Essay about Corporate personality is the most important feature of a company

Submitted By jiarongzhu
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Pages: 22

Corporate personality is the most important feature of a company, which represents company's legal personality distinct from its members and directors. Since the early Roman law, the existence of legal person other than human have been justified. This concept was further demonstrated in the UK company law by the so-called ‘proper claimant rule’ [It is the company have the power to sue the wrongdoer, not the members] in Foss v Harbottle [1843]. However, Salmon v A Salmon Co Ltd [1897] is the most famous case which affirmed this principle. The significance of the Salomon case is beyond the proof of the adoption of the corporate personality, providing a necessary precondition to the operation of limited liability. It also confirmed the status of one-person companies.
The principle of corporate personality, in the second half of the nineteenth century, functioned as a stimulus enabling a number of capitalists to embark upon risky adventures without shouldering the burden of personal liability. Obviously, another advantage of this principle is that the company as a separate person can be put into legal relationships as a party to contracts or as the owner of property. On the other hand, this doctrine gives members protection of limiting their liability to the amounts they have agreed instead of company’s debts.
However, because of the misuse of this doctrine (corporate personality or limited liability) by individuals seeking to escape liability, modern law recognise certain exceptions to these principles by legislative or by the court. The statutory exceptions to the principle of limited liability are normally concerned with fraudulent trading (Art 177, IO 1989) or wrongful trading (Art 178, IO1989). If respective requisite conditions are satisfied, the court may declare that the directors are liable to make such contribution to the company’s assets.
There are number of cases where the courts have set aside the principle of separate personality to look behind company framework. This judicial process of pulling up the veil of incorporation is known as “lifting the veil”. The consequences of this process will probably make directors liable. In this regard, lifting the veil would not make the shareholders liable for the contract debt of the company unless members are personally involved in the commission of tort. Hargovan and Harries (2007) stated that, at common law, the circumstances in which it is appropriate to piece the corporate veil has long been inconsistent and uncertain. In the case of fraud or sham, courts are more willing and certain to lift the veil. In both Gilford Motor Company Ltd v Horne [1933] and Jones v Lipan [1962] cases, the defendants were trying to avoid liability through setting up a ‘sham’ company. In both cases, the veil was pierced. In Gilford, an injunction was awarded; in Jones, the court awarded specific performance.
However, when it comes to the case of group of companies, it is quite difficult to classify the exception of the corporate personality principle. In the case of DHN Ltd v Tower Hamlets [1976], a subsidiary of DHN owned land was issues with a compulsory order, resulting DHN being closed. Lord Denning advanced the ‘single economic argument’ and lifted veil between DHN and its subsidiary company to treat parent-subsidiary as one legal entity. Finally the Court of Appeal held that DHN was also entitled to compensation. However, the approach of ‘single economic unit’ adopted in DHN was soon questioned by Lord Keith in Woolfson v Strathclyde [1978]. The lord reiterated that only in the circumstances of facade, it would be appropriate to lift the veil. However, situation became more confused when it was ruled in Re A Company (1985) “the court will use its powers to pierce the corporate veil if it is necessary to achieve justice”.
The appearance of the landmark case-Adams v Cape industries helped make this matter clear. The claimant, Adams, sought to ignore the separate legal personality of…