Lifting the Veil of Incorporation

Lifting the Veil of Incorporation
The concept of a company being a legal entity can sometimes give undesirable results. In particular, shareholders could use a company to obtain funds dishonestly, and then not be liable for repayment.
There are therefore numerous exceptions to the rules defined by Salomon v Salomon & Co Ltd. These can be implemented by the courts on a case-by-case basis, or by statute.

A company once incorporated becomes a legal personality, a juristic entity, separate and distinct from its members and shareholders and capable of having its own rights, duties and obligation and can sue or be sued in its own name.

It is also proving that a corporation exists merely as a completely controlled front (alter ego) for an individual or management group, so that in a lawsuit the individual defendants can be held responsible (liable) for damages for actions of the corporation. If a corporation has issued stock and held regular meetings of shareholders and directors, it is unlikely a judge will "pierce" the veil and limit the liability to the corporation, unless there is proof that the corporation was created to accomplish a fraud on those dealing with it.

Exceptions implemented by statute
The Companies Act 1985 includes a number of exceptions to the general rule
imposed by Salomon v Salomon & Co Ltd.
1) A public company must have at least two members. If there is a single
member (who is aware he is the only member) for more that six months,
he is personally liable for any debts incurred during that period.
2) Groups of companies must produce accounts acknowledging their
internal relationship, and profits and losses of different subsidiaries can
be offset for taxation purposes.
3) Under the Transfer of Earnings and Protection of Employment
Regulations (XXX), if an employee transfers from one company to a
sister company, their period o employment is held to be continuous.
4) Employees of a company can be liable for the company’s actions in
some circumstances:
- A public company must have an s117 certificate. If it operates
without one, a director may be personally liable for any debts
incurred.
- A company cheque must bear the name of a company exactly,
otherwise the director who signs is liable if the cheque is not cleared.
This applies even if the omission is due to a printing error. A
director of Michael Jackson Ltd was personally liable for a cheque
he signed bearing the company name M Jackson Ltd.
- If a company is wound up, its director may not carry out similar
business with a similar name for five years. Double glazing
companies are a good example of this; before his legislation,
directors would pay themselves high bonuses and run a company
into the ground, then would buy the assets of the insolvent company
cheaply and set up a virtually identical company with a similar name
to transfer any goodwill.
- Under the Company Directors Disqualification Act 1986, a person
who is disqualified from being a director can be personally liable if
they act as a director during their disqualification period.
- If directors know a company is close to insolvency but continue
trading, they may be personally liable. For example, Courts
Furniture Ltd recently continued taking orders and deposits despite
the directors knowing the business was close to closing.