Company is a Legal Person

A company is a legal person, though an artificial one. However, it enjoys as much as the same rights and is subject to as much as the same duties as a natural person. A company, upon incorporation [1] , attains the status of a legal personality, separate from its members, capable of suing and being sued in its own name and therefore becomes a separate legal entity. [2] This implies that the company is capable of committing wrongs and thus can be made liable for such wrongs whereby limiting the liability of its member. [3] These concepts of separate corporate personality and limited liability were firmly established by The House of Lords in Salomon’s case which demarcated a line between the company and its members often known as the corporate veil or the veil of incorporation. [4]

The English Courts applies this principle in most of the cases and does not generally go beyond this veil of incorporation. However in exceptional circumstances the English Courts may ignore the separate corporate personality of a company and pierce the veil of incorporation whereby regarding the rights and liabilities of the company as rights and liabilities of its members or shareholders but there are no set rules for doing the same. [5] In the absence of any set Directives or fundamental rules of the European Community on this issue, different jurisdictions follow different approach. [6] This essay offers a comparative study of the approach of other jurisdictions such as U.S.A., Germany, Canada, Australia, Singapore, France and Argentina on piercing the corporate veil to show their unfavourable contrast to the English approach.

Doctrine of Separate Corporate Personality:

The two key consequences of Incorporation of a limited company are separate legal personality and limited liability. Separate legal personality of a company means that it has rights and liabilities separate from its members, shareholders and directors. [7] Initially it required at least 25 members to incorporate a company which was then reduced to 7 members, but it was soon appropriated that a company can actually be controlled by one single member and the rest could be mere nominees in the formation for the purpose of incorporation. [8]

In Salomon’s case, Mr. Salomon, the proprietor of a successful leather business, incorporated a limited liability company with his wife, four sons and one daughter. Unfortunately, within a year of incorporation, the company went into insolvency despite efforts made by Mr. Salomon to keep it afloat. It was claimed by the creditors that A. Salomon and company was a one man company which was just an agent to Mr. Salomon and thus Mr. Salomon is personally liable to reimburse the creditors. On this Lord Hershell criticizing the decision of the lower courts stated that:

“It is to be observed that both courts treated the company as a legal entity distinct from Salomon and the members who composed it, and therefore as a validly constituted corporation… Under the circumstances I am at a loss to understand what is meant by saying that A Solomon and Co Ltd is but an alias for A. Salomon.” [9]

Thus it was held that the company is a separate entity and Mr. Salomon was not personally liable to pay to its creditors.

This rule has become a fundamental principle of Modern English Company Law and despite various changes being introduced to the Companies Acts (a private limited company may now be incorporated by a single member and a public limited company by two [10] ) since 1897, no attempts have been made to revise the rule set in the Salomon’s case. [11]

A similar approach has been taken by the English courts in dealing with group of companies. Templeman LJ in Re Southard Ltd held that:

“A parent company may spawn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the parent company. If one of the subsidiary companies to change the metaphor, turns out to be the runt of the tiller and declines into insolvency to the dismay of its creditors, the parent company and the other subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary.” [12]

However, in exceptional cases the English courts may ignore the separate legal personality of a company and look beyond the veil of incorporation.

Limited Grounds for dislodging the corporate veil by English Courts:

Staughton LJ, in Atlas Maritime Co SA v Avalon Maritime Ltd stated that:

“To pierce the corporate veil is an expression that I would reserve for treating the rights and liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, on the other hand, should mean to have regard to the shareholding in a company for some legal purpose.” [13]

The English Courts do occasionally look behind the corporate veil but only on exceptional grounds such as:

National Emergency:

The English Courts may lift the corporate veil of a company in a situation where the company may be observed to have acquired an enemy character in times of war. This is possible in a situation where a company incorporated in England is run and controlled by citizens of a country which had become an enemy in times of war. [14] In such a situation the English Courts may go behind the corporate veil to establish whether the company is to be categorised as an enemy.

Fraudulent Abuse:

The Principle set up in Salomon’s case was often looked upon as a shield to the members of a company. This shield could sometimes be misused by individuals incorporating a company for inappropriate and illegitimate purposes of surpassing an existing obligation with a third party. [15] Such pre-existing obligation may be to abstain from doing something [16] or a liability to do something in respect of a third party. [17]

The English courts tend to lift the veil only if it can be shown that a company is a mere facade hiding the true facts. [18] Thus the English Courts tend to look into motive behind incorporation of a company for determining whether to ignore the separate legal personality of the company or not. [19]

Agency, Corporate Groups and single economic unit:

The English Courts in deciding whether a subsidiary is an agent or not takes into consideration the questions of common profits, appointing staff, “head and brains”, and the directing and controlling body. [20]

In a landmark Judgement in DHN Food Distributors Ltd v. Tower Hamlets London Borough Council [21] in which one company in a group of companies owned and controlled the others, the Court considered them as single economic unit and thus ignored the separate legal entity of each company in the group.

Thus the English Courts may ignore the separate legal entity of the subsidiary company if the agency relationship is proved.

Statutory Provisions:

Failure to obtain a trading certificate [22]

Failure to use Company’s name [23]

Disqualified Directors [24]

Just and Equitable Winding Up [25]

Fraudulent Trading [26]

Wrongful Trading [27]

Phoenix Companies [28]

Unfair Prejudice [29]

Approach of other Common Law Jurisdictions: (U.S.A., Canada, Australia, Singapore)

U.S.A.:

Judge Fuld stated in Walkovszky v. Carlton stated that:

“broadly speaking … courts will pierce the corporate veil, whenever necessary to prevent fraud or to achieve equity” [30]

Thus the basic principle followed by the courts in the U.S. in lifting the corporate veil that of equity. The U.S. courts have applied the principle of equity in deciding whether undercapitalization can lead to a promote injustice or commit fraud. [31]

In Minton v. Cavaney it was held that:

“The equitable owners of a corporation, for example, are personally liable . . . when they provide inadequate capitalization and actively participate in the conduct of corporate affairs.” [32]

Therefore, the U.S. courts ignore the separate legal entity of a company when it is purposely undercapitalization in order to surpass a liability or a debt. [33]

A similar approach has been taken in applying the equity principle in cases of fraud, sham, and agency. In deciding who is responsible for the wrong the American courts generally apply the twin rules of control and improper conduct. [34]

Canada:

The Canadian Company Law treats companies as corporations. The Canadian Courts are not reluctant in finding persons controlling the corporation personally liable in cases of legal facade in order to achieve justice. [35] Statutory provisions have been laid down in the Canadian Law in order to hold the Directors personally liable in various situations of wrongs concerning shares, dividends and insolvency. [36] Thus it can be said that the Canadian Courts although respecting the separate legal personality of a corporation does not hesitate to go beyond Salmon’s principle to meet the ends of Justice. [37] Instances of corporate veil being lifted on grounds of alter ego, instrumentality, puppet corporations, and agency relations exemplify the sway of U.S. Law on Canadian Corporate Law. [38] Moreover, the Canadian approach in lifting the corporate veil is aimed at undoing the damage caused by a violation of a right. [39]

Australia:

Jenkinson J, in Dennis Willcox Pty Ltd v Federal Commissioner of Taxation, stated that:

“The separate legal personality of a company is to be disregarded only if the court can see that there is, in fact or in law, a partnership between companies in a group, or that there is a mere sham or facade in which that company is playing a role, or that the creation or use of the company was designed to enable a legal or fiduciary obligation to be evaded or a fraud to be perpetrated.” [40]

The Australian Courts follow this principle in lifting the corporate veil however are not limited to the above grounds. Factors concerning agency, fraud, sham or facade, group enterprises and interest of justice are also considered by Australian Courts to be sufficient grounds for lifting the corporate veil [41] . Moreover, the statutory provisions lays down the Directors liability in case of insolvency. [42] The reason behind such imposition is that the Australian law holds the view the person responsible for a doing is liable if the doing goes wrong. [43] An Empirical study shows that the corporate veil is frequently pierced by English Courts on grounds of contract, however, the most common ground for such an action is that of unfairness where the corporate veil is lifted to achieve justice. [44]

Singapore:

The company law of Singapore lays down similar principles of separate legal entity as that under the English Law. [45] Specific provisions have been laid down in the statute for cases of debts contracted by a company without any intention to pay shall result in lifting the corporate veil. [46] Another exception arises in case a company is wound up with an intension to defraud the creditors. [47] The court may also lift the veil if dividends are paid without any profit. [48] Apart from these statutory exceptions the Singapore Courts may also lift the veil in accordance with the common law exceptions of fraud and existing obligations. [49] Although the Singapore Company law is similar to the U.K. Law, however the Courts are not reluctant in lifting the corporate veil in order to meet the ends of justice.

Approach of Civil Law Jurisdictions: (Germany, France and Argentina)

Germany:

The German Law on separate legal personality of a company is well settled in the statute. [50] The law on controlling and controlled enterprises (Konzernrecht) treats the parent and subsidiary company as one economic unit and holds the parent company liable for the annual losses of its subsidiary. Even in the absence of a contract between the parent and the subsidiary company, the German Law (De Facto Konzern) requires the controlling company to recompense the controlled company for any losses incurred. Thus the German corporate environment is more affable to the creditors of a company than its members and applies the principles of equity and good faith while lifting the corporate veil. [51]

France:

France initially considered one-man companies to be illegal. However, it enacted a statute in 1985 whereby allowing companies to be incorporated by a single person. [52] Being a civil Law jurisdiction, France has a codified law and the piercing of the corporate veil mainly takes place while considering the contract under which the company is formed. If the contract is made with an intension to defraud it is considered to be a “dolus” and the courts are likely to lift the corporate veil. However, control and agency has very limited scope in lifting the corporate veil in French courts mainly look into the contract to find out the liability and control under the French law does not result in lifting the corporate veil.

The point of consideration, although have a very limited ground for lifting the corporate veil, however are not reluctant in doing so as and when the exceptions apply. [53]

Argentina:

One man companies are considered to be illegal under the Argentina Law. If a company is incorporated in the Argentine law is found to be owned by one member (as in Salmon’s case), such a company will be considered to be a sham or a fictitious company under the law. Principles on fraud in similar to that of Germany and France and the courts look into the intension behind making the contract in order to conclude if a fraud has been committed. Like any other civil jurisdiction it is not possible to lift the corporate veil based on the principle of agency, control or abuse of rights. [54]

Contrast between English Courts and other jurisdictions:

The English Courts are reluctant in applying the exceptions to Salomon’s principle even in the cases where it seems appropriate the lift the veil. [55] This shows dissimilarity with United states and other jurisdictions where the veil is lifted more readily to achieve justice. When the Court lifted the corporate veil in DHN [56] case, it was believed that the trend might change now and the wrongdoer can no more hide behind the shield of Salomon’s case. However, the courts once again made it clear that the Salomon’s shield is very much intact by deciding not to pierce the veil in a similar case like DHN. [57]

However, in Adam v Cape, the English courts even after observing that the subsidiary company did act as an agent to the principle company on some occasions and also admitting the wrongful intensions of the subsidiary restrained from lifting the veil on the ground that although the parent company supervised and controlled its subsidiary in U.S., however since the subsidiary company was in a different jurisdiction and hence the corporate veil cannot be lifted. [58] Thus we can say that a downward trend can be seen in the English courts lifting the veil in cases which require lifting the corporate veil. [59] The courts have been seen to apply Solomon’s principle even when the agency relationship can be clearly seen. [60]

The points of contrast between approach of English courts and other jurisdictions is not limited to the grounds on which the separate legal entity of a company is ignored, however the main point of consideration is in the application in the cases that required to so. It can be clearly seen that all other jurisdictions apply these exceptional grounds as and when required. For instance, Australia and Singapore has similar grounds for lifting the corporate veil as that of U.K. however they are not reluctant in applying them. On the other hand civil law jurisdictions only follow their statute in lifting the veil, however, they too apply it as and when required.

In my opinion the approach of English Courts is matter of concern as the courts stick to the Salomon’s principle even when justice demands otherwise. The Courts shall apply English classic maxim of “ubi jus ibi remedium” (where there is a right there is a remedy) to these cases and self evaluate its approach in lifting the veil. The aggrieved parties seem to have a “right” but no “remedy” to the “Salomon Shield” granted by the English Courts in almost all the cases.

Conclusion:

This essay has sought to discuss the distinctive approach on ignoring the principles of separate legal entity and limited liability in different jurisdictions to show contrast with the approach of the English Courts.

The mechanism of piercing is not codified in the statute of common Law Jurisdictions, however common principles of fraud and control are applied in lifting the corporate veil.

On the other hand, the Civil Law Jurisdictions like Germany, France, Argentina, and Lithuania follow principles laid down in the respective statutes while lifting the corporate veil. The courts analyse each case on the bases of rights, abusive control and liability and are not reluctant in lifting the corporate veil. However, the agency principle in civil law jurisdictions have a limited scope as the courts rely upon the law of contract and an undisclosed third party is not held responsible for acts of another.

As shown above, U.S.A. is sharp approach in lifting the corporate veil and Canada has now started to follow the trend. Even countries like Australia and Singapore which follow similar principles of lifting the corporate veil as that of the U.K. are not reluctant in applying these principles as and when they find it essential.

Thus in my opinion, different jurisdictions in both civil and common law have some common (like sham and facade) and some varied (like undercapitalization, agency and control) grounds to ignore the principle of separate legal personality. However, they can all be compared together with the U.K. on the bases of their approach in the application of whatever principles adapted by them. Although it has been over hundred years since the Salomon’s principle was laid down by the House of Lords, yet it appears that the English courts only take fraud as an exception to the rule and shows reluctance in applying any other exception. On the other hand, the approach of all other jurisdictions, distinguish unflatteringly from the English approach in applying the exceptions to the rule of separate legal entity.