lecture 3 [slides] - corporate personality - 29 october 2009

8/7/2019 Lecture 3 [Slides] - Corporate Personality - 29 October 2009

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Corporate Law 2009-10

Section 3

Corporate Personality


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The notion of Separate Personality

Sole TraderTrader owns

Business

Company

Members

Company owns

Business


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Salomons Case

Pre-1892: Salomon as sole trader

Business owned by Salomon alone

1892: A. Salomon & Co. Ltd

ares owne : Salomon (30,000)

Wife and 5 children (1 each, as nominees for S)

Business owned by A. Salomon & Co Ltd(bought from Salomon in exchange for sharesand debentures)


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Salomons case: the decision inthe lower courts

High Court (Vaughn Williams J)

Salomon liable for debts of the co. Business was Salomons business and co was his

agent

Court of Appeal (Lindley, Lopes & Kay LJJ) Salomon liable for debts of the co.

Co was an abuse of the corporate form;

Co merely Salomons shadow, and Salomon wastrustee for the co.


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Salomons case:the House of Lords

House of Lords Salomon not liable for debts of the co.

co and Salomon were separate entities;

for cos debts;

no abuse of corporate form; valid incorporation;

one-man co valid; no agency;

creditors must take responsibility for dealing withlimited co.


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Possible criticisms of theSalomonprinciple

One-man co not the intention of original C. Acts

25 shareholders, then 7, then 2, now 1

Too easy to avoid responsibility for debts

Kahn-Freund: calamitous

allows incorporation even where no significantbusiness risk and no need for outside capital

Balance between enterprise and creditors

risk moved to creditors not all creditors in position to contract for risk

Position of involuntary creditors

no opportunity to contract for risk


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Applying the principle: someexamples

Lee v Lees Air Farming

Controlling shareholder and director could becos employee

Even a sole shareholder has no interest inproperty belonging to the company

Tunstall v Steigmann The business carried on by a co is not carried

on by the cos shareholder


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Consequences of Salomon Co has separate legal personality

Co owns own property Co responsible for own debts and liabilities

Members not liable for cos debts (ltd liability)

Validity of one-man co sole member and costill separate entities

Individual can function in dual capacities

Cos in group are separate entities Co has (potential) perpetual succession


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The veil of incorporation

Sits between members and company

Ensures members and company are

separa e

Veil can be lifted (in exceptionalcircumstances)


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Lifting the veil by statute

Statute is able to provide that separate

legal personality should be ignored forsome purpose ie the veil should be lifted

requires veil to be lifted

Not necessarily in order to impose liability

Variety of reasons for veil-lifting but veryfew situations


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Lifting the veil at common law:attribution of characteristics

Veil may be lifted to attribute

characteristics of members to thecompany

Looking behind the veil for information

Eg Daimler: enemy alien status


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Lifting the veil at common law:single economic unit

Can corporate groups be considered a single

economic unit to justify lifting the veil betweenthem?

Previously interventionist court approach

Eg DHN Food Distributors Approach has now changed

Cos in a group are separate legal entities

Eg Woolfson v Strathclyde; Adams v Cape Some remaining scope when construing eg contracts,

documents

Adams v Cape


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Lifting the veil at common law:mere faade

Appropriate to lift the veil if the

circumstances indicate the co is a merefaade concealing the true facts

No comprehensive definition

One-man co not enough

Underfunded subsidiary not enough


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Lifting the veil at common law: therole of motive in mere faade

Not enough to be taking advantage of the

corporate form: Adams v Cape

Need evasion of liabilities (not just

faade

Motive highly relevant: Adams v Cape

Motive v- timingOrd v Belhaven Pubs


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Lifting the veil at common law: by-passing the veil

Arguably by-passing the veil rather than true

lifting but effect much the same Agency dependent on factual matrix: was the company in fact

acting as members agent

very difficult to establish Tort

Tension between imposition of tortious liability andSalomonprinciple

Need to show member (or more commonly director)liable for own tort (or as joint tortfeasor)

Difficult to establish in company context

lecture 3 [slides] - corporate personality - 29 october 2009

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