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The principle of separate corporate personality as established by Salomon’s case and emphatically reasserted in later cases.. forms the corner-stone of company law. The authority of these cases is unshakable; and yet exceptionally in some instances the law is prepared to disregard or look behind the corporate personality and have regard to the realities of the situation. This approach, which has come to be known as lifting the corporate veil of incorporation, is sometimes expressly authorized by statute, and sometimes adopted by the courts of its own accord.
THE LIFTING OF THE CORPORATE VEIL
The concept of corporate law in lifting corporate veil explain about any legal ruling where the management or the owners of a company are held responsible for any liabilities of the company beside the general principle that the owners of the company are protected from any suits in contract and thus holding the corporation to be liable.
other scholars have referred to this doctrine as the ”disregarding the corporate entity”. This phrase of the doctrine mostly rely on the metaphor of ”veil” which stands for the veneer of specialities and dignities which protects the company. This can only be disregarded at will if the situation of the warrant happens to be beyond the legal operation of a company owner to the truth of others people or entities who appears to be safeguarded by the company fiction.
The lifting of the company veil should not be the only means by which the management of the company be held responsible for the actions of the company. Liabilities in a corporation can be identified by conventional theories of the contract laws, tort or agency laws. For instance, in a case where the management of the company of its own commits a tort, he/she and the company are both liable hence its unnecessary to discuss the matter of lifting corporate veil. This doctrine is mostly used in places where liabilities are found, while the company is insolvent.
The basis of limited liabilities
The existence of the companies is to protect the individual assets of the owners and the management from their personal liability for debts of the company. Unlike in the sole proprietor or partnership business where in most cases the owner/s may be held liable for the debts of the company/business. In the past, the business limited the individual liabilities of the management, its in the recent years where this has drastically been narrowed down, now directors/management of the company are increasingly becoming liable.
The process of lifting the corporate veil in most cases is very effective with small businesses owned privately and appear to have no assets, and in the plaintiff may seek to hold liable an individual with more assets. This happenings is rarely on the plaintiff’s advantage as he/she lift the corporate veil with public owned businesses/company, this is so because the companies appear to have more assets which may be available for sue than suing the individual owner of the company. Also the legal staff of this publicly owned large companies may avoid the issues that tend to make the corporate veil to be lifted.
For the case of Salomon, the House held that the limited company by Salomon was either a legal entity or not, if the business belonged to it then Salomon was not liable, and on the other hand if it was not, then there was no person who was liable and hence nothing to do with an agent. It is also difficult to say there is a company and there is not. It was further noted that the company was a different entity from the owner besides the same person being the owner or the manager, also beside him receiving the profit, in law the company is no longer an agent or trustee for the shareholders. Also the owners are neither liable to any shape or form, except only to the manner which is provided in the statute law.
The basis of lifting the veil
In Australian law, corporate veil lifting appear to be the most litigated happenings in corporate/company law. Although majority of the courts are very reluctant on holding the management or the active owners responsible for the actions that may appear to be legally the liability of the company, as the matter of fact even if the company has a single owner/shareholder, this will be done done so only if the company was non-compliant, while on the other hand, if holding the company/corporation responsible will be unfair to the plaintiff. In Australia, a variety of theories, most common ”alter ego” or ”instrumentality rule”, has attempted to form a lifting standard.
Mostly this rest on three main prongs, that is;
- a) Unity of interest and ownership.
- b) Wrongful conduct.
- c) Proximate cause.
However this theories failed to articulate the real world approach which our courts could be directly applied in cases. This has made courts to struggle with proving of each prong and hence analyze all the given factors. This case is known as ”totality of circumstances”.
Their are jurisdiction matters which the company is incorporated in if its authorized to do business in more than one state. All companies have one specific state which they appear to be incorporated as domestic companies/corporations, and in case they operate in other foreign countries, they have to apply for authority of doing business in this countries/states as a foreign corporations. In the process of determining if the corporate veil will be lifted, the courts will be forced to use the companies’s home state. The plaintiff should prove that his/her incorporation was a formality and that the company avoided corporate formalities/requirements and did not follow the protocols expected, for example voting to approve major company undertakings in the context of authorized company meetings.
These occurrences are most common in a case where the corporation is facing legal liability,moves its assets/what it owns and business to other company with the same management and owners. This also happens with singularly owned company whose managerial activities are done in a careless manner. In such occurrences, the veil could be lifted in either civil cases or where regulatory proceedings are done against a shell company.
Some of the factors that courts should considered in lifting of corporate veil
- a) The failure of maintaining the arm’s length friendship with related parties/entities.
- b) Absconding the payment dividends
- c) Failing to consider company formalities in form of behavior and documentation
- d) Other related factors which the court may find them relevant
- e) In case of inaccuracy of company records
- f) Mingling of assets of the company and those of the shareholders.
- g) Where the business entity is undervalued.
- h) Where the individual treat the company assets as his/her own.
- Members misrepresentations.
The use by the Australian Internal Revenue Service
In the recent years, the i.............
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