Article Tends to Consider the Company's Legal Personality

The article tends to consider the company’s legal personality status with regards the liability of the company’s shareholders been limited to the amount left on unpaid if any. Furthermore, the concept of lifting the veil of the incorporation to reveal those that are behind the operation of the company’s activities and when the company (directors) can be liable are also consider in depth. This is done by reviewing the 2006 UK Company and also case law and materials.

Introduction

We shall be considering the company’s legal personality status with regards the liability of the company’s shareholders been limited to the amount left on unpaid if any. Furthermore, we shall be considering the concept of lifting the veil of the incorporation to reveal who are behind the operation of the company’s activities and when the company (directors) can be liable. We shall now consider all these in details.

Definition of a Company

By virtue of s.1 [1] , a company means a company formed and registered under the Act. A company is said to be regarded as a limited liability company if the liability of its members is restricted to the amount of shares or guarantee held by its members. And such liability is said to be limited to the amount left unpaid if any by the member (if limited by shares) or limited to the amount the member has agreed to contribute in the event the company is been wound up.

A company is either private [2] or public. Section 4 of the Companies Act 2006, defines a “public company” as a company whose liability is limited by either shares or guarantee and also having a share capital. Furthermore, a company is formed by meeting the requirements that has been set out in the Companies Act 2006 [3] on the registration of a company subject to the satisfaction of the Registrar. A certificate of incorporation is then issued to the company and it then becomes a separate legal [4] entity distinct from its members.

What is the essence of Legal Personality?

Upon incorporation, the subscribers to the memorandum and any other person(s) who might subscribe to the company’s memorandum later on are regarded as a corporate body as stated in the certificate of incorporation. The company can sue and also be sued and can also acquire property in its name. The most important thing about the concept of separateness is that it makes the subscribers to the company immune from any liability in excess of the contribution to the company [5] . The concept of separate personality was established in the case of Salomon v Salomon & Co [6] where the court held that the company was duly registered and was not an agent or trustee for the vendor. In the words of Lord Macnaghten:

A company is at law a different person altogether from its subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. [7] (emphasis added)

It should be noted that the compliance with the provision of the statute granted the company its separate legal status and not the circumstance surrounding the case.

The shareholders of the company do not have any propriety right over the property of the company regardless of the amount of shares held by them. They are only entitled to the bundle of rights attached to their shares [8] . In the case of Bowman v Secular [9] , it was held that the company owns its property and not the individual members of the company. Also in Lee v Lee’s Air Farming [10] , the court was faced with the question whether the company and Mr. Lee were two separate legal entities and thus enables them to enter a valid relationship with one and other. It was held that there exists a master and servant relationship between the two and the widow was entitled to compensation. While in Macaura v Northern Assurance Co Ltd [11] , the House of Lords decided that the timber was the property of the company and Mr. Macaura even though he was the sole owner of the shares of the company had no insurable interest in the company’s property.

It is important at this juncture to note that the concept of separateness and the limitation on the liabilities of members could be likened to that of Siamese twins and the limited status of a company’s liability is the logical consequence of the existence of a separate personality.

Also, it should be noted that the members and directors are separate from the company. The directors are agents of the company and never that of the members even though they were appointed by the members [12] .

Distinguishing between a company and its members

Having considered the concept of separateness of the company from its members and the limitation of liabilities it affords its subscribers, we would now look at the circumstances whereby the courts or legislature have disregarded the separation of the personality of the company and the members on the ground that it has not been maintained. This is widely referred to as the “doctrine of lifting the veil of incorporation”.

The Post-Salomon’s era has seen several circumstances whereby courts have been called upon to apply the corporate personality concept. The Salomon’s case is regarded as the fountain for the concept of separate legal personality and also serves as a referencing tool for courts in lifting the veil of incorporation.

According to Ottolenghi [13] , veil lifting is categorised into: ‘peeping’, where the veil is lifted to get member information; ‘penetrating’, where the veil is disregarded and liability is attributed to the members; ‘extending’, where a group of companies is treated as one legal entity and; ‘ignoring’, where the company is not recognised at all. In Atlas Maritime Co SA v Avalon Maritime Ltd [14] , Staughton LJ defined ‘piercing the veil’ as:

…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, therefore should mean to have regard to the shareholding in a company for some legal purpose. (emphasis added)

This doctrine which allows the court to peep, penetrate or ignore the principle of separate legal personality has been one of the most litigated issues in company law and has also been heavily criticized as sacrificing substance for form. Thus, in Gorton v Federal Commissioner of Taxation [15] , Windeyer J commented on the strict application of the doctrine of veil lifting by courts by saying that has brought the law into “unreality and formalism.”

We will take a look at the situations where the judiciary or legislature is prepared to disregard the separate legal personality of a company and lift the veil of incorporation. These are said to be exceptions to the concept of legal personality.

The court would not hesitate to pierce the veil of incorporation where a company was formed to perpetrate a fraud or used in order to evade other legal obligations. In Jones v Lipman [1962] 1 WLR 832 [16] , it was held that the defendant formed the company in other to evade the sale of the land and the judge regarded the company has a facade. While in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [17] , the court had to determine whether the company was an ‘enemy’ during the First World War. It was decided in the case that the company was indeed an ‘enemy’.

The importance given to fraud tends to differ from jurisdiction to jurisdiction. For instance, under the United States law, courts would not disregard the concept of separate legal personality without the proof of fraud. [18] But all that is required under the English law for courts to lift the veil is the existence of special circumstances indicating that it is a mere facade concealing true facts.

Another category to be considered is a situation where there exists an agency relationship. This occurs mainly between parent companies and its subsidiaries. The courts always try to see if there was an express agency agreement between the subsidiary and the parent company. In Smith, Stone and Knight v Birmingham Corporation [19] , the court laid down six requirements that need to be satisfied to empower the court to pierce the veil. The following are the six requirements:

Are profits of the subsidiary treated as profits of the parent?

Were persons conducting the business of the subsidiary appointed by the parent?

Was the parent the “head and brains” of the trading venture?

Did the parent govern the venture?

Were the subsidiary company’s profits made by the skill and direction of the parent?

Was the parent in effective and constant control of the subsidiary?

While in Adams v Cape Industries Plc [20] , the court had to consider whether a group of companies could be treated as a single economic entity. The court found that the business activities of the subsidiary were free from the control of the parent’s company. But the court in Samengo-Turner v J&H McLennan (Services) Ltd [21] gave a contrary decision and held that a group of companies was to be treated as a single entity on the basis of their single economic interest.

Another approach in which courts will lift the veil is in the interest of justice. To do this, there must be an existence of special circumstances which indicate that the company is a mere facade concealing the true facts [22] . In DHN Food Distributors Ltd v Tower Hamlets London BC [23] , the claim was allowed on the grounds that the appellant was capable of controlling its subsidiary in all forms. But the decision was challenged by the House of Lords in Woolfson’s case. In succeeding on this approach, one must prove that some fraudulent act had been committed by persons acting for the company. In Creasey v Breachwood Motors Ltd [24] , the court applied the interest of justice approach in lifting the veil of incorporation and found Breachwood Motors Ltd liable for the liability owed to Mr. Creasey by Breachwood Welwyn Ltd whose assets were transferred to Breachwood Motors Ltd. But the Court of Appeal had to overrule the lower court on the grounds that not only is the motives of those behind the alleged facade relevant but also consideration is to be given to the issue of breach of their duties as directors [25] .

Considerations must be given to the relevant statutory exceptions to the doctrine of piercing the veil of incorporation as contained in the Insolvency Act 1986. The provision of s.212 [26] creates room for the veil of incorporation to be lifted and allows the court to compel a delinquent director or liquidator to contribute towards the company’s assets. In Re Purpoint Ltd [27] , the proprietor of a company was ordered under the provision of s.212 of the Insolvency Act 1986 to contribute towards the assets of the company which was in the process of liquidation. Furthermore, the veil could also be lifted in instances where the director is found liable of wrongful trading or fraudulent trading (s.213 and 214 of Insolvency Act 1986).

The important thing to note however is that although a separate legal entity, a company or corporation can only act through human agents that compose it. As a result, there are two main ways through which a company becomes liable in company or corporate law to wit: through direct liability (for direct infringement) and through secondary liability (for acts of its human agents acting in the course of their employment) [28] .

Upon incorporation, a company is said to be regarded as an artificial human being capable of several rights such as instituting legal proceedings against anyone and also being opened to legal suits. The decision-making of the activities of the company is left in the hands of human beings i.e. the directors. They are regarded as agent of the company and thus have created a concept of agency between the Company (being the Principal) and the directors (being the Agent). The board of directors is said to be the mind of the company, thus has the authority to bind the company [29] . This is referred to as the “alter ego doctrine” or the “Organic Theory” which is an opposite of the doctrine of separate legal entity.

In the past courts were experiencing difficulties in finding companies liable for vicarious liability. It was not until the case of Campbell v Paddington [30] that the court had to rule that companies could be liable of tortuous act. Thus a company can be vicariously liable for the act of its agent (the employee). The doctrine was established in Lennard’s Carrying Co. v Asiatic Petroleum [31] , where the House of Lords held that L was the alter ego of the company and not merely a servant or agent as his was the directing mind and will of the company, and there was a presumption that his action was the action of the company itself within s.502 of the Merchant Shipping Act. Consideration will be given to the words of Haldane LC:

A corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation… somebody who is not merely an agent or servant for whom the company is liable upon the footing respondeat superior, but somebody for whom the company is liable because his action is the very action of the company itself [32] . (emphasis added)

To establish a successful claim against a company, all that needs to be done is to pinpoint an individual who could be said to be the ‘brain and mind’ behind the company and such individual has the authority of the company to do so.

Lord Denning in Bolton (Engineering) Co Ltd v Graham & Sons [33] , drew a distinction between the major decision makers in the company and those that simply carry out the decision. In Tesco Supermarkets Ltd v Nattrass [34] , Tesco was faced with prosecution for the act of a manager of a particular branch of the supermarket who had failed to check the stock for the proper pricing of some goods which were advertised at a reduced price but was sold at a higher price. The court was faced with deciding whether a manager of a particular branch could be said to be the directing mind which could lead to finding Tesco liable for such a person’s action. Whereas in Re Supply of Ready Mixed Concrete [35] , the court held that the company was only capable of acting by its agents and, for the purposes of the 1976 Act, in its capacity as a supplier of goods it was to be judged by its actions and not its statements. The decision was based on the fact the employee was acting within the course of his employment.

Who are those that could be said to be the directing mind of the will of the company? These include persons who hold senior positions in the general management of the company and they are directors, managers, secretary etc.

A modern approach to vicarious liability was established by Lord Hoffman in Meridian Global Funds Management Asia Ltd v Securities Commission [36] , the question before the court was who were the directing mind of the company with regards to attribution. This approach was seen to support the principle of separate legal personality. What this simply means is that the company could actually be held liable for the acts of those who are entrusted with carrying out the decisions of the senior officers in the company. In McNicholas Construction Co Ltd v Customs Excise Commissioners [37] , the acts of the employees of a company who were engaged in VAT arrangements, were held to render the company liable. The approach of Lord Hoffman was equally applied with some success in the case. Also, in Morris v Bank of India [38] , the issue before the court was to determine whether Mr. Samant was to be found to have knowledge of the fraud and the court held that Mr. Samant’s knowledge of the five transactions could be attributed to the company since he (Samant) had been given the ultimate authority to supervise the transaction. But in cases whereby the individual entrusted with the responsibility of directing the affairs of the company has ceased to do so any act of such an individual would not be attributed to the company. For this we could see the Canadian landmark case of Canadian Dredge & Dock Co Ltd v The Queen [39] where the Supreme Court observed that liability could only be imputed on the company if the act was done on the basis of directing the will of the company.

It should be noted that cases of embezzlement do not apply to the doctrine of attribution. For instance, where a director had misappropriated company money to his own use as it was in the case of Stephens (Inspector of Taxes) v T Pittas Ltd [40] , where it was decided that the company could not be said to have authorized any loan to the director since there was never an agreement between the two parties.

Another issue to consider is who should be held responsible for accidents, injuries and death at workplace. Can we accuse an inanimate thing such as a corporate entity of such a crime? The answer to this was NO [41] due to that fact that it was difficult to identify the alter ego responsible for the mens rea of such a corporate entity. It was not until the promulgation of the Corporate Manslaughter and Corporate Homicide Act 2007 [42] which makes provision for companies to be guilty for the offence of ‘corporate manslaughter’. The law makes companies to be held accountable for any lapses in the maintenance of health and safety at workplace. To succeed in an action for corporate manslaughter, one needs to prove “gross breach” of duty of care on the part of the management of the company.

The veil of incorporation could also be said to be lifted in cases of finding who is liable for a tort which was committed by a shareholder (who in most cases happens to be a director) in the course of carrying out the company’s business activity. Recourse would now be made to the case of Williams v Natural life Health Foods Ltd [43] , where a negligent misstatement claim made by a majority shareholder of the company was the issue in contention. It was held that to hold a director personally liable for negligent misstatement, the claimant must have been made to believe that the director was going to be personally liable. Thus the action of the claimant failed because there was no evidence of such in the case. While in Standard Chartered Bank v Pakistan National Shipping Corp [44] , the House of Lords found a director to be personally liable in tort of deceit.

Another situation to consider is when a director and a majority shareholder can be said to be liable as a joint tortfeasor. To answer this question, we would take a look at the case of MCA Records Inc v Charly Records Ltd [45] , where it held that for director to be held personally liable for the copyright breach, it must proven that he actually procured or instigated the breach.

Conclusion

The ideology behind the lifting the veil of incorporation is to seek remedies to the abuse of doctrine of legal personality of an incorporated company.

Over the years, the court has discussed in this article have been reluctant in application of this doctrine while some were seen to have disregarded the doctrine and reveal who are those behind the veil. But it must be noted that the essence of lifting the veil incorporation is to ascertain who damages are to be attributable to.

Having said this, one must understand that the various categories [46] that have been discussed in the article are mere guiding principle to assist the courts. But courts have shown over the years to consider each case based on its unique circumstance.