This legal doctrine allows courts to hold directors or shareholders personally liable for corporate misconduct in specific circumstances, particularly where a company’s separate legal personality has been abused. With the enactment of the Companies Act 71 of 2008, there is a codified pathway for piercing the corporate veil in South Africa. Here’s what individuals and businesses need to know about this concept and its practical applications. Salomon v Salomon was the first case to establish the principle that a company is a separate legal person quite distinct from its shareholders and directors and that because of this, the directors and shareholders cannot be liable for the debts and liabilities of the company. Upon the liquidation of Mr Salomon’s validly registered company, of which he happened to be a secured creditor, the liquidator objected to the payment of Mr Salomon and argued that as he owned all but six of the issued shares in the company, he and the company were the same person and therefore the debts of the company were his debts.
Some commentators believe this means courts will not lift the veil simply to do justice29. Even so, as both judgments are from the Court of Appeal it is uncertain which approach courts will follow in future. Had the business, the business premises and the vehicles used in the business been in the one ownership, compensation would have been payable, under rules (2) and (6) of section 5 of the Land Compensation Act, 1961 40 . Members are only liable for the amount unpaid on nominal value of their shares.
Admitted the validity of Mr. Broderip claim and that the 20,000 shares were fully paid up was not disputed. The case presented by the liquidator broke down completely but the learned Judge that the company had a right to indemnity against Mr. Salomon and the signatories of the memorandum of association were mere dummies. Whilst admitting that the company was a legal entity and distinct from its members, the learned Judge was of the opinion that the company was no more than an agent of its principal (Mr. Salomon). The basis for the agency argument was that the company was a mere alias of its founder and had not been formed in accordance with the true spirit of the Companies Act, 1862.
- These will require, as a matter of contract, that the shareholder makes good any shortfall in the amount owed which the company cannot repay.
- Recognising the limited liability framework is essential, especially in cities like New York, where businesses often consult a corporate lawyer to ensure compliance with corporate regulations and safeguard shareholder interests.
- In old law, it was assumed everyone would know the contents of the memorandum of association under constructive notice.
- Once incorporated, a company becomes a separate legal entity from its members.
- A total of 20,000 shares of £1 each were issued to Mr Salomon, credited as fully paid-up shares (i.e. the shares were regarded as having been paid for by Mr Salomon, not in cash but ‘in kind’, by the transfer to the company of £20,000 pounds’ worth of the business).
Common Law and Seperate Legal Personality
From the decision of the Court of Appeal in DHN Ltd case, it has been said, “but a short step” to “the proposition that the courts may disregard Salomon’s case whenever it is just and equitable to do so” 38 . Mark co-founded WMH Law Corporation and is the Joint Managing Director of the firm. Having formerly practiced respectively at Singapore’s oldest Asian boutique legal firm and at one of the Big Four law firms in Singapore, Mark’s extensive practice spans a broad spectrum of subject matters and diverse areas of the law. (d) Ability to sue and be sued; a company may sue and be sued in its own name.
Separate Legal Personality of the Company
The court in Cape Pacific rejected the test in Botha and favoured a more flexible approach which was based on the facts of each case. The court held that there was no closed list of categories in which a court will pierce the corporate veil and that the court has no general discretion to disregard a company’s separate legal personality whenever it chooses to do so. This case indicates the court’s recognition of the importance of upholding separate legal personality as a fundamental principle in our law and the framework provided by the court in Cape Pacific has created safeguards against a general discretion to disregard the principle. This case has ensured that the privilege of separate legal personality is not removed from our law, or threatened by the remedy of piercing the corporate veil. Within corporate law, the doctrine of separate legal personality for artificial persons is fundamental and has been understood since the late Middle Ages,13 although the present legal position has developed considerably since the late 19th century – both in terms of the general law position and statutorily.
THE COMPANY AS A DISTINCT AND LEGAL PERSON
Section 8 of the Companies Act 1963 established an alteration where outsiders can only enforce the ultra vires rule where they are not aware that the transaction is outside of the powers of the company. The Courts view this reform scarcely and believe that if a person digests the memorandum of a company but possibly misreads it, that person will not have grounds under this section. The plaintiff in the case of Northern Bank Finance Limited v Quinn & Achates Investment Company (1979) ILRM 221 was not afforded any protection under Section 8 of the Act.
Discuss the concept of Ultra Vires in relation to Company Law.
Indeed, the application of the principle of separate legal personality of a company in similar circumstances has recurred recently. xlv In Secretary of State for Business, Enterprise and consequences of incorporation separate legal personality Regulatory Reform v Neufeld and Howe, xlvi though with different context, the matter at stake was similar to Lee case. xlvii Thus, it was essential to determine whether or not a controlling shareholder, at the same time director of a company could be considered as an employee under contract of employment. In this specific case, the aim of the claim was the “employee guarantee payments” from the National Insurance Fund as provided in the event of company’s insolvency. xlviii The Court of Appeal, due to the not always coherent evolution of case law in regards to the employment status xlix after Lee case, l evaluated two test cases for offering clarity in such disputes.
Due to the doctrine of separate corporate legal personality, a parent company can also incorporate another subsidiary company, which also has separate corporate personality30. Courts have lifted the corporate veil in the past to hold the parent company responsible for the acts of its subsidiary. In 1978 in DHN Food Distributors Ltd v Tower Hamlets LBC31 a parent company owned all the shares in its two subsidiaries, which were heavily involved in carrying out the parent company’s business operations. The Court of Appeal held that the group of companies were a ‘single economic entity’ and lifted the veil to make the parent company able to receive compensation payable to the subsidiary. This is a potentially wide exception that could apply to all groups of companies. A limited company has a separate legal personality from its members, or shareholders1.
12 Richard Schulte, ‘Future of Corporate Limited Liability in Australia’ (1994) 6 Bond Law Review 64; John H Farrar, ‘Doctrinal incoherence and complex variables in piercing the corporate veil cases’ (2014) 29 Australian Journal of Corporate Law 23. A £10,000 secured loan note, or, ‘debenture’ was issued to Mr Salomon recording that the company owed Mr Salomon £10,000 pounds secured by a charge over the company’s assets. A total of 20,000 shares of £1 each were issued to Mr Salomon, credited as fully paid-up shares (i.e. the shares were regarded as having been paid for by Mr Salomon, not in cash but ‘in kind’, by the transfer to the company of £20,000 pounds’ worth of the business).
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- Therefore, a “parent” company would not be liable for a subsidiary and vice versa.
- Lenders will often get around the principle of separate legal personality by demanding personal guarantees from shareholders when they enter into loan contracts.
- A company will survive regardless if management changes frequently or even if shareholders sell up.
- In the study of business organisations, we are not concerned with corporations sole; we are concerned with corporations aggregate.
- Foremost the principle of separate legal personality is analyzed and explained in general and then it is analyzed from perspectives of both jurisdictions.
Similarly, in Bank of Ireland v Rockfield (1979) IR 21, the Courts ruled Section 8 would not hold where a company wanted to purchase shares in itself under circumstances that were disallowed under the Companies Act as this contract was not lawful in the first place. If the courts decide to lift the corporate veil, they will do so where they feel it is reasonable and equitable. When an English subsidiary was formed by an American company so that they could make and sell tyres in the European market in the case of Firestone Tyre & Rubber Co.
Therefore, this decision seeks to restrict the DHN case and to make it only applicable to interpreting statutes. This article looks at how the fundamental principle of legal entity and personality first developed and how it compares to limited liability. The limits of the 2007 Act in relation to small companies was further demonstrated in relation to Mobile Sweepers (Reading) Limited, a company that, having ceased trading immediately after the death of one of its employees, was fined merely £12,000 (its entire value). Legal liability of the individuals involved is often more important to pursue and s 37 of the Health and Safety at Work etc.
