Uploaded bySaumya Singh
Lifting the Corporate Veil
The document discusses the concept of lifting the corporate veil, which is an exception to the principle of a company having a separate legal identity from its owners. It provides examples from case law where the veil was lifted due to fraud, evasion of liability, the company being an alter ego or agent of its owners, or the company being used as a sham or mask. Statutory exceptions include misrepresentation in prospectus, failure to return application money, or investigation of ownership. The veil may also be lifted judicially when the company has been used to manipulate or evade liability based on precedents such as Gilford Motor Co. v Horne or Jones v Lipman.
Law◦
More Related Content
Similar to Lifting the Corporate Veil
Lifting the Corporate Veil
- 1. LIFTING OF CORPORATEVEIL AND EXCEPTIONS SAUMYA SINGH 1321760 CHRIST UNIVERSITY
- 2. CONCEPT A companyis a legal person with a separate entity. This shows that there is a veil drawn between the company and its members. Lifting the corporate veil is an exception to the concept of separate legal entity.
- 3. Contd. The corporateentity will be disregarded only in exceptional cases.
- 4. Case: Salomon v.Salomon This principle was first established by the English House of Lords in Salomon v. Salomon & Co. Ltd. and well accepted as part of Malaysian company law. The brief facts are as follow: Aron Salomon had for some year been a prosperous leather merchant and wholesale boot manufacturer running the business as a sole trader. He then decided to transfer the business into a limited liability company. The subcribers of the memorandum include Salomon, his wife and five of his children. Besides, he also received for his business debentures and continued to carry on the business as before. A year after, the company went bankrupt and was put into liquidation. There was just enough assets to pay off the debenture holders including Salomon himself. The unsecured creditors claimed that the company was “mere nominee and agent of Salomon”. Salomon should be ordered to pay compensation for the company against its debts other than Salomon himself. The Lord Macnagthen held that “though it may be that afer incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the comany is not in law the agent of the subcribers or trustee for them” Therefore, even though a person held almost all shares and debetures, and controlled the compay’s oporations, one was entitled to be deal with the company as a separate legal existence from oneself. As such, one is treated as other secured creditors who have priority over unsecured creditors in the event of the company being insolvent
- 5. Contd. Hence, acompany is an artificial legal person distinct from its individual members. Corporation or subsidiaries, not its directors or individual members or the parent corporation, is liable for its own contract made, torts commited or debts inccurred (Shub, 2006). This principle is regarded as the veil of the corporation.
- 6. LAW WILL LIFTTHE CORPORATE VEIL Under statutory provisions/exceptions Under judicial interpretation/exceptions
- 7. UNDER STATUTORY PROVISIONS/EXCEPTIONS Reductionof number of members below the statutory minimum Misrepresentation in Prospectus Failure to return application money Misdescription of the company’s name
- 8. Contd. For investigationof ownership of company Fraudulent or wrongful trading Case: In Re William C. Leitch Brs.Ltd.,the company went bankrupt but its directors continue to carry on its business and buy more goods on credit. Maugham J. held one of the directors personally liable for the price of those goods.
- 9. UNDER JUDICIAL INTERPRETATION/ EXCEPTIONS The company has been used to manipulate or evade liability. - Gilford Motor Co. lwn Horne - Jones lwn Lipman - Re Darby
- 10. Case: Gilford MotorCo. v Horne F: H was employed as a managing director in the P’s company. There was a covenant… not to solicit customers of the company after leaving his employment. When H left the company, set up his own company and in contravention with the covenant solicited the P’s customers. P applied an injunction against H.
- 11. H: Injunctiongranted. ‘Of course in law the Def. Co. is a separate entity from H but the reason for the creation of the company was the fear of H that he might commit breaches of the covenant’ ‘The company was formed as a device, a stratagem, in order to mask the effective carrying on of a business of Mr Horne’ Contd.
- 12. F: Lagreed to sell his house to J.L changed his mind, to avoid transfer he set up a company and transferred the house to the company. The company was wholly owned and controlled by L. Russel j: ‘….the company was a creature of L, a device and a sham, a mask which he holds before his face in an attempt to avoid the eye of equity’. Case: Jones v Lipman
- 13. F: Theshares- in Bugle Press were held by S & J – 4500 shares each and T- 1000 shares. S & J wanted to buy T’s shares. For this purpose they incorporated a company which made an offer to purchase all the shares in Bugle Press. S & J agreed except T. Thus, they invoked Sec 209 (equiv. To Sec 180) i.e. if a co. acquired 90 %, it could compulsorily buy out the remaining 10 %. Case: Re Bugle Press
- 14. Court ofAppeal: Rejected the application of sec 209. “the section had been used…for the purpose of enabling majority shareholders to expropriate or evict the minority” Contd.
- 15. Contd. The companyhas been agent or ‘alter ego’ to its members. - Aspatra S/B lwn Bank Bumiputra Malaysia Bhd Respondent company had applied an injunction against Lorrain who was once a director of the respondent company. R alleged L had channeled certain secret profits into Aspatra which he controlled to prevent R from recovering those proceeds
- 16. Contd. When thecompany has been used as mask to cover a wrongful act. - Re FG(Films) Ltd. F: 90 shares of a company were held by an American director and 10 shares were held by a British. The company sought to register its film “Monsoon” as a British film. The Board of trade refused because in reality it was made by an American company.
- 17. Contd. When theCourt acts on analogy and equity - Orri lwn Moundreas When it involves group of companies - Hotel Jaya Puri Bhd. lwn National Union of Hotel, Bar & Restaurant Workers
- 18.