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Corporate Personality and Limited Liability

The idea of corporate personality recognizes a firm as a distinct entity. Religious organisations mostly employed this theory to conceal their ownership of real estate. Parliament increasingly recognized this religious order practice, which resulted in the development of society in a previously imagined fashion.

The United Kingdom Parliament passed the Limited Liability Act 1855, which was the first law to explicitly provide limited liability for companies formed by members of the public in England, Wales, and Ireland.

It was the intention of the 1855 Act to reduce investor liability in order to stimulate investment in firms. In the eyes of the law, registered corporations are distinct from their stockholders. An investor may only be held responsible for his or her invested cash from 1855, when this rule was implemented.

A major goal of the 1855 Limited Liability Act in the United Kingdom was to stimulate investment during the industrial revolution. United Kingdom company law was founded in 1844 by the Joint Stock Companies Registration and Regulation Act. As a result, every company with more than 25 members or whose shares are easily transferable was required to be registered. The Registrar of Joint Stock Companies was likewise established under the Joint Stock Companies Act of 1956. Although all shareholders in a corporation were responsible for the company's obligations, they were not individually responsible for the company's losses.

It was agreed in 1855 that investors would be more inclined to lend money to small businesses if their liability was restricted by the British Parliament. After a lengthy discussion, the Limited Liability Act of 1885 was enacted by Parliament. Some referred to the Act as the "Rogues' Charter," and it didn't have a lot of support. Limited Liability Act was a small piece of law by current standards. Companies were compelled to incorporate "limited" or "ltd" in their names as a kind of limited responsibility, which created the notion of limited liability. When a corporation registers with the Registrar of Joint Stock Companies, it is given limited liability if it has more than 25 shareholders and shares worth at least 4.54 kg.

Having a corporation with limited liability means that each member's personal responsibility is restricted to the nominal value of their shares. When the Joint Stock Companies Act 1844 introduced a registration system for corporations, limited liability quickly became a major source of political contention. According to the traditional business ethic, the owner of a company should bear full responsibility for his or her debts and the success that comes with them. It was also viewed as a blow to the community's code of ethics when it came to trade. Liability limits harm both tort and unsecured creditors, according to a team of experts.

As a result, it was argued that members shouldn't be held culpable because they're merely investors and don't participate in the day-to-day operations of the firm. That money from private investors acts as capital for fresh projects, and it would be bad for the community if that money was lost. The elimination of the possibility of total financial loss in the event of a failing firm might inspire such efforts. In addition, Gower has lauded limited liability as a key factor in the world's economic and industrial advancement. At some point in time, proponents of limiting personal liability won out, and the Limited Liability Act of 1855 was passed, allowing limited liability to be applied to corporations having at least 25 shareholders and preventing shareholders from being held accountable for more than their nominal share value. The Joint Stock Companies Act 1856 diminished the members needed to 7 as a result of the limited liability principle.

Development of UK Company Law

Salomon v Salomon & Co Ltd was a test case for the reforms made under the Joint Companies Act in the late eighteenth century. Sole proprietorships can only have seven members, but Mr. Salomon extended his firm in line with the Companies Act of 1862 so that his family could become shareholders. Unfortunately, the company went bankrupt, and the liquidator decided to take legal action against Salomon to recoup the money he had invested in it.

In this case, the Vaughan Williams J found that Mr. Salomon exploited the company to profit from the benefits of "limited liability" and, as a result, should reimburse the liquidator for every amount owing.

Despite this, the Court of Appeal maintained the high court's conclusion. As John Lowry and Alan Dignam point out, the previous court grounded its ruling on moral considerations. As a trustee, Lindley LJ noted that the corporation helped Mr. Salomon to benefit from the Company Act 1862's objective. To further demonstrate his disgust for Salomon, Lopes LJ labels the situation a fabrication that should not be permitted. It was also noted that the primary goal of the Company Act 1862 was not to create "mere dummies," but rather individuals who were actively involved in operating the firm, just as they were in the days when the enterprise was solely handled by one person. As a result, he said, allowing such a transaction to be legal would be a disgrace. The Court of Appeal stated that Mr. Salomon's acts were not reasonable or consistent with the true intent of The Company Act, 1862. Therefore, the Court of Appeal determined that Mr. Salomon should pay the company's obligations.

A later court decision overturned the Court of Appeal's finding that Mr. Salomon was not obligated to pay back the company's creditors since he had not broken any of the provisions of the Company Act 1862 but had instead cooperated with them.  Halsbury J said that the focus needs to be on the requirements of the Company Act 1862, rather than the motivations of its members, this began to take place For his part, Lord Watson disagreed with Lindley LJ's assessment, which claimed that incorporation had taken place in a way that was at odds with that of the Company Act 1862's main purpose and had done exactly what legislators had hoped it would not: extend the limited liability concept to sole proprietors and other entities with fewer than seven members. Businesses with seven or more members are exempt from the Act's limited liability provisions, which apply only if the company itself becomes insolvent.

Lord Watson further argued that it is illogical to claim that Mr. Salomon's business violates the true purpose of the Act while yet being legally formed under the terms of the Company Act 1862. According to Herschell J., there is no assurance as to the authentic objective of the Company Act 1862 other than its requirements for incorporating a company mentioned on the Act, which he characterised as a sham.

The influential part of the judgement in which Lord MacNaghten stated that a company is separate from its members, even though the business is run in the same way as before it was incorporated, such as by individuals managing and receiving the corporation's profits. This statement has been widely regarded as significant. He went on to say that the losses suffered by unsecured creditors were the result of no fault of their own.

Limited Liability Act of 1885

The House of Lords' judgement in the Salomon case has been laid forth in this chapter, which will now analyse the ruling's implications.

In the first place, the Salomon decision reaffirmed the idea of corporate personality (the "corporate veil"), which depicts a corporation as a separate and distinct entity from its stockholders (ie, shareholders). As a result, it is alone responsible for repaying its debts. Members of a corporation are shielded from personal culpability by limiting their power to pay back corporate debt to the corporation itself.

These shares can be freely transferred amongst members since they are practically unfettered by prospective liabilities for company debt, as stated in Salomon. When a shareholder no longer wants to be a part of the firm, he or she can transfer their shares to another willing party and the business can continue as usual.

Because of Salomon's defined corporate personality premise, Eversheds LJ was able to show that a corporation owns its assets independently of its members in Short v Treasury Com.

The Privy Council also cited the Salomon judgement of the House of Lords in support of its position in Lee v Lee's Air Farming Ltd. In this case, the claimant sought compensation for her spouse's death against the firm founded by her late husband. At the time, her husband was the company's director and director-elect, as well as a salaried employee. Since the appellant's spouse was both a director and a controlling stakeholder, the court found in her favour since his position as an employee was independent from the firm.

Furthermore, Salomon has been used as a precedent to show that a firm can participate in lawsuit under its own name.

Salomon hasn't always had a positive influence on the world. It's possible, for example, that the House of Lords ruling in Salomon permits a business to lawfully hold assets without the input of its members. Macaura v Northern Assurance Co. shown this to be true. Former solo trader and now registered company owner Mr. Macaura was unable to collect on an insured property loss because he neglected to file an insurance claim. Despite the fact that he had previously insured the property, he no longer owned it and it was no longer insured in his name but rather in the company's. He was consequently unable to demonstrate a legal or equitable insurable interest, which is required for a valid insurance policy and claim.

Veil piercing has many detractors, but the case for keeping the doctrine in place outweighs those arguments. Veil piercing is a principle that assures justice in criminal and bankruptcy proceedings. The theory protects creditors of a corporation by laying accountability on the firm's controllers and shareholders if their improper activities caused the company's insolvency.

There are several reasons why veil piercing should not be abolished, and this section of the research focuses on those reasons. That penetrating the corporate veil should be made into law is discussed in this section of the research. It is proposed in this study SA’s section 20(9) Companies Act71 of 2008 be adopted by the UK, allowing the court to disregard a company's separate entity and take actions deemed appropriate in cases where claims are brought against the company and the court determines that a company is being used to carry out acts that contribute to "an unconscionable abuse" of the corporate personality. As a result, the court will examine a defaulter's activities to see if they constitute "unconscionable abuse." After determining that the defaulter's acts fell under 'unconscionable abuse,' the Court will penetrate the veil at its own discretion.

A member of a business should be allowed to file a lawsuit against an individual who intentionally violates the Act or the company's Memorandum of Incorporation, with the intent to conduct fraud or gross negligence in mind.

A provision should also be established to specify the circumstances under which the personal liability of a company's controllers for damages, losses, and costs incurred by the company would be changed.

Controllers should only be held personally liable in circumstances when they are performing corporate functions without being given explicit orders. Additionally, if the controller engages in risky trading, it should be protected. A controller who commits an act or omission that he knew was likely fraudulent to the company's workers, creditors, or members should be held personally liable. If a controller makes false or illegal assertions, he or she should be held accountable.

As a last point, courts should be given discretionary authority to look behind the curtain and determine if there are grounds for dissolving a firm when justice and equity need it.

A number of advantages will accrue to the United Kingdom as a result of the proposed changes. "Unconscionable misuse" of corporate personality is a word that includes common law phrases like façade, sham, deception, and concealment that have been used in the past to penetrate the veil in favour of creditors, but the phrase is not restricted to these common law terms. Compared to the present English evasion principle, this proposed amendment is more equitable since it attempts to pierce the veil in circumstances when it was impossible to do so before.

"The unconscionable abuse" includes a wide range of abuse of corporate personality, which is important since it catches up with the advances in today's business environment. Compared to the existing situation, this proposed change will better prepare English company law for any eventuality in the near future.

Clearly, this proposed reform shows the court's desire to break through the curtain, which is a considerable departure from the existing position in England. The English court system's unwillingness to pierce the cloak of secrecy is without foundation. It may be claimed that the primary goal of company law is to protect the members of a business by using the corporate veil. While limited liability supports and encourages business operations, the law should also be in existence as a means of redress against the misuse of the notion of corporate personhood.

Prest included a couple going through a divorce, and Mr. Prest's wife sought to be compensated when the divorce was finalised. Section 24 of the Matrimonial Causes Act1973 had been dealt with by the court, and he had previously requested that Mr. Prest pay his divorced wife £17.5 million and transfer many assets that are legitimately owned by Mr. Prest's firms to his former spouse.

The Supreme Court only acknowledged one of the three reasons that the ex-wife of Mr. Prest sought to breach the corporate veil based on: that the property owner was Mr. Prest due to the resulting trust.

Court Decisions on Limited Liability

Principles of trust were the driving force for Prest's judgement in this particular case. The Supreme Court ruled that the corporation was just acting as a trustee for Mr. Prest in relation to the properties. According to the court, reasoning behind this decision was the fact that the corporation and Mr. Prest refused to offer meaningful proof to the contrary.

Two basic reasons for penetrating a corporate veil were established by Sumption J., who had a majority of the rulings. When a controller tries to dodge his legal responsibilities or duties, the corporate veil can only be breached. When dishonesty results in a legal advantage, the court has the ability to withhold it from the dishonest individual.

The second concept established by Lord Sumption is the concealing principle; where the corporate veil can be peeled back to disclose the true identities of the wrongdoers who utilise a business or more firms to hide facts, in order to prevent the courts from recognising them.. Because of the corporate structure, it is only possible to see what is hidden behind the curtain when this happens. Rather than penetrating the veil, the court will use other conventional concepts like trusts or agency to attempt to determine the matter, as will be discussed in the discussion of Gencor ACP Ltd v Dalby, Because the new company (Burnstead) was only there to serve as a conduit for the controller to move funds covertly, Lord Sumption posited that the concealment principle would apply in this case. As a result, the curtain will be lifted to reveal the true nature of the relationship between Burnstead and the director.

The lifting of the corporate veil can be used only as a last resort, and Lord Sumption made clear that alternative methods should be taken before piercing the veil is considered.

Despite the fact that Lord Sumption had a large influence on the matter of veil piecing, the other judges did not share his enthusiasm. It was accepted by Lord Neuberger, however, that "fraud ruins all," and he agreed with the idea that corporate veil-piercing should be used only in cases of necessity. Even if breaching corporate veil has always been unnecessary, Lord Neuberger claims that it is now.

Even while Lord Mance and Lord Clarke did not accept a position that limited the court's ability to pierce the veil in other instances, they made it plain they were opposed to such view.

To differentiate between examples of evasion or concealment, Lord Wilson and Lord Hale both emphasised the difficulties in doing so. For the sake of the company's contractors, Lady Hale advocated for a narrower definition of "limited liability" that would prohibit the owners of companies from utilising the benefits of limited liability to their harm.

He also claimed that breaching the corporate veil was not a cohesive concept, but rather a name employed by the courts to avoid applying distinct personality principles in dissimilar cases when specific rule of law appears as an exception to the corporate persona principle.

Exemption from Limited Liability Provisions

Several scholars in the United Kingdom and other countries have backed Sumption J's position on a contentious issue in corporate law. Because Sumption J. narrows the standard for penetrating the corporate veil from past conditions of sham, device, mask and façade used in determining earlier cases, this might be the basis for the situation. Due to these conditions, it was difficult to determine whether it was proper to penetrate the veil. Lord Sumption restricted the conditions in which the veil might be pierced to those in which the veil could be raised based on the concept of evasion.

In the decisions of Jones v Lipman and Gildford Motor Co ltd v Horne, Lord Sumption's evasion theory was supported. An attempt to avoid an order for particular performance of a property sale contract was unsuccessful when the property was transferred to a business where the controller was a director, as was the case in Jones v Lipman. As Lord Sumption pointed out, the controller's actions were primarily motivated by a desire to avoid fulfilling an existing legal responsibility. Furthermore, in Gildford Motor Co ltd v Horne, Horne breached a promise he had made to his prior employer not to compete for customers by starting a new firm under his control. It was determined that the veil of secrecy should be pierced and the company's operations suspended in order to benefit the defendant. As a result of the controller's attempt to circumvent his prior employer's agreement, Lord Sumption categorised this case as an evasion.

Conclusion:

Lord Sumption's test in the Prest case helped clear up any uncertainty about company structures and brought clarity to circumstances where the curtain had been peeled back. With regard to breaching the corporate veil in transactions between corporations with group structures, courts previously relied on the DHN Food Distributors Ltd. v Tower economic reasoning previously established by the Prest judgement. The case of DHN Food v Tower Hamlets and the contradiction shown by the courts in following instances are necessary to consider in order to analyse the confusion and the extent to which the Prest case has helped to erase it.

There was a great deal of ambiguity and inconsistency around piercing the veil to obtain justice, which began with Wallersteiner v Moir and was followed by the courts in the instance of a corporation. The introduction of Lord Sumption's test eliminates all of these issues. When the veil might be pierced on morality grounds because it would be disadvantageous to tortious creditors if it were not done, the Lord Sumption test limits the extension of the scope of veil piercing because of the effect of limited liability and distinct personality principles on them. 

Dignam, Alan, and John Lowry. "Company Law, Oxford University Pressm 4th edition, page 30. Thompson, Piercing The Veil Within Corporate Groups: Corporate Shareholders As Mere Investors." Conn. J. Int’l L. 13 (1999): 379-383.

James Mandelsohn, ‘Still “The unyielding Rock?” A critical Assessment of the Ongoing Importance of Salomon v Salomon & Co Ltd [1897] AC 22 in the light of selected English Company Law cases’ (The University of Huddersfield, May 2012) 6

James Mendelson, ‘Still “The Unyielding Rock?” A Critical Assessment of the ongoing importance of Salomon v Salomon & Co Ltd [1897] AC 22

Janice Dean, 'A. Dignam And J. Lowry, Company Law B. Hannigan, Company Law' (2013) 47 The Law Teacher.

Jonathan Crowe, ‘Does Control Make a Difference? The Moral Foundations of Shareholder Liability Corporate Wrongs’ (2012) 75 (2) MLR 159

Tan Zhong Xing, ‘The New Era of Corporate Veil-Piercing: Concealed Cracks and Evaded Issues?’ (2016) 28 Singapore Academy of Law Journal 209, 240

Case Law

DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852

Gencor ACP Ltd v Dalby [2000] 2 BCLC 734

Gilford Motor Co Ltd v Horne [1933] Ch 935

Jones v Lipman [1962] 1 WRL 832

Macaura v Northern Assurance Co. [1961] AC 619

Pey Woan Lee, ‘The enigma of Veil piercing’ (2015) 26(1) ICCLR 28

Prest v Petrodel Resources [2013] 3 WLR 1SC

Salomon v Salomon & Co Ltd [1897] AC 22

Wallersteiner v Moir [1974] 1WLR 991

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