For an England formation company, an important factor that determines the conduct of the company is the influence of the shareholders on the legal rights of the company. The article discusses about the factors regarding insolvency that need to be implemented after form a company UK.
Separate Legal Personality of a Company
The companies are entitled to have a separate legal personality. By an isolated lawful personality, it means that the member and directors of any company are separate from the company and the company enjoys separate rights and responsibilities that are lawful.
Property of a Company
As per the isolated lawful personality, the assets of company are only owned by the company. The members do not have any authority over them. Interestingly, the members are neither even given any insurable interest on the assets nor does any creditor get it. However, a secured creditor may have it.
Piercing the Corporate Veil
A general rule regarding the payment of debts of a company at the time of insolvency is that, the members that are offered limited liabilities are not liable to pay all the debts of the creditors for their satisfaction. Hence, even if the funds of the company are not sufficient enough to make the complete payment of debts, the members cannot be invoked to pay them. However, this rule is quite strict at times. There may be situations when there is no other possibility other than to ask the members for help. Piercing the corporate veil was a concept that was introduced via the verdicts of certain cases related to such issues. It means that the separate legal personality of a company may be ignored at times to help the company gain funds from the members for the payment of debts at the time of insolvency. There may be situations where the subsidiary company is not financially strong enough to pay its liabilities because of any loss caused by the subsidiary, and the parent company is comparatively in a stronger financial position, the creditors may demand the parent company to pay the debts as in the case of Adams.
Regulations on Piercing the Corporate Veil
Most of the laws and regulations that are related to piercing the corporate veil are presented by revenue law. Some of them are presented by the 2nd Section of Trading with the Enemy Act 1939. Before proceeding towards the laws provided by this act, the article will discuss the verdict given in the Daimler case.
The company had its basis in England. It was working in the United Kingdom after the war broke. Most of the shareholders and directors of the company were living in an enemy country. However, until the day of the commencement of war, the company was entitled to receive its payments on the pre-decided dates. The payments were to be made in return of its supplied goods. Although the company had a UK company incorporation it was argued that due to the reason that shareholders resided in the enemy country, the matter should be handled considering this fact. The company should be treated as a German at the time of war.
Lord CJ held:
Hence it was apparent from the verdict of the Court of Appeal that as the company had UK company incorporation, it was termed to be a British company and not an alien enemy’s belonging.
Trading Enemy Act 1939 about Piercing the Corporate Veil
The above mentioned verdict was given by the Court of Appeal. However, this verdict was disregarded by the House of Lords. The Trading with the Enemy Act 1939 forms its provisions on the basis of the views given by House of Lords regarding the case of Daimler. Section 2 of this act defines an alien enemy:
Enemy of the United Kingdom
According to this section, the definition of an enemy may include either of these:
It may be ordered by the Board of Trade to term any person as an enemy who under this section is eligible to be deemed as an enemy.
Definition of “Control”
The different contexts of company laws may require the definition of “Control”. However, due to the diversity of context, no definition completely fits every context of the laws regarding companies. As mentioned in the case of Bermuda Cablevision, the definition of words like control and controlling interest vary from context to context. Section 1159 of Companies Act 2006 defines subsidiary and parent company, whereas Section 1162 of the same act present the definitions of undertaking of parent and subsidiary. These definitions elaborate the issue faced by the draftsmen of legislature. For further elaboration, go through the case of Lonrho and the discussion made on the ‘fraud on the minority’ as an exception to the ruling given by Foss.
Consequences of these Rulings
According to Merchant Shipping Act 1988, it was a rule that the vessels for fishing that had been registered under Britain could fish but under a specific quota decided by EU. Moreover, the vessels were registered as British only when the company’s 75% shareholders complied with the requirements of nationality, domicile and residency of Britain. According to CJEU in Secretary of State for transport, such restrictions contradict with the 52nd article of the EC Treaty. This article provides for the liberty given to all the member states’ nationals for the formation.
Piercing the Corporate Veil in terms of Companies Acts and other Acts
The concept of piercing the corporate veil does not get promoted by any of the provisions given by Companies Act 2006. In fact, it penalises the directors and other officers for anything wrong that is done to the company. The members are not held responsible. Some other acts that promote the separate legal personality of a company include the Insolvency Act 1986 and the Company Directors Disqualification Act 1986.
Insolvency Act 1986 on Directors Penalty
The Insolvency Act 1986 provides the penalisation of directors and other officers. Specifically, Section 213-215 provide rulings for any fraud done or any trade done wrongfully.
Fraud in Trade
Section 213 states that:
Section 214 states that:
Hence, from these rulings it can be noticed that the Insolvency Act 1986 focuses on a separate legal personality of a company and penalises directors for any wrong done to the company. Hence at the time of liquidation of company formation UK the people who are most likely to suffer are the directors provided they conduct an unjust affair. One who is to form a company UK must know that at present the concept of separate legal personality prevails over the concept of piercing the corporate veil.