Corporate veil

Download 48.37 Kb.

Bog'liq
Corporate Veil (1)

Corporate veil is a legal term which distinguishes a company from its shareholder. According to it the individual members shall not be personally responsible for the debts and obligations of the company.

However, they began to abuse it as a mask for fraud and unethical conduct. It is therefore necessary for the courts to break through the corporate shell and look behind the corporate body as if there is no independent existence of the organization from its members.

Thus where a fraudulent use is made of the business entity, the individuals concerned will not be allowed to be protected under its corporate personality. Furthermore, if found guilty of any wrongdoing, members can be held responsible for the acts of the company, including any unpaid debts. This is termed as the lifting of the corporate veil.

There are two principles on lifting of corporate veil namely the “alter-ego” theory and “instrumentality” theory. The alter ego theory takes into account whether the boundaries between the company and its shareholders are distinctive in nature. On the other hand, the theory of instrumentality explores the use of a business by its owners in ways that favour the owner instead of the company. It is up to the court to determine which principle to enforce or merge the two doctrines with one another.

The lifting of the corporate veil implies neglecting the corporate personality and looking for the genuine individual who is in the control of the organization. At the end of the day, where a false and deceptive utilize is made of the legitimate entity, the people concerned won’t be permitted to take shield behind the corporate personality. In this respects, the court will get through the corporate shell and apply the guideline of what is known as “lifting or piercing the corporate veil.”

1 To evade existing obligations

Mr Gilford, an ex- employee of the claimant, Gilford Motor Company, was bound by a restrictive covenant in favour of his ex-employer not to engage in any competing business ‘either solely, or jointly with or as agent for any other person, firm or company’. He was unable to escape the covenant by carrying out the restricted activity through a company technically owned by his wife and a business associate. An injunction was issued against both Mr Horne and the company.

Mr Lipman, who had contracted to sell a piece of land to the claimant, Mr Jones, was not permitted to avoid an order for specific performance of the sale by transferring the land to a company created solely for the purpose of avoiding the transfer to Mr Jones. The company was subject to the specific decree order as well as Mr Jones.

‘Those circumstances include a situation where, as in the present case, (1) the businesses of the parent and subsidiary are in a relevant respect the same; (2) the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry; (3) the subsidiary’s system of work is unsafe as the parent company knew, or ought to have known; and (4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees’ protection.’

The court will look at the relationship between the companies more widely. The court may find that element (4) is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues.

The Supreme Court considered three legal bases on which the properties (assets of the companies) might be made subject to an order:
that this was a case where, exceptionally, the Court could disregard the corporate veil in order to give effective relief;
that s 24 of the Matrimonial Causes Act 1973 conferred a distinct power to disregard the corporate veil in matrimonial cases; and
that the companies held the properties on trust for the husband, not by virtue of his status as sole shareholder and controller of the company, but in the particular circumstances of the case.

Lords Sumption and Neuberger confirmed that the sole basis for piercing the corporate veil was the ‘evasion principle’.
Munby J in Ben Hashem v Al Shayif [2009] 1 FLR 115 suggested that it should only do so in favour of a party when all other, more conventional, remedies have proved to be of no assistance.’

Download 48.37 Kb.

Do'stlaringiz bilan baham: