Concept of lifting of corporate veil, case studies and exceptions

1. LIFTING OF CORPORATE VEIL AND
EXCEPTIONS
SAUMYA SINGH
1321760
CHRIST UNIVERSITY

2. CONCEPT
 A company is a legal person with a separate entity.
 This shows that there is a veil drawn between the company and its
members.
 Lifting the corporate veil is an exception to the concept of
separate legal entity.

3. Contd.
 The corporate entity will be disregarded only in exceptional cases.

4. Case: Salomon v. Salomon
 This principle was first established by the English House of Lords in Salomon v. Salomon & Co.
Ltd. and well accepted as part of Malaysian company law.
 The brief facts are as follow: Aron Salomon had for some year been a prosperous leather
merchant and wholesale boot manufacturer running the business as a sole trader. He then
decided to transfer the business into a limited liability company. The subcribers of the
memorandum include Salomon, his wife and five of his children. Besides, he also received for
his business debentures and continued to carry on the business as before. A year after, the
company went bankrupt and was put into liquidation. There was just enough assets to pay
off the debenture holders including Salomon himself. The unsecured creditors claimed that
the company was “mere nominee and agent of Salomon”. Salomon should be ordered to
pay compensation for the company against its debts other than Salomon himself. The Lord
Macnagthen held that “though it may be that afer incorporation the business is precisely the
same as it was before, and the same persons are managers, and the same hands receive
the profits, the comany is not in law the agent of the subcribers or trustee for
them” Therefore, even though a person held almost all shares and debetures, and controlled
the compay’s oporations, one was entitled to be deal with the company as a separate
legal existence from oneself. As such, one is treated as other secured creditors who have
priority over unsecured creditors in the event of the company being insolvent

5. Contd.
 Hence, a company is an artificial legal person distinct from its individual
members. Corporation or subsidiaries, not its directors or individual
members or the parent corporation, is liable for its own contract made,
torts commited or debts inccurred (Shub, 2006). This principle is regarded
as the veil of the corporation.

6. LAW WILL LIFT THE CORPORATE VEIL
 Under statutory provisions/exceptions
 Under judicial interpretation/exceptions

7. UNDER STATUTORY
PROVISIONS/EXCEPTIONS
 Reduction of number of members below the statutory minimum
 Misrepresentation in Prospectus
 Failure to return application money
 Misdescription of the company’s name

8. Contd.
 For investigation of ownership of company
 Fraudulent or wrongful trading
Case: In Re William C. Leitch Brs.Ltd.,the company went bankrupt but its
directors continue to carry on its business and buy more goods on credit.
Maugham J. held one of the directors personally liable for the price of
those goods.

9. UNDER JUDICIAL INTERPRETATION/
EXCEPTIONS
 The company has been used to manipulate or evade liability.
- Gilford Motor Co. lwn Horne
- Jones lwn Lipman
- Re Darby

10. Case: Gilford Motor Co. v Horne
 F: H was employed as a managing director in the P’s company. There was
a covenant… not to solicit customers of the company after leaving his
employment. When H left the company, set up his own company and in
contravention with the covenant solicited the P’s customers. P applied an
injunction against H.

11.  H: Injunction granted.
 ‘Of course in law the Def. Co. is a separate entity from H but the reason for
the creation of the company was the fear of H that he might commit
breaches of the covenant’
 ‘The company was formed as a device, a stratagem, in order to mask the
effective carrying on of a business of Mr Horne’
Contd.

12.  F: L agreed to sell his house to J.L changed his mind, to avoid transfer he set up a company
and transferred the house to the company. The company was wholly owned and controlled
by L.
 Russel j: ‘….the company was a creature of L, a device and a sham, a mask which he holds
before his face in an attempt to avoid the eye of equity’.
Case: Jones v Lipman

13.  F: The shares- in Bugle Press were held by S & J – 4500 shares each and T-
1000 shares. S & J wanted to buy T’s shares. For this purpose they
incorporated a company which made an offer to purchase all the shares
in Bugle Press. S & J agreed except T. Thus, they invoked Sec 209 (equiv. To
Sec 180) i.e. if a co. acquired 90 %, it could compulsorily buy out the
remaining 10 %.
Case: Re Bugle Press

14.  Court of Appeal:
 Rejected the application of sec 209.
 “the section had been used…for the purpose of enabling majority
shareholders to expropriate or evict the minority”
Contd.

15. Contd.
 The company has been agent or ‘alter ego’ to its members.
- Aspatra S/B lwn Bank Bumiputra Malaysia Bhd
Respondent company had applied an injunction against Lorrain who was
once a director of the respondent company.
R alleged L had channeled certain secret profits into Aspatra which he
controlled to prevent R from recovering those proceeds

16. Contd.
 When the company has been used as mask to cover a wrongful act.
- Re FG(Films) Ltd.
F: 90 shares of a company were held by an American director and 10
shares were held by a British. The company sought to register its film
“Monsoon” as a British film. The Board of trade refused because in
reality it was made by an American company.

17. Contd.
 When the Court acts on analogy and equity
- Orri lwn Moundreas
 When it involves group of companies
- Hotel Jaya Puri Bhd. lwn National Union of Hotel, Bar & Restaurant
Workers

18. Thank You