Incorporation of Company Law in the United Kingdom (UK)

Incorporation of Company Law in the United Kingdom (UK)

One of the most uncertain and, as a result, disputed issues in English company law pertains to the circumstances in which a court will be justified in disregarding the autonomous legal personality of a registered company.[1] The general rule governing this issue, as laid down in successive Companies’ Acts in the UK since 1844, is clear: where a company exists by virtue of legal incorporation, properly administered, that company will be regarded as an autonomous legal person in its own right.[2] Once freedom of incorporation and general limited liability was enacted, a new practice had been set in motion in Britain.[3] The company as a form of organisation radically transformed between 1862 and 1907.[4]  This article will review the common law doctrine of the piercing of corporate veil.

In 1897, the UK House of Lords in Salomon v Salomon[5] famously confirmed the sanctity of a validly formed corporation. Its liabilities were its own and not its shareholders’ whose risk was limited to the amount invested in the corporation.[6] Furthermore, once a company has been legally incorporated, it must be treated like any other independent person with rights and liabilities appropriate to itself, while the motives of those who promote the company are irrelevant in discussing what those rights and liabilities are.[7]  However, this ruling of a full panel of the House of Lords attracted the ire of some commentators because of its potential for abuse, but its current status as the dominant company law precedent remains unquestioned.[8]

Salomon‘s case also held that a company’s property was not the property of the members and its debts were not the debts of its members. The case involved the question of whether Aron Salomon, a boot manufacturer, had been personally responsible for the losses of A. Salomon & Co. Ltd. When it was ruled that he was not, the scope of limited liability had been greatly extended by establishing that the corporate form could be used legitimately to shield a business owner from liability.[9] Salomon thus drew a “veil” between a limited company and its members or subsidiaries.[10] However, to hold that a company is attributable to an individual is legal fiction – a company has no separate existence other than in contemplation of the law.[11]

Indeed, corporations can potentially abuse the Salomon principle. The extent of parent companies’ liabilities for the acts of subsidiaries, especially with regard to wholly-owned subsidiaries, has not as yet been finally settled by the Community courts.[12] In examining this topic, consideration of whether there is a single economic entity by looking at formal legal structures of ownership and control may be complemented by examining economic behaviour from relevant evidence and a social scientific perspective.[13] Yet, overemphasis of corporate law doctrines of separate entity and limited liability has meant that wrongdoers can escape liability for their tortious activities carried out through corporate vehicles.[14] Hence, in the absence of any statutory reforms to deal with this problem, the common law doctrine of piercing of the corporate veil provides an important mechanism for addressing the issue.[15]

UK corporate law, through judicial ingenuity, has done a lot to create a discrete regulatory regime for the ‘close company’.[16] The adaptation of corporate legal personality has rested largely upon judicial creativity.[17] While empirical legal studies present challenges, we believe that they can provide insights, observations and patterns that potentially enrich discourse not only among academics and practitioners but also within the judiciary.[18] A study conducted by Alan Dignam affirms that the Court of Appeal has had a relatively high disregard rate – with reversals on appeal principally coming from the English Court of Appeal in favour of corporate disregard. Therefore, the Salomon principle seems to be eroded. The data indicate that the English Court of Appeal has had very high disregard rates over many decades, with an overall disregard rate of 44.74%, compared with the overall data set disregard rate of 35.65%.[19]

The legal instrument pertaining to a limited liability company can be unfair to general creditors, but it is also supremely useful to the functioning of the commercial system.[20] The House of Lords in Salomon protected the doctrine of limited liability against the claims of the creditors who paid for it, on the moral basis that their risks had been disclosed to them.[21] Similar efforts to pierce the corporate veil when the ‘interests of justice require’ have also fallen foul of the strict application of the rule in Salomon.[22] Nevertheless, the legacy of Salomon has survived many attempts to roll back its influence and it is still the case today that courts will only recognize exceptions to separate legal personality, thereby ‘piercing the corporate veil’ in truly exceptional circumstances.[23]

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References

[1]M Moore, ‘A Temple Built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon’ (2006) Journal of Business Law 180.
[2] Limited Liability Act 1855.
[3] Ron Harris, The Private Origins of the Private Company: Britain 1862–1907 – Oxford J Legal Studies (2013) 33 (2): 339.
[4] Ron Harris, The Private Origins of the Private Company: Britain 1862–1907 – Oxford J Legal Studies (2013) 33 (2): 339.
[5]Salomon v Salomon [1897] AC 22 (HL) 53.
[6]Salomon v Salomon [1897] AC 22 (HL) 53.
[7]M Moore, ‘A Temple Built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon’ (2006) Journal of Business Law 180.
[8]Witness VTB Capital Plc v Nutritek International Corp [2013] UKSC 5.
[9] D Singh, Incorporating with fraudulent intentions – (2010) JFC 17(4), 459–484.
[10] D Singh, Incorporating with fraudulent intentions – (2010) JFC 17(4), 459–484.
[11] D Singh, Incorporating with fraudulent intentions – (2010) JFC 17(4), 459–484.
[12] S Hurley & A Scott, The Concept of an Undertaking and the Responsibility of Parent Companies for the Actions of Subsidiaries in the EU and UK – [2008] Comp Law 301.
[13] S Hurley & A Scott, The Concept of an Undertaking and the Responsibility of Parent Companies for the Actions of Subsidiaries in the EU and UK – [2008] Comp Law 301.
[14] Stefan, Piercing of the Corporate Veil for Evasion of tort Obligations CLWR 46 1 (42).
[15] Stefan, Piercing of the Corporate Veil for Evasion of tort Obligations CLWR 46 1 (42).
[16] Joanna Benjamin, The Narratives of Financial Law – Oxford J Legal Studies (2010) 30 (4): 787.
[17] David Milman, Regulating close companies in Corporate Law: Towards a more formal recognition? CLWR 46.
[18] Alan Dignam, Disregarding the Salomon Principle: An Empirical Analysis, 1885–2014 – Oxford J Legal Studies (2019) 39.
[19] Alan Dignam, Disregarding the Salomon Principle: An Empirical Analysis, 1885–2014 – Oxford J Legal Studies (2019) 39.
[20] Joanna Benjamin, The Narratives of Financial Law – Oxford J Legal Studies (2010) 30 (4): 787.
[21] Joanna Benjamin, The Narratives of Financial Law – Oxford J Legal Studies (2010) 30 (4): 787.
[22] S Hurley & A Scott, The Concept of an Undertaking and the Responsibility of Parent Companies for the Actions of Subsidiaries in the EU and UK – [2008] Comp Law 301
[23] S Hurley & A Scott, The Concept of an Undertaking and the Responsibility of Parent Companies for the Actions of Subsidiaries in the EU and UK – [2008] Comp Law 301

 

The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any other organization with which he might be associated.

Muhammad Arif Achakzai

The writer is an aspiring Barrister. He is a student at the University of East Anglia, UK and is pursuing a degree in Bachelor of Laws (Honours). He serves as the Director at Jan's Law Firm (opening soon) and has also worked with Barrister Chambers, UK and the former Vice Chair, Supreme Court Bar Association, Pakistan.



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