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Principles of liability and personality

This dissertation will discuss the principles of limited liability and corporate
personality and the courts' reluctance to disregard the corporate veil the principle
called piercing the Corporate Veil. We shall consider the circumstances in which
the Courts have been able to pierce the veil of incorporation and the reasons as to
why they have in most cases upheld the decision in Solomon v Solomon & Co.
All companies in the United Kingdom have to be registered and incorporated under
the Companies Act which governs the principle of limited liability hence giving the
owners or shareholders a curtain against liability from creditors in the case of the
company falling into financial troubles. This curtain so created gives the company a
separate legal personality so that it can sue and be sued in its own right and the only
loss to the owners or shareholders is the number of shares held in the company on
liquidation with no effect on their personal assets.
This distinct separation between the owners or shareholders and the limited
company is the concept referred to as the veil of incorporation' or corporate veil'.
In conclusion, it shall be argued that the courts should lift or pierce the corporate veil
to a significantly greater extent so as to hold erring shareholders or directors of a
corporation liable for the debts or liabilities of the corporation despite the general
principle of limited liability were the corporation has insufficient assets to off-set the
creditor liabilities.
Limited liability and Corporate Personality
The principles of limited liability and corporate personality are the cornerstone of the
United Kingdom company law since the Joint Stock Companies Act 1844, its
consolidation in 1856 and the introduction of the Limited Liability Act 1855. These
two principles have been so guarded by the courts as being fundamental to today's
company law by upholding the separate legal personality of a corporate entity.
However, whilst the original intention of the legislation was to help companies raise
capital through the issue of shares without exposing the shareholders to risk beyond
the shares held, the present attraction to incorporating a company is the advantage
of shielding behind the curtain of limited liability which could be abused by some
Limited liability
As stated above, the doctrine of limited liability was introduced by the Limited
Liability Act 1855 as a means by which companies could raise capital by selling
company shares without exposing the shareholders to unlimited liability.
The principle of limited liability shields the company owners, shareholders and
directors or managers against personal liability in the event of the company winding
up or becoming insolvent. In such an event the liability of its owners and
shareholders is limited to the individual shareholding held as provided for by the
Companies Act 2006 and the Insolvency Act 1986. This means that the members of
a company do not have to contribute their personal assets to the company assets to
meet the obligations of the company to its creditors on its liquidation but have to
contribute the full nominal value of the shares held by individual shareholders. It
should be noted here that such limited liability does not shield the limited company
from liability until all its debts or assets are exhausted.
This principle has so been held since the House of Lords ruling in the Solomon case
in which the Lords where of the view that the motives behind the formation of a
corporation was irrelevant in determining its rights and liabilities as long as all the
requirements of registration are complied with and the company is not formed for an
unlawful purpose.
Much as a limited company has a separate legal personality, its decisions are made
by directors and managers who should use the powers conferred unto them by the
company board of directors and the memorandum and articles of association, and
any abuse will entail personal liability by the officer concerned.
Limited liability encompasses both the small enterprise including one-man
companies and big companies hence limiting the liabilities to company assets and
not to any other personal assets.
This view has been endorsed in recent times through numerous cases as evidenced
in a one-man company, Lee's Air Farming. Lee was the majority shareholder and
director in the company in which he was also the employee. He was killed on duty in
an air accident and the court held that Lee and the company were two separate
entities and hence entitled to compensation.
The courts will only in exceptional circumstances such as abuse, fraud or where the
company was used as an agent of its owner disregard the doctrine of limited liability
and hold members, shareholders or directors personally liable for the debts and
other company obligations to the creditors in what has been termed the piercing or
lifting of the "veil of incorporation". One commentator puts it plainly that in this age
of high expectations, people (and they may be good people) want to have their cake
and eat it as wellThey find a limited company a very useful vehicle for carrying
on business because it has a separate legal personality which is responsible for all
the debts of the business.
However, there are several statutory laws which allow for the principle of limited
liability to be ignored in such situations as in the reporting of financial statements of
group companies, corporate crime and insolvency which we shall discuss below.

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