Lifting the Coporate Veil
LIFTING THE CORPORATE VEIL (i) Introduction
(ii) Principles of Corporate Personality
(iii)Statutory Exceptions
(iv)Common Law and the Mere Façade Test
(v) Agency and Groups
(vi)Conclusions
INTRODUCTION
1. When a creditor discovers that a debtor company is insolvent, the creditor will frequently want to recover the debt from a shareholder, director or associate of the insolvent company. There exist various statutory and common law mechanisms by which the corporate veil can be lifted and liability imposed on individuals or other companies. This lecture sets outs and discusses those mechanisms in the light of recent authorities and of the Companies Act 2006.
PRINCIPLES OF CORPORATE PERSONALITY
2. One of the fundamental principles of company law is that a company has personality that is distinct from that of its shareholders. This rule was laid down by the House of Lords in
Salomon v. Salomon & Co1, in which it was held that even if one individual held almost all the shares and debentures in a company, and if the remaining shares were held on trust for him, the company is not to be regarded as a mere shadow of that individual. Lord
MacNaughten stated2:
“The company is at law a different person altogether from the subscribers to the
Memorandum and, although it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the
1 [1897] A.C. 22
2 Ibid, at p. 51
2
same hands receive the profits, the company is not in law the agent of the subscribers or the trustee for them. Nor are subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act3.”
The rule in Salomon lies at the heart of corporate personality, and is the principal difference between companies and partnerships. However, there are situations in which the courts look beyond that personality to the members or directors of the company: in doing so they are said to
(ii) Principles of Corporate Personality
(iii)Statutory Exceptions
(iv)Common Law and the Mere Façade Test
(v) Agency and Groups
(vi)Conclusions
INTRODUCTION
1. When a creditor discovers that a debtor company is insolvent, the creditor will frequently want to recover the debt from a shareholder, director or associate of the insolvent company. There exist various statutory and common law mechanisms by which the corporate veil can be lifted and liability imposed on individuals or other companies. This lecture sets outs and discusses those mechanisms in the light of recent authorities and of the Companies Act 2006.
PRINCIPLES OF CORPORATE PERSONALITY
2. One of the fundamental principles of company law is that a company has personality that is distinct from that of its shareholders. This rule was laid down by the House of Lords in
Salomon v. Salomon & Co1, in which it was held that even if one individual held almost all the shares and debentures in a company, and if the remaining shares were held on trust for him, the company is not to be regarded as a mere shadow of that individual. Lord
MacNaughten stated2:
“The company is at law a different person altogether from the subscribers to the
Memorandum and, although it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the
1 [1897] A.C. 22
2 Ibid, at p. 51
2
same hands receive the profits, the company is not in law the agent of the subscribers or the trustee for them. Nor are subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act3.”
The rule in Salomon lies at the heart of corporate personality, and is the principal difference between companies and partnerships. However, there are situations in which the courts look beyond that personality to the members or directors of the company: in doing so they are said to