Concept of company: Separate legal entity and corporate veil
In this writing the author has tried to analyze and discuss what company means, what its position in law is and to what extent the court can interfere with ‘concept of corporate veil’ under court’s interpretation and the statutes.
Concept of Company and Separate Legal Entity
Concept of the company got its origin from England. At first, the organizations which had corporate personalities were basically based on a charter from the crown. Royal charters conferring privileges on such companies are found as early as the fourteenth century, but it was not until the expansion of foreign trade and settlement in the sixteenth century that they became common. Companies could be formed by the Royal Charter or by the Special Act of Parliament.[1]
However, in due course of time legislative measures have been taken to regulate the formation of companies. In Bangladesh, under the Company Act 1994 no comprehensive definition of a company is given. Section 2(1)(c) and section 2(1)(h) of this act talk about the concept of a company incorporated under this act but no meaningful definition is given anywhere in the act.
But the concept of separate legal entity has been explained, analyzed and developed by the courts in various case laws, such as Solomon Vs Solomon and Company, Lee Vs Lee and Farming Company, Macaura Vs Northern Assurance Company etc. For better understanding, analysis of these cases are required.
Solomon Vs Solomon and Company Limited:[2]
In this case, Mr. Solomon had the business of shoe and boots manufacture. ‘Salomon & Co. Ltd.’ was incorporated by Solomon with seven subscribers-Himself, his wife, a daughter and four sons. The company purchased the business of Salomon for 39000 pounds, the purchase consideration was paid in terms of 10000 pounds debentures conferring charge on the company’s assets, 20000 pounds in fully paid, 1 pound share each and the balance in cash.
The company in less than one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Salomon itself) and nothing was left to the insured creditors. The House of Lords unanimously held that the company had been validly constituted, since the Act only required seven members holding at least one share each and that Salomon is separate from Salomon & Co. Ltd.
The entity of the corporation is entirely separate from that of its shareholders, it bears its own name and has a seal of its own, its assets are distinct and separate from those of its members, it can sue and be sued exclusively for its purpose and the liability of the members are limited to the capital invested by them.
Lee v Lee’s Air Farming:[3]
The Privy Council held that Lee, as a separate and distinct entity from the company which he controlled, could be an employee of that company so that Lee’s wife could claim workers’ compensation following her husband’s death.
Macaura Vs Northern Assurance Company:[4]
The House of Lords decided that insurers were not liable under a contract of insurance on property that was insured by the plaintiff but owned by a company in which the plaintiff held all the fully-paid shares. The House of Lords held that only the company, as the separate legal owner of the property and not the plaintiff, had the required insurable interest. The plaintiff, being a shareholder, did not have any legal or beneficial interest in that property merely because of his shareholding.
The above mentioned cases establish the principle of separate legal entity and the court did not interfere with the corporate veil as long as possible. Though in these cases a company has been established as a legal person, it can’t claim all the rights in the same way a citizen can.[5]
Corporate veil and lifting corporate veil
Corporate veil is such that the company is considered as a separate legal entity and is not looked behind the real person who is in the control of the company. However, in the United States Vs Milwaukee Refrigerator Co.[6] the court held, “A corporation will be looked upon as a legal entity as a general rule……but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons.”
From the discussion above in this writing, it is clear that the courts have established the company as a separate legal entity and the courts were reluctant to interfere with the company business. Two types of views are found in interfering with company business, one is where the court strictly followed the Solomon case principle with some exceptional cases and another is where the court took modern view and interfered with the company business following the Solomon case but with some new principles.
In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commissioners, Denning’s observation is that ‘the doctrine laid down in Salomon Vs Salomon and Salomon Co. Ltd, has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited liability company through which the Courts cannot see. But, that is not true. The Courts can and often do draw aside the veil. They can and often do, pull off the mask. They look to see what really lies behind.’[7]
Classical period (1897-1966):
In this period courts of England strictly followed the Solomon case principles with some exception such as Enemy Company or on the basis of fraud. The court, for example, in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd[8] lifted the corporate veil to determine whether the company was an ‘enemy’ during the First World War. As the shareholders were German, the court determined that the company was indeed an ‘enemy’. Again, in Jones v Lipman[9], Lipman had entered into a contract with Jones for the sale of land.
Lipman then changed his mind and did not want to complete the sale. He formed a company in order to avoid the transaction and conveyed the land to it instead. He then claimed that he no longer owned the land and could not comply with the contract. The judge again found the company was but a façade and granted relief. In this case the court uplifted the corporate veil to see if there was any fraud to form the company.
Modern period (1966- present):
Adams v Cape Industries[10] is the case where modern view is seen and some new principles have been established. This is also the case where the relationship of holding and subsidiary company has been discussed. In this case three principles have been established while lifting the corporate veil:
- Single economic unit: the court tries to find out whether the parent company and the subsidiary company is doing the business as a single economic unit or not and for this reason the court can interfere with company business and uplift the veil.
- Agent relationship: whether the parents and the subsidiary company doing the business as agent and principal.
- Intention to form the company: this point is considered with fraud and the court can uplift the corporate veil in considering this point.
In this case modern view is taken but the court did not supersede the Solomon case principle. Rather the court added some new principles with the Solomon case principle.
Statutory interference
Interference can be done either by the court while interpreting the intention of the company (mere façade/single economic unit/fraud) or by the statutes where it has been incorporated in what manner and to what extent interference with the company business can be done. As we have discussed earlier the court’s position in interfering with the company business and corporate veil, now we will try to find out the sections of The Company Act 1994 where interference with the company business has been incorporated. Some relevant provisions are:
Reduction of members below the statutory number
When the number is less than the required number as provided by law and carried on business for a period more than 6 months, the members of that company shall be personally liable if the liability question arises.[11] So in this matter we find that the concept of separate legal entity of a company has been uplifted and the members of that company are made liable.
Wrong description of the company
The mandate of the law is that in all documents of the transaction, the name of the company shall be mentioned specifically. But if any member of the company enters into a contract with a third party without referring to the name of the company, that person shall be liable personally.[12] So it is clear that the court can interfere with the company’s business in order to see who that person was.
Investigation as to affairs
Under section 199, an inspector appointed for the purpose of investigating the affairs of a company can also uplift the corporate veil to see the inner matter of the company.
Investigation as to ownership and Minority rights
Under section 195, 197 the government can appoint inspectors for the purpose of determining who the real owners are and who are financially interested in the company and also to protect the rights of the minority shareholders.
Misstatement
Under section 145 civil liability is incorporated for misstatement by the director and criminal liability under section 397 as well. In these sections scope for interference with company business is incorporated.
Conclusion
From the beginning of the case of Solomon to present, the concept of separate legal entity and corporate veil of company has been followed with some exceptional cases as discussed earlier. People are getting more interested in forming companies as there is limited liability and the personal liability is less than any other form. But some case laws and also some statutory provisions are incorporated for controlling fraud and saving the creditors, shareholders and others in contact with the company business.
Writer: Soeb Aktar, student of Department of Law, University of Dhaka.
References
[1] A I Khan, Fundamentals of Company Law (University Publication, 2010) page 38
[2] Solomon Vs Solomon and Company Limited [1897] A.C. 22
[3] Lee v Lee’s Air Farming [1960] 3 AII E.R. 420
[4] Macaura v Northern Assurance Company Ltd, [1925] A.C. 619
[5] State Trading Corporation of India Vs C.T.O. [1963] A.I.R. 1811 (SC)
[6] United States V. Milwaukee Refrigerator Co., 145 F. 1007 (1906)
[7] All Answers ltd, ‘Lifting of the Corporate Veil Essay’ (Lawteacher.net, February 2022) <https://www.lawteacher.net/free-law-essays/business-law/article-on-lifting-of-the-law-essays.php?vref=1> accessed 14 February 2022
[8] Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 A.C. 307
[9] Jones v Lipman [1962] W.L.R. 832
[10] Adams v Cape Industries [1990] 1 CH 433
[11] The Company Act 1994, s 222
[12] The Company Act 1994, s 225
