his manufacturing business to the respondent
company that is Salomon company Ltd which is a company he incorporated by getting
consideration for all and six shares in the company and got 10 pounds in form of debentures. His
wife and his five children were the subscribers of memorandum and each took one share. The
business collapsed subsequently and he made a claim that debentures held is a secured
debenture. The liquidator argued that Salomon could not rank ahead of other creditors because,
in fact, the company and Mr. Salomon were one and the same or alternatively, that the company
carried on business on Salomon's behalf. The house of lords on appeal held that Salomon and
company Ltd was not a sham and the debts of the company are not the debts of Salomon because
they were two separate entities and once an artificial person has been established and
incorporated, they must be treated like an independent person with its rights and liabilities
appropriate to itself. Lord Halsbury further noted that, either the company was a legal entity or it
was not. If it was, the business belonged to it and not Mr. Salomon. If it was not, there was no
person and nothing to be agent at all.
Likewise, in Macaura v. Northern Assurance Co. Ltd., the House of Lords decided that insurers
were not liable under a contract of insurance on property that was insured by the plaintiff but
owned by a company in which the plaintiff held all the fully-paid shares. The House of Lords
held that only the company as the separate legal owner of the property, and not the plaintiff, had
the required insurable interest. The plaintiff, being a shareholder, did not have any legal or
beneficial interest in that property merely because of his shareholding. Support for the doctrine
has been exhibited more recently in Lee v. Lee's Air Farming. The Privy Council held that Lee,
as a separate and distinct entity from the company which he controlled, could be an employee of
that company so that Lee's wife could claim workers' compensation following her husband's
death.
As clearly stated in the case of Salomon vs Salomon, judgments have indicated possible
exceptions to the separate entity concept. Two general reasons why exceptions to the separate
entity principle exist can be identified. First, although a corporation is a legal person, it cannot
always "be treated like any other independent person." For example, a corporation is not capable
of committing a tort or a crime requiring proof of mens rea unless courts disregard the separate
entity and determine the intention held by the directors and/or shareholders of the corporation.
Secondly, strict recognition of the principle may lead to an unjust or misleading outcome if
interested parties can "hide" behind the shield of limited liability. Further analysis suggests that
these two reasons can be summed up in the one: that judicial discretion and also legislative
action allows the separate entity principle to be disregarded where some injustice is intended, or
would result, to a party (either internal or external to the company) with whom the company is
dealing.
The court may lift the corporate veil to allow a group of associated companies to be treated as
one. In DHN Food Distributors Ltd Vs Towers Hamlets London Borough Council, DHN ran a
wholesale cash and carry grocery business. The premises which DHN carried on business is
owned by a wholly subsidiary, Bronze. All of Bronze directors were DHN directors. DHN also
had a wholly owned subsidiary which owned all the vehicles that DHN used. In 1970, the
Towers Hamlet Borough Council compulsorily acquired the premises owned by Bronze leading
to DHN having to close down its business. Bronze was entitled to receive compensation for
disturbance if it could establish that it had an interest in land greater than that of a bare licensee.
It was held by the court of appeal that, the entire group of companies should be treated as a
single economic unit and that DHN had business but not land.
Where a company is owned or controlled by the nationals of an enemy country in times of any
public policy will dictate that such a company not be recognized as a separate legal entity despite
its formal incorporation in the jurisdiction. Such firm will be considered in fact ass an enemy
firm and face all disabilities of enemies. In Daimler Co. Ltd. Vs Continental Tyre and Rubber
Co. Ltd the respondent company was incorporated in England, however, all of its shares were
held by german residents, except for one share held by the secretary who resided in England.
Also, all the directors were German residents. During this time, England and Germany were at
war. In this case the issue is that, whether the respondent could sue and recover a debt from the
appellant in England. It was held that, looking at the nationality and residence of the
shareholders and directors and not merely the jurisdiction of incorporation, Daimler company
limited was held to have an enemy character.
The court may also lift the corporate veil and, in light of the facts and circumstances, hold that a
company is in fact an agent of another entity and not a principal in the purported transaction. In
Kuni vs State gold mining corporation, the court held that, where a company is proven to be an
agent of the other, then the liability of the subsidiary can be classified as the liability of the
company. In proving agency between companies the following factors may be considered
3. is the parent company the head and the brain of the subsidiary company
4. are the profit of the subsidiary company made by the skills and direction of the parent
company
The corporate veil may also be lifted to prevent the deliberate evasion of a contractual obligation.
Where the court establishes that, a party to a contract is relying on the separate legal entity
principle purposely to evade contractual obligation, then the court will lift the corporate veil,
identify that person, and hold him responsible for the breach of the contractual obligation. In the
case of Gilford Motor Co vs Horne, the defendant Mr. Horne was formerly employed as the
managing director of Gilford motor company. They had entered into a written contract by which
Mr. Horne had covenanted not to solicit customers of Gilford motor company. Mr. Horne’s
employment with Gilford motor company did terminate and he established his own business in
competition with, and undercutting the prices of Gilford motor company. Mr. Horne later formed
a company, JM Horne &Co Ltd, also a defendant, in which his wife and an employee were sole
shareholders and directors. J M Horne & Co took over Mr. Horne’s business and solicited the
customers of Gilford motor company, Gilford sued for an injunction against both defendants,
namely Mr. Horne and JM Horne & Co, from soliciting its customers. The trial court refused to
grant the injunction and the defendant successfully appealed to the court of appeal.
CONCLUSION
The doctrine of lifting the corporate veil is not subject to any bright line tests. Courts have
struggled for years to develop and refine their analysis of these claims. However, each new
action brings a different set of facts and circumstances into the equation and a separate
determination must be made as to whether the plaintiff has adduced sufficient evidence of
control and domination, improper purpose, or use and resulting damage.
The decision whether to lift the corporate veil may be assisted, at least in part, upon the opinion
of qualified experts. In particular, expert testimony would be helpful to the trial of fact in
determining whether the corporation has been adequately capitalized for its intended purpose.
Ultimately, however, the judgment whether to disregard the corporate entity will be based upon a
balancing of various factors all or some of which are necessary but may not be sufficient to lift
the veil. The bottom line being only the court will lift the veil in the face of grave abuse of the
corporate form and not otherwise. Also the trend regarding the increase or decrease in the
judicial pronouncement regarding lifting of veil of a corporate entity cannot be ascertained as
each the courts view on lifting of corporate veil depends on the facts of each case.