Business Advice Essay, Research Paper

In advising Gus, Gloria, and

the liquidator (collectively known as the

?claimants?) as to the sustainability in law of their respective claims in

relation to, Rajinder (hereinafter

referred to as ?R?), Sarah (hereinafter

referred to as ?S?), and the liquidated company Exotic Holidays Ltd. (hereinafter referred to as ?E Ltd.?),

the core issue appears to be that of corporate identity as opposed to personal

identity of the members of the corporate entity. Issues relating to the general

effects and consequences of incorporation are also discussed, namely, issues of

separate legal personality, liability and related exceptions, which in turn

necessitates consideration of the ?corporate veil? and under what circumstances

the courts will be prepared to assign liability etc beyond the corporate entity

to the members. Before considering

individual claims, some thought is given to the general or fundamental issue of

legal identity, on the grounds that this is central to all the situations.

The most important case in this regard is undoubtedly Salomon v Salomon

[1897] AC 22 (hereinafter referred to

as ?Salomon?), which also provides an apt starting place.The fundamentally important

principal that emerged from Salomon is that a company, once incorporated,

is a legal entity in its own right. In other words, the company itself, in this

instance E Ltd., is a distinctly separate being from those that are its members

(R and S), and as such, has ?individual? rights and liabilities accordingly.This has two immediate

results. Firstly, the company, not its members, must seek a remedy despite the

fact that in reality, it will be the members, not the company, that conclude a

remedy is needed to address some wrong doing to the company. Secondly, the

alternative situation in which the company itself must be sued directly, not

the members personally, in the event that the company itself has committed some

wrongdoing. The overall result is that

members? personal liabilities and the liabilities of the company are regarded

as separate. For all intents and purposes, the courts have traditionally drawn

a divide between them. This separation of members and company, or rather the

distinction between them, is often referred to as the ?corporate veil?.The Salomon

principal has been generally upheld by the courts, sometimes with severe

consequences. In the Irish case Macaura v Northern Insurance Company Limited

[1925] AC 619, the court upheld the argument of an insurance company that

it was not liable to pay out if items were insured on a member?s own name and

not ?his? company?s name despite the fact that the items being a part and

parcel of the company?s business. The court maintained a rigid divide between

the member and the company.In more modern

times, Slade LJ essentially reiterated the continuing validity of the Salomon

principal in Adams v Cape Industries [1990] Ch 433,??the court is not free to disregard the principal of Salomon?merely

because it considers that justice so requires??This principal

was more recently again affirmed in Ord & Another v Belhaven Pubs

Limited [1998] BCC 607.However, as

resolute as the principal stands, there are exceptional cases where the court

will ?lift the corporate veil? either at common law or by statute. This was

considered in Atlas Marine v Avalon Maritime [1991] a All ER 769,? ?. . . to pierce the corporate veil

is an expression I would reserve for treating the rights or liabilities or

activities of a company as the rights or liabilities or activities of its

shareholders??There are various

circumstances where the court will lift the veil. In the context of liability,

such a course of action by the courts will mean that the members themselves

will be held liable beyond the company. In other words, liability will not stop

at the company, as per the Salomon principal, provided the court is

satisfied that certain conditions are met.?

It is these conditions that

need to be considered in each individual case with respect to the claimants,

since from the given facts, it appears that R and S seek to rely on the Salomon

principal in order to divert any potential liability from themselves personally

to E Ltd as a separate legal entity. ? —Gus.According to the given

facts, Gus has issued a writ against R arising from alleged ??conduct in breach of contract?? that

predates and overlaps the date of incorporation of the company.The alleged breaches extend

from April 1998 to October 1998, while R sold his business to E-Ltd in June

1998 while the company itself was incorporated on the 30th June

1998. Therefore, it appears that Gus had been dealing with E Ltd. and not R

personally after the incorporation.Ordinarily, by application

of the Salomon principal, the action against R would fail on the grounds

that Gus was dealing with? E Ltd. and

not with R.However, as mentioned above,

there may be a way in which the courts may be asked to life the veil and seek

action against R directly. This may happen if R is suspected of fraud, although

not necessarily of a criminal nature. In this case, equitable fraud would

suffice. Put another way, the obligations binding the member are extended to

the bind the company.In Jones v Lipman [1962]

1 All ER 442, the sale of a piece of land was at the centre of a contract.

The seller had subsequently changed his mind?

and in order to avoid an order of specific performance of his

contractual obligations, he transferred his land into the name of a company.

The court refuses the defence that the land was now in the possession of the

company and granter an order of specific performance against the seller.Likewise, in Gilford

Motor Company Limited v Horne [1933] Ch 935, the court held that a company

that constituted a mere ?sham? and formed to avoid contractual obligations

would not be tolerated. In this case, the court again lifted the veil and

issued an order against an individual who was not even a member of the company

in question.Similarly, Gus must show that R

was in effect ?hiding? behind E Ltd. If this can be achieved, it seems possible

that the court may grant a remedy against R directly. However, if R can show that

the sale was a legitimate deal in the sense that the sale of R?s former

business to E Ltd. was not a ?sham? and was formed merely to avoid a

contractual obligations etc, it seems unlikely that the courts will follow the

route taken in Jones v Lipman or Gilford v Horne in light of the

decision in Adams v Cape Industries where the courts refused to lift the corporate veil. Lord

Keith commented in Wolfson v Strathclyde Regional Council [1979] that

the Salomon principal should only be excluded in cases of a fraudulent

nature where facts were being concealed by a ruse.That said, if R

seeks to rely on Adams v Cape Industries, there might be a problem

considering that this case was distinguished from a similar case, Creasey v

Breachwood Motors Limited [1992] BCC 638 partly on the basis of the timing

of the transfer from entity to entity. The court may well consider the timing

of the sale, i.e. half way through the alleged breach of contract, as a

relevant factor and may well view this as some sort of avoidance manoeuvre on

R?s part. It is worth

bearing in mind that Creasey v Breachwood was subsequently criticised in

Ord v Belhaven. Hobhouse LJ stated, ??it seems to me inescapable

that the case in Creasey v. Breachwood as it appears to the court cannot be

sustained. It represents a wrong adoption of the principle of piercing the

corporate veil? Therefore, in my judgement the case of Creasey v. Breachwood

should no longer be treated as authoritative??(Although the

grounds for the criticism might well not apply to the present case.)In summary, the

facts are not sufficiently clear to warrant a clear conclusion, but it appears

that the main obstacle to Gus succeeding would be the ability to demonstrate

that R sold his business to E Ltd. in order to avoid contractual obligations

via assumed reliance on the Salomon principal. Notably, Lord

Keith commented in Wolfson v Strathclyde Regional Council [1979] JPL 169

that the Salomon principal should only be excluded in cases of a

fraudulent nature where facts were being concealed by a ruse. Such as ruse must

clearly be demonstrated.—Gloria (hereinafter referred to as ?G?).From the given facts, G is

stated to have been a ??former client??

of E Ltd. Again, with regard to the

doctrine of the corporate veil, G would prima facie only have a claim against E

Ltd. and not R directly or personally. Unless, the courts can again be

persuaded to lift the corporate veil.Members of a company have a general

fiduciary duty of care which should govern all their conduct within the

framework of the company in question, and unless it can be shown that they have

breached that duty by gross negligence or acts of bad faith, no personal

liability claims can generally be successful against them. In Williams v Natural Life Health Foods Ltd

(1998) 2 ALL ER 577, the House of Lords held that the corporate veil should

only be lifted in extreme cases and furthermore, there must be some sort of

personal misrepresentations made by the member of the company, who accepts as

much, and that the plaintiff would have had to have relied on these

misrepresentations. The House of Lords refused to lift the veil in

that case on the grounds that there had been no contact between the parties and

in any event, there was no evidence that the plaintiff had believed that the

defendant had accepted any personal liability.In summary, it seems

unlikely, based on the given facts, that G?s action directly against R will

succeed. However, taking the decision in Williams v Natural Life into

account and the stated criteria upon which the House of Lords refused to lift

the corporate veil, if G can meet those criteria, her claim might well be

sustainable.— The Liquidator (hereinafter referred to as ?L?).Again, the principal from

Salomon is the starting point with regard to L?s claim against R and S.A further parallel can be

drawn with Salomon. The liquidator in Salomon claimed that the company therein

was void as it was essentially a ?sham?

on the grounds that the company was in reality nothing more that Salomon?s ?agent?, due in part to it being a

?one-man company?. However, the House of Lords

held that it was irrelevant that the company was in effect a ?one man company?? and that provided the company had been

incorporated correctly, the fact that one person held an overwhelming majority

of shares in the company was not relevant either.More specifically, it was

held in Kodak Limited v Clark [1905] 1 KB 505 that a 98% shareholding in

a company does not by itself create a member/agency relationship. Therefore any similar

arguments on the grounds that E Ltd. was basically an ?agent? of R?s due to his

large shareholding will fail due to the ruling in Salomon and Kodak v Clark..

Generally speaking, L will be

unable to rely on a common law based approach in asking the court?s to life the

corporate veil against R and S. However, there may be a

potential route via statute. Section 213 of the Insolvency Act 1986 in

effect states that where a person has continued to trade through a company

knowing full well, i.e. fraudulently, that the company will be unable to duly

repay creditors, the person may be held personally liable to an extent

determined by the courts. Section 214 of the same Act, relevant to companies in

insolvent liquidation (as is the case with E Ltd.), extends beyond a clear ?intent to defraud creditors?, as per

s213, to include ?wrongful trading?

whereby the person knew or ought to have known that creditors will be unable to

be duly paid while continuing to trade through the company until the time of

the winding up order being granted. ? In order for the s213 to

apply, L must produce evidence of a fraudulent intent by R and S to defraud the

creditor he represents. Alternatively, under s214, L must demonstrate ?wrongful

trading? which might be an easier proposition.When considering s213,

s213(4) directs the courts to take various things into account. Under s213(4)

the courts are directed to consider whether the member/s had acted reasonably

under the circumstances, or more specifically, ??the facts which a director of a company ought to know or ascertain,

the conclusions which he ought to reach and the steps which he ought to take

are those which would be known or ascertained, or reached or taken, by a

reasonably diligent person having both ? (a) the general knowledge, skill and experience that may reasonably be

expected of a person carrying out the same functions as are carried out by that

director in relation to the company, and (b) the general knowledge, skill and experience that that director has.

Therefore in summary, in

order for s213 to apply, these standards must be applied to the facts of the

present case, and if it is found that R and S had fallen below the required

standards, an application via s214 might well be sustainable in that the courts

may well lift the corporate veil and extend liability to R and S in their

personal capacities. Bibliography.?Farrar?s

Company Law??? J.H. Farrar & B.M.

Hannigan ?Company Law?

(Statutes) ? Butterworths ?Company Law?

(Cavendish)Internet

Sources.?Rethinking

Company Law and Practice? ? The Hon Justice Michael Kirby

(www3.lawfoundation.net.au) ?Company

Law? (www.bigwig.net) ?Limited

Liability ? a necessary consequence of incorporation ?? ? Aiden Small

(www.nuigalway.ie) ?Company

Law ? Corporate Personality? (www.ukcle.ac.uk) ?Piercing the

Corporate Veil? (www.themis.wustl.edu) ?The Doctrine of

Separate Legal Personality? (www.law.anu.edu.au) ?Lifting the

Corporate Veil Revisited? (www.acca.org.uk)