{"id":347,"date":"2019-07-29T14:33:08","date_gmt":"2019-07-29T14:33:08","guid":{"rendered":""},"modified":"2019-08-07T12:19:07","modified_gmt":"2019-08-07T12:19:07","slug":"separate-corporate-responsibility-corporate-veil-7554","status":"publish","type":"post","link":"https:\/\/www.lawteacher.net\/free-law-essays\/company-law\/separate-corporate-responsibility-corporate-veil-7554.php","title":{"rendered":"Separate Corporate Responsibility and Lifting the Corporate Veil"},"content":{"rendered":"

Question: <\/strong>\u201cIn company law, separate corporate personality ensures that the corporate veil is lifted in very exceptional cases.\u201d Do you agree? Use relevant case law to justify your answer.<\/strong><\/em><\/p>\n

In
\nany business, the risk of loss and failure is inherent. Loses can be brought
\nabout by various circumstances such as, recession, poor business management, government
\npolicies, among many other factors.[1]<\/a> The fear of losing it all,
\nhistorically led to increasing reluctancies from businessman in setting up new
\nbusiness ventures, fearing loss of personal property through repossession to
\npay off debts owed in situations where business endeavours failed.[2]<\/a>
\nIn order to avoid such events faced by business starters a legal principle was
\nenacted, stating that the liability of shareholders and directors be \u2018limited\u2019[3]<\/a>,
\nin instances where a company is incorporated under the Companies Act[4]<\/a>.
\nFurthermore, the latter be legally assessed separate from the company, thus
\ncompanies being animatedly existent with a separate legal personality.[5]<\/a>  Moreover, the essence of limited liability by
\nnature limits the creditor solely to the assets of the company, protecting
\nshareholders from loss of personal property when creditors seek to reclaim
\ntheir funds[6]<\/a>.<\/p>\n

Conversely, the approbate of corporate personality with limited liability created a loop hole for many business owners to evade paying back large sums of owed monies[7]<\/a>. In order to limit the misuse of the rule \u2018lifting the corporate veil[8]<\/a>\u2019 was introduced, which meant, in exceptional circumstances the courts could disregard the notion of corporate personality. <\/p>\n

However, the British courts have often expressed disinclination
\nin lifting the corporate veil, maintaining the corporate legal entity stance,
\neven in cases where it would be deemed necessary to uplift the corporate vail
\nto ensure justice[9]<\/a>. This essay attempts to explain
\nwhy separate corporate personality ensures that the corporate veil is lifted in
\nexceptional cases, and to what extent it is reasonable for British courts to do
\nso.<\/p>\n

Firstly, the courts in Britain have often expressed
\nutter reluctance regarding lifting the corporate veil, the courts often readily
\nprotect the limited liability notion. Equally, the number of cases where the
\ncorporate veil has been lifted in the UK are scarce, and only occurs in
\nexceptional events[10]<\/a>.
\nProfessor L Sealy suggested that \u201cthe courts refused to violate the sacred rule
\nof limited liability[11]<\/a>\u201d,
\nwhich illustrates even to this day, the courts will readily evade lifting the
\nveil, which would place debt liability of the company on the shareholders[12]<\/a>.
\nThe doctrine of British company law timeline can be split into two, firstly,
\nthe Salomon v Solomon[13]<\/a>
\ncase decision in 1897, to the 1930-40s during the Second World War.<\/p>\n

Cheng describes this era as, early trial and error period, whereby English courts tested various approaches to company law. Second stage commencing post WW2 \u20131978, where the ruling of Woolfson v Strathclyde Regional Council[14]<\/a> case was concluded by Lord Denning[15]<\/a>. Moreover, the Solomon principle was re-asserted in the 1989 Adams v Cape industries[16]<\/a> case. The history of the corporate veil doctrine in Britain transparently lacks in developing a systematic approach regarding the corporate veil problem[17]<\/a>.<\/p>\n

Furthermore, most company law cases in Britain
\nconsign on the concept of agency, courts lifting the corporate veil only if the
\nagency relationship exists[18]<\/a>.
\nFor example, in the case of Adams v Cape Industries Plc[19]<\/a>,
\nthe court did not pierce the veil even though crucial in order to prevent
\ninjustice, the judiciary reinforced the notion of maintaining the usage of
\nSolomon v A Solomon & Co Ltd[20]<\/a>.
\nThe refusal of the court to lift the corporate veil in the Adams case, did not
\nconsider the implications the ruling was to have on the asbestos victims, the
\ncompany simply shut down to merely evade liability[21]<\/a>.
\nThus, the leeway of company law rules clearly hinders the judicial
\nresponsibility to prevent injustices[22]<\/a>.
\nBy the same token, the pretentiousness on the notion of agency by the court,
\ncreate little room for other categories to be realized, proven in the case of Commissioner of Ireland Revenues v Sansom<\/a>[23]<\/a>,
\nwhereby a charge was made against Sansom for using his company solely for the
\navoidance of tax liabilities. The court was seen to neglect the taxation policy,
\nonly basing the case on the agency concept[24]<\/a>.<\/p>\n

Moreover, there is a perception that British courts
\nare keen in lifting the corporate veil in cases where fraud is proved, however,
\nunlike misrepresentation, fraud is not always easy to prove[25]<\/a>.
\nIn cases regarding fraud the accuser must make a great attempt at proving the
\nmisrepresentation, as well as intent of the parties involved, which is amongst
\nthe most complicated in veil piercing cases, thus, although keen, by no means
\nare the courts willing or flexible to lift the corporate veil[26]<\/a>.
\nFraud cases therefore harder to prove, besides, the amount of evidence
\navailable in corporate veil cases, is relatively smaller than required to
\nsuccessfully sustain a fraud claim[27]<\/a>.<\/p>\n

Despite the consistent reluctancies from the court
\nto uplift the corporate vail, British courts have already demonstrated the
\nability to use considerable flexibility in ruling if they choose to. For
\nexample, Lord Denning made influential decisions relating to piercing the
\ncorporate veil, the most significant to the latter being the ruling on
\nLittlewoods Mail Order Stores case[28]<\/a>,
\nwhere he suggested courts where indeed capable and did lift the veil,
\nencouraging other judges to follow suit. Although, Lord Denning was widely
\ncriticised for taking a stance outside the norm regarding piercing the
\ncorporate veil, there is no justification, nor logic in retaining the reluctant
\napproach, as it lacks the necessary adjustments as to avoid exploitation and
\nabuse of the limited liability privilege[29]<\/a>.<\/p>\n

Also, the notion of corporate legal entity was
\nenacted to support trade and the promotion of economics, not as a shield to
\nevade liability in situation where illegal dealings and defrauding of the
\nsystem takes place, thus, where it is found that the corporate character is
\ndeployed for such purposes, lifting the corporate veil should be mandatory, and
\nthe courts should willingly encourage transparency, welcome the notion of
\npiercing the corporate veil in order to provide clarity and justice regarding
\nthe parties involved, regardless of the legal sufficiency of the corporate
\nstructure[30]<\/a>. American Judge Sanborn,
\nsuggested that, when the notion of legal entity is misused to protect fraud or
\njustify wrong doings, corporation would be regarded as an association of in
\ncommand[31]<\/a>,
\nthis hard-legal stance is essential in modernised economies.<\/p>\n

In conclusion, one can not undermine the importance
\nof corporate legal personality as well as limited liability, as it enabled
\nbusiness ventures along with entrepreneurs to venture into business without the
\nconstant fear of losing everything, including personal property if business
\nfailed. Furthermore, the businesses created as a result, contributes to the
\ngood of the country, creating jobs to name one of many benefits, which would
\notherwise be non-existent as a result of fear, especially in modern era, where
\nit would be near impossible for economics to function at productive pace
\nwithout the notion of limited liability[32]<\/a>.\n<\/p>\n

Nevertheless, when shareholders exploit the values
\nof limited liability, by bending the rules in order to evade responsibility in
\ninstances where it would be morally right 
\nand just to accept such liabilities, but through greed choose not to, it
\nleads to creditors being sceptical towards the promotion and funding of
\nbusinesses, implications which affect all in society, less jobs amongst many
\nother effects. As previously noted, the fundamental notion of separate legal
\npersonality was enacted to promote and influence industrialisation of business
\neconomics, not hinder it[33]<\/a>.
\nHowever, the elementary interpretation of lifting the corporate, which is
\ncurrently practised by British courts, is to be re-evaluated and amended
\naccordingly as it may well frustrate the very purpose it seeks to encourage,
\nwhich is growth in economics[34]<\/a>.<\/p>\n

 From the cases
\nevaluated above, it is evident that the British rule regarding corporate legal
\npersonality and piercing of the corporate veil is outdated, and in need of
\nmodern amendment to better deal with modern corporations. But, the most
\nimportant aspect regarding providing justice through the courts, is a radical
\nchange in attitudes of judges who occupy the Supreme courts, as they are
\nultimately the ones who can make considerable impact regarding how Britain
\ntackles the notion of lifting the corporate veil, given the autonomy of legal
\nauthority which they possess.<\/p>\n

 <\/strong>Bibliography<\/strong><\/p>\n