Business Advice Essay, Research Paper
In advising Gus, Gloria, and
the liquidator (collectively known as the
?claimants?) as to the sustainability in law of their respective claims in
relation to, Rajinder (hereinafter
referred to as ?R?), Sarah (hereinafter
referred to as ?S?), and the liquidated company Exotic Holidays Ltd. (hereinafter referred to as ?E Ltd.?),
the core issue appears to be that of corporate identity as opposed to personal
identity of the members of the corporate entity. Issues relating to the general
effects and consequences of incorporation are also discussed, namely, issues of
separate legal personality, liability and related exceptions, which in turn
necessitates consideration of the ?corporate veil? and under what circumstances
the courts will be prepared to assign liability etc beyond the corporate entity
to the members. Before considering
individual claims, some thought is given to the general or fundamental issue of
legal identity, on the grounds that this is central to all the situations.
The most important case in this regard is undoubtedly Salomon v Salomon
[1897] AC 22 (hereinafter referred to
as ?Salomon?), which also provides an apt starting place.The fundamentally important
principal that emerged from Salomon is that a company, once incorporated,
is a legal entity in its own right. In other words, the company itself, in this
instance E Ltd., is a distinctly separate being from those that are its members
(R and S), and as such, has ?individual? rights and liabilities accordingly.This has two immediate
results. Firstly, the company, not its members, must seek a remedy despite the
fact that in reality, it will be the members, not the company, that conclude a
remedy is needed to address some wrong doing to the company. Secondly, the
alternative situation in which the company itself must be sued directly, not
the members personally, in the event that the company itself has committed some
wrongdoing. The overall result is that
members? personal liabilities and the liabilities of the company are regarded
as separate. For all intents and purposes, the courts have traditionally drawn
a divide between them. This separation of members and company, or rather the
distinction between them, is often referred to as the ?corporate veil?.The Salomon
principal has been generally upheld by the courts, sometimes with severe
consequences. In the Irish case Macaura v Northern Insurance Company Limited
[1925] AC 619, the court upheld the argument of an insurance company that
it was not liable to pay out if items were insured on a member?s own name and
not ?his? company?s name despite the fact that the items being a part and
parcel of the company?s business. The court maintained a rigid divide between
the member and the company.In more modern
times, Slade LJ essentially reiterated the continuing validity of the Salomon
principal in Adams v Cape Industries [1990] Ch 433,??the court is not free to disregard the principal of Salomon?merely
because it considers that justice so requires??This principal
was more recently again affirmed in Ord & Another v Belhaven Pubs
Limited [1998] BCC 607.However, as
resolute as the principal stands, there are exceptional cases where the court
will ?lift the corporate veil? either at common law or by statute. This was
considered in Atlas Marine v Avalon Maritime [1991] a All ER 769,??.. to pierce the corporate veil
is an expression I would reserve for treating the rights or liabilities or
activities of a company as the rights or liabilities or activities of its
shareholders??There are various
circumstances where the court will lift the veil. In the context of liability,
such a course of action by the courts will mean that the members themselves
will be held liable beyond the company. In other words, liability will not stop
at the company, as per the Salomon principal, provided the court is
satisfied that certain conditions are met.?
It is these conditions that
need to be considered in each individual case with respect to the claimants,
since from the given facts, it appears that R and S seek to rely on the Salomon
principal in order to divert any potential liability from themselves personally
to E Ltd as a separate legal entity.? —Gus.According to the given
facts, Gus has issued a writ against R arising from alleged ??conduct in breach of contract?? that
predates and overlaps the date of incorporation of the company.The alleged breaches extend
from April 1998 to October 1998, while R sold his business to E-Ltd in June
1998 while the company itself was incorporated on the 30th June
1998. Therefore, it appears that Gus had been dealing with E Ltd. and not R
personally after the incorporation.Ordinarily, by application
of the Salomon principal, the action against R would fail on the grounds
that Gus was dealing with? E Ltd. and
not with R.However, as mentioned above,
there may be a way in which the courts may be asked to life the veil and seek
action against R directly. This may happen if R is suspected of fraud, although
not necessarily of a criminal nature. In this case, equitable fraud would
suffice. Put another way, the obligations binding the member are extended to
the bind the company.In Jones v Lipman [1962]
1 All ER 442, the sale of a piece of land was at the centre of a contract.
The seller had subsequently changed his mind?
and in order to avoid an order of specific performance of his
contractual obligations, he transferred his land into the name of a company.
The court refuses the defence that the land was now in the possession of the
company and granter an order of specific performance against the seller.Likewise, in Gilford
Motor Company Limited v Horne [1933] Ch 935, the court held that a company
that constituted a mere ?sham? and formed to avoid contractual obligations
would not be tolerated. In this case, the court again lifted the veil and
issued an order against an individual who was not even a member of the company
in question.Similarly, Gus must show that R
was in effect ?hiding? behind E Ltd. If this can be achieved, it seems possible
that the court may grant a remedy against R directly. However, if R can show that
the sale was a legitimate deal in the sense that the sale of R?s former
business to E Ltd. was not a ?sham? and was formed merely to avoid a
contractual obligations etc, it seems unlikely that the courts will follow the
route taken in Jones v Lipman or Gilford v Horne in light of the
decision in Adams v Cape Industries where the courts refused to lift the corporate veil. Lord
Keith commented in Wolfson v Strathclyde Regional Council [1979] that
the Salomon principal should only be excluded in cases of a fraudulent
nature where facts were being concealed by a ruse.That said, if R
seeks to rely on Adams v Cape Industries, there might be a problem
considering that this case was distinguished from a similar case, Creasey v
Breachwood Motors Limited [1992] BCC 638 partly on the basis of the timing
of the transfer from entity to entity. The court may well consider the timing
of the sale, i.e. half way through the alleged breach of contract, as a
relevant factor and may well view this as some sort of avoidance manoeuvre on
R?s part. It is worth
bearing in mind that Creasey v Breachwood was subsequently criticised in
Ord v Belhaven. Hobhouse LJ stated, ??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??(Although the
grounds for the criticism might well not apply to the present case.)In summary, the
facts are not sufficiently clear to warrant a clear conclusion, but it appears
that the main obstacle to Gus succeeding would be the ability to demonstrate
that R sold his business to E Ltd. in order to avoid contractual obligations
via assumed reliance on the Salomon principal. Notably, Lord
Keith commented in Wolfson v Strathclyde Regional Council [1979] JPL 169
that the Salomon principal should only be excluded in cases of a
fraudulent nature where facts were being concealed by a ruse. Such as ruse must
clearly be demonstrated.—Gloria (hereinafter referred to as ?G?).From the given facts, G is
stated to have been a ??former client??
of E Ltd. Again, with regard to the
doctrine of the corporate veil, G would prima facie only have a claim against E
Ltd. and not R directly or personally. Unless, the courts can again be
persuaded to lift the corporate veil.Members of a company have a general
fiduciary duty of care which should govern all their conduct within the
framework of the company in question, and unless it can be shown that they have
breached that duty by gross negligence or acts of bad faith, no personal
liability claims can generally be successful against them. In Williams v Natural Life Health Foods Ltd
(1998) 2 ALL ER 577, the House of Lords held that the corporate veil should
only be lifted in extreme cases and furthermore, there must be some sort of
personal misrepresentations made by the member of the company, who accepts as
much, and that the plaintiff would have had to have relied on these
misrepresentations. The House of Lords refused to lift the veil in
that case on the grounds that there had been no contact between the parties and
in any event, there was no evidence that the plaintiff had believed that the
defendant had accepted any personal liability.In summary, it seems
unlikely, based on the given facts, that G?s action directly against R will
succeed. However, taking the decision in Williams v Natural Life into
account and the stated criteria upon which the House of Lords refused to lift
the corporate veil, if G can meet those criteria, her claim might well be
sustainable.— The Liquidator (hereinafter referred to as ?L?).Again, the principal from
Salomon is the starting point with regard to L?s claim against R and S.A further parallel can be
drawn with Salomon. The liquidator in Salomon claimed that the company therein
was void as it was essentially a ?sham?
on the grounds that the company was in reality nothing more that Salomon?s ?agent?, due in part to it being a
?one-man company?.. However, the House of Lords
held that it was irrelevant that the company was in effect a ?one man company?? and that provided the company had been
incorporated correctly, the fact that one person held an overwhelming majority
of shares in the company was not relevant either.More specifically, it was
held in Kodak Limited v Clark [1905] 1 KB 505 that a 98% shareholding in
a company does not by itself create a member/agency relationship. Therefore any similar
arguments on the grounds that E Ltd. was basically an ?agent? of R?s due to his
large shareholding will fail due to the ruling in Salomon and Kodak v Clark…
Generally speaking, L will be
unable to rely on a common law based approach in asking the court?s to life the
corporate veil against R and S. However, there may be a
potential route via statute. Section 213 of the Insolvency Act 1986 in
effect states that where a person has continued to trade through a company
knowing full well, i.e. fraudulently, that the company will be unable to duly
repay creditors, the person may be held personally liable to an extent
determined by the courts. Section 214 of the same Act, relevant to companies in
insolvent liquidation (as is the case with E Ltd.), extends beyond a clear ?intent to defraud creditors?, as per
s213, to include ?wrongful trading?
whereby the person knew or ought to have known that creditors will be unable to
be duly paid while continuing to trade through the company until the time of
the winding up order being granted.? In order for the s213 to
apply, L must produce evidence of a fraudulent intent by R and S to defraud the
creditor he represents. Alternatively, under s214, L must demonstrate ?wrongful
trading? which might be an easier proposition.When considering s213,
s213(4) directs the courts to take various things into account. Under s213(4)
the courts are directed to consider whether the member/s had acted reasonably
under the circumstances, or more specifically, ??the facts which a director of a company ought to know or ascertain,
the conclusions which he ought to reach and the steps which he ought to take
are those which would be known or ascertained, or reached or taken, by a
reasonably diligent person having both? (a) the general knowledge, skill and experience that may reasonably be
expected of a person carrying out the same functions as are carried out by that
director in relation to the company, and (b) the general knowledge, skill and experience that that director has.
Therefore in summary, in
order for s213 to apply, these standards must be applied to the facts of the
present case, and if it is found that R and S had fallen below the required
standards, an application via s214 might well be sustainable in that the courts
may well lift the corporate veil and extend liability to R and S in their
personal capacities. Bibliography.?Farrar?s
Company Law??? J.H. Farrar & B.M.
Hannigan ?Company Law?
(Statutes)? Butterworths ?Company Law?
(Cavendish)Internet
Sources.?Rethinking
Company Law and Practice?? The Hon Justice Michael Kirby
(www3.lawfoundation.net.au) ?Company
Law? (www.bigwig.net) ?Limited
Liability? a necessary consequence of incorporation ??? Aiden Small
(www.nuigalway.ie) ?Company
Law? Corporate Personality? (www.ukcle.ac.uk) ?Piercing the
Corporate Veil? (www.themis.wustl.edu) ?The Doctrine of
Separate Legal Personality? (www.law.anu.edu.au) ?Lifting the
Corporate Veil Revisited? (www.acca.org.uk)