Corporate Principles

Question 1

What is limited liability?

Answer 1

Owners are responsible for the debts of a company only to the extent of the nominal value of their shares.

Question 2

Which business mediums have limited liability?

Answer 2

Companies, LLPs and some partners to a limited partnership

Question 3

What is the effect of limited liability?

Answer 3

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.

Question 4

When can a shareholder be personally liable to repay money?

Answer 4

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.

Question 5

What is separate legal personality?

Answer 5

When an entity has a separate legal existence from its owners.

Question 6

What is the effect of separate legal personality?

Answer 6

It can sue, be sued and is liable for its own debts.

Question 7

What business mediums have separate legal personality?

Answer 7

Companies and LLPs

Question 8

What is the corporate veil?

Answer 8

The principle that a company is separate from its shareholders and directors.

Question 9

What is the effect of the corporate veil?

Answer 9

Shareholders and directors are not legally responsible for the actions of the company. They may hide behind the ‘corporate veil’.

Question 10

When is the court prepared to look behind the corporate veil?

Answer 10

Where the company is being used to carry out fraud or to avoid existing obligations

Question 11

What methods will the court use to look behind the corporate veil?

Answer 11

o Lifted the veil (i.e. the concealment principle)
o Pierced the veil (i.e. the evasion principle)
o Side-stepping the veil

Question 12

Will the court lift the corporate veil because it would be unfair for shareholders to hide behind it?

Answer 12

No. There must be exceptional circumstances and serious injustice. The burden of proof is high.

Question 13

When is the concealment principle used?

Answer 13

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

Question 14

What does the concealment principle involve?

Answer 14

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.

Question 15

Common examples where the concealment principle might be used:

Answer 15

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

Question 16

When is the evasion principle used?

Answer 16

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.

Question 17

What is the difference between the concealment principle and evasion principle?

Answer 17

The evasion principle is the only situation where the protection offered by limited liability will actually be impugned.

Question 18

What is the effect of the evasion principle?

Answer 18

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.

Question 19

When will the courts not use the evasion principle?

Answer 19

If there is another legal remedy available.

Question 20

To what extent can the veil be pierced?

Answer 20

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.

Question 21

When will the court pierce the veil?

Answer 21

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.

Question 22

What are the facts of Jones v Lipman?

Answer 22

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.

Question 23

What is the position regarding the remedy when the evasion principle is used?

Answer 23

The remedy can be shared between the individual and the company

Question 24

How will the court side-step the veil?

Answer 24

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