Corporate (with a) Personality

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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.