Assignment 3 Elaborate in detail the concept of lifting the veil of incorporation by the court and by statue.

The rule of separate legal personality can sometimes work injustice, particularly where the shareholders who control a company use its facade to conceal their own wrongdoing. (Wrongdoing in this sense means much more than mere inability to pay debts.) Lifting the veil of incorporation is classified into the two ways. There are by court and by statute. The instances where the courts have lifted the veil of incorporation are difficult to classify. It is not easy to discover any coherent policy: The courts have been prepared to lift the veil in certain circumstances where justice demands it. These circumstances may be categorised as follows:
(a) The separate personality of a company has often been used as a hide to disguise a fraud.

Thus, if a person uses a company as a device to avoid a contractual or statutory duty, the court may ignore the companys notional separateness. In cases of fraud or sham. The company was establish for a fraudulent purpose. Jones v Lipman [1962] WLR 832 (High Court. England) Lipman agreed to sell a house to Jones. For some reason he changed his mind. To avoid having to transfer the house, Lipman set up a company called Alamed Ltd and transferred the house to it. Alamed Ltd was wholly owned and controlled Llipman. His solicitors then wrote to Jones solicitors offering to pay damages for the breach of contract. Jones sought an order of specific performance. The defence was raised that Alamed Ltd was not a party against whom specific performance could be ordered. Russell J declined to accept this. He stated that Alamed Ltd was a creature of [Lipmans], a device and a sham, a mask which he holds before his face in an attempt to avoid the eye of equity. Both Lipman and the company were ordered to specifically perform the contract to sell the house

(b)

Company used to avoid legal obligation. The separate personality of a company has often been used as to enable a person to avoid his legal obligations In case of a company that has been used to avoid legal obligation of an individual.
Gilford Motor Co Ltd v Horne (1933) Ch935 (Court of appeal, England)

Mr. Horne was formerly a managing director of the Gilford Motor Co Ltd. He agreed in writing (clause 9) to not solicit customers of the company when he left employment. Then he was sacked. He set up his own business and undercut their prices. Then he got legal advice saying that he was probably acting in breach of contract. So he set up a company, JM Horne & Co Ltd, in which his wife and a friend called Mr. Howard were the sole shareholders and directors. It took over Hornes business and continued. The company had no such agreement with Gilford Motor about not competing, however Gilford Motor brought an action alleging that the company was used as an instrument of fraud to conceal Mr. Horne's illegitimate actions. The courts held that the new company established by Horne was sham to cloak his wrongdoings. Injunction was granted to restrain Horne and the company from carrying on the business.
(c)

The same holds true when one has to attribute some classify of character to a company; thus, when determining whether a company is an enemy alien in wartime one must look at the character of the corporators. In case of in public interest to hold the member/director responsible. Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd [1916]2 AC 307 The Continental was incorporated in England, but all its shareholders except one and all its directors were German residents in Germany. When war broke out between England and Germany, Daimler commenced an action for payment of a trade debt. Daimber argued that Continental was an alien enemy company and payment of the debt would amount to trading with the enemy. The courts held that Daimler must pay the debt.

(d) A company, like any other legal person, may act as an agent for another. There is nothing

to prevent a company acting as an agent for its member. In case of when the courts recognise an agency relationship. Smith, Stone & Knight Ltd v Birmingham Corporation [1939]4 All ER 116 (High Court, English) Birmingham Waste Co Ltd (the waste company) carried on business as waste paper merchants in certain premises belonging to Smith, Stone & Knight Ltd (Smith). The waste company was a subsidiary of Smith, which held 497 of the 502 issued shares (the other five shares were held by director of Smith, who were also director of the waste company). The Birmingham Corporation acquired the premises. Under the relevant legislation, an owner-occupier was entitled to compensation, but a mere tenant was not. Smith put in a claim for compensation. The Birmingham Corporation refused to grant compensation, claiming that in law Smith and the waste company was distinct entities. It transpired that although the waste company was apparently carrying on the business, that business was owned by Smith. There was no agreement of any kind made between the two companies, nor was anything done to transfer beneficial ownership to the waste company. The waste company had no staff. The books were maintained by Smith. The waste company never declared dividend, and their profits were in fact treated as part of Smiths profits. Atkinson J held that it was well settled that the mere fact that a person owns all the share in a particular company does not make the business carried on by that company his business. This is equally true where the shareholder is itself a limited company. However, it is question of fact in every case whether the company is carrying on the business as an agent of its shareholders. In this case, Atkinson J was satisfied that on the facts the waste company was a tool or simulacrum of Smith; accordingly he held that the occupation of the premises by the waste company amounted to occupation by Smith, and that the business was Smiths.
(e) In certain situation, a group of companies may be treated as a single corporate entity,

although the general rule is that each company within a group is a different entity. However, this group entity concept should not be taken too far.In case of both entities are

within a single group enterprise. Sometimes the courts are prepared to treat groups of companies as one. DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 (Court of Appeal, England). The company operating the business was the holding company and the premises were owned by the companys wholly owned subsidiary. Compensation was only payable for disturbance of the business if the business was operated on land owned by the company. It was held that the ownership of a lease and of the business which used the premises divided between two companies of the same group were treated as if owned by the same person. By statute. This part relates to the lifting of the veil of incorporation under the Companies Act 1965. These circumstances may be categorised as follows:
(a) Section 36\,Company Act 1965

If the number of members of a company is reduced below two and it carries on business for more than six months while the number is so reduced, a person who is a member of the company during the time that it so carries on business after those six months, and is know of it, is personally liable for all the debts of the company contracted after those six months and may be sued therefor, and shall also be guilty of an offence against the Act. (b) Section 304(1), Company Act 1965 By this section where the companys business has been carried on with intent to defraud creditors or for other fraudulent purpose, any person knowingly a party thereto may be made personally liable to pay the debts or other liabilities of the company as the court deems fit. (c) Section 365(2), Company Act 1965 Every director or manage of a company who pays or permit a dividend to be paid out of money which is not profit, shall be personally liable to the creditors
(d) Section 121(2), Company Act1965

Where an officer of a company has signed on behalf of the company any bill of exchange, promissory note or other negotiable instrument, and the name of the company is not properly stated therein, he can be made personally liable to the holder of that instrument for the amount stated therein, if the company does not pay. (e) Section 169 and the Ninth Schedule of the Companies Act 1965. The directors of a holding company are required to prepare consolidated accounts consolidating the financial position of the holding company and its subsidiaries. In this respect the Act does not treat each company in the group as a separate legal entity but recognizes the reality that a group of related companies functions as a single entity. (f) Sections 303 (3) and 304 (2) An officer who knowingly contracts a debt with no reasonable or probable ground of expectation of the company being able to pay the debt is guilty of an offence, and a conviction may be the basis for a court to declare that the officer concerned shall be personally liable to pay that debt. There are the situation and case of lifting the veil of incorporation.