Separation Of Members And Company example essay topic

In advising Gus, Gloria, and the liquidator (collectively known as the claimants) as to the sustainability in law of their respective claims in relation to, Rajinder (hereinafter referred to as R), Sarah (hereinafter referred to as S), and the liquidated company Exotic Holidays Ltd. (hereinafter referred to as E Ltd. ), the core issue appears to be that of corporate identity as opposed to personal identity of the members of the corporate entity. Issues relating to the general effects and consequences of incorporation are also discussed, namely, issues of separate legal personality, liability and related exceptions, which in turn necessitates consideration of the corporate veil and under what circumstances the courts will be prepared to assign liability etc beyond the corporate entity to the members. Before considering individual claims, some thought is given to the general or fundamental issue of legal identity, on the grounds that this is central to all the situations. The most important case in this regard is undoubtedly Salomon vs. Salomon [1897] AC 22 (hereinafter referred to as Salomon), which also provides an apt starting place.

The fundamentally important principal that emerged from Salomon is that a company, once incorporated, is a legal entity in its own right. In other words, the company itself, in this instance E Ltd., is a distinctly separate being from those that are its members (R and S), and as such, has individual rights and liabilities accordingly. This has two immediate results. Firstly, the company, not its members, must seek a remedy despite the fact that in reality, it will be the members, not the company, that conclude a remedy is needed to address some wrong doing to the company. Secondly, the alternative situation in which the compan itself must be sued directly, not the members personally, in the event that the company itself has committed some wrongdoing. The overall result is that members personal liabilities and the liabilities of the company are regarded as separate.

For all intents and purposes, the courts have traditionally drawn a divide between them. This separation of members and company, or rather the distinction between them, is often referred to as the corporate veil. The Salomon principal has been generally upheld by the courts, sometimes with severe consequences. In the Irish case Mac aura vs. Northern Insurance Company Limited [1925] AC 619, the court upheld the argument of an insurance company that it was not liable to pay out if items were insured on a members own name and not his companys name despite the fact that the items being a part and parcel of the companys business. The court maintained a rigid divide between the member and the company. In more modern times, Slade LJ essentially reiterated the continuing validity of the Salomon principal in Adams vs. Cape Industries [1990] Ch 433, the court is not free to disregard the principal of Salomon merely because it considers that justice so requires This principal was more recently again affirmed in Ord & Another vs. Belhaven Pubs Limited [1998] BCC 607.

However, as resolute as the principal stands, there are exceptional cases where the court will lift the corporate veil either at common law or by statute. This was considered in Atlas Marine vs. Avalon Maritime [1991] a All ER 769, ... to pierce the corporate veil is an expression I would reserve for treating the rights or liabilities or activities of a company as the rights or liabilities or activities of its shareholders There are various circumstances where the court will lift the veil. In the context of liability, such a course of action by the courts will mean that the members themselves will be held liable beyond the company. In other words, liability will not stop at the company, as per the Salomon principal, provided the court is satisfied that certain conditions are met. It is these conditions that need to be considered in each individual case with respect to the claimants, since from the given facts, it appears that R and S seek to rely on the Salomon principal in order to divert any potential liability from themselves personally to E Ltd as a separate legal entity. -Gus.

According to the given facts, Gus has issued a writ against R arising from alleged conduct in breach of contract that predates and overlaps the date of incorporation of the company. The alleged breaches extend from April 1998 to October 1998, while R sold his business to E-Ltd in June 1998 while the company itself was incorporated on the 30th June 1998. Therefore, it appears that Gus had been dealing with E Ltd. and not R personally after the incorporation. Ordinarily, by application of the Salomon principal, the action against R would fail on the grounds that Gus was dealing with E Ltd. and not with R. However, as mentioned above, there may be a way in which the courts may be asked to life the veil and seek action against R directly. This may happen if R is suspected of fraud, although not necessarily of a criminal nature.

In this case, equitable fraud would suffice. Put another way, the obligations binding the member are extended to the bind the company. In Jones vs. Lipman [1962] 1 All ER 442, the sale of a piece of land was at the centre of a contract. The seller had subsequently changed his mind and in order to avoid an order of specific performance of his contractual obligations, he transferred his land into the name of a company. The court refuses the defence that the land was now in the possession of the company and granter an order of specific performance against the seller. Likewise, in Gilford Motor Company Limited vs. Horne [1933] Ch 935, the court held that a company that constituted a mere sham and formed to avoid contractual obligations would not be tolerated.

In this case, the court again lifted the veil and issued an order against an individual who was not even a member of the company in question. Similarly, Gus must show that R was in effect hiding behind E Ltd. If this can be achieved, it seems possible that the court may grant a remedy against R directly. However, if R can show that the sale was a legitimate deal in the sense that the sale of Rs former business to E Ltd. was not a sham and was formed merely to avoid a contractual obligations etc, it seems unlikely that the courts will follow the route taken in Jones vs. Lipman or Gilford vs. Horne in light of the decision in Adams vs. Cape Industries where the courts refused to lift the corporate veil. Lord Keith commented in Wolfson vs. Strathclyde Regional Council [1979] that the Salomon principal should only be excluded in cases of a fraudulent nature where facts were being concealed by a ruse.

That said, if R seeks to rely on Adams vs. Cape Industries, there might be a problem considering that this case was distinguished from a similar case, Creasey vs. Breachwood Motors Limited [1992] BCC 638 partly on the basis of the timing of the transfer from entity to entity. The court may well consider the timing of the sale, i.e. half way through the alleged breach of contract, as a relevant factor and may well view this as some sort of avoidance manoeuvre on Rs part. It is worth bearing in mind that Creasey vs. Breachwood was subsequently criticised in Ord vs. Belhaven. Hobhouse LJ stated, it seems to me inescapable that the case in Creasey vs. Breachwood as it appears to the court cannot be sustained.

It represents a wrong adoption of the principle of piercing the corporate veil Therefore, in my judgement the case of Creasey vs. Breachwood should no longer be treated as authoritative (Although the grounds for the criticism might well not apply to the present case.) In summary, the facts are not sufficiently clear to warrant a clear conclusion, but it appears that the main obstacle to Gus succeeding would be the ability to demonstrate that R sold his business to E Ltd. in order to avoid contractual obligations via assumed reliance on the Salomon principal. Notably, Lord Keith commented in Wolfson vs. Strathclyde Regional Council [1979] JPL 169 that the Salomon principal should only be excluded in cases of a fraudulent nature where facts were being concealed by a ruse. Such as ruse must clearly be demonstrated. -Gloria (hereinafter referred to as G). From the given facts, G is stated to have been a former client of E Ltd. Again, with regard to the doctrine of the corporate veil, G would prima facie only have a claim against E Ltd. and not R directly or personally.

Unless, the courts can again be persuaded to lift the corporate veil. Members of a company have a general fiduciary duty of care which should govern all their conduct within the framework of the company in question, and unless it can be shown that they have breached that duty by gross negligence or acts of bad faith, no personal liability claims can generally be successful against them. In Williams vs. Natural Life Health Foods Ltd (1998) 2 ALL ER 577, the House of Lords held that the corporate veil should only be lifted in extreme cases and furthermore, there must be some sort of personal misrepresentations made by the member of the company, who accepts as much, and that the plaintiff would have had to have relied on these misrepresentations. The House of Lords refused to lift the veil in that case on the grounds that there had been no contact between the parties and in any event, there was no evidence that the plaintiff had believed that the defendant had accepted any personal liability.

In summary, it seems unlikely, based on the given facts, that Gs action directly against R will succeed. However, taking the decision in Williams vs. Natural Life into account and the stated criteria upon which the House of Lords refused to lift the corporate veil, if G can meet those criteria, her claim might well be sustainable. - The Liquidator (hereinafter referred to as L). Again, the principal from Salomon is the starting point with regard to Ls claim against R and S. A further parallel can be drawn with Salomon. The liquidator in Salomon claimed that the company therein was void as it was essentially a sham on the grounds that the company was in reality nothing more that Salomon agent, due in part to it being a one-man company. However, the House of Lords held that it was irrelevant that the company was in effect a one man company and that provided the company had been incorporated correctly, the fact that one person held an overwhelming majority of shares in the company was not relevant either.

More specifically, it was held in Kodak Limited vs. Clark [1905] 1 KB 505 that a 98% shareholding in a company does not by itself create a member / agency relationship. Therefore any similar arguments on the grounds that E Ltd. was basically an agent of Rs due to his large shareholding will fail due to the ruling in Salomon and Kodak vs. Clark... Generally speaking, L will be unable to rely on a common law based approach in asking the courts to life the corporate veil against R and S. However, there may be a potential route via statute. Section 213 of the Insolvency Act 1986 in effect states that where a person has continued to trade through a company knowing full well, i.e. fraudulently, that the company will be unable to duly repay creditors, the person may be held personally liable to an extent determined by the courts. Section 214 of the same Act, relevant to companies in insolvent liquidation (as is the case with E Ltd. ), extends beyond a clear intent to defraud creditors, as per's 213, to include wrongful trading whereby the person knew or ought to have known that creditors will be unable to be duly paid while continuing to trade through the company until the time of the winding up order being granted. In order for the's 213 to apply, L must produce evidence of a fraudulent intent by R and S to defraud the creditor he represents.

Alternatively, under's 214, L must demonstrate wrongful trading which might be an easier proposition. When considering's 213,'s 213 (4) directs the courts to take various things into account. Under's 213 (4) the courts are directed to consider whether the member /'s had acted reasonably under the circumstances, or more specifically, the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has. Therefore in summary, in order for's 213 to apply, these standards must be applied to the facts of the present case, and if it is found that R and S had fallen below the required standards, an application via's 214 might well be sustainable in that the courts may well lift the corporate veil and extend liability to R and S in their personal capacities.

Bibliography

. Farrar's Company Law J.H. Farrar & B.M. Hannigan Company Law (Statutes) Butterworths Company Law (Cavendish) Internet Sources. Rethinking Company Law and Practice The Hon Justice Michael Kirby (web) Company Law (web) Limited Liability a necessary consequence of incorporation Aiden Small (web) Company Law Corporate Personality (web) Piercing the Corporate Veil (web) The Doctrine of Separate Legal Personality (web) Lifting the Corporate Veil Revisited (web).