There are occasions when the court will look behind the formality of legal personality and will appear to disregard the separate legal existence of company.
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in which standard you are so that i can explain you more clearly
Answer:
Introduction
A limited company has a separate legal personality from its members, or shareholders1. The barrier between the company’s assets and those of its members is known as the ‘veil of incorporation’2. However, courts have ‘lifted the veil’ in certain circumstances3, such as when authorized by statute, in wartime and to prevent fraud. These are narrow exceptions to the general rule. However, a number of other exceptions exist which are wider in scope. Recent cases have sought to narrow the exceptions. However, there is still uncertainty about when courts will lift the veil in future.
The Corporate Veil
In a limited company, the members’ liability for the company’s debts is limited to the nominal value of their shares4. A company also has a separate legal existence from that of its members. It can enter contracts, sue and be sued in its own right5. For instance, in Salomon v Salomon a sole trader incorporated his business as a limited company and owned almost all of its shares. However, the House of Lords held that despite this, the company was a separate legal entity from its members. Therefore, according to Salomon v Salomon the corporate veil cannot be lifted at all.
Salomon v Salomon is a House of Lords case and its authority is, therefore, ‘unshakable’6. However, in exceptional cases courts have ‘lifted the corporate veil’ and disregarded this legal barrier between the company and its members7. Some critics suggest that the circumstances in which this can be done are narrow. For instance, Taylor states that the exceptions only operate to prevent fraud or wrongdoing, and that they only apply to those who actually created the situation8. However, both old and recent cases contain exceptions which cannot be neatly categorized and are quite wide and uncertain.
The cases may be split into three broad time periods. From 1897 to 1966 Salomon v Salomon bound all court decisions9. Veil lifting was only permitted in exceptional circumstances, such as in wartime and to counter fraud10. However, after 1966 the House of Lords could use its 1966 Practice Statement11 to change its mind. This led to the courts adopting a more interventionist approach12. Finally, in the 1980s the courts returned to a more orthodox approach, typified in Adams v Cape plc13. Therefore, since Salomon v Salomon there has been a great deal of change in the ways courts lift the corporate veil.
Statute
Some statutes expressly authorize lifting the corporate veil. For instance, s.213 Insolvency Act 1986 states that a court may ignore the corporate veil if, during winding up a company it appears that the company’s business has been carried on with intent to defraud its creditors, a court can force anyone who is knowingly a party to this business to contribute to the company’s debts. However, there must be evidence of dishonesty14. This is a high burden of proof15. Therefore, this is a very narrow exception.
Under s.214 Insolvency Act 1986 a company director may be liable for wrongful trading if they continue to trade and they ought to have known that there was no reasonable prospect of avoiding insolvent liquidation. There is no need for any dishonesty. However, this only applies to directors, not shareholders. The Companies Act 2006 also makes no mention of lifting the corporate veil. Therefore, Parliament has not significantly widened the exceptions to Salomon in recent years.
Wartime
A court may also look behind the corporate veil to see if a company is controlled by an enemy in wartime. For instance, the House of Lords held during World War I that where a company’s directors and the majority of its shareholders resided in Germany it could be classed as the enemy16. However, this is very narrow as it only applies in wartime.
Agency
Courts have also lifted the corporate veil by finding that an agency relationship exists between a company and its shareholders. For instance, in Re FG (Films) Ltd17 a British film company was held to have been an agent for an American company which had provided all the finance and facilities for the making of a film. The UK company also had no place of business, and almost all of its shares were owned by the American company. This is a very wide exception, as an agency relationship could really apply to any company where members control the company18. Accordingly, critics have said that this case is doubtful19. Consequently, it may be of limited application.