One of the effects of integrating a limited liability company is that it becomes a separate legal entity. This means that it is has a separate and distinguishable personality from the members of the company, and so becomes a individual in a legal sense. [ 1 ] Thus the company bears its ain liabilities and debts separate from the stockholders and has rights and responsibilities. [ 2 ] The rule of the separate personality of a company was discussed at length in the instance ofSalomon v. A Salomon, [ 3 ] where Lord Macnaghten stated:
…The company is at jurisprudence a different individual wholly from the endorsers to the memoranda ; and, though it may be that after incorporation the concern is exactly the same as it was before, and the same individuals are directors, and the same custodies receive the net incomes, the company is non in jurisprudence the agent of the endorsers or legal guardian for them. Nor are the endorsers as members apt, in any form or signifier, except to the extent and in the mode provided by the Act.”[ 4 ]
Consequently, the fact that one individual owned all or bulk of the portions of the company did non do that individual the exclusive proprietor of the concern in the eyes of the jurisprudence. This was emphasized in the Salomon instance when Lord Macnaghten stated: I can non understand how a organic structure corporate therefore made capable ” by legislative act can lose its individualism by publishing the majority of its capital to one individual, whether he be a endorser to the memoranda or not.” [ 5 ]
In the instance ofLee V Lee Air Farming Ltd, [ 6 ] Lord Morris made it clear that it was possible for an person to come in into a contract with his ain company. The justice stated that if the company was accepted to be a separate legal entity, so there was no ground to dispute the cogency of any contract between the company and another person, even if that person was its bulk stockholder. It was the judge’s position that control would in fact remain with the company irrespective of whoever the company’s agent was.
Therefore, as a separate entity, the company can have belongings which would belong entirely to it and non to its members. Neither a member of the company or a creditor has any involvement in that belongings. [ 7 ] The company as a legal personality does non keep the belongings in trust for the stockholders. [ 8 ] They merely have no right to it.
The purpose of this treatment is to look at the separate legal personality theory in footings of groups of companies and detect what the attitude of the tribunals is with respect to the theory and group companies. The first measure in this will be placing the exclusion to this theory, which is described as raising the corporate head covering, when it can be used and the attitude of the tribunals to this theory in past instance jurisprudence. Traveling frontward, the application of the rule and its exclusion will looked at from an international point of position. Finally, the treatment will concentrate on groups of companies with the assistance of instance jurisprudence and an analysis will be made about the recent stance of the tribunals sing the theory.
Under certain fortunes, it is possible for the tribunals to look behind the company’s model or separate personality to do the members of the company apt for a error. This procedure is referred to as ‘lifting the corporate veil.’ [ 9 ] In every bit much as the corporate head covering saves stockholders from liability by dividing them from the company, it besides makes it possible for them to conceal behind the corporate head covering in order to victimize creditors. [ 10 ] It has been suggested that the corporate head covering would be lifted by the tribunals if there was grounds of fraud. [ 11 ]
In the yesteryear, the UK tribunals have been criticized for demoing small reluctance in raising the corporate head covering. [ 12 ] An illustration of this is in the instance ofDaimler Co Ltd v. Continental Tyre and Rubber Co ( Great Britain ) Ltd[ 13 ] where the Continental Tyre company sued Daimler company for debts owing. The tyre company was incorporated in the UK but all except one of its stockholders were German occupants. All the managers of the company besides lived in Germany. The issue was whether the company had the right standing in England to action and retrieve a debt when there was an on-going war between Britain and Germany at the clip. The tyre company was allowed to subscribe a drumhead judgement which was appealed, and Lord Reading, while confirming the old determination, emphasized that one time a company was formed and registered under the Companies Act, it had a existent being with rights and liabilities as a separate legal entity. It was a different individual wholly from the stockholders on the registry hence if the plaintiff in errors were to win so the debt owed would be collectible to the stockholders and non to the company. However, a debt due to the company was non a debt due to the stockholders.
The House of Lords reversed this determination and Lord Parker stated that while no 1 could deny the separate legal being of a company, the character of the members of the company was non irrelevant to the character of the company. Equally much as a natural individual could hold enemies, the company as a legal individual could besides hold enemies. He went farther to province that the Acts of the Apostless of a company’s variety meats, managers, directors and so forth were the Acts of the Apostless of the company and may put in it enemy character.
The difference between the attack of the Court of Appeal and the attack of the House of Lords is noticeable in this instance. The thought of a company holding a separate legal personality is popular in the sense that it retains a personality different from that of its stockholders. Therefore as an unreal creative activity of jurisprudence, it besides retains the nationality of the topographic point in which it was incorporated. [ 14 ] It seems a spot arbitrary that a company is given the features of its stockholders if as a limited liability, it has been separated from them in the first topographic point.
A really recent instance which shows support for imputing the character of stockholders to the company is the United States instance ofBurwell v. Hobby Lobby Inc. [ 15 ] The United States Supreme Court held that closely held corporation proprietors could be exempted from a jurisprudence based on their spiritual beliefs if there was a less clogging method of advancing the law’s aim. In this instance, the proprietors of Hobby Lobby Inc. refused to supply contraceptive method for their female employees because of their spiritual beliefs. The footing of this determination was to widen rights to corporations to protect the rights of the people connected with the corporation including its stockholders. [ 16 ]
In recent times nevertheless, the tribunals have been less willing to raise the corporate head covering. In the instance ofPrest v. Petrodel Resources, [ 17 ] Mr Prest owned a web of offshore companies over which he exercised entire direction control. The concern of those companies was originally limited to having assorted residential belongingss, including the marital place he shared with his married woman, but subsequently the companies were used in his concern. When their matrimony failed Mrs Prest made a claim under subdivisions 23 and 24 of the Matrimonial Causes Act 1973 for fiscal aid based, in portion, on the value of the existent estate owned by that web of companies. Mr Prest argued that he was non entitled to those belongingss and refused to follow with orders for full revelation as to his assets.
In giving their opinion, the Supreme Court laid down the appropriate state of affairss in which the corporate head covering could be lifted. Lord Sumption found that in the instance of piercing the corporate head covering, it was merely instances which were true exclusions to the separate legal personality regulation, where a individual who owned and controlled a company could be said in certain fortunes to be identified with it in jurisprudence by virtuousness of that ownership and control.
He went farther to province that in civil jurisprudence legal powers, the juridical footing of raising the corporate head covering is by and large the construct of maltreatment of rights, where the head covering could be lifted in instances of abuse, fraud, malfeasance or equivocation of legal duties. The broader rule in English jurisprudence nevertheless, was that the corporate head covering may be pierced merely to forestall the maltreatment of the corporate legal personality. The maltreatment could be the usage of a company to hedge the jurisprudence or to thwart its enforcement. The tribunal may so pierce the corporate head covering for the intent, and merely for the intent, of striping the company or its accountant of the advantage that they would otherwise hold obtained by the company ‘s separate legal personality.
The separate legal personality rule has besides been applied internationally. InRayner 5 Department of Trade and Industry, [ 18 ] the International Tin Council was a United Nations international administration established by a pact to modulate the Sn market and it had assorted member provinces as stockholders. The Sn market got into trouble and the contracts which were made could non be honoured. It was held that that the International Tin Council had a legal personality separate and distinguishable from its members and that under the common jurisprudence the members of the Tin Council had no liability for the contracts made.
Internationally, fraud seems to be the motivative factor for several states in using the rule and its exclusion. In Germany, raising the head covering is known as transgressing the walls of the corporation, [ 19 ] and it is applied where a exclusive stockholder has failed to separate between his private assets and the assets of the company and has gained a benefit from that. [ 20 ] The rule is nevertheless limited to state of affairss where the actions of the stockholder has rendered it impossible for creditors to obtain satisfaction of debts from the company’s assets. [ 21 ] There is besides the issue of undercapitalization where a stockholder gives a loan to the company and really receives payment on that debt from the company.
Fraud is besides present in other Civil Law legal powers like France and Argentina, and an illustration of fraud is in one adult male companies. This type of company is treated as fabricated on the footing that that a company is treated as a contract, and plurality is an of import component of contract jurisprudence, therefore a company which is made up of one adult male lacks the component of a contract and is hence fabricated. [ 22 ] Besides the construct of fraud in footings of companies is used to work out jobs originating from a company being used as a shelter to hedge contractual duties towards 3rd parties. [ 23 ]
There have been times where the UK tribunals have ignored the corporate head covering wholly because of fraud. This normally happens when a company has been set up as a agency to victimize creditors or other organic structures, and is runing as a facade or a fake. The illustration of this rule is in the instance ofRE Darby, ex parte Brougham. [ 24 ] Darby and Gyde, two undischarged insolvents with strong beliefs for fraud registered a company called City of London Investment Corporation Ltd ( LIC ) in Guernsey. It had seven stockholders and issued ?11 of its nominal capital of ?100,000. They were the lone managers and entitled to all net incomes. The company so registered another company in England called Welsh Slate Quarries Ltd, for ?30,000. It bought a quarrying license and works for ?3500 and sold it to the new company for ?18,000. The prospectus invited the populace to take unsecured bonds in the new company but failed to advert the names of the two incorporators or the fact that they would have the net income on sale. The new company failed and went into settlement. The murderer claimed Darby’s secret net income, which he made as a booster. Darby objected that the first company had been the booster of the 2nd and non him. The tribunal held that they had incorporated the company in order to commit a fraud. They acted through the company in order to do a net income, which is why they concealed their individuality as the boosters of the new company so they could conceal behind the separate personality of the old company. [ 25 ]
When the rule of a separate legal entity is applied to group companies, every member in a group of companies has a separate individuality and in the same vena they are separated wholly from their stockholders, whether the stockholder is a private individual or a keeping company. Thus a keeping company can non command the paperss of its subordinate. [ 26 ] The UK Companies Act 2006 defines a group of companies as a parent project and its subordinate projects. [ 27 ] Accordingly, one company runs as the caput, or keeping company and runs a figure or lawfully separate companies which make up the group. [ 28 ] However, the application of the separate legal entity rule to instances affecting liability in group companies has non ever been consecutive frontward. Judges have antecedently relied on tools like bureau [ 29 ] or the fact that group companies can be regarded as a separate legal entity in order to raise the corporate head covering. InDHN Food Distributers Ltd v. Tower Hamlets London Borough Council, [ 30 ] the tribunals were willing to handle a parent company and its subordinate as a individual economic entity. In giving his opinion, Lord Denning stated that when a parent company owned all the portions of the subordinates, it could command their every motion. These subordinates are so bound manus and pes to the parent company and must make merely what the parent company says.
A 2nd illustration is in the instance ofRe FG ( Films ) Ltd, [ 31 ] where the tribunals were willing to make an bureau relationship between a British subordinate and its American stockholder in order to raise the corporate head covering. By the footings of an understanding between the two companies, the American company had undertaken to finance the devising of a movie by the British subordinate. The movie was held to be an American movie and therefore was non registered as a British 1. The footing of this bureau relationship used by the tribunals is that the ‘principal’ ( commanding stockholder or keeping company ) had induced the ‘agent’ ( the company or subordinate ) into moving harmonizing to their waies, and hence the act of the ‘principal’ was the act of the company. [ 32 ]
The debut of a individual economic entity in group companies has really been met with a negative response. [ 33 ]Industrial Equity v. Blackburn[ 34 ] has found that the rule works to forestall a keeping company from managing a subsidiary’s net incomes as its ain. The Australian High Court went farther to province that in the absence of a contract making some extra right, the creditors of company a subordinate company within a group, could merely look to that company for payment of their debts. They could non look to the keeping company, for payment. Besides, inWoolfson v. Strathclyde Regional Council, [ 35 ] the House of Lords refused to follow the opinionin DHN Food Distributers Ltd v. Tower Hamlets London Borough Counciland Keith L.J affirmed that the lone ground to pierce the corporate head covering would be where a company was runing as a facade. He stated that in the DHN Foods instance, the company that owned the land was the wholly-owned subordinate of DHN who was in control of anything which might impact the concern. In the Woolfson instance nevertheless, the company had no control over the proprietors of the land therefore Woolfson was non entitled to any compensation.
By and large, it seems the tribunals are tilting towards the application of the separate legal entity rule but with a figure of reserves. InAdams V Cape Industries, [ 36 ] the Court of Appeal looked at the cases of bureau, the group as a individual economic entity and the subordinate company used as a facade for the parent company. The tribunal stated that there was no justification for raising the corporate head covering utilizing the tool of bureau, Slade LJ stated that there was no given of bureau, neither was there one that the subordinate was the parent company ‘s alter self-importance. On the issue of groups being a individual economic unit, the justice stated that there is no general rule that all companies in a group of companies are to be regarded as one. Quite to the contrary, the cardinal rule was that each company in a group of companies is a separate legal entity possessed of separate legal rights and liabilities ” [ 37 ] the justice went farther to province that the corporate head covering could merely be lifted in the instance where the company was runing as a facade or a fake.
The consequence of this was summed up by Templeman L.J. in the instance ofRe Southard & A ; Co Ltd[ 38 ] where he stated:
A parent company may engender a figure of subordinate companies, all controlled straight or indirectly by the stockholders of the parent company. If one of the subordinate companies, to alter the metaphor, turns out to be the shrimp of the litter and diminutions into insolvency to the discouragement of its creditors, the parent company and the subordinate companies may thrive to the joy of the stockholders without any liability for the debts of the bankrupt subsidiary.”[ 39 ]
It would look that the general place on raising the head covering for group companies is that the tribunals will non happen keeping companies apt for the Acts of the Apostless of their subordinate, nevertheless, the place is still in difference. In the instance ofMillam v The Print Factory,[ 40 ] the employees of a wholly-owned subordinate were found to be the employees of the keeping company because the activities of the subordinate company were so incorporate with those of the keeping company that the two companies were considered as a individual entity. Although the companies were individually registered, the keeping company paid the rewards of the subsidiary’s staff, managed their pension strategy and really combined some of their meetings.
Besides in the instance ofBeckett Investment Management v. Hall, [ 41 ] a restrictive trade contract was held to include a keeping company and its subordinates because
Considering, it is submitted that the UK tribunals have antecedently taken a really eager position of raising the corporate head covering. It comes from the fact that there should be answerability where corporations are involved. The limited liability is in topographic point to protect the stockholder, though, the really same people it protects have besides come up with a manner to mistreat it by concealing behind it whenever it suits them. It should nevertheless be stated that making a manner for tribunals to travel jabing behind corporate head coverings has the disadvantage of doing the jurisprudence really unsure, which seems to be the way the tribunals have taken in footings of their recent determinations.
It is submitted that the thought of a separate legal personality keeps the image of a corporation integral to enable it to transport on concern, and the purpose of the tribunals in raising or piercing the corporate head covering should be to protect the company. Therefore in every bit much as the stockholders or the managers of a corporation might be personally apt for debts owed to creditors, the range of the tribunal should be to indicate
Basically that philosophy exists in order to continue the rule of limited liability. It is concerned with the rights of creditors in the context of company jurisprudence.