1.2 Business - Legal Personality & Limited Liability

Question 1

What is separate legal personality?

Answer 1

[Salomon v Salomon]

• Veil between Co’s duties and rights + SHs/Ds’ duties and rights
• Co is liable to TP
• SH is NOT liable to TP
• Exists after incorporation/registration at CH

Co’s actions (through D as agent)

• Make contracts
• Own property
• Carry on business on own accounts (regardless of SHs who hold shares at time/members ceasing to exist)
• Sue debtors
• Be sued by creditors

Question 2

What is the purpose of piercing the veil?

Answer 2

SHs/Ds become liable for Co’s actions/debts

Co treated as if run by individual members where Co is wound up

Question 3

How can fraudulent trading pierce the veil?

Answer 3

IA 1986, s. 213-215
CA 2006, s. 993 (crime)
Fraudulent Act 2006, s. 9 (unincorporated businesses)

Allegation of fraudulent trading

• High burden of proof
• Intent to defraud/fraud purposes

During WU > Appears to Liquidator fraudulent trading occurred

• Apply to Court for order
• Parties knowing fraud trading took place => Must contribute to Co’s assets as court sees fit

Question 4

How can wrongful trading pierce the veil?

Answer 4

IA 1986, s. 214

Reqs

1) Insolvent liquidation
2) D knew/should have known NO reasonable prospect of avoiding insolvent liquidation
3) D did NOT take every step to minimise potential loss to Co’s creditors
4) Some time before commencing WU

Allegation of fraudulent trading
- Low burden of proof

During WU > Appears to Liquidator wrongful trading occurred

• Must prove on balance of probabilities
• Apply to Court for order
• Parties knowing wrongful trading took place => Must contribute to Co’s assets as court sees fit

Question 5

How can transactions at undervalue pierce the veil?

Answer 5

IA 1980, s. 423-425

Reqs

1) Winding up
2) Co pays significantly more than agreed consideration
3) Transaction puts assets beyond reach of/prejudice interests of Person making claim vs Co

Court to order relief > Aim

• Restore position of deal not entered
• Protect victims’ interests

Court to order relief > Examples

• Members/Officers to contribute assets in WU
• Subsidiary (insolvent) to transfer liability to Parent

Question 6

What case law can pierce the veil?

Answer 6

[VTB Capital v Nutritek]

• Supreme Court to decide piercing corporate veil
• Reaffirms basic UK company law (separate legal personality)

[Prest v Petrodel Resources]

• Persons subject to existing obligations > Attempts to avoid/frustrate through control of Co
• BUT courts reluctant to extend piercing circumstances

[Williams v Natural Life Health Foods]
- Managing Director is also Majority SH (corporate/natural) > Tort liability (courts more willing to)

[Okpabi v Royal Dutch Shell]

• Starting point: Broader view of duty of care?
• Did Parent take over/intervene in/control/supervise/advise management of Subsidiary’s Operations?

[Chandler v Cape]

• Parent owes duty of care of safety to Subsidiary’s employees > Parent is liable for personal injuries
• BUT NO pierce veil