Separate Legal Entity of a Company

A company is a separate legal entity as distinct from its members,

therefore it is separate at law from its shareholders, directors, promoters
etc. and as such is conferred with rights and is subject to certain duties
and obligations.
These central principles of company law were first laid down in very
clear terms by the House of Lords in the case Salomon v Salomon &
Company Ltd [1897] AC 2.
The ruling outlined in part in the quoted text of the assignment from
Lord Macnaghten’s ruling has several important consequences, not least
that where the liability of the members is limited, they cannot, only in
exceptional circumstances be held liable for the companies debts.
Under the concept of Limited liability the owners of the company under
normal circumstances, are not answerable or responsible for the
obligations of the company therefore making the owners/ shareholders
liable only for the amount of their unpaid shares and not the obligations
of the company.
The principle from the Salomons case firmly established that a company
has a separate legal identity to that of its shareholders and has been
applied over a wide range of cases.
Roundabout Ltd v. Byrne [1959] IR 423
The owners of a public house when in dispute with its employees, who
had placed a picket on the premises transferred the pub to a company.
The court held that the picket must be lifted as there was no dispute
between the employees and the new owner , despite the fact that the
ownership of the company was vested in the original owners of the pub.
Battle v Irish Art Promotion Centre Limited [1968] IR 252
The court held that while a human person can represent himself in
Court , a legal person such as a company can only be represented by a
Solicitor or Barrister.
The principle set down in Salomon v Salomon & Co is known as the Veil
of Incorporation. However it is now been increasingly restricted in its
application to an increased extent by leglislation in order to prevent the
abuse of limited liability protection and to ensure that liability for tax is
not being avoided.
The veil of incorporation may only be disregarded by the court in certain
circumstances.
Re a Company (1985)[1985] BCLC 333
The court held that it would use its powers to pierce the corporate veil if
it felt it was necessary to prevent an injustice.
The 3 main reasons why the veil may be lifted are:
 1. To enforce the provisions of the companies act
2. To avoid fraud, and
3. To deal with a group of companies
The corporate veil can be lifted in two ways:
1. By a specific provision in legislation
2. By the discretion of the Courts
1) Lifting the Veil by Legislation
There are a number of Statutory provisions that have the effect of
ignoring the separate legal existence of the company by attaching
responsibility for the companies’ obligations to its members, or in
extreme cases, the Directors,
Personal liability for the number of members –
Under Section 36 Companies Act 1963 a reduction in the number of
members of a company below the legal minimum – two in the case of a
private company and seven in the case of a public company for a period
of more than 6 months, then every person who is a member during that
time who was aware of the definite will be held liable for the debts
incurred by the company in that period.
Personal Liability for Taxation Offences –
Section 94 of the Finance Act provides that when a tax offence is
committed by a company with the consent of a person within that
company, that person may be subject to legal proceedings
Personal Liability for Fraudulent Trading
Section 297 Companies Act 1963 states that if in the course of
liquidation, a person knowingly was a party to carrying on any business
of the company with the intention to defraud creditors or any other
fraudulent purpose that they may be held personally liable without limit
for the debts of the company.
Re Hunting Lodges Limited [1985] ILRM 75 - The High Court held the
directors and the purchaser of the main asset liable for the company’s
debt after it transpired, the purchaser paid for the asset by way of 3 bank
drafts payable to fictitious persons which were then deposited by one
director in a building society.
Personal Liability for Reckless Trading
Section 297 Companies Act 1963 states that any person who was
knowingly a party to carrying on any business of the company in a
reckless manner ( it is a defence to have acted honestly and reasonably)
they may be held personally liable without limit for the debts of the
company
To recognise the existence of groups of companies
Under section 150 Companies Act 1963 if a company has subsidiary
undertakings, then consolidated group accounts must be prepared
showing the profits and losses and assets/liabilities of the group. The
corporate veil may be lifted to identify a holding/subsidiary company
relationship .
2) Lifting the Veil by the Courts
The Courts have a wide gambit in deciding whether to lift the corporate
veil and it is not easy to extract a general principle, however it is
established that the Courts will not permit the Veil of Incorporation to be
used for fraudulent purposes. In past decisions the Veil has been lifted in
the following situations
Implied Agency - where an agency relationship exists
Gilford Motor Company v Horne [1933] Ch 935 – the defendant entered
into a non – compete agreement with the company in the event of his
leaving. He sought to evade this agreement on leaving by forming a
company with family members as directors and him as an employee. The
courts lifted the veil.
Jones v Lipman [1962] 1 All ER 442, a house was sold to a newly formed
company to avoid an order for specific performance given against him by
selling the house to a company formed by him . Russel J described the
company as “ a device and a sham, a mask which he holds before his face
in attempt to avoid recognition by the eye of equity.” The court lifted the
veil.
Single Economic Entity -
Where the parent subsidiary relationship between companies in the same
group is so interlinked that they should be treated as a single economic
entity. The courts will lift the veil to reflect the economic and commercial
realities of the situation.
Powers Supermarkets v Crumlin Investments Ltd (Unreported 22nd of
June I981) -
A company held a lease with a restrictive covenant from a shopping
centre company which precluded it from granting a lease to a
competitor. The shopping centre was subsequently sold to a subsidiary of
a rival business who then sold part of the freehold ( no longer leasehold)
of the shopping centre to another subsidiary to allow it to trade on the
site. The court held that although the newly formed subsidiary was not
party to the contract with the restrictive covenant it was bound by the
covenant because the court may “treat two or more related companies as
a single entity…… if this conforms o economic and commercial realities
of the situation”.
Where the company was formed for fraudulent or illegal purposes, or for
the avoidance of legal duties.
Where the company is being used to perpetrate a fraud or an injustice
against the minority shareholders.
Re Bugle Press Limited [1961] 1 CH 270
To establish the true residency of the company
Daimler v. Continental Tyre Company [1916] 2 ac 307
Under British wartime laws trading with the enemy was forbidden. The
defendant owned monies to the plaintiff a British registered company,
whose directors and shareholders were German. The court lifted the Veil
and concluded that the Plaintiff was not obliged to pay the debt as this
would constitute trading with the enemy.