After a series of attempts by the Court of Appeal during the late s and early s to establish a theory of economic reality, and a doctrine of control for lifting the veil, the House of Lords reasserted an orthodox approach. According to a case at the Court of Appeal, Adams v Cape Industries plcthe only true "veil piercing" may take place when a company is set up for fraudulent purposes, or where it is established to avoid an existing obligation.
It constitutes the bedrock principle upon which company is regarded as an entity distinct from the shareholders constituting it. When a company is incorporated it is treated as a separate legal entity distinct from its promoters, directors, members, and employees; and hence the concept of the corporate veil, separating those parties from the corporate body, has arisen.
This doctrine has been established for business efficacy, necessity and as a matter of convenience. Various grounds for piercing of the corporate veil and elements of lifting of corporate veil analyzed through the lens of leading case laws and judgements form the crux of this project report.
The other subscribers to the memorandum were his wife and five children who each Lifting of corporate veil in tort up one share. The business subsequently collapsed, and Salomon made a claim, on the basis of the debentures held, as a secured creditor.
The liquidator argued that Salomon could not rank ahead of other creditors because, in fact, the company and Mr. 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. In Hobart Bridge Co. J summarizes the position in the following manner: Therefore, it can be seen that there has been, and still is, the highest authority for the separate entity concept.
However, consideration has to be given to the limitations of the separate entity principle which completely denies the efficacy of the corporate entity as a legal person separate from its founders, shareholders or management.
Judgements as early as the Salomon case have indicated the recognition of exceptions to the principle of separate entity by the courts. The courts can, and often do, pull off the mask.
They look to see what really lies behind. Judicial discretion and also legislative action allows the separate entity principle to be disregarded where some injustice is intended, or would result, to a third party either internal or external to the company with whom the company is dealing.
Lifting the veil doctrine exists as a check on the principle that, in general, investor shareholders should not be held liable for the debts of their corporation beyond the value of their investment. The corporate evil is said to be lifted when the court ignores the company and concerns itself directly with the members or the managers.
One of the grounds for lifting of the corporate veil is fraud. The courts have pierced the corporate veil when it feels that fraud is or could be perpetrated behind the veil. The courts will not allow the Solomon principal to be used as an engine of fraud. The two classic cases of the fraud exception are Gilford Motor Company Ltd v.
Horne in which Mr. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company.
The company brought an action against him. In the second case of Jones v. Lipman a man contracted to sell his land and thereafter changed his mind in order to avoid an order of specific performance he transferred his property to a company.
Russel J specifically referred to the judgments in Gilford v. Lipman and the company. Under no circumstances will the court allow any form of abuse of the corporate form and when such abuse occurs the courts will step in.
The second ground for piercing of corporate veil covers group enterprises. Sometimes in the case of group of enterprises the Solomon principal may not be adhered to and the court may lift the veil in order to look at the economic realities of the group itself.
In the case of D. The court of appeal thought that the present case where it was one suitable for lifting the corporate veil. Here the three subsidiary companies were treated as a part of the same economic entity or group and were entitled to compensation.In a recent article, ‘Piercing of the Corporate Veil for Evasion of Tort Obligations’, I analyse the common law doctrine of veil piercing in the context of tort liabilities of a company.
In the tort context, the prevailing view is that it is permissible to establish a company to carry on. Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its benjaminpohle.comy a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed.
Common law countries usually uphold this principle of. Student loan forgiveness and loan repayment programs provide borrowers a means of having all or part of their student loan debt forgiven or repaid in exchange for work or service in specific fields or professions or following a prolonged period during which their .
8Compare the observation by Angelo Capuano of MonashUniversity in his paper propounding a ‘realist’ approach to piercing the corporate veil, ‘The realist’s guide to piercing the corporate veil: Lessons from Hong Kong and Singapore’, () 23 Australian Journal of Corporate Law: ‘The corporate veil cannot be measured physically, nor can the corporation be touched, hand cuffed or.
Lifting The Corporate Veil: Incorporation by registration was introduced in and the doctrine of limited liability followed in Subsequently in Lifting of Corporate Veil in Tort Cases in Pursuit of Justice Introduction Limited liability has been the prevailing rule for corporations for more than a century.