Corporate Veil Essay

In the main, traders and business raft atomic number 18 risk averse as a result, in whatever they do they forever fight for risk minimization. The said(prenominal) factor i.e. of minimizing risk- contributes, to a signifi bumt extent, for the decisions by traders and businessmen to forming companies. Consequently, traders and businessmen pull up stakes see as the main attraction of forming a association the reward of avoiding indebtedness for business debts. This advantage arises from the concepts of fracture reasoned item-by-item and contain financial obligation which ar embodied in the doctrine of corporeal kill chthonian beau monde honor. However, some businessmen, law scholars and the public at liberal argue that bodied obnubilate is nothing but a illusion meant to dupe business people into a false sense of hostage. The pursuit presentation seeks to discuss this assertion, bringing out the significance and exceptions of the concept of bodily embryonic membrane. The doctrine of in corporeal disguise emanate from the ruling of the expression of Salomon vs Salomon 1897, whose facts atomic number 18 as follows Aron Salomon was a successful leather merchant who specialized in manufacturing leather boots.For many years he ran his business as a sole proprietor. Salomon decided to in somatic his business as a especial(a) union, Salomon & Co. Ltd. Mr. Salomon himself was a managing director who featureed 20,001 of the go withs 20,007 shares the remaining sextuplet were shared individu every last(predicate)y between the other six shareholders (wife, daughter and quadruplet sons). Mr. Salomon sold his business to the new muckle for almost 39,000, of which 10,000 was a debt to him. He was thus simultaneously the companionships chief(prenominal) shareholder and its principal referenceor. The telephoner almost immediately ran into difficulties and only a year by and by the then holder of debentures appointed a receiver and c aller went into liquidation. Its as casts were ample to discharge the debentures but nothing was left for the unsecured creditors. The liquidator argued that the debentures utilize by Mr. Salomon as a auspices for debt were invalid on the causal agent of fraud hence Salomon was not a genuine incorporator. The foundation of company law came by the ruling made by the House of Lords in the Salomon trip.It was held that Salomons company was a judicial person separate from Salomon and since Salomon had compel a secured creditor of the company, he had to be paid first before all other creditors. Once legal individualizedity was established, the is serve of share retentivity could notbe necessary. In concurrence with the Houses (court) finding Lord McNaughten at P 51 said The company is at law is a different person altogether from the subscribers..and though it may be that after incorporation, the business is hardly the same as it was before and the same persons are managers and t he same custody receive profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent that in the manner provided by the Act. It is always hard to exaggerate the significance of the typeface of Salomon Vs Salomon and Co Ltd in hurt of its contribution to company law globally. By recognizing an collective firm as a corporate legal persona, it led to the creation of the corporate veil which brought a hatful of benefits to the business people.A corporate veil is delimitate as a legal concept that separates the constitution of a corporation from the individualisedities of its shareholders, and protects them from being personally liable for companys debts and other obligations (m.businessdictionary.com). In other words, the corporate veil can be described as being the separation between a company and its members. Due to the separate legal status of a company from its member s this is usually very rigorously maintained. This give, on the other hand, provide a true sense of security to business people. As a separate legal persona, a company has a limited liability, perpetual succession, ownership of property, rights and obligations in its own soma and easy borrowing means as its features which are of great impressiveness to investors and other stakeholders.These features make a company enticing to business people. The corporate veil plays a pivotal role in maintaining the corporate legal persona status of a company, hence providing entrepreneurs with a less waste means of pursuing ideas and projects in the business world as they enjoy the benefits arising from the characteristics of the concept of separate corporate persona.One of the benefit arising from an incorporated company that of limited liability. According to Anton Behr, Stand throne the veil of incorporation is the precept of limited liability that the court will use to prescribe that a c ompany will be responsible for all the debts that defend been incurred kinda of its shareholders or members. In the case of Tatro v. Citigroup, Inc. D.R.I. March 15, 2010 where the courts recognized limited liabilityof manager under Georgia law and dismissed claims against manager because illness did not allege facts plausibly suggesting direct intimacy or personal involvement by manager in alleged fair credit reporting violations by the limited company. This gives the shareholders a great level of security. They are able to profit from the successes of the company whilst being safe in the knowledge that their personal liability is limited to the value of the shares they have purchased. restrain liability is even enforced in S7 of company act. However, it may not be attractive to potential creditors who may require additional security for their loan. more thanover a company, by means of the proceeds of the corporate veil, holds property in its own pee as illustrated in the case of Macaura v Northern assertion Co ltd (1925) wherein Mr Macaura had insured timber under his own name and this was then destroyed by a fire.When Mr Macaura claimed for compensation, his claim was rejected on effort that he did not have insurable interest since a company is a separate legal persona distinct from Macaura. As a result, by owning its own property, a company gives more security to its members than if when a leaving director was able to enforce a sale and breakdown of any company property he owned. Pursuantly, the shareholders investments are made more attractive and secure. However, this may be to the detriment of a trader as in Macaura case. Another benefit flowing from the concept of corporate veil is of efficiency. As soon as it is recognised that a company is a distinct, legal person in itself then the company can name contracts in its own name. As a result, trade is made simpler when it involves multiform commercial organisations. Members of different rac es and background can also benefit in trading in some areas where they are not personally allowed under the shield of the corporate veil.For example in the case of Dadoo Limited V Krugersdorp Municipality where on that point goed during the apartheid regime legislation which prohibited non-whites from owning land in a certain area which was reserve for whites only. Mr Dadoo was an Asian and he form a company called Dadoo Limited and it bought land in the white area and set up business there. The municipality sought to enforce the legislation and remove Dadoo from the place. It was that Dadoo Limited was a company and enjoyed legal spirit separate from its members. A company could not be said to be white or Asian as race/ colour did not have any effect on the legal personality of the company. Equally important, the company can sue orbe sued on its name as illustrated in the case of in the case of Foss v. Harbottle (1843). Held The action could not proceed as the individual shareho lders were not considered as proper plaintiff. He held that a wrong was connected against the company, and only the company could take the legal action. The members did not have legal standing to sue the wrongdoers because the members and the company were separate legal entities. By screen the company from its members, the corporate veil enables perpetual succession of an incorporated company.It can only be subsequently terminated by the law the conditions for which are specified in S206 of CA 24-03. Unlike people, companies are immortal and will continue to exist after the exit or death of its members by the process of perpetual succession. Even if all the members die, it will not govern the privileges, immunities, estates and possessions of a company. The principle of perpetual succession is clearly illustrated in the case of Re Noel Tedman Holdings Pty Ltd (1967).The company had a husband and a wife as its only shareholders. They were also the companys directors. They died in an accident, leaving behind an baby child. After their death the company was still in existence. The chore that arose was, as the shareholders and directors had died, the shares could not be transferred according to the will of the deceased to the infant child. The court thus allowed the personal representative of the deceased to appoint directors of the company, so that these directors could allow the transfer of the shares to the child.Therefore, the company may even continue to exist despite the death of all its shareholders and directors. It will last until it is deregistered or appal up On the contrary even though the corporate veil is one of the main advantages of establishing a company as it will provide a liability protection against lawsuits and creditors, it also crucial to note that there are times where there are some exceptional muckle where the court would ignore it and strip the company members and shareholders limited liability that they enjoy. This is called the lifting of the corporate veil, which is defined as a legal decision which will brood the rights and obligations of a corporation as the rights or liabilities of its owner. In this case, the members will be responsible in carrying out their fiduciary duties towards the company. If they act in uncool faith, the court will lift the company veil and they shall have a personal liability(ammangomolly.blogspot.com) Lifting the corporate veil writes off the sense of security once instilled in business people. Generally, the corporate veil is elevate through two ways namely by judiciary evasion and statutory evasion.The former involves the use of common law to lift the veil. The courts have the pastime exceptions to peep behind the corporate veil Firstly, where there is fraud and indecorous conduct. The Courts will not allow the corporate veil to be utilize as an engine of fraud. The Courts have been more that prepared to pierce the corporate veil when it fells that fraud is or could b e transactd behind the veil. This is shown in the case of Gilford Motor Company Ltd v. Horne. Mr. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company. In order to defeat this, he incorporated a limited company in his wifes name and solicited the customers of the company. The company brought an action against him. The Court of appeal was of the view that the company was formed as a device, a stratagem, in order to mask the utile carrying on of business of Mr. Horne. The Court of appeal regarded it as a classical sham to cloak his wrongdoings since it was clear that the main purpose of incorporating the company was to perpetrate fraud.Secondly, courts also lift the corporate veil where the principle of corporate personality runs contrary to state interests. This exception supports the concession theory which holds that legal personality is just a concession by the state or a privilege gran ted by the state which the state may chicken out at any time. For example, as was held in case of Daimler Company V Continental tyre Company. Daimler was a German company and during the course of the business, it came to be owed money by continental Tyre Company. World War 1 broke out and Daimler Company claimed the money owed to it by Continental Tyre Company which refused to pay arguing that since Daimler was a German Company and German was at war with England, paying Daimler Company the money would be equal to trading with an enemy. The court upheld the argument. The courts may also apply the agency social structure to lift the corporate veil by holding that a tout ensemble owned footslogger would be playacting as an agent of the holding company. This was clarified in the case of DHN Food V London Borough Of prevail Hamlet.There were two companies, one holding the other a subsidiary. The subsidiary was wholly-owned but using land which belonged to the holdingcompany. The municipality wanted to compulsorily find land but it was supposed to compensate the owner of the land if he disturbed him in business. The question was whether the holding company was disturbed in business. It was held that the holding company was entitled to compensation since the subsidiary company was acting as its agent. The corporate veil can also be lifted by the use of the Companies Act this is known as statutory evasion. The followers sections of the Zimbabwe Companies Act explain the situations on which the corporate veil can be lifted leaving the members of the company liable fragment 32 imposes personal liability on a member who knowingly allows a company to carry on business for a period of more than 6 months without members.Section 58 and 59 imposes civil and criminal liability for misstatements contained in the prospectus. Section 124 imposes liability on directors who fail to properly hold statutory meetings. Section 126 directors are liable for failing to hold an extra-ordinary general meeting. Section 186 directors are liable for failing to disclose interests which they have in company contracts. Section 318 directors are liable for fraudulent conduct of the company business. Consequently, lifting the corporate veil leaves the members of the company without security which is the reason why some people say the corporate veil is a fallacy.In the eyes of the law removing the shield of incorporation discourage business people from using a company as a vehicle of fraud hence inspection and repair justice. To sum up, it is certainly true that some of the implications of the corporate veil have proved damaging some of the time. However, it is submitted that the benefits generated as a consequence of the corporate veil hugely outweigh the negative effects that it has had.BIBLIOGRAPHYGOULDING SIMON, COMPANY police SECOND EDITION 1999MAVHUNGA. M. (UZ) CORPORATE LAW AND BUSINESS ADMINISTRATION consider PACK NCUBE LISON (NUST), COMMERCIAL LAW 1204 MODULE, 2014COMPANIES ACT CHAPTER 2403www.lawteacher.netm.businessdictionary.com