Corporate Personality Essay Paper

Corporate Personality
Corporate Personality

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Corporate Personality

The concepts of separate corporate personality have provided the ground for companies to survive even in the absence of its original owners, provided they adhere to the companies act. Despite this, the company is limited in that it cannot enter a contract ultra vires. The global economy and businesses are built on the separate corporate personality. However, it has been established that corporate personality has been the vital cause of several frauds and a legal shield in the courts of law (Mohanty & Bhandari, 2011).

To achieve a compensation for a fraud, the fraudster needs to be identified together with the company that the perceived fraudster controls. Usually such a process is referred to as piercing the corporate veil. Currently, the Supreme Court has reviewed the ruling in relation to corporate personality. Of particular interest is the case in Prest v Petrodel, where the supreme courts provided a new definition to the law in respect to the corporate personality.

Whereas the courts have limited powers to ignore the limited corporate personality, the courts acknowledge that many other English law doctrines can be used to provide an alternative interpretation and enhance the justice system. This essay illustrates how the ruling in the case of Prest v Petrodel altered the law and its effect on the meaning of corporate personality.

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The background of the case can be traced from a man by the name Prest. He shared the matrimonial home with his wife and the operations of his businesses were limited to owning residential properties. When the marriage failed and they decided to divorced, his wife sued.  However, he denied that the wealth in the company was solely his and she should not be sharing with anybody.

In the first ruling, the court applied the clause in the Matrimonial Cause Act to treat the assets of the company as if they belong to the man (Stockin, 2014). Therefore, the companies could not be ordered to transfer the property to the woman since they belonged to the man. Having lost the case at the courts of the appeal, the woman took the issue to the Supreme Court.  

The Supreme Court overturned the court of appeal decision that and ordered that the properties be transferred to the women since the first judge had erred in his judgment. The courts could only transfer the assets that are actually owned by the husband.

Unlike the appeal court, the Supreme Court discussed the concept of the corporate veil at length while delivering the justice. The concept of corporate veil in this ruling provides the precedent that may be formally binding to future cases (Daehnert, 2007). Immediately after the landmark ruling, the courts of appeal had already indicated that attempts to widen the scope of the doctrine would be difficult or even impossible.

Despite the supreme courts attempt to pierce the corporate veil, it is associated with some limitations as the application of law is concerned. The first limitation of this attempt to pierce of corporate veil is that it will only be applied of the when there is no other legal method of achieving justice. This means that this precedence may not apply if there exist other mechanisms of achieving equivalent results.

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In this regard, it is only necessary to pierce the corporate veil if it is appropriately to do so. One of the supreme courts judges asserted that it is only necessary to pierce the corporate veil when all other legal remedies cannot be applied to provide justice in the courts (Hargovan, 2007). The other limitation to the courts power to pierce corporate veil is possible when the claimant fails to establish an alternative way to identify the company with its controller.  

It was evident before the supreme courts that the accused had already established his company several years before he divorced his wife. In this regard, the evasion principle was not applicable in his case and this limited the ability of the judges to pierce the corporate veil. On the other hand, the existence of the resulting trusts also limited the ability of the judges to pierce the corporate veil.

Corporate personality is a legal concept where an organization acquires separate legal personality that is an organization is a separate legal person from its members (Hargovan, 2007). Therefore, an organization is able to have legal obligations and rights. Consequently, an organization can sue and be sued, own property, continue its existence despite change in membership, shareholders can entrust management to directors, right to sell, purchase and mortgage its property in its own name, and enter into contracts. In international law, legal personality is a prior condition for an organization to use its own name in signing of international treaties (Ross 2008).

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This concept of corporate personality has consequences to both the company and its members (French, Mayson, & Ryan, 2015). These consequences are a member’s liability is limited to the share amount they fully paid or the fixed amount a guarantee pays. As a result, a company cannot claim additional contribution from the members. The members are also not liable to cover debts that the company incurred as a separate legal person (Gray, 1997).

A company is at liberty to sue third parties, and even its shareholders. Members are not capable of suing on behalf of the company since it is a separate person with its own legal rights. A company’s property is its own, hence neither creditors nor members have any legal or interest in its possessions. Another consequence in this concept is that a company has liabilities and rights occasionally claiming human rights. The artificial personality does not go as far as giving it human rights, for example, it cannot claim compensation for hurt feelings (McAdms 2014).

Piercing the corporate veil has been a tight rope for the courts as they have to deviate from existing liabilities to do so. However, the cases such as the one Trutor AB v Smallbone provided the need for the courts to pierce the corporate veil. The Canadian courts have the power to pierce the corporate veil in their pursuit for justice. Such a concept is complete contrast to other legal concepts in the common law world.

However, it is emerging that Canada has moved from the British legal system and is slowly influencing the American legal system on corporate matters (Hargovan & Harris, 2007). The North American country has added a conceptual fog of veil piercing jurisprudence through their indiscriminate use of the agency concept. According to Daehnert (2007), the English and the German legal systems are largely based on the limited liability and the separate legal entity philosophies.

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Piercing the corporate veil is a situation in which a court does not abide to the limited liability law and holds a company’s directors or shareholders legally responsible for the company’s statement, debts, or actions. This situation arises when there has been a serious misconduct such as engaging in fraud, undercapitalization at time of incorporation, and other criminal activities (McAdms 2014).

For a long time, the case in Salmon still holds true due to its widely accepted concept of limited liability. Therefore, most English and the American courts have adopted the approach that permits companies to order the affairs by the use of subsidiaries as they claim for limited liability. However, such a concept prejudiced the creditors on the basis that they should not know the state of affairs before transacting with the company (Ruane, 2005).

Throughout the evolution of legal practice, the yardstick of prevention of injustice continue to hold much power in the courts as the judges continue to lean in favor of the decision that favors justice(Mohanty & Bhandari, 2011).

The case in Salomon provided the benchmarks that have been used for years to deal with the issue of corporate personality and liability of directors. The courts established that a member is a legal entity that is separate who is not liable for the debts of the company and his personal assets cannot be used to offset the company debts (Walters, 1998).

The case in Bottrill was one of the numerous attack on the virtues held in Salomon. This ruling in this was fair but left the sole director of the company vulnerable to legal consequences. Whenever other directors of the company are absent, the sole director is left exposed to claims to the claims that his company is operating in a sham contract of employment (Howell, 2000). Therefore, the principle in Salomon can be denied on the policy grounds.

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The rationale for lifting the veil has been observed by law experts for some time. According to Krishnaprasad (2011), lifting corporate veil is a rare and unprincipled legal concept that is often left to jurists. From the policy perspective, the concept of trading with the enemy might form the rationale of lifting the veil. However, the corporate veil is usually lifted to stop people from abusing the legal privileges of the corporate form such as the case of fraud.

However, it is hard to determine whether established company can abuse the concept of corporate form through breaking out hostilities. Theretofore, corporate personality is a privilege that is superimposed on the agreement between the company shareholders that is cloaked in corporate veil and can only be lifted in the case of abuse (Ruane, 2005). 

Traditionally, the courts were very reluctant to pierce the corporate veil, unless there exist a compelling issue to do so. However, the courts are increasingly to disregard the autonomous personality of the companies to facilitate the course of justice. In order to uphold the public interest, the courts have strongly relied on the strict rule in Salmon v Salmon to preserve the veil (Nakajima, 1996). The courts have observed the principle of separate personality by noting that the body corporate lacks the basic characteristics of human beings.

There are several corporate structures around the world with different legal consequence. However, most justifications for limited liability no longer apply when the creditor requesting to lift the veil is an involuntary creditor or when there exists a controlling shareholder.

According to Krishnaprasad (2011), the burden of the cases entailing an involuntary creditor and controlling shareholder should be put on the shareholder having potential control of the company to show that he exercises actual control. Such a system is likely to create incentives on the shareholders to invest in socially productive monitoring that activates the social sensitivity of corporations.

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The law in Salomon provided the basis cornerstone of the corporate personality. However, it is evident that the law has been evolving over the years as the court seeks justice. The extent by which the courts will pierce the corporate veil depends whether they are applying the common law of the statutes. For the courts applying the common law, they would only pierce the veil on exceptional circumstances.

On the other hand, there are statutory provisions where the veil can be pierced. From the case laws, it is evident that the courts have the power to pierce the veil or even lift the veil. The recent decision by the Supreme Court in Prest to revisit the issue of corporate veil brought a new concept with consequences in legal practice. In this case, the courts addressed the controversial issue of corporate personality by concealment and evasion principles.

The Supreme Court decision brought the concept that the remedy can be sought from a different position and provides alternative legal base on which equivalent remedy can be provided. In this regard, the courts will have alternative legal routes to make decisions in the vast majority of the corruption and fraud cases. The implication is that the courts should be left free to pierce or lift the veil upon observing certain criteria that falls within the evasion principle and if it is necessary to do so.

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French,D., Mayson, S. and Ryan, C. (2015) Mayson, French & Ryan on Company Law. 32nd edn. United Kingdom: Oxford University Press

Sneha Mohanty & Vrinda Bhandari, (2011) “The evolution of the separate legal personality doctrine and its exceptions: a comparative analysis”, Comp. Law. 2011, 32(7), 194-205

Krishnaprasad, K.V (2011) “Agency, limited liability and the corporate veil”, Comp. Law. 2011, 32(6), 163-165

Marc Moore, (2006)”A temple built on faulty foundations”: piercing the corporate veil and the legacy of Salomon v Salomon, (Journal of Business Law), J.B.L. ,Mar, 180-203.

Christopher Ruane, (2005) “Metaphysics and the corporate veil”, (Company Lawyer), Comp. Law. 2005, 26(2), 62-64.

Claire Howell, (2000) “Salomon under attack”, (Company Lawyer), Comp. Law., 21(10), 312-314.

Adrian Walters, (1998) “Corporate veil”, (Company Lawyer), Comp. Law.,19(8), 226-227.

Gray, (1997), “SIB attempts to pierce the corporate veil”,(Company Lawyer),Vol 18 No 7,page 217).

Anil Hargovan, (2007) “Piercing the corporate veil in Canada: a comparative analysis”, (Company Lawyer), Comp. Law, 28(2), 58-62.

Alexander Daehnert, (2007), “Lifting the corporate veil: English and German perspectives on group liability”, (International Company and Commercial Law Review), I.C.C.L.R. 2007, 18(11), 393-403.

Laura Stockin (2014), “Piercing the corporate veil: reconciling R. v Sale, Prest v Petrodel Resources Ltd and VTB Capital Plc v Nutritek International Corp” Comp. Law. 2014, 35(12), 363-366

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