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Corporate Personality The effect of registering a company under the Companies Act 1985/2006 is that the company becomes a CORPORATION with its own legal personality, completely separate from its members or creators. The doctrine of corporate personality is an ancient one, with the key case being Saloman v Saloman & Co (1897) Facts: Saloman had been a leather boot maker fro some time. Together with other family members he formed a limited company and sold his previous business to it. Payment was in cash, shares and debentures. When the company eventually wound up, it was argued that Saloman and the company were one and the same, and, as he could not be his own creditor, his debentures would have no effect. Held: Although at first instance the court found against him, the HL held that in the absence of fraud, his debentures were valid. The company had been properly constituted and was in law, a distinct legal entity, completely separate from Saloman. However, under some circumstances, the courts will ignore the separate entity and may make the directors personally liable. This is known as LIFTING THE VEIL of incorporation. Advantages of the separate legal personality: Limited Liability : no one person is responsible for the other’s debts unless they agree to be. [but see limited liability above Perpetual existence: changes in membership [death, bankruptcy] have no effect and the company can only be brought to an end by being wound up Business property owned by the company : all assets are owned by the company Legal Capacity; the company itself can sue or be sued. Its liability however is unlimited and all assets must be used to pay debts. It can also be liable in tort The rule in Foss v Harbottle: where a company suffers an injury, it is for the company to take action – an individual cannot act on its behalf Transferability of title and investments: shares can be easily transferred to a new owner without approval of other members of the company Membership: No maximum number for corporations. For partnerships, generally maximum is 20 Loan Capital: The company can borrow capital via debentures or loan stock – not available to sole traders or partnerships. Companies can also secure debts by way of floating charge Disadvantage: Complex regulations and the Companies Act 1985 ARTICLE - When will the veil be lifted? Lifting the corporate veil revisited By Mike Griffiths 01 Feb 2000 It was of course, Saloman v. Saloman & Co Ltd (1987) AC 22 that established the irrevocable position in English law of the concept of separate legal personality for companies. That veil will be lifted in appropriate circumstances by the courts, sometimes at common law, sometimes under statute. The purpose of this article is to suggest that the courts have over recent years become rather more hard-line in upholding the corporate veil at common law. There are instances where the courts will readily lift the veil under statute. Examples arise where the directors are found liable for fraudulent or wrongful trading under Sections 213 and 214 of the Insolvency Act 1986 respectively, where a person signs a cheque or other bill of exchange drawn in the name of a company on which instrument the company name does not appear in full, or where the relationship between the members of a quasi-partnership company breaks down and a winding up is ordered on the just and equitable ground under Section 122 (1)(g) of the Insolvency Act 1986. Traditionally, there have been a number of instances where the courts have been willing to lift the veil at common law. Every company law student is familiar with Gilford Motor Co Ltd v. Horne (1933) Ch 935 where a salesman employed by the company had a restrictive covenant in his contract of service preventing him from soliciting his s company� customers. He wanted to start up his own business and so established a limited company in which all the shares were held by his wife and a friend. He purported simply to work for the company. The court was prepared to lift the veil of incorporation to show that the company was a mere sham designed to allow Horne to evade his contractual obligations. Accordingly an injunction was granted to restrain Horne from breaking the covenant. Another, and more recent instance, of the court lifting the veil arose in the case of Creasey v. Breachwood Motors Ltd (1992) BCC 638. Creasey had been a manager employed by a garage, Breachwood Welwyn Ltd. He had been dismissed in circumstances where he probably had a substantial claim for damages for a wrongful dismissal. The proprietors of the business wanted to avoid paying these damages. Before Creasey put in his claim they formed another company, Breachwood Motors Ltd, transferred the entire undertaking of Breachwood Welwyn Ltd to it and then had Breachwood Welwyn Ltd struck off following the procedure laid down in Section 652 of the Companies Act 1985. Robert Southwell QC, sitting as deputy High Court Judge, held that Creasey could present his claim for damages directly against the new company, Breachwood Motors Limited, it having been formed specifically to get the proprietors out of their legal liability to Creasey. With respect, this seems an eminently sensible decision. The alternative procedure open to Creasey would be first to seek to restore Breachwood Welwyn Ltd, the original company, to the register, and then to bring substantive proceedings against it. However, even if such proceedings were successful. The plaintiff would be faced with a fairly substantial snag � the resuscitated company would be without funds from which to satisfy the judgement. However, the Court of Appeal has recently said that this approach is inappropriate and that the Creasey decision, was wrong. This was in Ord & Anor v. Belhaven Pubs Ltd (1998) BCC 607. Proprietors of a company which was in the business of acquiring old pub premises, doing them up and then letting them to tenants, duly let a renovated pub building to Ord. There had been misrepresentations made by the company as to the potential profitability of the premises, these misrepresentations only came to light some time later. By the time this occurred, the company from which the lease had been taken had practically ceased trading and no longer had any substantial assets from which any judgement against it could be satisfied. Leave was sought to substitute the holding company of the company which had originally created the lease as the defendant. The trial judge, following the decision in Creasey v. Breachwood Motors Ltd allowed this. The Court of Appeal, however, said that this was completely the wrong approach. The defendant company which had granted the lease had not been a mere façade for the holding company. Such companies as there were in the group were independent trading companies: they had not been set up as mere shams to get the proprietors out of some liability, which otherwise they would have to meet in some other way. If the Court of Appeal had simply left things like this then Creasey could have been distinguished easily enough on the basis that in that case there had been a deliberate asset stripping from the dissolved company whereas in Ord there had not. But the Court of Appeal went much further than this. Hobhouse L.J., giving the judgement of the Court, made it quite clear that Creasey had been wrongly decided: "But it seems to me inescapable that the case in Creasey v. Breachwood as it appears to the court cannot be sustained. It represents a wrong adoption of the principle of piercing the corporate veil� Therefore, in my judgement the case of Creasey v. Breachwood should no longer be treated as authoritative". The proper procedure in a case such as Creasey would therefore be to seek to restore the dissolved company to the register, then to bring substantive proceedings against it, and then, if it had no funds, to put back in funds using the procedure under Section 423 of the Insolvency Act 1986. This is the remedy under which a person who claims to be the victim of a transaction at an undervalue whereby assets have been transferred deliberately with a view to putting them beyond the reach of persons such as future creditors can seek to get at such assets. In reaching this decision, the Court of Appeal cited with approval its own previous decision in Adams v. Cape Industries plc (1990) Ch 433. This case concerned two subsidiaries of an English parent company, one was in South Africa and the other in the United States of America. The South African subsidiary mined asbestos, which it sold to an American subsidiary. Tragically, the asbestos resulted in the deaths of a number of Americans, the relatives of whom brought proceedings against the American subsidiary which, having been successful, resulted in the American subsidiary going into liquidation. The question arose whether the successful plaintiffs against the American subsidiary could enforce judgement against the English parent company. The Court of Appeal held that this was not possible. The veil of incorporation should not be lifted. A similar decision was reached by the House of Lords in Williams v. Natural Life Health Foods Ltd (1998) 2 ALL ER 577. The case concerned the letting of a concession to operate a health food shop. The franchiser was effectively a one man company. The one man was responsible for the advertising material which resulted in the creation of the franchise. He wrote all the letters sent by the franchiser company to the franchisee. These letters he signed "pp" the franchiser company. The franchiser and the franchisee never met face to face in the course of these negotiations. There were misrepresentations in the letters. The franchise did not work out as it had been promised. By the time the misrepresentations came to light, the franchiser company was in liquidation. The question arose whether the franchisee could bring proceedings directly against the one man behind the franchiser company. At first instance, and again in the Court of Appeal, it was held that the corporate veil could be lifted. However, the House of Lords held that this approach was wrong The veil of incorporation was sacrosanct and should only be lifted in the most exceptional circumstances. In the absence of any personal contact resulting in a specific reliance by the franchisee on the representations made on behalf of the franchisor company, the corporate veil of the franchisor company should not be lifted. A director of a limited company will only become personally liable for loss suffered as a result of negligent advice if he assumes personal liability for that advice and the plaintiff relies on that assumption of liability. In this case there had been no personal dealings between the one man behind the company and the franchiser. There was no evidence that the plaintiff had believed that the one man was accepting any personal liability. In these circumstances there could be no imposition of personal liability. Thus, the message seems to be coming through fairly clearly. The veil of incorporation is here to stay and should only be lifted in the most exceptional circumstances. It may be relatively easy to say with clarity when the veil should be lifted in those instances where statute allows. However, where there are no statutory guidelines the courts are becoming increasingly reluctant to do so.
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