An Analysis of the Corporate Veil

The cardinal construct of company which is a separate legal entity, it means that there is a separation between the company and the members or the direction. The construct will be established once the company is incorporated. The separate legal entity is besides referred as the head covering of corporation. The separate legal entity is found in the instance of Salomon V Salomon ( 1897 ) and Section 16 ( 5 ) of the Companies Act 1965. Therefore, merely the company will be apt all the liability without involve all members. As like natural individual can keep, sell and buy the assets under its name. Besides, under the jurisprudence the company can action and be sued when the breach of contract. The company has ageless sequence which means it can go on its concern irrespective the alternation of the rank.

Section 16 ( 5 ) Consequence of incorporationOn and from the day of the month of incorporation specified in the certification of incorporation but capable to this Act the endorsers to the memoranda together with such other individuals as may from clip to clip become members of the company shall be a organic structure corporate by the name contained in the memoranda capable forthwith of exerting all the maps of an incorporated company and of actioning and being sued and holding ageless sequence and a common seal with power to keep land but with such liability on the portion of the members to lend to the assets of the company in the event of its being wound up as is provided by this Act.

To intensify the cognition about the construct of separate legal entity, we shall hold a expression into some instance Torahs. The rule in Salomon V Salomon is best demonstrated by reexamining some of the instances that followed after. It is the first instance that establishes a limited company is a separate legal entity.

Salomon v. A.Salomon & A ; Co. Ltd [ 1897 ]

Aaron Salomon, a exclusive bargainer, decided to stop his leather merchandiser and boot maker due to his concern turned into a failure. He so sold his concern to A.Salomon & A ; Co. Ltd, which was a limited company turned by Aaron Salomon in order to fulfill his boies desire to go the stockholders of the company, for a nominal capital of 40,000 portions of ?1 each. The limited company’s stockholders merely stood up of the seller, his married woman, a girl and four boies, who subscribed the portions for ?1 each. The company paid Aaron Salomon by issued 20,000 portions and issued a unsecured bond amounted ?10,000 which transporting a drifting charge on the plus of the company. Although Salomon’s household were portion of the stockholders, nevertheless, Aaron Salomon hold 20,001 portions out of the company’s 20,007 portions. Aaron Salomon was appointed as the company’s pull offing manager.

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A twelvemonth subsequently, the company was wound up and went into settlement. What was happened was the company’s assets were running abruptly of its liabilities by ?11,000. If was to follow the sequence of refund of liabilities, the unsecured bonds would hold the precedence to acquire paid foremost, so followed by the ordinary stockholders, which meant there is no fund left to refund the ordinary stockholders.

However, the murderer, avering that Aaron Salomon was the same entity as the company and the company was a mere agent of Aaron Salomon in the eyes of jurisprudence. Hence, Aaron Salomon was apt to do certain that the ordinary stockholders get paid in full, so followed by the unsecured bonds which held by himself.

The test tribunal ( Vaughan Williams J ) gave the opinion against Aaron Salomon, and this was confirmed by the Court of Appeal. The House of Lords reversed the opinion by saying that a company exists independently and distinguish from its members. Therefore, the plus of a company must acquire utilized to pay out the liabilities harmonizing to the precedence degree, which means that the unsecured bond holders have the precedence to acquire paid foremost so followed by the ordinary stockholders. Virtually, Aaron Salomon was the biggest stockholders of the company, he was besides the unsecured bond holder and was entitled to repayment in precedence so followed by the refund of his portions.

Lee v. Lee’s Air Farming Limited [ 1961 ]

Mr. Lee forms a company which is Lee’s Air Farming Limited in 5th grand 1954. He was manager, stockholder and employee. He appointed himself go employed as head pilot for the company. This company is to carry on an aerial top-dressing concern. Their secretary of the company, Mr. Sugden obtained insurance screen claims brought under the Worker Compensation Act for the company benefit and its employee and supplied the insurance agent with a statement of rewards to the insurance company. In March, 1956, Lee was killed while working for the company when an aircraft crashed and burst into fires. Mr. Lee go forthing a married woman and four kids were wholly depending on him. His married woman sued under the Worker Compensation Act insurance. She says that clip her hubby was “ Worker ” referred to the Workers’ Compensation Act 192. ( Oliver, 1984 )

Section 3 ( 1 ) of the Act provided

“if any employee applies personal hurt by accident due to the clip he/she performs his/her employment caused to worker, his employer will be apt to pay compensation in conformity with commissariats of this Act.” ( Oliver, 1984 )

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Section 2 defined “worker” as

“any individual who employed by an employer to work under a contract of service with salary or otherwise.” ( Oliver, 1984 )

First, this issue went to the New Zealand Court of entreaty but the New Zealand Court rejected this issue because he is manager of the company, he could non be its employee. After that, Mrs. Lee entreaty to the Privy Council and the judgement is delivered to Lord Morris from judicial commission.

The Court held that the company was a separate legal entity. Harmonizing to Lord Morris:

“ when the two parties have reached a consensus, the contractual relationship can be existed. it was ne’er recommend ( nor in their positions of the Privy Council, could moderately hold been proposed ) the company is a cozenage, or merely a mirage. It is a fact that person is a manager of a company but did non forestall him to come in into a contract to function the company. Well, if it is accepted, the respondent company is a legal entity, the Privy Council that there is no any ground to doubt because the company is to set up the cogency of any contractual duties between the company and the asleep person.”

( Dignam, 2011 ) ( Kershaw, Jun 28, 2012 ) ( Sealy, 1971 )

Lord Morris besides said:

“assuming that the company is non a fake so the capacity of the company to do a contract with him could non fault because he is the agent of the company. Deceased individual may hold made a house contract to service this company in a fixed period. During this period, if he had retired from the manager and other managers had been appointed, his contract will non be affected. When he is a stockholder, he can command the development of the state of affairs itself and will non impact his company ‘s procedure. So when person says ‘one of his first Acts of the Apostless was to name himself the lone pilot of the company’ , it must be admitted and the understanding is made by company, and this is a valid understanding can non be less because he arrange himself acted as the agent of the company. In their Privy Council position it is a logical effect of the determination in Salomon ‘s instance that one individual may work in double capacities.” ( Dignam, 2011 ) ( Kershaw, Jun 28, 2012 ) ( Sealy, 1971 )

Then Mr. Lee can be a manager and give himself an order as a main pilot. Therefore, a maestro and servant relationship is can be carry through the definition of ‘worker’ under the Act. So Mrs. Lee is can appeal allowed and entitled to compensation.

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Macaura v. Northern Assurance Co. Ltd [ 1925 ]

In Macaura v. Northern Assurance Co. Ltd [ 1925 ] , Mr. Macaura, the proprietor of lumber on the Killymoon estate in Country Tyrone. He agreed to sell all the lumber to the Irish Canadian Saw Mills Ltd. The lumber was to be paid for portions, the lumber amounted about to the all plus in the company. So that, now he becomes the significant stockholder of the company.

Therefore, Mr. Macaura insured the lumber in his ain name with several insurance companies including the Northern Assurance Co. Ltd, but he non insured under the company’s name. At the same clip, he was besides a creditor of the company. Unfortunately, two hebdomads subsequently a fire was burned all the lumber on the estate. Mr. Macaura tried to claim under the insurance policy to retrieve losingss, but the insurance company refused Mr. Macaura’s claim for compensation. The insurance company was argued that he had no insurable involvement in the lumber because the lumber was the belongings that belongs with the company, but non he’s belongings whether Mr. Macaura was a creditor or significant stockholder in the company.

Finally, the tribunal held that in order to hold an insurable involvement in belongings a individual must hold a legal or just involvement in that belongings. Neither a creditor nor a stockholder in a company has any insurable involvement in an plus owned by the company. The corporator, even if he holds all the portions, is non the corporation ( separate legal entity ) .

In our point of position, other than the separate legal entity to be applied in Macaura v. Northern Assurance Co. Ltd [ 1925 ] , the philosophy of privity of contract besides available to use in this instance. It means that a non-party ( Irish Canadian Saw Mills Ltd ) can non convey an action on the contract. Therefore, the company has no right to action on the contract. This is because Mr. Macaura enters into an insurance contract with Northern Assurance Co. Ltd under he’s name, non under the company’s name. Hence, the insurance company will non transgress of contract. However, if that clip when the contract was made under company’s name, so the insurance company will liable the losingss suffered by the company.

There are drawbacks to divide legal entity, we think that the tribunal should hold considered others factor such as Mr. Macaura did non awaked about the rule of separate legal entity, so the insurance company should liable all of the losingss or the insurance company should hold compensated him portion of the losingss.