Lifting the Veil of Incorporation Case Study Example | Topics and Well Written Essays - 1500 words

Lifting the Veil of Incorporation - Case Study Example The doctrine of separate personality of a corporation engendered by the sheer act of incorporation is a well entrenched principle in English law. The doctrine simply states that once a company is formally incorporated in accordance with law, it starts to possess a personality of its own, one distinct from its members and stockholders. This distinct personality, by fiction of law, protects a corporation from the consequences of the individual acts of its members and stockholders. The principle had its beginnings in the Roman law and was officially adopted by English law in the early case of Salmon v The Hamborough Co (1671) 1 Ch Cas 2041. Unfortunately, this principle had been, time and again, employed as a vehicle to evade individual liabilities and responsibilities that the courts were compelled to 'lift the veil,' so to speak, that separates corporations from their stockholders. Recent developments in the corporate world, however, had made it difficult to anticipate when judicial i nterference will be exercised to lift or pierce the veil of incorporation as courts have exhibited equivocations in handling 'lifting-the-veil" cases in the past. The case of Adams, however, seemed to have narrowed down the principles when judicial interference may be exercised in such cases.In the early days before the advent of complex corporate structures, there was not much question about the application of the corporate separate personality or the "lifting of the" veil cases. ... The economy soon turned bad which affected Salomon Ltd's business, forcing it to seek loans from outside creditors among which was a Mr. Broderip. The company, however, failed to revive itself and paying the loans became difficult. Broderip sued to obtain payment for his secured loan and the company went into liquidation. 2 The liquidator, subsequently handling the company's winding up, argued that the corporation was a fraud and that therefore Salomon's debentures should be made to apply as payments to the company's creditors. The decision was debunked by the House of Lords which sustained the separate nature of the company's personality from that of Mr. Salomon. The HL held that, on its face, the incorporation was valid and in accordance with the formalities of law and therefore the court is precluded from reading meaning or inserting their own version of the law into its incorporation. There was nothing unlawful about Salomon holding ownership of more than half of the company's shares or of the fact that the subscribers or incorporators were all members of his family to which he wielded great influence upon. 3 Judicial Interference Although the Salomon principle had since been held the classic view, court decisions have swung from one side to another that it became difficult to anticipate whether they would adhere to the Salomon principle or not in every case. The basic presumption is that the court will lift the veil of incorporation in instances when "equity demands that justice be dispensed." Yet, court decisions have shown that there was no clear-cut rule as to what constitutes injustice that would merit court intervention and disregarding the principle held in the Salomon case. 4 This equivocation is illustrated in the