Company is at law a different person altogether from the

subscribers to the memorandum.

Company is not in law the agent of the subscribers or trustees for
them.
Introduction:
A corporation is a legal entity with an identity different from its owners. As such,
owners generally are not held liable for the firms obligations in excess of the value of their
investment. However, certain actions by the corporation or its owners can lead to instances in
which a court will determine that the veil of limited liability ought to be pierced. Cases
involving the corporate veil vary in complexity and require different analytical approaches
depending on the allegations. When a firm is alleged to have used its corporate structure to
intentionally deceive creditors, the question to be resolved is primarily one of legal
interpretation requiring little economic or financial inquiry. An example of such a case would
be one in which a firm misleads a creditor into believing it is dealing with the parent when,
in fact, it is dealing with the subsidiary. A corporate veil case resulting from allegations of
fraudulent conveyance, on the other hand, demands an analytical framework that is primarily
financial in nature. For instance, if the parent has allegedly stripped the assets of its
subsidiary or fraudulently minimized the resources available for a subsidiary to meet its
liabilities, the financial facts regarding transfers of wealth must be discerned through
complete investigation of intercompany dealings.
A third type of case that may jeopardize the corporate veil is one that alleges a lack
of separation between the corporation and its owners. These cases are the most difficult to
evaluate since they involve neither clear-cut interpretations of the law nor straightforward
analyses of financial transactions. These cases hinge on the degree to which the affairs of
the corporation and its owners have become intertwined and co-mingled.

Company: Company is an association of a number of individuals for the purpose of carrying on some
legitimate business. Generally, company is a form of organization. Company is an association of a
number of individuals for the purpose of carrying on some legitimate business.
Organization engaged in business as a proprietorship, partnership, corporation, or other form of
enterprise. Originally, a firm made up of a group of people as distinguished from a sole proprietorship.
However, since little proprietorship owes their existence exclusively to one person, the term now applies
to proprietorships as well.

Shareholders: Shareholder is an owner of shares in a company. Due to the principle of separate legal
personality, a shareholder does not own any assets of a company, but rather own shares. The relationship
between the shareholders and the company and the rights of shareholders are regulated by the articles of
association of the company. The majority of shareholders usually control the company, however
exceptions exist for protection of minority shareholders where the majority act oppressively or cause
detriment to the minority, or use powers granted in the articles for their personal benefit.
Shareholders are the owners of the corporation as a result of their personal financial investment in the
firm. The percentage of the shares they hold represents the percentage of ownership. A company's
shareholders collectively own that company. They receive dividends. Stockholders have special rights to
vote on matters such as elections to the board of directors, to propose shareholder resolutions, to share in
distributions of the company's income, to purchase new shares issued by the company, to a company's
assets during a liquidation of the company. But they dont receive any thing after liquidation of the
company after bankruptcy.

Example 1: Salomon v Salomon and Co [1897]

Salomon was a sole trading leather merchant. He decided to form a limited company which had
seven shareholders (i.e. Salomon, his wife and his five children) each holding one share. As well as a
shareholder, Salomon also made himself the managing director of the new company. The newly
incorporated company subsequently purchased the sole trading leather business for 39,000. This was
partly paid by the further issue of 20,000 1 shares which Salomon purchased. 10,000 of the purchase
price was not paid by the company which instead issued Salomon with a series of debentures (ie written
acknowledgements of indebtedness) which were secured against the company assets. At this stage,
Salomon was, therefore, the majority shareholder in the company (20,001 shares), the managing director
and a debenture holder against the company. The company failed and went into liquidation. Salomon
aimed to enforce his debenture and have the company assets sold to repay his 10,000 loan. If this
succeeded, the other company creditors would receive nothing. The liquidator, acting on behalf of the
other creditors, claimed the other creditors should have priority of payment arguing (1) Salomon and the
company was the same person and (2) Salomon should be personally liable for the debts of the company.
The House of Lords ruled that Salomon was not liable for the company debts since the business and
debts belonged to the company not Salomon.

Example 2: Lee and Lees Air Farms Ltd

Mr Lee formed the corporation, Lee's Air Farming Ltd. Its main business was aerial
spraying. He was the director and owned most of the shares. As director of the corporation, he
hired himself as an employee of the corporation. The corporation's plane crashed while Mr Lee
was flying it as part of his work, and he was killed on the job. His widow, the plaintiff, attempted
to collect what was rightfully due to a widow of a man killed on the job. The actual defendant, if
I remember correctly, was the Workmens' Compensation Board.
The main question in the case was whether a person could be both a director and major
shareholder of a corporation, on the one hand, and also an employee of the corporation, on the
other.
Previous cases, beginning with the Salomon case, had confirmed that a corporation has
an existence separate and apart from its shareholders and directors. The exceptions to that
principle are gathered under the rubric, 'Piercing the Corporate Veil.' Where a corporation is a

mere sham, the law can cut through the veil of corporate legitimacy, and reach into it for the
shareholders and directors.
The Lee's Air Farming case confirmed the Salomon principle. Lee's Air Farming Ltd. was
not a mere sham. It was a legitimate corporation, established for legitimate purposes, and had
carried on a legitimate business. His employment by the corporation was well-documented,
through government records of tax deductions, workmens' compensation contributions, etc., and
was not something his widow had attempted to piece together after the fact of his death. There
was no reason in law why a person could not perform corporate functions and employee
functions within the same corporation.

Example 3: Macaura v Northern Assurance [1925]

Macaura (M) owned a timber estate, formed a limited company and sold the business to it. Prior to
sale, the estate was insured in Ms name. After the sale, M neglected to transfer the insurance policy to
the company. The estate was destroyed by fire and M tried to claim under the insurance policy. He was
unsuccessful since the damaged assets now belonged to a different person, i.e. the company not M.

Lifting the Veil of Incorporation

Lifting the veil refers to situations where the courts decide that the separation of the personality of
the company and the members should not be maintained. Consider the following example:
A Ltd (known as a parent company) owns all the issued share capital in three other companies X
Ltd, Y Ltd and Z Ltd which in turn are known as wholly owned subsidiaries. Thus, A Ltd controls all
three subsidiaries. In economic reality there is just one business but it is organized through four separate
legal personalities. This allows the parent company, A Ltd, to gain of limited liability as a shareholder of
the other remaining companies. In other words, A Ltd can conduct its risky commercial investments
through, for example, X Ltd and if things go wrong, the assets of A Ltd as a shareholder of X Ltd cannot
be seized or sold to pay the unpaid creditors. Many consider this unfair and so in certain cases, the courts
will lift the veil of incorporation between the company and its members, thus treating both as one single
entity. In this case, the courts may lift the veil between the company, X Ltd, and its shareholder, A Ltd,
and treat both as one single legal personality. Thus, if the risky investment conducted by A Ltd through X
Ltd fails, A Ltd may be held liable for any debts incurred.

There are therefore numerous exceptions to the rules defined by Salomon v Salomon & Co Ltd.
These can be implemented by the courts on a case-by-case basis, or by statute.
Exceptions implemented by the courts since the courts rule on a case-by-case basis, it can be
difficult to classify the exceptions.
Generally, courts will intervene where justice demands it. Some examples of this include:
In cases of fraud or sham. These occur where individuals have used the
separate legal entity to do something they are personally forbidden from
doing.

Gilford Motor Co Ltd v Horne [1933]

An employee (Mr Horne) promised that after the termination of his employment he would not
solicit his former employers customers. After the termination of his employment contract, Horne formed
a company which issued circulars to clients of his former employer. Horne argued that it was the
company (as a separate legal personality) that was attracting the clients not him. The court lifted the
veil and issued an injunction preventing the further distribution of the circulars on the grounds that the
company was merely a front for Horne.
So, we can conclude that, company is distinct from its shareholders or members. Company is a
separate legal personality, which has its own liability rather than the shareholders. But there are some
exceptions where the court decided to withdraw the separation of the personality between the company
and the members.

Catamaran Cruises Ld v Williams (1994)

W was employed by C. W set up a company and C then subcontracted with this company,
paying the company Ws wages gross of tax. W worked and had the same benefits as all
other employees of C. C ended their contract with Ws company, but the courts held that
this was the same as dismissing W directly, and W was able to sue for unfair dismissal
(however, W lost this case, since the dismissal was held to be fair).

a) When the courts recognize an agency relationship. If a subsidiary company is acting

as an agent for its holding company, it may be bound by the same liabilities and rights
of its holding company. However, no court has yet found subsidiary companies liable
for their holding companys debts.

Smith, Stone & Knight Ltd v Birmingham Corporation (1939)

SSK owned some land, an a subsidiary company operated on this land. BC issued a compulsory
purchase order on this land. Any company which owned the land would be paid for it, and
would reasonably compensate any owner for the business they ran on the land. Since the
subsidiary company did not own the land, BC claimed they were entitled to no
compensation. The courts held that the subsidiary company was an agent and BC must pay
compensation

c) When the entities are considered to be a single economic unit.

DHN Food Distributors Ltd v London Borough of Tower Hamlets (1976)
A subsidiary company of DHN owned land which LBTB issued a compulsory purchase order
on. The courts held that DHN was able to claim compensation because it and its subsidiary
were a single economic unit
Woolfson v Strathclyde Regional Council (1978)
This was similar to DHN v Tower Hamlets. However, the House of Lords ruled that Woolfson
and its subsidiary were not a single economic unit due to operational practices. Note that
since this case was based in Scotland, different law applied.

Adams v Cape Industries plc and Another (1991)

A worked for a US subsidiary of CI, which marketed asbestos in the US. The US subsidiary had
no assets. A suffered injuries through exposure to asbestos dust and wanted to sue. If he had
sued the US subsidiary, he would have received no compensation since thee was no money
to pay out. He therefore sued CI in the UK and claimed that the company was a single
economic unit. The courts held that, even though they recognised that the corporate
structure was designed to minimise liability and taxation, it was not illegal and should not be
considered a single economic unit.

d) Under European Union law, the European Court of Justice can consider
Subsidiary companies as a single unit for competition purposes. If there was a monopoly which
set up ten subsidiaries to make it appear as if there was competition, the ECJ could consider
all companies to be a single economic unit.
e)

In cases of national emergency, the courts may need to consider ownership of

companies.

Daimler Co Ltd v Continental Tyre and Rubber (GB) Ltd (1916)

C sued D for debts owing. C was a UK company; however all shareholders but one) were
German. D argued that they should not pay the debt to German individuals to prevent
money going towards Germanys war effort. The court held that C was German

f) When companies have been set up for tax evasion purposes. Companies may transfer
assets between subsidiary companies to reduce tax liability, but the courts may ten treat
them as a single unit.

Exceptions implemented by statute

The Companies Act 1985 includes a number of exceptions to the general rule imposed by
Salomon v Salomon & Co Ltd.
1) A public company must have at least two members. If there is a single member (who is aware
he is the only member) for more that six months, he is personally liable for any debts
incurred during that period.
2) Groups of companies must produce accounts acknowledging their internal relationship, and
profits and losses of different subsidiaries can be offset for taxation purposes.
3) Under the Transfer of Earnings and Protection of Employment Regulations (XXX), if an
employee transfers from one company to a sister company, their period o employment is
held to be continuous
4) Employees of a company can be liable for the companys actions in some circumstances:
- A public company must have an s117 certificate. If it operates without one, a director may be
personally liable for any debts incurred.
- A company cheque must bear the name of a company exactly, otherwise the director who signs
is liable if the cheque is not cleared. This applies even if the omission is due to a printing
error. A director of Michael Jackson Ltd was personally liable for a cheque he signed
bearing the company name M Jackson Ltd.
- If a company is wound up, its director may not carry out similar business with a similar name
for five years. Double glazing companies are a good example of this; before his legislation,
directors would pay themselves high bonuses and run a company into the ground, then
would buy the assets of the insolvent company cheaply and set up a virtually identical
company with a similar name to transfer any goodwill
- Under the Company Directors Disqualification Act 1986, a person who is disqualified from
being a director can be personally liable if they act as a director during their disqualification
period.
- If directors know a company is close to insolvency but continue trading, they may be
personally liable. For example, Courts Furniture Ltd recently continued taking orders and
deposits despite the directors knowing the business was close to closing.

Conclusion
By analyzing the corporate entity in its entirety and not focusing only on a few
issues, we obtain a comprehensive view of how the corporation, in fact, operates in
the business world. In addition, while the legal standards related to piercing the
corporate veil are unquestionably complicated and difficult to summarize, our
approach can easily be articulated to a jury

Bibliography:
1. Singh, Avtar (1966). Company Law (14th Edition). Eastern Book Company.
2. Puig, Gonzalo Villalta (2000). A Two-Edged Sword: Salomon and the Separate Legal
Entity Doctrine.
3. http://en.wikipedia.org/wiki/Salomon_v._Salomon_&_Co. Retrieved 3 April, 2009
4. http://www.scribd.com/doc/3901115/Company-Law. Retrieved 3 April, 2009
5. http://wiki.answers.com/Q/What_are_the_case_facts_of_Salomon_vs_Salomon_1897_A
C_22&src=ansTT. Retrieved 3 April, 2009
6. http://www.murdoch.edu.au/elaw/issues/v7n3/puig73a.html. Retrieved 3 April, 2009
7. http://www.londonexternal.ac.uk/current_students/programme_resources/laws/subject_gu
ides/company_law/E7992_company_law06ch4.pdf. Retrieved 3 April, 2009
8. http://www.ehow.com/about_4727895_what-veil-incorporation.html. Retrieved 3 April,
2009

9. http://www.cornerstone.com/pdf/practice_other_publications_tab/CorporateVeil.pdf.
Retrieved 3 April, 2009

10. http://www.jonesbahamas.com/pdf.php?a=11675. Retrieved 3 April, 2009

11. http://www.economic-truth.co.uk/cima/notes/law13.pdf. Retrieved 3 April, 2009
12. http://wiki.answers.com/Q/What_was_Lee_v_Lee's_Air_Farming_Ltd_case. Retrieved 4
April, 2009