Constituted Of Symbiosis International University, PUNE

The concept of separate legal personality of the company

Submitted By: HazratBilal Mujadadi

Assignment of Company Law

SUBMITTED TO: PROFESSOR SAURABH

CHANDRA

PRN No: 15021021148

Section: A

Date: 15/02/2017
 C E R T IF IC AT E
The Project entitled The concept of separate legal personality of the company submitted to the Symbiosis
Center for Management Studies, NOIDA for Company Law as part of internal assessment is based on my
original work carried out under the guidance of Mr. SAURABH CHANDRA from 05/02/2017 to
14/02/2017. The research work has not been submitted elsewhere for award of any degree.

The material borrowed from other sources and incorporated in the thesis has been duly acknowledged.

I understand that I myself could be held responsible and accountable for plagiarism, if any, detected later
on.

Signature of the candidate

Date:

15/02/2017

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 Acknowledgement

In performing our assignment, we had to take the help and guideline of some respected persons,
who deserve our greatest gratitude. The completion of this assignment gives us much Pleasure.
We would like to show our gratitude Mr. SAURABH CHANDRA, from SIU for giving us a good
guideline for assignment throughout numerous consultations. We would also like to expand our
deepest gratitude to all those who have directly and indirectly guided us in writing this
assignment.

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Content

Introduction 5

Meaning of separate legal 5

personality

What is the difference 5-6

between separate entity and
separate legal entity?

The concept of separate legal 6-10

personality of the company

The courts treatment of 10-12

separate legal personality

Advantage and Disadvantage 12-14

of separate Legal personality
Concept

Hallmark of the registered 14-16

company

Exceptions to the Separate 16-17

Legal Personality Doctrine

Conclusion 17-19

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Introduction
The separate legal personality of a company, as aforementioned, represents one of the most
fundamental principle of company law. Established by the House of Lords in the Salomon case,
this principle delineates the legal relationship between a company and its members. According
to this principle, the parts of such relation are thoroughly two diverse legal entities, or legal
persons. As Lord Macnaghten stated in Salomon case, the company is at law a different person
altogether from the subscribers to the memorandum". In fact, if we consider the procedure of
forming a company under Company Act 2006, once the registrar issues the certificate of
incorporation, the company comes into existence with its separate legal personality or, as CA
2006 provides in section 16(2), with its body corporate and it may continue in existence
indefinitely". In other words, a company once incorporated has dual nature as both an
association of its members and a person separate from its members". Thus, from that time
forward, as Hannigan B. stated in her book, the company must be treated like any other
independent person with rights and liabilities appropriate to itself".

The consequences of this separate legal personality are several. As a person separated from its
members, it is the company that conducts its business, owns its property, enters into contracts,
incurs debts, sues and it is sued, not its members. Therefore, one of the most practical benefit
for companys members is that they are not responsible for the company debts except for the
extent of their investment in the company. In this regards, as reported by Mayson et al., it
follows that the members of a corporation cannot owe any duty of care in respect of
corporations acts, that is, they cannot be liable in tort for the corporations acts".

A legal entity, typically a business, that is defined as detached from another business or
individual with respect to accountability. A separate legal entity may be set up in the case of a
corporation or a limited liability company, to separate the actions of the entity from those of
the individual or other company.

What is the difference between separate entity and separate legal entity?
Separate entity is basically an accounting concept where as separate legal entity is a legal
concept which overrules the accounting concept of separate entity.

According to separate entity concept (also termed as business entity concept) the business and
the owner(s) of the business are two distinct and separate entities which implies that assets and
liabilities of the business/organization ARE NOT the assets and liabilities of the owner(s).

However, in the eyes of law, not all the organizations can enjoy this separate status.

There are three different kinds of entities we normally study which are as follows:

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 1. Sole Trader

2. Partnership

3. Company

In accounting approach all three kinds of organizations are separate legal entities and even the
business of sole trader is separate and distinct for its only owner. Same goes for partnership
and company.

However, legally, sole traders and partnerships are not separate from its owners and thus does
not qualify as separate legal entity. In legal terms, the assets and liabilities of sole trader and
partnership organizations are the assets and liabilities of its owners. As the assets and liabilities
of these business are attached to its owner completely that is the reason why their owners
have unlimited liability towards creditors, lenders etc which means that the resources of the
business are not sufficient to pay back all the money owed by the business to its creditors,
lenders etc then owners private assets will be used to fulfill business liabilities. Even though
accounting treat these two kinds as separate entities but legally they are not. Thus legality will
overrule accounting approach.

But this is not the case under Company. In the eyes of law, Company (which is third kind of
organization) is separate from its owners and thus holds the status of separate legal entity.
Because of this fact, owners of companies have their liabilities limited up to interest involved
or amount guaranteed in such organizations. And if all the resources of a company are used up
and there are still some lenders and creditors left to pay then owners are not liable pay it as it
was the liability of the business not the owners.

What is a company?

The word company is a Legal term used to describe a particular medium through which one
or more persons chose to conduct business relations. In the course of setting up and running
this particular type of business, certain rights and responsibilities attach to stakeholders (i.e.
owners, officers, investors, customers, other stakeholders) vis--vis themselves, and the
regulatory regime. Because of this, the regulatory regime requires the business (the
company) to be legally recognized

The concept of separate legal personality of the company

The main object of Law is to regulate the relationship between individuals in the society. The
validity of the acts and omissions of persons is determined on the basis of their reasonableness.
All those acts which do not adversely affect the interest of others are held to be lawful whereas
the acts which interfere with the rights of others are called unlawful. Therefore law enforces
certain duties on individuals for the protection of interest of mankind. Therefore rights and
duties form the basis of judging the legality of mans act. The law imposes liability for

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unreasonable and unlawful acts, the enforcement of which is ensured through legal sanctions.
The law being concerned with regulating the human conduct the concept of legal sanctions.
The law being concerned with regulating the human conduct, the concept of legal personality
constitutes an important subject matter of jurisprudence because there cannot be rights and
duties without a person.

The separate legal entity concept, as it applied to large joint stock companies, evolved
throughout much of the nineteenth century, and in particular, during the period between 1840
and 1880. This evolution was gradual and involved subtle changes that occurred on a number
of fronts. Common law developments included the changing nature of shares and the
refinement of the internal relationships within a company which served to separate a company
from its shareholders and thereby differentiated companies from partnerships. At the same
time, companies adapted their capital structures and the ways in which they raised capital so as
to make themselves more attractive to investors. These practices also reflected the distinction
drawn by the investment sector between joint stock enterprises and partnerships. The separate
legal entity concept then, was largely developed by the late nineteenth century insofar as it
applied to joint stock companies.

Definition of legal person:-

The German jurist Zitelmana considers will as the essence of the legal personality to quote
him personality is the legal capacity of will, the bodylines of men for their personality a wholly
irrelevant attribute

Salmond defines a person as any being to whom the law regards as capable of rights and
duties. Any being that is so capable is a person whether human being or not and nothing that is
not so capable is a person even though he be a man.

Gray defines person as entity to which rights and duties may be attributed any being that is
capable of holding a right or duty, whether it being a human or not is person in law.

According to Paton, legal personality is a medium through which some such units are created
in whom right can be vested.

Therefore persons in juristic terms are of two kinds: natural and legal .the former are human
beings while the latter may be real or imaginary, in whom law vests rights and imposes duties
and thus attributes personality by way of fiction.

A natural person is a living human being. But all human beings need not necessarily be
recognised as persons in law. For example slavery, before abolition of slavery the slaves were
considered to be devoid of any legal personality for they could not have any rights and duties.
Also persons such as children have restricted rights for they do not have right to vote.

Legal persons on the other hand is a person any subject matter in which the law attributes
legal personality. Legal personality being the creation of law can be conferred on entities other

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than human beings. As Salmond rightly observed that law in creating legal persons always
does so by personifying some real things. He further pointed out that all though all legal
personality involves personification the converse is not always true.

Legal persons are therefore artificial beings to which law attributes personality by way of
fiction where it does not exist in fact. They are capable of rights and duties like natural persons.

THE CONCEPT OF SEPARATE LEGAL ENTITY:

The principal effects of the formation of a company are twofold. First, its shareholders, and
their transferees, become members of an association and are granted rights as such. Pre-eminent
among these are, usually, powers of control in the widest sense of an entitlement to participate,
by voting, in the management of the company through the appointment and removal of its
directors, the distribution of profits and other decisions of the company in general meeting, and
also by the power to enforce the companys regulation. Secondly, and consequently, the
members relinquish all proprietary and other interests in the monetary or other consideration
which they have given for their shares and which becomes wholly vested in the company. In
effect, therefore, the members rights of ownership of their assets are completely reconstituted
and the powers conferred by membership substituted for powers of direct this result is achieved
by.

Applying to the company three basic principles or groups of principles. First, the legal capacity
of the company is restricted or limited in its extent, both by the objects of the company and,
more basically, by the common law, to activities which are both lawful and appropriate to the
general scope of its purposes. Secondly, within the scope of its particular objects the company
is accorded legal capacity for proprietary, contractual and other purposes which is of exactly
the same nature as that possessed by natural persons of full capacity. This capacity is entirely
separate from, and not derived from or related in any way to, the individuals who ultimately
comprise the companys membership. Thirdly, the company itself is accorded full and
independent procedural capacity both vis-h-vis its members and outsiders. From the
combination of these principles flow all the well-known practical aspects of separate legal
entity. For example, due to its separate proprietary and other capacity the company may enjoy
perpetual existence, its usefulness as an entity for accounting purposes is given a legal
foundation, and the possibility is opened that its members may limit their liability.

Like the trust, the company enables the proprietary interests of natural persons to be associated
and reconstituted in a manner which makes possible a real division of the ownership and control
of property. Unlike the trust, however, the company may, to the extent it is empowered, itself
possess full and independent capacity to exercise contractual, proprietary and other rights.

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Corporate personality:

Meaning

Corporate personality is a creation of law. Legal personality of law is recognised both in

English and Indian law. A corporation is an artificial person enjoying in law capacity to have
rights and duties and holding property.

A corporation is distinguished by reference to different kinds of things which the law selects
for personification. The individuals forming the corpus of the Corporations are of two kinds
distinguished in English law as corporations aggregate and corporations sole. According to
coke persons are of two sorts (a) persons naturally created by god and persons incorporate or
politique by policy of man. A corporate aggregate is a group of co-existing persons and a
corporation sole is an incorporated series of successive persons. The former is that which has
several members at a time and the latter is that which has one member at a time. Corporations
are found only when the successive holders of some public office are incorporated so as to
constitute a single, permanent, and legal persons.

Evolution of the notion of corporate personality

In mature systems of law the doctrine of corporate personality is fully developed and a clear
cut distinction is made between the individual who compose a corporation and the corporation
itself. If we postulate that the company may have a distinct persona separate from that of is
shareholders or directors, it is difficult to attack the logic of this distinction. Whatever may be
said of its practical effect? Conversely the acts of two separate departments of a company are
in law the act of the same person.

If a group of miners wish to co-operate to secure cheap delivery of coal from the colliery at
which they work, they must be careful as to the legal forms they use. if they create an
incorporated company to organise the transport a carriers licence must be secured, since the
company is carrying goods for hire or reward .but if they merely form an association then each
member is regarded as the part owner of the vehicles and the co-owners do not carry their own
goods for hire or reward merely because they contribute to the running expenses. The formation
of a company introduces a new legal persona which owns vehicles and receives money for coal
that does not belong to it.

The first step to evolve is based on family, but no doctrine of group personality is necessary at
home the family retained a very strong organisation but no theoretical difficulty arose as its
powers were vested in human pater families. Religious and ecclesiastical grouping provides
another unifying element and we also have the manifold agencies of government such as
government such as the counties, hundreds and boroughs of English law. Economic
associations such as the merchant guilds create another organisation of the community. But it
is futile to expect to find answers to problems phrased in modern language concerning
corporate personality, for they were not asked earlier by the lawyers. We have already seen
that the state in England reached a high degree of organisation on the very inadequate theory
that the state was the king and the king the corporation sole. Duffs analysis on rule of Roman

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law reveals how long the road to a fully developed conception of human personality is. Persona
was not always used in the sense of legal personality, and there are hundreds of passages where
homo could be substituted for persona without any apparent change in the sense. If we find
lack of analysis where the individual is concerned it is not surprising to say that the republican
lawyers did not get beyond the first rudiments of that very abstract and artificial conception,
corporate personality.

The concept of the corporation as a separate legal personality is, as Farrar describes
essentially a metaphorical use of language, clothing the formal group with a single separate
legal entity by analogy with a natural person] while obviously a fiction, the choice of metaphor
or analogy is not entirely arbitrary, and must respond to organisational realities of the
corporation as well as conforming with and making intelligible the treatment of organisations
as legal actors. In this sense the conception of a corporation is both analytical and ideological,
descriptive and prescriptive, It is not enough to dismiss the debate over the nature of corporate
personality as Dewey did in 1920 by emphasising that corporate rights and Liabilities were the
product of the law and that the legal implications or meanings of the corporation was whatever
the law makes it mean.

The laws conception that the company is at law a different person in some ways seems
proper and satisfying, as Dan-Cohen writes, it at once provides a unifying familiar image of
The organisation and expresses those features in virtue of which treating the organisation as a
legal actor makes sense . The corporation as a complex organisation requiring regulation in
many different situations presents a special problem as Dan Cohen writes:

The cognitive need for epistemic access thorough a Unifying metaphor is felt most urgently
with respect to organisations because of their ontological elusiveness: hovering between the
abstract and the concrete, they evade our grasp by constantly invoking the opposing fears of
reductionism and Rectification.

The courts treatment of separate legal personality

The doctrine of piercing the veil has been the primary method through which the courts have
mitigated the strenuous demands of the logical fulfilment of the separate legal personality
concept. The problems with finding some thread of principle through all the decisions basically
stem from the false unity of the cases which, while involving vastly different underlying issues,
are still linked under the metaphor of the veil As Blumberg writes ~the conceptual standards
of entity law are frequently regarded as universal principles and applied indiscriminately across
the entire range of the law o In that way while it is possible, as some writers have done, to
analytically organise the cases in this area in various ways, what is needed is a more diagnostic
approach which examines why rather than how the area is a problem o The point is not to
simply rationalise the disparate cases under some principle, but to point to their essential
dissimilarity and criticise the framework around which they are organised. The function of
much of the courts work in this area is to delineate the legitimate uses of the corporate form
It is obvious that the existing framework, organised as it is around reluctant departure from the

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demands of a metaphor, is inadequate for the proper articulation of such varied and complex
questions.

The primary weakness of most attempt to rational the cases in the area is their tacit acceptance
and reliance on the veil metaphor. A more obvious example of this can be seen in an article by
Otto lenghi whose self-appointed task is to propose suggestions for some inroads into this
jungle of judgments.

Ottolenghi commences his analysis the popular warning of Cardozo J that metaphors in law
are to be narrowly watched, for starting as devices to liberate thought they end often by
enslaving. . However, his analysis is divided and organised around four categories: peeping
behind the veil, penetrating the veil, extending the veil, and ignoring the veil of each of
these categories he argues has its own appropriate set of considerations and justifications.

Such an approach is flawed in its reliance for a legal principled analysis on the concept of the
veil. While obviously compromised by the fact that it is result-driven its assertion that there
are considerations appropriate to categories referable to the veil allies itself to perpetuating
the very source of confusion in this area. Any framework that would align Lee v Lees Air
Farming Ltd. (a case about whether the director of a single member family business could
legally be allowed to employ myself for the purposes of workers compensation) and Walker v
Wimborne (a case on directors duties within corporate groups) on the basis of their similar
treatment of the corporate veil can only blur any understanding of the area.

The categories analysis adopted by most writers identifying particular legal categories which
have been used to justify piercing the corporate veil has similarly been criticised for being
result oriented and rarely assisting as a guide to predicting when and under what conditions
another court will be prepared to lift the veil.

Corporations: Legal Capacity

To the extent that a company is properly authorised to act, what is the nature of the legal
capacity which it may exercise? Is it real, or fictitious? The terms fictitious and
artificial, as sometimes used to describe companies can only be understood by taking
account of the twofold nature of the corporation. It consists both of an association of members,
which may themselves be corporate bodies; and of an entity possessing independently of its
membership the legal capacity to exercise proprietary, contractual and other powers. Clearly,
as an association of members it has as real an existence as any other formally constituted
society, and the above terms must therefore refer primarily to the nature of its legal rights and
obligations. It may be thought, for example, that when a company owns or deals in property,
or enters into service, sale or other contracts, it does so not in its own right, as a natural person
may do, but merely for or on behalf of its members and for their benefit. This being so, the
company in reality exists simply as the agent of its members, or as a trustee for them, of
property and contractual rights and obligations which in a true sense, taking into account (the
realities of the situation, belong to those members.

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It follows that on appropriate occasions the courts may or ought to disregard the fiction and
deal instead with the company in its true nature as the agent or trustee of its members. To deny
this proposition is not to assert that a company can never be the agent or trustee of its members
or directors. It can, of course, act as an agent or as a trustee for any other person or persons,
including its own members and directors. Whether or not it is acting in such capacity does not
depend on the existence of an independent mind to control the company, as was shown in Lee
v. Lees Air Farming Ltd., but on whether the proprietary, contractual or other rights in
question are, as a question of fact, being exercised on behalf of its members.

While this is undoubted, it does not affect the wider proposition that, irrespective of true legal
agency, a company may always be held to be the agent or trustee of its members in appropriate
circumstances. In oth3er words, in reality, or in substance, all the pro- proprietary, contractual
or other rights which may be in the apparent or (fictitious ownership or possession of a
company are in fact held or exercised by it on behalf of its shareholders. This proposition, if it
represents the law, must be of fundamental importance and there is, it seems, considerable
authority in its support.

Advantages and disadvantages of separate legal entity concept

Legal protection

Forming a corporation offers legal protection because the business owner becomes a separate
entity from the incorporated company, Inc. notes. This distinction protects business owners
from personal lawsuits and corporate liabilities and secures their personal assets. A C
corporation can be sued since it serves as its own entity. That means the company and all of its
assets and equity are exposed to risks, while the owners remains safe.

Liability and Taxation

Since a corporation is a separate and distinct legal entity, owners of a corporation are only
indebted to the extent of their interest in the corporation, according to Business Accent. This
means that shareholders are not personally liable for any company debt and creditors cannot
go after their personal assets for business debts. Similarly, shareholders only pay taxes on any
profits paid to them as salaries, bonuses or dividends and the corporation itself pays corporate
rate taxes on any additional profits at the lower corporate rate.

Perpetual Existence

The main advantage of a corporation is its perpetual existence. Since the corporation is a
separate legal entity from any of its owners, it does not dissolve when one owner leaves. If a
shareholder dies, the company may transfer her shares in the same way as any other property,
and the corporation is not negatively affected. This also allows a shareholder to disconnect
from the corporation by selling all of her shares without ending the corporation. Keep in mind
that when deciding to dissolve a company there are procedures and paperwork required.

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Disadvantages

While a corporation offers many advantages, those same qualities can also make life more
difficult. It costs money to incorporate your business, as start up, operating and tax costs are
not required of most other structures, reports Business.gov. Corporations have rules to follow
and you must adhere to the formalities of organizing and running the company. Increased
business regulations lead to a large amount of paperwork required to both incorporate and keep
accurate tax, business and monetary records as required by la

Liability of corporations

Corporations are legal persons .it means that they have rights and liabilities .so far as rights are
concerned there is no difficulty in their enforcement .But the liabilities of corporations present
very complicated problems. How are the liabilities of an entity which is treated as person only
by a fiction of law to be enforced against it? This problem shall be discussed under three
headings:-

1. Liability of a corporation in contract: For entering into a contract two things are
important i.e. the form of the contract and the capacity of the parties, a corporation has
no material existence therefore it always through its agents. It signifies its assent
through seal. Therefore the presence of the seal is considered as evidence of the assent
of the body corporate. The power of the corporation to enter into contract is limited by
the statute .and anything beyond the words of the statute is rendered as ultra vires.
Therefore the corporation formed under a statute is liable only for the acts done within
the ambit of the statute.

2. Liability of corporations of torts: as observed earlier a corporation always acts through

its agents therefore the liability of the corporation for the torts is based on the principle
of vicarious liability. A corporation is liable for the acts of its servants done in the
course of employment but this rule applies only to those acts which are intra vires the
corporation. Two things are taken into consideration while imposing the liability upon
the corporation i.e. whether the act was done by the authority of the corporation or the
act was done without the authority of corporation for the acts done with authority the
corporation is liable but for the acts done without the authority the corporation could
not be made liable.

3. Liability for criminal acts:- the earlier view was that the corporation cannot be made
liable for criminal offences for the theoretical difficulties like how to attribute mens rea
to the corporations and how can a corporation be punished. The procedural difficulties
have been now been removed partly by legislations and partly by judicial decisions and
in the recent years the corporations have been made liable for the criminal acts .for
instance:- in the case of D.P.P. v Kent and Sussex contractors[27] where the manager
of the company has sent in false returns for the purpose of obtaining petrol coupons the
court held the company liable and said that though the act was done through the
manager the company was liable for the acts. In another case of Moor v Bresler Ltd.

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 The court held the company liable for the criminal acts of the secretary. Moreover a
suit can be filed against the company in the capacity of juristic person.

CONCLUSION

Therefore from the analysis of the studies of different theories on corporate personality
undertaken as a part of this project it can be concluded that the concept of separate legal entity
is of great importance as it imposes rights and duties on non-living persons by attributing legal
personality to them. Clothed with the legal personality these corporations can own, use and
dispose of property in their own name. Moreover in case of any dispute such conferment of
title of legal personality enables the entity to sue or be sued in its own name. Therefore in the
light of above statements the concept of separate legal entity cannot be regarded as a sham
concept, though not real but not fully fictitious as well.

Hallmark of the registered company

Separate Legal Personality:

Unlike the Sole Trader, registration of a business as a company, (i.e. Incorporation) makes
the company a legal person in its own right. It can buy and sell property, sue others or be sued
itself. In short it is a separate legal person distinct in all respects from the directors and
shareholders. The fact that the company is a separate entity means that it has its own
responsibilities for debts etc., which cannot be summarily passed on to the shareholders. The
concept of limited liability therefore serves to limit the obligations of shareholders; either by
the unpaid or partly paid nominal value of shares held, or by guarantee. Compare this with the
status as a sole trader whose liability for the business obligations is unlimited.

Consequences of Incorporation

The fact of separate Legal Personality leads to the company being a separate person in law
from its members. One of the most obvious differences between the company and other forms
of business organisation is that the members of both private and public companies have limited
liability. This means that the members of the company are only liable for the amount unpaid
on their shares and not for the debts of the company.

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a.) Limited Liability

In order to warn those who might deal with a company that the members have limited liability
the word limited or Ltd must appear after a private companys name or plc after a public
company.

Limited Liability of shareholders The Company is liable for its own debts: The shareholders
are not liable for the debts and liabilities of the company and cannot be sued by the companys
creditors. However, a shareholder can be a debtor or creditor of the company and can sue or
be sued by the company. See Salomon v Salomon & Co Ltd and Lee v Lees Air Farming Ltd

(b) Ownership of Company Property

A company owns its own property the shareholders have no direct right to this or any share
of it. A person who no longer wishes to be a member of the company is only entitled to
whatever price he can get for his shares. A shareholder has no legal interest in the companys
property and cannot insure it against theft, damage, etc.

(c) Contractual Capacity

A company has full contractual capacity and only the company can enforce its
contracts. Companies may also be liable in negligence but a shareholder cannot be made liable
for the negligence of the company, unless he was also personally negligent.

(d) Crimes

A company can be convicted of a crime, regardless of whether its directors are also
convicted. Some limitations:

It has been held that a company cannot be convicted of a crime which requires the physical act
of driving a vehicle: Richmond on Thames Borough Council v Pinn & Wheeler

A company cannot be convicted of any crime for which the only available sentence is
imprisonment.

There are particular problems with crimes which require mens rea (a guilty mind) most
common law crimes require mens rea, while many statutory offences involve strict criminal
liability. In order to convict companies of common law crimes, courts sometimes use (attribute)
the mens rea of those individuals who control the company to be the mens rea of the company.

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Crimes against the Company

A company can be the victim of crime. It is theft to steal from a company, even if those accused
of the theft are also the companys only shareholders:

(e) Perpetual Succession

Separate personality means that the existence of a company does not depend on the existence
of its members. Membership may change or members may die but the company continues in
existence until wound up.

(f) Borrowing

A company can borrow money and grant a security for a debt. Only a company can create a
floating charge (a kind of security for a loan). The charge floats because is does not attach to
any particular asset, but floats over the companys assets as they exist from time to time. Certain
events cause the charge to crystallize and attach to whatever assets the company has at the
time.

Exceptions to the Separate Legal Personality Doctrine

Going behind the Corporate Veil

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. When we speak of lifting the veil we are referring to instances where the law
either (1) goes behind the corporate personality and attach liability to the individual members
or directors, instead of the company, or (2) ignores the separate personality of each company
(in a group) in favour of the economic entity constituted by a group of associated companies.

The latter situation is often merely an example of the former, the individual members being
corporate, rather than human beings but even when that is so the two situations are worth
distinguishing since there seems to be a greater readiness to lift the veil in the latter.

There are therefore numerous exceptions to the rules defined by Salomon v Salomon & Co
Ltd, (i.e. the rule that the directors and other officers, being separate and individual members
of the company cannot be held liable for defaults of the company). These exceptions can be
implemented by the courts on a case-by-case basis, or by statute.

Since the courts rule on a case-by-case basis, it can be difficult to classify the exceptions. The
General approach of the courts is to intervene when justice of the particular case demands it.

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Lifting the Veil Judicially

1. Cases of fraud or where the company is a mere sham:

These occur where individuals have used the separate legal entity to do something they are
personally forbidden from doing; hiding behind the company for protection

2. When the courts recognize an agency relationship.

If a subsidiary company is acting as an agent for its holding company (the parent company),
the subsidiary may be bound by the same liabilities and rights of its holding company.

Under a strict application of Salomon, the parent company could not be held liable for the
defaults of its subsidiary. However, in some cases the courts will treat the parent company and
the holding company as one single business (because in economic reality, that is what they
are).

Thus, in Smith, Stone & Knight Ltd v Birmingham Corporation (1939) SSK owned some
land, and one of its subsidiary companies operated on this land. The defendants, BC had issued
a compulsory purchase order for the land. Under the Order, any company which owned the
land would be paid for it. In addition, reasonable compensation would be paid to any owner
for the business they ran on the land. Since the subsidiary company did not own the land, BC
claimed they were entitled to no compensation. The courts held that the subsidiary company
was an agent of SSK. In economic reality there was a single business, operated through two
entities and as such, BC must pay compensation.

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Summary

As discussed above, we could conclude that the veil of incorporation will be pierced by the
courts in cases in these circumstances:

(a) In cases of fraud or sham. These occur where individuals have used the separate legal entity
to do something they are personally bund to do so.

(b) When an agency relationship is recognized by the court. If a subsidiary is considered as an

agent for its holding company, the veil of incorporation will be lift thus the holding company
will be liable to the subsidiary's debts.

Besides the two main circumstances, the veil of incorporate may be pierced in circumstances
such as Paramount Public Interest or Evasion of legal obligations.

Basically, the courts lift the veil and ignored the separate personality of incorporation where
justice and require them to do so.

Conclusion
The Separate Entity Principle established in Salomon case is regarded as a double edged
sword. Debates concerning this principle will last and the question---whether the positive
effects overweight the negative one'---is best to be left unanswered, since it is far too broad.

Despite of the criticism of the Separate Entity Principle, in my opinion, it has been very
instrumental in promoting the developed of modern capitalism and it has generated immense
social and economic wealth. The status of Separate Entity Principle as a cornerstone of
Company Law should never be changed.

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References
1- https://viviangraylawresources.wordpress.com/2013/11/06/lecture-1-the-concept-of-
separate-legal-personality/

2- https://www.lawteacher.net/free-law-essays/business-law/separate-legal-personality-
of-a-company-business-law-essay.php

3- http://www.lawctopus.com/academike/concept-separate-legal-entity-light-
corporations/

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