Understanding The Corporate Veil: Circumstances Of Lifting And Legal Essay.

Concept of Corporate Veil

A company is not considered to have a specific definition but it attempts to provide a meaning for the word through the provisions of usage of the statute in company law. A company is well-thought out to imply that it has been formed as well as registered under the Companies Act for becoming an incorporated association. If it is not registered then it becomes an illegal association (Ambalkar 2020). Therefore, corporate veil is considered to be a legal concept which distinguishes and separates the personality of the company from the commission of frauds as well as illegal and improper activities. Since the company is deemed to be an artificial person, it is not having the capacity of doing anything legal or fraudulent as the façade of corporate personality is considered to be removed through the detection and identification of individuals who are guilty of committing the fraud. Therefore, this concept is known as the lifting off the corporate veil (Nzegwu and Uhumuavbi 2022).

This segment critically discusses the circumstances when both the courts as well as the statutory laws lift the veil of incorporation. This particular segment also explains the concept of corporate personality through the application of the case Salomon v Salomon 1897. In addition to this, the court also lifts the veil by offering interests for justice as such is demanded by the rules that were supposed to be restricted during the case of Adams v Cape Industries 1990. However, it would be discussed how the veil can only be lifted during specific circumstances. In conclusion, it summarizes the points that have been discussed in the paper.

The corporate veil is supposed to be a legal concept that distinguishes the personality of a company from the personalities of the shareholders as it protects them from being personally responsible for the debts and other obligations of the company. The principle of veil of incorporation is considered to separate the legal entity through the actions of the human agents as they cannot compose it or neglect the actions caused by them. Therefore, the statutory provisions regarding the lifting of the corporate veil are supposed to address the real state of affairs as the legislature and the courts do not permit the corporate veil to be lifted until and unless the rule and the instances have been proved (Na 2019). It can be elaborated through the case of Saloman v Saloman & Co Ltd [1897] AC 22 where the effect of the unanimous ruling was supposed to uphold the ruling of the doctrine of the corporate personality. The case also explained the concept of separate legal entity by distinguishing the company from its owners. The separate legal entity is recognized by law where the legal rights and responsibilities would be afforded to the company (Udemezue 2020).

As per the statements of the author, Govender (2019), it can be noted that, the statutory provisions of the company law can help in lifting the corporate veil as well if the situation where the shareholder has been held liable is proved. The doctrine is supposed to be invoked for the act of the shareholders as they blur the distinction between the corporation as well as the shareholder. However, it has been stated that there are two theories for the lifting of the corporate veil. The first is the alter-ego theory that is considered through the distinctive nature as the boundaries between the shareholders and the corporations are understood and then comes the instrumentality theory where the usage of the corporation through the owners are supposed to create distinctions in its own ways as it would be benefitting the owner rather than the corporation. Therefore, the court is supposed to decide on the application of the theory as it combines two doctrines to understand the motives and the liabilities of the directors. It can be enumerated upon through the instance of Adams v Cape Industries 1990 Ch 433 where the separate legal personality had been demonstrated through the limited liability of the shareholders. The decision was significant because it created a direct duty of the shareholders in administering justice as the lifting of the corporate veil was supposed to create a mere façade for the company for concealing the true facts of the agents which were in the form of shareholders (Cheng-Han, Wang and Hofmann 2019).

Circumstances When Corporate Veil can be Lifted

According to the statements made by the author, Tuyisenge (2022), it can be found that, as per the Adams v Cape Industries case the veil could be lifted off on following circumstances and it can be understood from the case of Gramophone and Typewriter Co Ltd v Stanley [1908] 2 KB 89 where the decision had been held on the basis of owned shares of the appellant company as such was not enough to make business. Therefore, the appellant company did not incur any liability. It also stated that the directors were not servants of shareholders as they did not need to obey the shareholders’ directions. Due to this, the liability of the shareholders had been identified. However, it has been understood through the case of Smith, Stone and Knight Ltd v Lord Mayor, Aldermen and Citizens of the City of Birmingham [1939] 4 All ER 116, that the plaintiff ran various businesses and SSK had purchased a waste business by incorporating it as a subsidiary. In spite of that, through the legislation, the city had to pay compensation for compulsory or mandatory acquisition and this benefitted the city due to the removal of the occupiers. Therefore, the case tried to turn the application on the separate legal entity principle and such was not possible. It can be also observed from the instance with respect to the case of Firestone Tyre and Rubber Co. Ltd v. Llewellyn (1956) 1 WLR 464 where the company made certain payments as a separate legal entity but certain payments had been retained to its parent company. Due to this, the agreement and the action was deemed as fraudulent and the shareholders were supposed to be liable in spite of the company being a separate legal entity as the artificial person could not commit such offence (Paltanwale 2018).

As per the case of DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 the economic entity was supposed to be analyzed as the company needed to be compensated for the loss as it was a compulsory acquisition of the order and the group was supposed to be identified as a single economic entity. This case helped in creating a basis for understanding as it was deemed to be the liberal example of an instance when the UK courts lifted the veil of incorporation from a company. However, the case of Jones v Lipman [1962] 1 W.L.R. 832 helped in distinguishing between the corporate façade or fraud as the Supreme Court ruled the application of certain specific circumstances as it created an assistance in masking the recognition through the eye of equity. This was on the basis of prevention of the basic requirement of specific performance and due to such the defendant in this case had the power to control the sham by holding the property. Therefore, the corporate façade and fraud had been established through the actions of the individual who performed the agreement. It can also be enumerated through the case of Gilford Motor Co Ltd v Horne [1933] Ch 935 where the case concerned itself with the piercing of the corporate veil. Furthermore, the case of Creasey v Breachwood Motors [1993] BCLC 480 concerned itself with the lifting of the corporate veil but it could not provide the steps for establishing the facade.

Landmark Cases

In accordance with the statements made by the author, Nsubuga (2020), it can be understood that, the case of Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 provided a decision regarding the nature of the doctrine of piercing as it resulted in trusts as well as equitable proprietary remedies. It also stated that the person could only lift the corporate veil if there was an existence of a legal obligation as such would be deliberately evading the enforcement through the imposition of power of the position in a company that is under the individual’s control. Therefore, this case helps in putting a restrictive regime as it makes it difficult for the court to life the corporate veil. However, section 213 and 214 of the Insolvency Act 1986 apportions the liability for fraudulent trading where the principles would be determined through evaluation by examining the quantum of liability for fraudulent trading as per the case of Goldfarb v Higgins and others (no.2) [2010] EWHC 613 (Ch). Thus, the wrongful trading is also considered to be understood through the statute (Spotorno 2018).

Conclusion

Therefore, in conclusion, it can be stated that, the law in piercing or lifting the corporate veil is not adequate as it is metaphorically applied which symbolizes the difference between the company as a separate legal entity and the shareholders who are supposed to own shares of the company. The law needs to be improved upon as the effect needs to be stringent as the liability of the shareholders would create relevant implications on the success of the company. Thus, the principle to impose liability on shareholders need to be enhanced and improved upon by ascertaining the appropriate jurisdiction as there is a general reluctance that creates problems in rulings. The issues regarding such needs to be addressed in order to prevent the shareholders from acting in a manner that would be detrimental towards the success of the company.

The issue that is to be determined through the present scenario is regarding the rights and remedies of the Joneses for being minority shareholders. Whether the Joneses be applicable for such rights and remedies.

As per the rule of Foss v Harbottle (1843) 2 Hare 461, 67 ER 189 the legal action was considered to be pursued by the two minority shareholders against the directors of the company as they alleged that the conduct was supposed to concert illegal transactions that was resulting from the loss of the company property. This particular case is a landmark English case regarding company law where the propounding of proper plaintiff rule has been elaborated on through the majority rule. However, in spite of the rule being well laid, there are certain exceptions regarding the enjoyment of the personal rights as such requires a strong immunity of application. Therefore, this case aims to trace the development through the highlighting of the relevance of personal rights outside the former purview. The directors in this case were supposed to misappropriate the assets which adversely effected the original objective of the company. Thus, the primary issue was regarding filing an action against the shareholders for doing wrong (Spotorno 2018).

Legal Significance

However, there were certain exceptions that were stated in the Foss v Harbottle case where the severity of the rules was supposed to be conferred through the substantive rights of the minority shareholders as they were denied the procedural grounds. Nevertheless, the case was considered to reduce the effect of harshness as well as unjustness on the minority shareholders. The exception regarding the challenging the illegality or ultra vires decision was not considered to be applicable in the above-mentioned case as it was a breach of fiduciary duties and it resulted into fraud as well as oppression against the minority shareholders through variation of class rights as well as scheme of compromise and arrangement. It also took care of the oppression as well as mismanagement through the rights of the dissentient shareholders through class action suits as it was supposed to be under the takeover bids. Thus, the exceptions regarding the infringement or denial of the personal rights were supposed to create a principle for going against the major shareholders. The case has also propounded the majority rule whereby the shareholders are brought to courts through frivolous litigation and this would be regarding the matters of internal management as the internal irregularity would be in the form of infringement of the articles of association of the company and this would affect the company as it would be ratified only by the majority. Thus, the breach is supposed to give rise to the right of the shareholders for filing of an action (Bawah 2019).

The statutory derivative action claims as per the Companies Act 2006 is considered to act as a remedy for the minority shareholders as it would help them make a claim on behalf of the company for compensation from directors who have violated and breached their duty to cause loss. The claim is considered to be contained in Part II, Chap 1 Sc 260-264 of the CA 2006. The derivative claim is supposed to have a two-stage procedure where the permission is either granted or refused. Therefore, the court is supposed to guide the shareholders through section 263 by adjourning, rejecting or granting the direction as it deems fit (Gibbs-Kneller and Ogbonnaya 2019).

In addition to this, the unfair prejudice petition would also act as a statutory remedy whereby the remedy would be available under sections 994-999 of the Companies Act 2006. The primary or the principle procedure for a minority shareholder would be on the basis of the victim who has been subjected to the unfair prejudicial conduct and due to such the claim has been brought to obtain relief from the court. It can be enunciated through the case of Re Sam Weller & Sons Ltd. [1989] 5 BCC 810 where the non-payment of the dividends was considered to be capable of constituting unfair prejudicial behavior as the petitioners were supposed to hold minority shareholding through the family company. The primary or the principle complaint of the petitioners were regarding the company not being able to increase its dividend for thirty-seven years and the court held that the non-payment of dividends were considered to create unfair prejudicial behavior. However, this particular case had stated that in spite of such, it did not entitle the shareholders to complain in every case when the income by dividend is received as the control of the company is provided through the direct income as well as profits of the company and such are not fully distributed through the dividends (Hardman 2022).

Conclusion

It can be understood from the scenario, that, the Joneses being the minority shareholders have the right to claim for remedies as per the case of Foss v Harbottle case. The case helped in reinforcing the rule of majority as t discouraged the shareholders from bringing certain frivolous litigation to the courts regarding the internal management matters of the company. Thus, Joneses can bring their case to the court if the mere internal irregularity created infringement of the articles of association. This infringement would also have to cause an impact on the ratifiable nature of the shareholders in the company. In addition to this the breach would have to create a violation of the constitution of the company as it would give rise to the breach of the right of the shareholders. If these criteria are fulfilled the Joneses would have the option of filing an action against the Smiths. The litigation would also have to file a legitimate action against the Smiths as the irregularity would have to be depicted and demonstrated by the Joneses.

The Joneses from the analysis of the scenario, can claim for remedies through the statutory derivative claim available to them from the Companies Act 2006 as the court would take cognizance of the views of the members without having any personal interest through the derivative claim. In addition to this, the adjournment would be given on the basis of ratification of the company as the breach would create a complete bar of the proceedings. Furthermore, it can also be understood that the cumbersome procedure as well as limitations of statutory derivative claim might create breach of directors’ duties as the shareholders might nit want to institute the derivative action. However, the Act helps in providing certain remedies to the shareholders who think that they have been wronged due to the company directors and other majority shareholders.

The Joneses through the analysis can also be seen having a remedy regarding the unfair prejudice petition as unfairness is considered to be an essential ingredient in the petitions of the minority shareholder as prejudice itself is not enough. Therefore, Section 994 of the statute helps in allowing a member of the company to petition to the court for the relief on the basis of the company affairs as these were deemed to create unfair prejudice through the interests of the members. The petitioner who are the Joneses need to establish four elements that would satisfy the court and these would be in the form of the conduct of the company’s affairs along with the prejudice such has caused as well as the unfairness and the interests of the petitioner as a member of the company. Therefore, the conduct needs to be established through unfairness and prejudice as this would be the basis of the remedy. In this case the Smiths had fulfilled such unfair prejudice criteria and due to such, the Joneses would have the opportunity of applying this remedy.

As per the case of Re Sam Weller [1990], it can be understood that a remedy can be claimed due to the non-payment of the dividends in case of Joneses as the situation of the case is similar to that of the scenario and due to such, the complaint of Joneses can be heard. The court through this instance would be offering a little bit of caution for the allegations as this would have to be established and if the application strikes out the certainty of the petition would succeed.

References

Conclusion

Therefore, in conclusion, it can be stated that as minority shareholders of the company, the Joneses had faced certain oppression from the Smiths and due to this the Joneses have certain rights and remedies available to them to protect them against such oppression under the Companies Act 2006. They would have to establish that they had been wronged and it was unfair as well as prejudicial through the analysis of the afore-mentioned rule. This in turn would help the court determine the form of damages for the breach. Thus, the Joneses are applicable for the rights and remedies through the analysis.

References

Adams v Cape Industries 1990 Ch 433.

Ambalkar, L., 2020. Corporate Veil Lifting: Issues and Solutions and Public Policy as a Ground; Tracing the Indian, English and American Jurisprudence. Supremo Amicus, 22, p.239.

Bawah, A.S., 2019. A Comparison of the Statutory Provisions of the United Kingdom (UK) Companies Act 2006 and Ghana's Companies Act 1963 (Act 179), to the Rule in Foss v Harbottle. Beijing L. Rev., 10, p.153.

Cheng-Han, T., Wang, J. and Hofmann, C., 2019. Piercing the Corporate Veil: Historical, Theoretical and Comparative Perspectives. Berkeley Bus. LJ, 16, p.140.

Companies Act 2006.

Creasey v Breachwood Motors [1993] BCLC 480.

DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852.

Firestone Tyre and Rubber Co. Ltd v. Llewellyn (1956) 1 WLR 464.

Foss v Harbottle (1843) 2 Hare 461, 67 ER 189.

Gibbs-Kneller, D. and Ogbonnaya, C., 2019. Empirical analysis of the statutory derivative claim: de facto application and the sine quibus non. Journal of Corporate Law Studies, 19(2), pp.303-332.

Gilford Motor Co Ltd v Horne [1933] Ch 935.

Goldfarb v Higgins and others (no.2) [2010] EWHC 613 (Ch).

Govender, T.N., 2019. An analysis of lifting of the corporate veil in light of s20 (9) of the Companies Act 71 of 2008 (Doctoral dissertation).

Gramophone and Typewriter Co Ltd v Stanley [1908] 2 KB 89.

Hardman, J., 2022. The Plight of the UK Private Company Minority Shareholder. European Business Law Review, 33(1).

Insolvency Act 1986.

Jones v Lipman [1962] 1 W.L.R. 832.

Na, T., 2019. Piercing the corporate veil: when LLCs and corporations may be at risk. International Journal of Law and Management.

Nsubuga, H.J., 2020. The road to Prest v Petrodel: an analysis of the UK judicial approach to the corporate veil-part 2: post Prest. International company and commercial law review, 31(11), pp.597-608.

Nzegwu, S.N. and Uhumuavbi, I., 2022. Assessing the suitability of “Lifting the Corporate Veil” Legal Mechanism in the Enforcement of Law on Corporate Manslaughter and Corporate Social Responsibility in Nigeria. Educational Research (IJMCER), 4(1), pp.129-140.

Paltanwale, D., 2018. Lifiting the Corporate Veil: A Historical and Jurisprudential Analysis. Supremo Amicus, 7, p.56.

Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415.

Re Sam Weller & Sons Ltd. [1989] 5 BCC 810.

Saloman v Saloman & Co Ltd [1897] AC 22.

Smith, Stone and Knight Ltd v Lord Mayor, Aldermen and Citizens of the City of Birmingham [1939] 4 All ER 116.

Spotorno, A.R., 2018. Piercing the corporate veil in the UK: The never-ending mess. Business Law Review, 39(4).

Spotorno, A.R., 2018. Why Is the Rule in Foss v. Harbottle Such an Important One?. Business Law Review, 39(6).

Tuyisenge, S., 2022. The Concept of Piercing Corporate Veil. Available at SSRN 4056386.

Udemezue, S., 2020. Does Salomon v. Salomon Still Reign? A Disquisition on Recent Case Law on Corporate Legal Personality and Lifting the Veil. Salomon Still Reign.