Corporate Principles Flashcards
What is limited liability?
Owners are responsible for the debts of a company only to the extent of the nominal value of their shares.
Which business mediums have limited liability?
Companies, LLPs and some partners to a limited partnership
What is the effect of limited liability?
Owners cannot lose more than they invest.
The debts belong to the entity and not the owners, so the entity would go bankrupt and not the owners themselves.
When can a shareholder be personally liable to repay money?
If the shareholder has not paid their shares in full, the liquidator can obtain the outstanding money the shareholder is to pay for the shares.
What is separate legal personality?
When an entity has a separate legal existence from its owners.
What is the effect of separate legal personality?
It can sue, be sued and is liable for its own debts.
What business mediums have separate legal personality?
Companies and LLPs
What is the corporate veil?
The principle that a company is separate from its shareholders and directors.
What is the effect of the corporate veil?
Shareholders and directors are not legally responsible for the actions of the company. They may hide behind the ‘corporate veil’.
When is the court prepared to look behind the corporate veil?
Where the company is being used to carry out fraud or to avoid existing obligations
What methods will the court use to look behind the corporate veil?
o Lifted the veil (i.e. the concealment principle)
o Pierced the veil (i.e. the evasion principle)
o Side-stepping the veil
Will the court lift the corporate veil because it would be unfair for shareholders to hide behind it?
No. There must be exceptional circumstances and serious injustice. The burden of proof is high.
When is the concealment principle used?
When the company is being used to hide the true position i.e. a company is acting as an agent/nominee of an individual and receiving property on their behalf
What does the concealment principle involve?
The court will ‘lift’ the veil to uncover the true facts of the situation and establish the relationship between the company and the individual i.e. is the company acting for an agent/nominee for someone?
The corporate veil is not pierced.
Common examples where the concealment principle might be used:
o The company was to receive secret profits
o Directors uses a company to receive monies obtained in breach of fiduciary duty (there would also be an equitable claim here)
o Where an individual uses a company to try to hide actions that are actually theirs
When is the evasion principle used?
Where an individual who is under an existing legal obligation seeks to deliberately evade / frustrate enforcement through use of a company under their control.
Courts rarely use this principle.
What is the difference between the concealment principle and evasion principle?
The evasion principle is the only situation where the protection offered by limited liability will actually be impugned.
What is the effect of the evasion principle?
The court will ‘pierce the veil’. The courts will disregard the idea that the company is separate from its owners and will impose liability upon them personally.
When will the courts not use the evasion principle?
If there is another legal remedy available.
To what extent can the veil be pierced?
The corporate veil can only be pierced so as to deprive the company or the individual of the advantage that they obtained through the company’s separate legal personality.
When will the court pierce the veil?
The individual must be seeking to use the company to protect them from a claim (or enforcement of a claim) pre-dating the involvement of the company.
What are the facts of Jones v Lipman?
D entered into a contract to sell a property and then changed his mind. To avoid an order for specific performance, he sold the property to a company he purchased. The evasion principle allowed the performance of specific performance to be made again the company.
What is the position regarding the remedy when the evasion principle is used?
The remedy can be shared between the individual and the company
How will the court side-step the veil?
o Non-party cost orders
o If there was an express agency agreement, a subsidiary company might be able to argue that they are only the agent of the principal holding company and so the holding company should be liable for the subsidiary’s debts.
o Possible actions under tort i.e. if a holding company owed DOC to claimants against a subsidiary
o 3rd party accepting liability or guarantees the debts of a company
o Principles of equity i.e. constructive trusts
