Case: Limiting Personal Liability

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The veil of incorporation limits the personal liability of corporate directors, officers and employees for actions taken by the business. However, business owners can still be liable for business activities if they failed to follow corporate guidelines, commingled assets or acted recklessly (eHow,2015). The courts typically do not look behind the veil of incorporation if there a separate legal entity. But in certain circumstances, the court is willing to ‘lift the veil of incorporation’. The courts will lift the veil of corporation where the justice of the case demands or if the veil has been misused, this mean that a people who is controlling a company misused the veil to the prejudiced of creditors or third parties. The courts can lift the …show more content…
Horne had been employed as Managing Director of Gilford Motors. In his employment contract, he had agreed to a “non-compete” clause, this is to prevent him from leaving Gilford Motors and setting up in opposition to it. Under the contract, he was subject to a contractual agreement not to solicit customers of Gilford Motors. After he resigned, he set up a new company which attempted to do so. The proof showed that Mr. Gilford was concerned that, in doing so, he maybe in breach of his contract not to solicit Gilford’s customers. A company was established to conduct the new business, in which the only shareholders were Mr. Horne’s wife and one of his business associates. The company conducted the rival business and Mr. Horne ran the company. Gilford Motor argued that the court should pierce the corporate veil to recognize that the person behind the new company was Mr. Horne and to treat the company, along with Mr. Horne, as being bound by the non-compete clause in the contract. The court found, in this case that the company had been formed for the sole or dominant purpose of avoiding the non-compete clause. It was prepared to treat the company, along with Mr. Horne, as being bound by it (Aiman and Aishah, 2002, pg …show more content…
In this case, the courts pierced the corporate veil and treated the contractual obligation on Mr. Lipman to transfer the land as also binding on the company. This was because the court took the view that the company had been used by Mr. Lipman as a device to avoid his existing contractual obligations (Aiman and Aishah,2002,pg 3-240). Last but not least, the courts can lift the veil of incorporation by where the company is acting as agent or partner of the controlling or parent company. The case law is Smith, Stone & Knight Ltd. V Birmingham Corporation (1939). In the case of Smith, Stone & Knight v. Birmingham Corporation, there are two issues need to be considered by the court which is whether Birmingham Waste Co Ltd (BWC) was an agent for Smith, Stone & Knight Ltd (SSK) and whether it was entitled to compensation from the local government. In this case, Birmingham Waste occupied the premises which owned by Smith, Stone & Knight to operate the waste paper business. Besides, Birmingham Waste was a subsidiary of Smith. Birmingham Corporation wanted to acquire the premises owned by Smith. However, Birmingham Corporation argued that these two companies were two separate entities and refused to compensate

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