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Business Advice Essay Research Paper In advising

Business Advice Essay, Research Paper


In advising Gus, Gloria, and


the liquidator (collectively known as the


?claimants?) as to the sustainability in law of their respective claims in


relation to, Rajinder (hereinafter


referred to as ?R?), Sarah (hereinafter


referred to as ?S?), and the liquidated company Exotic Holidays Ltd. (hereinafter referred to as ?E Ltd.?),


the core issue appears to be that of corporate identity as opposed to personal


identity of the members of the corporate entity. Issues relating to the general


effects and consequences of incorporation are also discussed, namely, issues of


separate legal personality, liability and related exceptions, which in turn


necessitates consideration of the ?corporate veil? and under what circumstances


the courts will be prepared to assign liability etc beyond the corporate entity


to the members. Before considering


individual claims, some thought is given to the general or fundamental issue of


legal identity, on the grounds that this is central to all the situations.


The most important case in this regard is undoubtedly Salomon v Salomon


[1897] AC 22 (hereinafter referred to


as ?Salomon?), which also provides an apt starting place.The fundamentally important


principal that emerged from Salomon is that a company, once incorporated,


is a legal entity in its own right. In other words, the company itself, in this


instance E Ltd., is a distinctly separate being from those that are its members


(R and S), and as such, has ?individual? rights and liabilities accordingly.This has two immediate


results. Firstly, the company, not its members, must seek a remedy despite the


fact that in reality, it will be the members, not the company, that conclude a


remedy is needed to address some wrong doing to the company. Secondly, the


alternative situation in which the company itself must be sued directly, not


the members personally, in the event that the company itself has committed some


wrongdoing. The overall result is that


members? personal liabilities and the liabilities of the company are regarded


as separate. For all intents and purposes, the courts have traditionally drawn


a divide between them. This separation of members and company, or rather the


distinction between them, is often referred to as the ?corporate veil?.The Salomon


principal has been generally upheld by the courts, sometimes with severe


consequences. In the Irish case Macaura v Northern Insurance Company Limited


[1925] AC 619, the court upheld the argument of an insurance company that


it was not liable to pay out if items were insured on a member?s own name and


not ?his? company?s name despite the fact that the items being a part and


parcel of the company?s business. The court maintained a rigid divide between


the member and the company.In more modern


times, Slade LJ essentially reiterated the continuing validity of the Salomon


principal in Adams v Cape Industries [1990] Ch 433,??the court is not free to disregard the principal of Salomon?merely


because it considers that justice so requires??This principal


was more recently again affirmed in Ord & Another v Belhaven Pubs


Limited [1998] BCC 607.However, as


resolute as the principal stands, there are exceptional cases where the court


will ?lift the corporate veil? either at common law or by statute. This was


considered in Atlas Marine v Avalon Maritime [1991] a All ER 769,? ?. . . to pierce the corporate veil


is an expression I would reserve for treating the rights or liabilities or


activities of a company as the rights or liabilities or activities of its


shareholders??There are various


circumstances where the court will lift the veil. In the context of liability,


such a course of action by the courts will mean that the members themselves


will be held liable beyond the company. In other words, liability will not stop


at the company, as per the Salomon principal, provided the court is


satisfied that certain conditions are met.?


It is these conditions that


need to be considered in each individual case with respect to the claimants,


since from the given facts, it appears that R and S seek to rely on the Salomon


principal in order to divert any potential liability from themselves personally


to E Ltd as a separate legal entity. ? —Gus.According to the given


facts, Gus has issued a writ against R arising from alleged ??conduct in breach of contract?? that


predates and overlaps the date of incorporation of the company.The alleged breaches extend


from April 1998 to October 1998, while R sold his business to E-Ltd in June


1998 while the company itself was incorporated on the 30th June


1998. Therefore, it appears that Gus had been dealing with E Ltd. and not R


personally after the incorporation.Ordinarily, by application


of the Salomon principal, the action against R would fail on the grounds


that Gus was dealing with? E Ltd. and


not with R.However, as mentioned above,


there may be a way in which the courts may be asked to life the veil and seek


action against R directly. This may happen if R is suspected of fraud, although


not necessarily of a criminal nature. In this case, equitable fraud would


suffice. Put another way, the obligations binding the member are extended to


the bind the company.In Jones v Lipman [1962]


1 All ER 442, the sale of a piece of land was at the centre of a contract.


The seller had subsequently changed his mind?


and in order to avoid an order of specific performance of his


contractual obligations, he transferred his land into the name of a company.


The court refuses the defence that the land was now in the possession of the


company and granter an order of specific performance against the seller.Likewise, in Gilford


Motor Company Limited v Horne [1933] Ch 935, the court held that a company


that constituted a mere ?sham? and formed to avoid contractual obligations


would not be tolerated. In this case, the court again lifted the veil and


issued an order against an individual who was not even a member of the company


in question.Similarly, Gus must show that R


was in effect ?hiding? behind E Ltd. If this can be achieved, it seems possible


that the court may grant a remedy against R directly. However, if R can show that


the sale was a legitimate deal in the sense that the sale of R?s former


business to E Ltd. was not a ?sham? and was formed merely to avoid a


contractual obligations etc, it seems unlikely that the courts will follow the


route taken in Jones v Lipman or Gilford v Horne in light of the


decision in Adams v Cape Industries where the courts refused to lift the corporate veil. Lord


Keith commented in Wolfson v Strathclyde Regional Council [1979] that


the Salomon principal should only be excluded in cases of a fraudulent


nature where facts were being concealed by a ruse.That said, if R


seeks to rely on Adams v Cape Industries, there might be a problem


considering that this case was distingu

ished from a similar case, Creasey v


Breachwood Motors Limited [1992] BCC 638 partly on the basis of the timing


of the transfer from entity to entity. The court may well consider the timing


of the sale, i.e. half way through the alleged breach of contract, as a


relevant factor and may well view this as some sort of avoidance manoeuvre on


R?s part. It is worth


bearing in mind that Creasey v Breachwood was subsequently criticised in


Ord v Belhaven. Hobhouse LJ stated, ??it seems to me inescapable


that the case in Creasey v. Breachwood as it appears to the court cannot be


sustained. It represents a wrong adoption of the principle of piercing the


corporate veil? Therefore, in my judgement the case of Creasey v. Breachwood


should no longer be treated as authoritative??(Although the


grounds for the criticism might well not apply to the present case.)In summary, the


facts are not sufficiently clear to warrant a clear conclusion, but it appears


that the main obstacle to Gus succeeding would be the ability to demonstrate


that R sold his business to E Ltd. in order to avoid contractual obligations


via assumed reliance on the Salomon principal. Notably, Lord


Keith commented in Wolfson v Strathclyde Regional Council [1979] JPL 169


that the Salomon principal should only be excluded in cases of a


fraudulent nature where facts were being concealed by a ruse. Such as ruse must


clearly be demonstrated.—Gloria (hereinafter referred to as ?G?).From the given facts, G is


stated to have been a ??former client??


of E Ltd. Again, with regard to the


doctrine of the corporate veil, G would prima facie only have a claim against E


Ltd. and not R directly or personally. Unless, the courts can again be


persuaded to lift the corporate veil.Members of a company have a general


fiduciary duty of care which should govern all their conduct within the


framework of the company in question, and unless it can be shown that they have


breached that duty by gross negligence or acts of bad faith, no personal


liability claims can generally be successful against them. In Williams v Natural Life Health Foods Ltd


(1998) 2 ALL ER 577, the House of Lords held that the corporate veil should


only be lifted in extreme cases and furthermore, there must be some sort of


personal misrepresentations made by the member of the company, who accepts as


much, and that the plaintiff would have had to have relied on these


misrepresentations. The House of Lords refused to lift the veil in


that case on the grounds that there had been no contact between the parties and


in any event, there was no evidence that the plaintiff had believed that the


defendant had accepted any personal liability.In summary, it seems


unlikely, based on the given facts, that G?s action directly against R will


succeed. However, taking the decision in Williams v Natural Life into


account and the stated criteria upon which the House of Lords refused to lift


the corporate veil, if G can meet those criteria, her claim might well be


sustainable.— The Liquidator (hereinafter referred to as ?L?).Again, the principal from


Salomon is the starting point with regard to L?s claim against R and S.A further parallel can be


drawn with Salomon. The liquidator in Salomon claimed that the company therein


was void as it was essentially a ?sham?


on the grounds that the company was in reality nothing more that Salomon?s ?agent?, due in part to it being a


?one-man company?. However, the House of Lords


held that it was irrelevant that the company was in effect a ?one man company?? and that provided the company had been


incorporated correctly, the fact that one person held an overwhelming majority


of shares in the company was not relevant either.More specifically, it was


held in Kodak Limited v Clark [1905] 1 KB 505 that a 98% shareholding in


a company does not by itself create a member/agency relationship. Therefore any similar


arguments on the grounds that E Ltd. was basically an ?agent? of R?s due to his


large shareholding will fail due to the ruling in Salomon and Kodak v Clark..


Generally speaking, L will be


unable to rely on a common law based approach in asking the court?s to life the


corporate veil against R and S. However, there may be a


potential route via statute. Section 213 of the Insolvency Act 1986 in


effect states that where a person has continued to trade through a company


knowing full well, i.e. fraudulently, that the company will be unable to duly


repay creditors, the person may be held personally liable to an extent


determined by the courts. Section 214 of the same Act, relevant to companies in


insolvent liquidation (as is the case with E Ltd.), extends beyond a clear ?intent to defraud creditors?, as per


s213, to include ?wrongful trading?


whereby the person knew or ought to have known that creditors will be unable to


be duly paid while continuing to trade through the company until the time of


the winding up order being granted. ? In order for the s213 to


apply, L must produce evidence of a fraudulent intent by R and S to defraud the


creditor he represents. Alternatively, under s214, L must demonstrate ?wrongful


trading? which might be an easier proposition.When considering s213,


s213(4) directs the courts to take various things into account. Under s213(4)


the courts are directed to consider whether the member/s had acted reasonably


under the circumstances, or more specifically, ??the facts which a director of a company ought to know or ascertain,


the conclusions which he ought to reach and the steps which he ought to take


are those which would be known or ascertained, or reached or taken, by a


reasonably diligent person having both ? (a) the general knowledge, skill and experience that may reasonably be


expected of a person carrying out the same functions as are carried out by that


director in relation to the company, and (b) the general knowledge, skill and experience that that director has.


Therefore in summary, in


order for s213 to apply, these standards must be applied to the facts of the


present case, and if it is found that R and S had fallen below the required


standards, an application via s214 might well be sustainable in that the courts


may well lift the corporate veil and extend liability to R and S in their


personal capacities. Bibliography.?Farrar?s


Company Law??? J.H. Farrar & B.M.


Hannigan ?Company Law?


(Statutes) ? Butterworths ?Company Law?


(Cavendish)Internet


Sources.?Rethinking


Company Law and Practice? ? The Hon Justice Michael Kirby


(www3.lawfoundation.net.au) ?Company


Law? (www.bigwig.net) ?Limited


Liability ? a necessary consequence of incorporation ?? ? Aiden Small


(www.nuigalway.ie) ?Company


Law ? Corporate Personality? (www.ukcle.ac.uk) ?Piercing the


Corporate Veil? (www.themis.wustl.edu) ?The Doctrine of


Separate Legal Personality? (www.law.anu.edu.au) ?Lifting the


Corporate Veil Revisited? (www.acca.org.uk)

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