.
Corporate Personality:
Advantages of
Incorporation:
·
Company is treated as a Separate Legal entity
·
There exists a corporate veil which separates members from its
company
·
Members of the company have limited liability
·
Shares can be transferred by members.
Disadvantages:
·
Corporate Veil can be lifted or pierced whenever there is public
interest involved depending on the circumstances like for
determination of character, for tax evasion, in case of fraud etc.
·
There are lot of formalities involved it’s more expensive
·
Though company is a separate legal entity and an artificial person
in the eyes of the law, it doesn’t enjoy the citizenship of a country.
Corporate Veil:
A fictional veil created between the members
of the company and the company itself is a corporate veil. This provides the
company a separate legal existence from its members.
But this veil can be lifted in certain
cases where the corporation or its members are indulged in fraudulent
activities or trying to get some undue benefits. Thus in such cases the
directors of the company may be held personally liable.
Salomon v
Salomon & Co Ltd.(1897)
Salomon,
a shoe manufacturer incorporated a company Salomon & Co Ltd. and his wife,
his daughter and four sons became the only members of company. So the company
was covered by Limited Liability clause, which allowed the company to be a
distinct legal entity from its owners. The company went into liquidation within
one year. Salamon was a debenture holder with the largest share and there were
unsecured creditors as well. Assets were not even sufficient for debenture
holder and thus nothing would have been left for unsecured creditors.
Now liquidator on behalf of those unsecured creditors contended that this
company was mere sham and it was like an agent of Mr. Salamon.
The
British Court of Appeal stated that Salamon had abused the privileges of
Incorporation and limited liability and other subscribers to shares were mere
puppets and he continued doing business as a sole proprietor. These legal
proceedings did not impress the business community.
House of
Lords however reversed the decision. Lord Hershell said” I ‘am at a loss to
understand what is meant by saying that A. Salamon & Co Ltd. is but an
alias for A. Salamon. It is not another for same person; the company is a
distinct legal persona.”
In my
opinion, this judgement was absolutely based on the principle of “Separate
legal entity” and “limited liability” which generally encourage people to
form in-corporations inspite of being more expensive and more
formalities involved. Also there was an opportunity for the unsecured
creditors to have a look at company’s documents like Memorandum of Association
where members of the company were clearly stated and had an option of not
signing the contract with them. Since there was no fraudulent or tax evasion
activity done, court did not have to pierce through the corporate veil.
Principles involved in this case:
Separate legal entity – Company has a separate existence from
its members thus Mr. Salamon is not personally liable but just company is.
Limited Liability –
Company as a separate entity has unlimited liability but the members of the
company have limited liability ,thus providing them a great sense of security
and promoting limited liability companies.
Prest (Appellant) v Petrodel Resources Limited
& Others (Respondents) [2013]
This case is related to financial
remedies following a divorce between Michael Prest and Yasmin Prest. It’s about
seven residential properties belonging to Petrodel Group which was owned and
controlled by Michael Prest, the husband. The question was whether these
properties could be transferred to Yasmin Prest as they legally belonged to his
companies.
The lower court gave the judgement in favor of Mrs. Prest. The
Court of Appeal allowed the appeal by Mr Prest's companies and stated that it
made no difference that the companies had a single owner which had total
control over them and their assets. Rimer L J stated that "there may be
factual circumstances in which it will be legitimate for the Court to pierce
the corporate veil" but he said this was not such a case.
But the Supreme Court unanimously allows the appeal by Yasmin Prest and
declares that the seven disputed properties vested in the companies are held on
trust for the husband on the ground that the properties were held by the
husband’s companies on a resulting trust for the husband, and were accordingly
“property to which the husband is entitled, either in possession or reversion”.
But it said that Corporate Veil has to be lifted in rare instances like for tax
evasion or where there is an undue advantage obtained by the company or its
owner based on the principle of separate legal entity. The only basis on which
the companies were ordered to convey properties to the wife was that they
belonged beneficially to the husband, they were held by companies on trust for
the husband. Properties were transferred not merely because the sole owner and
controller of the company was husband, but because funds for that property were
provided by her husband.
This was also a landmark decision which depicted the importance of corporate veil, which was not supposed to be lifted in any case apart from rare cases. Though this case went in favor of Mrs. Prest, it sent a very strong message to other courts that corporate veils can not be lifted in any random case of financial relief.
