Veil of Incorporation Flashcards
Separate Corporate Personality Definition
e.g. independent legal person, recognised by the law, has legal capacity, perpetual succession etc.
A separate corporate personality also known as the “corporate veil” means an organisation can be its own legal person. A legal person possesses legal rights and is subject to legal obligations. There are two types of legal person natural and artificial. A natural person is an actual human being, for example, a sole trader whereas an artificial person is created and destroyed by the law for example corporations.
A business that has a separate corporate personality is an independent legal person who is separate from its members and owners meaning that is it responsible for its own legal obligations. It is recognised by the law meaning that it can raise legal actions on its own rights and is subject to legal actions against it. The company also has legal capacity and becomes a party to the contracts meaning that it can deal with 3rd parties. Lastly, the company obtains perpetual succession meaning that the business will continue to exist despite changes in membership (unlike partnerships where it must be dissolved).
Veil of incorporation
Separate legal personality
3 Important Cases
Salomon v Salomon & Co Ltd (1897)
MacAura v Northern Assurance Co Ltd (1925)
Lee v Lee’s Air Farming Ltd (1961)
Salomon v Salomon & Co Ltd (1897)
CASE: Salomon owed a boot business which he sold to a company that he had formed called Salomon & Co Ltd. 7 of his family members owned shares in the business. The company was then wound up and the assets of the business amounted to £6,000 where £10,000 was owed to Solomon and £7,000 to unsecured creditors.
The unsecured creditors claimed that Salomon and Salomon & Co Ltd were the same person and he could not owe money to himself, and they should be paid their £7,000 first.
HELD: Salomon was entitled to the £6,000 first and the unsecured creditors got nothing. The company was regarded as a completely separate person in the eyes of the law from its members and its officers.
MacAura v Northern Assurance Co Ltd (1925)
CASE: MacAura owned a forest. When he incorporated his business, he transferred the ownership of the forest to the company however he failed to transfer responsibility for insuring the property (against possible damage or loss) to the company. The forest later burned down, and he tried to enforce the insurance policy. The insurance company argued that MacAura was no longer owner of the forest and didn’t have insurable interest. He sues the company for proceeds.
HELD: MacAura transferred ownership of the forest of the company. The company should have insured the forest. Therefore neither he, nor the company could claim proceeds (as he no longer owned the forest he couldn’t claim insurance). MacAura and the company were completely separate persons in the eyes of the law.
Lee v Lee’s Air Farming Ltd (1961)
CASE: Mr Lee was majority shareholder, sole director and chief pilot in his own company. He was killed in a work related air accident and his widow claimed compensation. Company insurers refused to pay compensation as they claimed he could not be an employee of the company.
HELD: Mrs Lee was entitled to compensation as Mr Lee and the company were regarded as completely separate people in the eyes of the law. Mr Lee was an employee of the company and was killed in the course of his employment.
Lifting the Veil of Incorporation
2 Important Cases
Daimler Co Ltd v Continental Tyre & Rubber Co (GB) (1916) [public interest]
Gilford Motor Co Ltd v Horne (1933) [evasion of obligations]
Daimler Co Ltd v Continental Tyre & Rubber Co (GB) (1916) (public interest)
Case: A company was registered and had its registered office in England. All of its members with control of the company (except one) were German.
Held: The veil could be lifted to expose the company as an enemy alien. Therefore trading with this company was against the law (in wartime).
Gilford Motor Co Ltd v Horne (1933) (evasion of obligations)
CASE: An employee was contractually bound not to solicit customers from his ex-employer after leaving its service. In order to get round this, he formed a company and carried on his work, soliciting his ex-employer’s customers in the process.
HELD: The veil was lifted to reveal his company as a “mere cloak or sham” and an injunction was granted against it and the employee. (to prevent an evasion of obligations)
Pre Incorporation Contracts
Phonogram Ltd v Lane (1982)
Kelner v Baxter (1866)
Tinnevelly Sugar Refining Co v Mirrless, Watson & Yaryan Co Ltd (1894)
Phonogram Ltd v Lane (1982)
Pre-incorporation Contracts
Kelner v Baxter (1866)
Pre-incorporation Contracts
Case: K sold wine to B who claimed to be an agent for a company that had not yet been registered. The wine was consumed but no payment made.
Held: B was personally liable to K for payment since a principal who does not exist at the time the contract was made cannot later ratify it.
Tinnevelly Sugar Refining Co v Mirrless, Watson & Yaryan Co Ltd (1894)
Pre-incorporation Contracts
Case: Darley & Butler claimed to be acting on behalf of Tinnevelly. D&B entered a contract with Mirrlees to purchase machinery. At the time D&B entered the contract with Mirrlees, Tinnevelly did not exist ( not yet registered as a company. Therefore not a legal person). Machinery broke down and Tinnevelly sued Mirrlees for breach of contract.
Held: Tinnevelly was not a party to the contract with Mirrlees because D&B couldn’t have been acting as agents for a principal (Tinnevelly) that did not yet exist.
It’s not possible to act as an agent for non-existing principal.
What are Pre Incorporation Contracts
These are contracts that have been made before a company has become incorporated. Any pre-incorporation contracts made are not valid as the company does not yet have a legal existence. Any agreement which has been made will still take effect as a contract was made between an individual (agent/promoter) and the third party meaning that they will be personally liable to the third party.
Consequences of pre-incorporation contracts
- When the company is formed, they are not bound by the contract.
- The company is unable to sue the third party (not a legal person, the company doesn’t yet exist)
- Cannot ratify the agreement
- Any agreements made will still take effect as this was made between the promoter and the 3rd party. (However, since this contract was created before the company existed this means the promoter will be personally liable)
- However, there is a way the promoter can be protected, and this can be through the process of novation.
Novation: the third party can make an agreement that once the company is incorporated the company will enter into a new contract with the same terms releasing the promoter from personal liability.
