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  • Explain the attributes of a company once it comes into being.
  • Explain what is meant by the corporate veil.
  • Identify the problems for third parties which arise from theexistence of the corporate veil.
  • Identify circumstances where the corporate veil will be ignoredor lifted either at common law orunder statute.

Artificial Legal Entity

There are various features which a company gets when it has been registered or incorporated. A company is a form of business structure which is selected for the purpose of carrying out business activities. The attributes which a company gets after being incorporated are as follows:

  1. Separate legal entity

Through the term spate legal entity a company becomes an artificial legal person. This means that it has its own existence which is not the same as that of the owners. The company has the right to sue and get sued in its own name. The company also has the right to own property in its own name. It is a considered as a corporate person in the society.

  1. Perpetual existence

This signifies that the existence of a company is ongoing. A company does not come to an end when any of its owners have died unlike that in a partnership. Even if all owners of a company are dead it would not make the company come to an end. As it is a personality which has been created by law it will only come to an end when it has been done so by law. The process of bringing a company to an end is called winding up of the company.

  1. Common seal

A company is provided with a common seal. A common seal is an instrument which is used by the company to give consent to documents. The document can be anything such as contract. As the company is not a natural person  it cannot sign documents in a conventional manner and thus the directors on behalf of the company execute a document by affixing a common seal to them. The document is considered to be passed when it has a common seal attached to it.

  1. Limited Liability

One of the main and most distinct features of a company is that of a limited liability. As the word suggest limited liability means limiting the liability of the owners of the company. Under the notion of limited liability the shareholders of the company are not liable to all the losses which have been incurred by the company. This means that their personal assets cannot be attached when the company is making losses. Only the amount which the shareholders of the company have invested in it would be considered as their liability. However in case of fraud they may also be made liable personally by the courts.

  1. Transfer of ownership

This feature signifies that the shareholders of the company can transfer their ownership to any other person by selling or gifting them their shares. Shares are part ownerships in a company which can be freely transferred and thus causing the transfer of ownership as well.

  1. Separation of management and ownership

Perpetual Succession

The management and ownership of a company is different. This means that a set of managers known as the directors are appointed to manage the affairs of the company. The shareholders of the company may be numerous so they will not be able to manage the affairs of the company together as there will be chaos. Thus they appoint the directors who are the employees and officers of the company who make decisions on behalf of it keeping in mind the interest of the shareholders (Beatty Samuelson and Abril 2018).

The notion of corporate veil had been first discussed in the case of Salomon v. Salomon and Co. Ltd. (1897) A.C 22. Corporate veil has been defined by Mucha (2017) as a legal concept which separates the identity of a corporation for that of the managers and shareholders. This corporate veil is a veil which is present between the company and the shareholders which the court will have to take into consideration where there is any issue in relation to the company. The court has the duty to keep the identity of the shareholders and the identity of the company separate from each other. In the Solomon case the defendant was almost the sole owner of the company. He had provided a loan to the company which was a secured loan in relation to debentures. The company was not  able  to perform well and thus had been subjected to liquidation. As the loan provided by the defendant was a secured loan he was able to get the money first before the unsecured creditors who were left with nothing to be compensated with form the company.  It had been argued by the claimant creditor that the defendant is a fraud and the corporate veil should be lifted in this case to make him liable in personal capacity. The court made a ruling in favour of the defendant. The court stated that as the company had been formed in compliance with the law of Companies Act and there had been no fraudulent intention on the part of the defendant at the time the company had been formed there is no reason which the court has to lift the corporate veil. This decision had been sustained by the court in the case Macaura v Northern Assurance Co Ltd [1925] AC 619 also where the court did not raise the corporate veil in form of the defendant insurance company. However in certain situations the corporate veil may be lifted or pierced by the court. The court may lift of pierce the corporate veil when it is satisfied that the sole purpose for which the company had been brought to existence was t avoid a legal obligation or to commit a fraudulent activity. For instance the corporate veil had been lifted by the court in the case of Gilford Motor Co Ltd v Horne [1933] Ch 935 where the sole purpose for which the company had been brought to existence was to avoid a legal provision. Thus the doctrine of corporate veil separates the personality of the company and the shareholders. The shareholders are behind the corporate veil.

Common Seal

As discussed above the doctrine of corporate veil provides separates the personality of the company and the shareholders. The shareholders are behind the corporate veil. In the Solomon case the defendant was almost the sole owner of the company. He had provided a loan to the company which was a secured loan in relation to debentures. The company was not  able  to perform well and thus had been subjected to liquidation. As the loan provided by the defendant was a secured loan he was able to get the money first before the unsecured creditors who were left with nothing to be compensated with form the company.  It had been argued by the claimant creditor that the defendant is a fraud and the corporate veil should be lifted in this case to make him liable in personal capacity. The court made a ruling in favour of the defendant. This makes it clear that a disadvantage had been caused to the third party in this situation who was the plaintiff. In this case the plaintiff had invested a significant amount of money in the company of the defendant. When the company was liquidated the defendant walked off with all the money keeping nothing for the creditors. Thus the creditors who are the third party are subjected to significant disadvantage. In the same way in the case of Macaura v Northern Assurance Co Ltd the owner of the company had been subjected to a disadvantage. The company’s property was destroyed by fire. The property had been insured. The company was liquidated. The owner of the company claimed the insurance amount for the insurance company which they denied to pay. The court in this case held that because of the presence of the corporate veil the owner of the company is not entitled to receive the amount as the identity of the owners is different from the company and it is the company who is allowed to make the claim.  Thus in these situation it can be derived that shareholders may hide behind the protection of the corporate veil and limited liability provisions to cause losses to the third party creditors who are evidently subjected to a disadvantage.

There are various situations where the corporate veil may be lifted by the courts. The piercing of corporate veil is used as in situation where the company has been formed for the purpose of avoiding an already existing legal obligation, as a remedy by the court with respect to a conduct which appears to be fraudulent conduct and also where there has been bankruptcy value. The courts restrain themselves form lifting the corporate veil. However the courts have been ready to pierce the veil in case it feels that fraud has been perpetrated behind the veil. The Salomon principle would not be allowed to be used by the court where it has been used in from of an engine of fraud. Here have been two classic cases were the exception of fraud had been discussed namely the cases of Gilford Motor Company Ltd v. Horne and Jones v. Lipman. In the former case Mr Horne who was an ex employee of the company had in his employment contract that he would not solicit the clients of the company. The person incorporated a company in the name of his wife and started to solicit clients. The court in this case held that the new company was a result of fraud and thus the corporate veil had been lifted by the court. In the next case in order to avoid a specific performance a person who had decided to sell his land changed his mind and transferred the property in the name of a company. The court in his case held that the company was a mask which the person holds before the face to avoid being identify through equity.


Corporate veil may also be lifted in case where the company is formed for benefit of revenue.  Thus the court can pierce a corporate veil in case the company had been formed to carry out a tax evasion or to circumvent obligations of taxation as done in the case of Dinshaw Maneckjee Petit, Re. A company which is of an enemy character to the state may also have its corporate veil lifted as t had been done in the case of Daimler Co.Ltd V. Continental Tyre And Rubber Co.Ltd. The corporate veil is also lifted where the company is a mere sham or cloak (Hoax) or have been set up to avoid a legal obligation.

References

Beatty, J.F., Samuelson, S.S. and Abril, P.S., 2018. Business law and the legal environment. Cengage Learning.

Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307

Gilford Motor Co Ltd v Horne [1933] Ch 935

Jackson, K., 2015. Behind the Corporate Veil. ReVista (Cambridge), 15(1), p.50.

Macaura v Northern Assurance Co Ltd [1925] AC 619

Mucha, A., 2017. Piercing the corporate veil doctrine under English company law after Prest v Petrodel decision.

Murray, J., 2015. Corporate Shield-Corporate Veil-Piercing the Corporate Veil. US Business Law: Tax Categories.

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

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