Acts Supporting the Idea of Separate Legal Personality in Contrast to Acts Supporting the Idea of Piercing the Corporate Veil in Company Formation UK

30 Oct

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.

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:

  • The company was justly formed and remained an English company despite the fact that most of its shareholders lived in an enemy state.
  • The commencement of war should not affect the formation of this company. As justice cannot be ignored by merely putting aside the fact of the company’s existence in United Kingdom.
  • Although it is the practice of courts to consider substance and ignore form. However, the same cannot be done merely because the case seems easier to deal with in such a scenario.
  • The appellants argue that after the commencement of war, the company that was registered in England per the statute, should be considered as a German company because of the residency of its shareholders. The fact is that the formation of the company under the statute is a reality. The existence of the company is real and cannot be ignored if the situation of the country changes and becomes warlike.
  • The personality of a company formed under the statutory laws is separate and legal. It may have responsibilities, rights and liabilities that are separate from the shareholders and the directors as mentioned by the case of Salomon.
  • It is not possible that the technical formation of the company is English and the substantial formation of the same company is German except in the situation where the language is misused.
  • The disagreement made by the appellants could only be valid if it was believed that the payments that were being made to the company would be made to the shareholders. However, according to the verdict given by Salomon, a debt of the company cannot be attributed as a debt of its shareholders.
  • The company has the authority for the enforcement of the payments of debts. After this conclusion, it becomes clear that any payments made to the alleged company are not being given to the shareholders that are considered as alien enemies.

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:

  • Any state that either itself or its sovereign declares war with His Majesty.
  • Any person that resides in the area of enemy.
  • A structure either incorporated or not, running a business in any area will be deemed as an enemy until it is administered by someone who is already termed as an enemy under this section.
  • Any structure that has its formation either under the regulations of any state that has declared war against His Majesty or the structure is formed in any such state is considered as an enemy under this section.
  • The administrators of any business that is run in the area of enemy, will be considered as enemy. However, any person who is merely an enemy subject may not be considered as an enemy.

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:

  • At the time of liquidation, if it becomes apparent that there is any business that was done in the company for swindling the creditors, either of the company or any other person, or for any other reason that leads to fraud, the statement that follows will be applicable.
  • If any liquidator appeals in the court for justice, and the accusation of fraudulent on any group of the company are found true, the court will order that group to make a contribution in the belongings of the company, in any way the court finds appropriate.

Trading Wrongfully

Section 214 states that:

  • If the following statement is found applicable on any person at the time of liquidation, the court will have to penalise that person to make contribution in the assets of the company, if the liquidator appeals for justice.
  • If some time before the insolvency of the company, any person had anticipated liquidation and the person owned the directorship of the company at that moment. The court shall declare against that person, except for the scenario where the case took place before 28th of April 1986.
  • Even if the above mentioned criteria is fulfilled by someone, the court cannot pass any verdict against a person, if it is known that some time before the liquidation he had the intention of reducing the loss to be faced by the company and took every possible measure for that.
  • In relation to the above mentioned two statements, the facts known by a director, the functions he performs or the conclusions he draws must be known by a person who is diligent and owns the following properties:
  • The expertise and knowledge that is expected to be owned by someone who has to perform the same duties as the director regarding the firm.
  • The director’s general knowledge and expertise as well as experience.
  • The functions regarding a company mentioned in the previous statement are not the functions that the director successfully carries out, but they are functions that are his responsibilities and should be fulfilled by him.
  • A company will have said to be in an insolvent liquidation state if the company runs out of funds to pay its debts, liabilities and the expenses of liquidation.
  • The term Directors under this section is inclusive of Shadow Directors and this section has no prejudice for Section 213.

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.

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