Corporate Personality and Lifting the Veil Flashcards
What case affirmed the principle of separate corporate personality?
Salomon v Salomon
What is the separation between the assets of a company and personal assets of members also known as?
It is also known as the veil of incorporation
Will the Court always treat companies as having separate corporate personality?
No, sometimes the Court will ‘lift’ or ‘pierce’ the veil of incorporation
Name the exceptions where the Court may ‘pierce of veil’.
- Sham/Facade
- Statutory exceptions:
- Disqualification of directors
- Pre-incorporation contracts
What do we mean by ‘sham’ or ‘facade’ companies?
Where the stated purpose of a company is fake, and its true purpose is to cover a dishonest activity
Give us an example of what could constitute a sham.
Example: Incorporating a separate company with partner in an attempt to avoid a restrictive covenant prohibiting individual from approaching former clients from a previous business.
What principle dictates when the Court should apply the sham/facade’ exception?
The evasion principle
What are the 3 requirements for the evasion principle to apply?
- There must be a pre-existing legal obligation, liability or restriction on a person (e.g. pay a debt)
- That person must interpose a company in order to deliberately evade or frustrate that obligation, liability, or restriction).
- The company being interposed must be under that person’s control.
Is it common for courts to lift the veil on the basis of ‘sham/facade’?
No, it is a last resort where no other remedies will do and the Court stresses that there must be serious impropriety.
- It is not sufficient to argue that the company is merely involved in some way, or that it is in the public interest or interest of justice.
Why do many parent companies prefer to become members/own other companies (i.e subsidiary companies?
It allows them to ‘ringfence’ risky activities by having subsidiaries carry them out without affecting the parent company
If a subsidiary business fails, can creditors seek recourse from its parent company?
No as the members enjoy limited liability
What are the statutory exceptions for allowing members to become liable?
- Taxation: where there are breaches of obligations to produce accounts (CA 2006) or of obligation to provide details of subsidiaries.
- Employment: protection for employee rights when transferred between companies. If breached, members or directors can be held personally liable.
- Corporate insolvency - via fraudulent or wrongful trading.
- Fraudulent or wrongful trading.
NOTE: technically not exceptions but allowing members to be liable in certain circumstances.
What is ‘fraudulent trading’ and what happens if a company is found to engage in it?
Fraudulent trading is when, during a winding up, a business of a company is carried on “with intent to defraud creditors of company or creditors of any other person” or “for any fraudulent purpose”
- If caught, liquidator can apply to court for declaration that “any persons who were knowingly party [to it] must pay a contribution to creditor”
Why is ‘fraud’ difficult to prove?
It requires evidence of ‘actual dishonesty’.
What is ‘wrongful trading’ and what happens if a company is found to engage in it?
“Trading while insolvent”
Wrongful trading happens when a company goes insolvent and is wound up, and a director of the company “knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation”
- If director found to have ‘wrongfully traded’, he can be held personally liable for debts of company.
Does honesty matter for the ‘wrongful trading’ exception to apply?
No, even if the director was honest, the exception still applies.
What is the ‘disqualification of directors’ exception to limited liability?
This exception can make a disqualified director personally liable for company debts incurred during disqualification period, even though they are no longer acting as a director
What is the ‘pre-incorporation contracts’ exception to limited liability?
If a contract was entered into before the company was incorporated, the people that entered into the contracts will be personally bound by it and not the company.
NOTE: technically not an exception as there is no veil to lift prior to company existing
Name other circumstances where companies may face a liability for the actions of individuals.
- If there are Contractual terms imposing liability on the company
- Agency agreements: i.e. company may be held liable for actions of agent
- Tort: Generally, no need to pierce veil if tortious remedies exist but parent company can still be held liable for actions of subsidiary.
- Attribution theory in tort.
- Attribution theory in crime
What are the 4 conditions for finding that a parent company breached a duty of care to the subsidiary? (in tort)?
4 conditions (relevant in cases such as asbestos cases)
- Both companies operated in same area
- Parent company had superior experience and knowledge of relevant Health and Safety Regs.
- Parent comp knew that subsidiary was operating with unsafe practices: and
- Parent company ought to have foreseen that subsidiary + employees would rely on it for protections
If all are satisfied, parent company deemed to have assumed duty of care
What is the identification principle?
A principle which aims to impose liability on a company by finding the “controlling mind” of a company
What is the ‘attribution theory’ in tort?
Where Courts impose tortious liability on a company by applying the identification principle to find the “controlling mind” of the company. The individuals actions and mental state are deemed to be that of the company itself.
- in practice, this is difficult
What is the attribution theory in crime?
Where Courts impose criminal liability on a company by applying the identification principle to find the “controlling mind” of the company. The individuals actions and mental state are deemed to be that of the company itself.
- Company can even be held liable for causing death under Corporate Manslaughter and Homicide Act 2007 but difficult.
What is a major criticism of the identification principle/attribution theory?
It is very difficult to convict a company under it as it is difficult to establish who was acting as the “controlling or directing mind” of a company.
