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3 Cards in this Set
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A separate legal entity to first to a business which is legally separate (separate legal personality) from the individual or owner, for example a limited liability company or a corporation.
-The amount you stand to lose is proportionate to the amount you invested – very different to sole trader/partnership.
SALOMON V. SALOMON: -Sullivan on paper had satisfied the requirements in the 1985 Company act. -sold his business to a new company with him and his family as shareholders. -he had been listed as a secured creditor after entering into a contract with himself through the business – therefore when the company went into insolvency, he got the money before other creditors. -liquidator and creditors said that Solomons company was not a real company only an agent to Salomon – he was the principal. -said it was a scheme – a device to defraud creditors, family were nominees, not real members. As principal, Simon was therefore personally liable for losses incurred and caused by the agent – the company.
MAIN POINTS: court of appeal; incautious creditors fell into the trap life for them. HOFL: they only have themselves to blame for their misfortune.
-S and his company were two separate legal personalities who were free to contract with each other. -in the absence of fraud, there was nothing wrong with S being a secured creditor. Even though his position [director and controlling shareholder] was one with capacity to make the company enter into a contract with himself.
SEPARATE LEGAL PERSONALITY IS PARAMOUNT. |
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Consequences of not forming a business correctly |
These cases highlight how separate legal personality can hurt you/benefit you, depending on how you organize and run your business.
LEE V. LAF (lees air farming) LTD -reformed LAF, an Ariel crop spraying company in New Zealand. LAF had 3000 shares; lee took 2999 and his wife took one – he was majority shareholder and governing director. He appointed himself using proper procedure by passing a resolution, chief pilot of LAF and only employee. -LEE DIES IN ACCIDENT. -his wife sought workers compensations- which only apply to someone under a contact of service. -Was lee an emplyee? Can he be a majority shareholder, governing director and emplyee? HELD: due to separate legal personality and Lee performing correct procedures to employ himself, he could be all three roles.
MACAURA v. NORTHERN ASSURANCE CO Mr. recur sold his timber to the company which he was majority shareholder. He insured the timber in his own name, even though it belong to the company due to separate legal personality. -The timber Burns, insurance wouldn't pay out – no insurable interest over the timber – the company didnt insure it, mac had. But the company owns it.
HOFL: unusual case – Vail lifting was asked for by corporation owner. Held that insurers were not liable for contract. The timber did not belong to Mr. M who held the insurable policy. There was no insurable interest. |
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Piercing the veil of incorporation |
This is a situation in which the courts put aside limited liability and hold a corporation shareholders or directors personally liable for the corporations actions or debts.
-the courts are reluctant to pierce the veil of incorporation and only do it rarely in certain circumstances. The most up to date common law is PREST V PETRODEL. -The Supreme Court, lord sumption in particular, closely examined the scenarios in which the corporate veil could be pierced under common law. (Of course statutory rules still apply) The courts have stated repeatedly that where a company is a sham, or is used to perpetrate a fraud or evade a contractual obligation, then that company’s corporate personality will be set aside. Prest has confirmed this by stating that the only instances in which the courts can pierce the veil is where ‘a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.’
SALOMON v. SALOMON: -The court was not willing to pierce the corporate veil, as Mr. S had not acted fraudulently.
However, it should be noted that in Prest, the Supreme Court stated that the veil will be pierced only if other more conventional remedies have proved to be of no assistance.
1)finding out who the shareholders are. Daimler v. Continental Tyre FILMS competition case -2,000 for winning BRITISH company- all shareholders were bloody Americans
2) AVOIDING EXISTING LEGAL OBLIGATIONS: fraud:
Jones v. Lipman -contract signed to sell property, backs away from contract – gets around damage payments by creating new company and changing property ownership. Lip Limited owns company. Court suggest that he used Solomon principal as 'a sham,A device, a mask' for invading his existing legal obligations.
Gilford Motor Homes LTD v. Horne -set up company in wife's name to get around restrictive covenant regarding NOT soliciting existing customers/clients. The company is not breaking restrictive covenant – but Mr. Horn is if you lift the corporate veil.
These are examples of when Sumption believes the veil can be pierced, and Neuberger is not so sure.
3)justice argument- single economic unit -Single economic unit and the facade– the demise of the group entity theory. -pre PREST if a company was being used as a 'facade concealing the true facts', it was seen as acceptable to pierce the veil. -each subsidiary and parent company has their own legal personality.
DHN -compulsory purchase – business had to own property for compensation for loss of business. Other company owned property. Lord Denning; natural justice argument – the corporate veil is getting in the way of a just solution. He created the 'single economic unit' PROBLEMATIC- subsidiaries would be able to sue parent company.
Woolfson v strathclyde regional council -compulsory purchase at wedding shop in charring Cross. Lord Dennings approach rejected – return to salomon principle – every single group in the company has a separate legal personality.
-didn't overrule- distinguished on the flimsiest of facts. Court says you can only pierce Veil and special circumstances – doesn't tell us what they are. now you have two approaches. SORTED IN...
Adams v Cape Industries -court takes opportunity to address the issues. Parent company based in UK [British company], two subsidiaries- One a south African Mining Company, two an American marketing company. PCC is standalone asbestos compnay- American marketing company helps market these products. - only way Cape industries could be liable is to be in NY via subsidiary. -endorsed the approach of Wilson – agency, statute, fraud and of avoiding existing legal principles.
Rejection of Justice approach: VTB v Nutritek ⟨ It is appropriate to pierce the veil of incorporation only where there is special circumstances indicating that the company was a mere façade concealing the true facts.
⟨ Even if it was appropriate to pierce the veil of incorporation, the court could not treat those in control of the company as parties to the company's contracts.
Prest v PETRODEL -she wanted money, court said he had to give property- concealment/frustration principle. Lord sumption -when avoiding a legal obligation or frustrating the operation of law.
-concealing assets is not a veil piercer- use agency law.
- this judgement overlooks the human, Justice level.
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