1、 1 BE212-BUSINESS LAW Individual Assignment 2012 Name: ANRAN WANG Student no: 1004952 Word counts: 2562 Essay Topic: What is meant by the corporate veil? In what circumstances can separate corporate personality be disregarded? Discuss. UP:29/02/2012-15:46:27 WM:29/02/2012-15:46:34 M:BE212-5-SP A:11a
2、1 R:1004952 C:A4CDECDF042B02251D2C6E550DB18FE9F9D4BA342 Content: Introduction: 3 The Definition of corporate veil and lifting the corporate veil: 3-4 -The Definition of Corporate Veil: 4 -The Definition of lifting the corporate veil: 4 The source and development of principle of lifting corporate vei
3、l: 5 The conditions to use the principle of lifting the corporate veil: 6-9 -Combating fraud: 6 -Groups: 7 -Insufficient investment: 8 -Agency: 9 Advantages of lifting the corporate veil: 10 -Fairness for the loaners: 10 -Preventing the abuse of rights: 10 Disadvantage of lifting the corporate veil:
4、 10 Conclusion: 11 Reference 12UP:29/02/2012-15:46:27 WM:29/02/2012-15:46:34 M:BE212-5-SP A:11a1 R:1004952 C:A4CDECDF042B02251D2C6E550DB18FE9F9D4BA343 1. Introduction The corporations have their independent personality; which is the basic characteristic of the system of companys legal personality. T
5、he company possessing the independent legal personality is to make the corporation to become an independent entity and distinguish from its staff1. Modern enterprise system is based on corporate state of a company. And the corporate system has been vividly compared to the veil established between sh
6、areholders and corporation with independent personality by scholars in business law circle. Following the development of corporate system lifting the corporate veil has been worked out. Thus the shareholders, the truly corporate controller behind corporate veil, bear the responsibilities. Lifting co
7、rporate veil usually express that court could ignore the corporate personality so that the shareholders or the stuff take the responsibility for the companys loaner in order to realize the purpose of justice in concrete legal case. Combining the corporate independent personality with the limited dut
8、ies of shareholder, investors wish, pursuing benefits under the premise of decreasing risks, would come true. Meanwhile the form of corporate has been recognized widely. Nevertheless the system of limited responsibilities of shareholders, there is a great challenge to the value of existence for mode
9、rn company. So the corporate veil and the principle of lifting the corporate veil should be considered. 2. The Definition of corporate veil and lifting the corporate veil In the practical commercial activity, the shareholders who are behind the corporation and the managers who possibly utilize the c
10、orporate legal personality to do illegal activities also undertake the limited duties. Therefore the courts frequently refuse to organize the companys independent legal personality of a legally established corporation and directly explore the true relationship between the corporation and shareholder
11、 for pursuing justice and fairness. 1 L. E. Mitchell the holding company was the true ownership. Therefore, the holding company had the right to demand for the related compensation9. 4.3 Insufficient investment Companies Act 1985 rules that nothing in this section affects the validity of any transac
12、tion entered into by a company; but, if a company enters into a transaction in contravention of this section and fails to comply with its obligations in that connection within 21 days from being called upon to do so, the directors of the 8 DHN Food Distributions v Tower Hamlets London Borough Counci
13、l (1976) 1 WLR 852, (1976) 3 ALL ER 462. 9 Len, S. Sarah, W. Cases and Materials in Company Law, Oxford, 2008 UP:29/02/2012-15:46:27 WM:29/02/2012-15:46:34 M:BE212-5-SP A:11a1 R:1004952 C:A4CDECDF042B02251D2C6E550DB18FE9F9D4BA349 company are jointly and severally liable to indemnify the other party
14、to the transaction in respect of any loss or damage suffered by him by reason of the companys failure to comply with those obligations10. The insufficient investment of shareholders is a very important reason to lift the corporate veil. If the investment is shortage, the court has the right to lift
15、the corporate veil and deny the corporate independent personality and ask the shareholders or director to bear the responsibility which statutory is defined clearly. The responsibility of shareholder is tort liability. The theoretical basis of the liability is that the interests of ignorant ordinary
16、 investors will be infringed if the shareholders havent invested or transfer the investments because the payment capacity of the company will be decreased. 4.4 Agency Ferran (1999) point out that in this condition the consequence is similar to lifting the corporate veil even though it actually does
17、not refer to the principle of lifting the corporate veil. So in this property agency, it is considered as one of the factor for lifting the corporate veil. If the subsidiary can be proved as the agent of the parent company, the parent company will undertake the liability for the activities of the su
18、bsidiary. The British judges think whether the subsidiary is the agent of the parent company or not depends on the individual case11. They think insufficient investment of the subsidiary may make the subsidiary become the agent of the parent company12. But this idea will not be inevitable, it will d
19、epend on the purpose of establishment. The court cautiously utilizes the vital principle of lifting the corporate veil which will influence the companys independent personality system. The court generally doesnt want to lift the corporate veil. The judge usually uses the specific wisdom to achieve a
20、 balance between fact and the principle of companys independent personality. 10 Companies Act 1985, s 117 (8) 11 Adams v Cape Industries plc (1990) Ch 433, CA. 12 Re FG Films (1953) 1 ALL ER 615 UP:29/02/2012-15:46:27 WM:29/02/2012-15:46:34 M:BE212-5-SP A:11a1 R:1004952 C:A4CDECDF042B02251D2C6E550DB
21、18FE9F9D4BA3410 5. Advantages of lifting the corporate veil 5.1 Fairness for the loaners The shareholders have the right to share the interests, making the important decision, and choose the managers. Meanwhile the limited liability of the shareholders which seems as a protective umbrella makes the
22、shareholders risks under the contribution. Therefore a part of the risks will be transferred to the stakeholder outside the corporation13. The loaner as the stakeholder has the right to intervene with the corporations internal management. The limited obligation system pays more attention to protect
23、the investors but is unfair to the loaners. So the principle of lifting the corporate veil gives more protection to the loaners. 5.2 Preventing the abuse of rights The shareholders may use the principle of limited liability to harm the corporate interests and engage in unfair trade. And they may uti
24、lize the companys independent personality to do various fraudulent conducts for getting illegal income. 6. Disadvantage of lifting the corporate veil There will be a lot of problems if the principle of lifting the corporate veil is abused. If the principle of Companys independent legal personality a
25、nd limited obligation can not be protected, it will influence Britain in becoming a favourable destination for investment and affects the increase of rate of employment and taxation. Lots of scholars think that we can use much more proper methods to achieve the aim of the principle of lifting the co
26、rporate veil. Such as if someone establishes a new company in order to transfer personal debts and try to avoid from loaners, the court can release a prohibition to achieve the same result. 13 Easterbrook & Fischel: Limited Liability and the Corporation, The university of Chicago Law Review ( 52: 89
27、 1985) p.98. UP:29/02/2012-15:46:27 WM:29/02/2012-15:46:34 M:BE212-5-SP A:11a1 R:1004952 C:A4CDECDF042B02251D2C6E550DB18FE9F9D4BA3411 7. Conclusion To conclude, the principle of lifting the corporate veil is a double-edged sword. It is not only the negation of companys legal personality but also the
28、 limitation of limited liability of shareholder. of course, the principle of lifting the corporate veil is necessary supplement for the limited obligation of shareholders. Undoubtedly this principle has important value. But as an exceptional situation of the companys legal personality, there is no u
29、niversal formula to guide the problem. So the courts all over the world have strict limitation for applicable standards for preventing from abusing the principle of lifting the corporate veil. Using the judges initiative is a good method to make the system manifest its affect and is an effective met
30、hod to guarantee that the principle will not be abused. In the process of establishing and operating the corporation, the investors ought to strictly standardize the investment action and make the relationship between shareholders and corporation clearly. Thereby making the corporation becoming a mo
31、re truly independent market entity and maintain a good market environment. UP:29/02/2012-15:46:27 WM:29/02/2012-15:46:34 M:BE212-5-SP A:11a1 R:1004952 C:A4CDECDF042B02251D2C6E550DB18FE9F9D4BA3412 Reference Easterbrook & Fischel: Limited Liability and the Corporation, The university of Chicago Law Re
32、view ( 52: 89 1985) Len, S. Sarah, W. Cases and Materials in Company Law, Oxford, 2008 L. E. Mitchell & L. D. Solomon, Corporate Finance and Governance Cases, Materials, and Problems for and Advanced Course in Corporations, Carolina Academic Press,1992, Sealy, L S (1996) , Cases and Materials in Company Law (6th ed) , Butterworths, Otley, M. and Rush, J (2006) Business Law , (1st edition) Thompson Learning, UP:29/02/2012-15:46:27 WM:29/02/2012-15:46:34 M:BE212-5-SP A:11a1 R:1004952 C:A4CDECDF042B02251D2C6E550DB18FE9F9D4BA34
