Introduction:
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Corporate Law: A study of body corporates or corporations or companies.
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Body corporate or corporation: It is Artificial Legal Person, invisible, intangible and
existing only in the contemplation of law.
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Corporations can own property, enter into contracts, suffer or inflict wrongs, sue and be sued,
have a seal of perpetuity.
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The corporate law studies these corporations; how their shareholders, directors, employees,
creditors interact with each other and the society in general.
Scope of Corporate Law:
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Regulatory in nature.
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Constraints and fetters on operations of companies.
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Preamble of the Companies Act, 2017 states
“WHEREAS it is expedient to reform company law with the objective of
facilitating corporatization and promoting development of corporate sector, encouraging use
of technology and electronic means in conduct of business and regulation thereof, regulating
corporate entities for protecting interests of shareholders, creditors, other stakeholders and
general public, inculcating principles of good governance and safeguarding minority interests
in corporate entities and providing an alternate mechanism for expeditious resolution of
corporate disputes and matters arising out of or connected therewith.
Human beings are generally legal persons—that is, they are subject to the legal system in which
they find themselves. While that legal system imposes obligations on the legal person it also
confers rights. When dealing with humans who are legal persons we have little difficulty with
the concept, generally viewing them as one and the same. This is however incorrect and is often
at the root of students’ misunderstanding of corporate personality. Children for example, while
they are human beings, are commonly excluded from having full legal personality until they
cease being children. It is important for now if you are to understand legal personality to keep
the human and the legal person separate. In essence humanity is a state of nature and legal
personality is an artificial construct which may or may not be conferred.
Legal Fiction:
So, if humanity is not necessary for legal personality it follows that it is possible for legal
personality to be conferred on non-humans. Some societies for example attribute legal
personality to religious icons. The icon itself is therefore treated as having rights and obligations
within the legal system. A logical extension of this separation of humanity from legal personality
is that groups of humans who are engaged in a common activity could attempt to simplify their
joint activity by gaining legal personality for the venture. This is the origin of the corporation.
History of corporations:
The most successful groups to attain legal personality were religious orders. Their motive was
relatively simple. If a religious order could obtain legal personality the complications that
regularly arose when an Abbot died, over the passing of the order’s land to the new Abbot,
would fall away. The conferring of legal personality would mean that the religious order as a
legal personality would hold the land in its own name and as it was not human and therefore
not subject to weaknesses of the flesh, such as death, the death of an individual head of the
order had no effect on the life or land of the legal personality of the order. As the main
beneficiary of these land disputes with religious orders was the Crown (through death taxes
levied on what the Crown deemed to be the Abbot’s lands), the conferring of legal personality
was necessarily tied directly to a concession from the Crown, in the form of a charter or grant,
incorporating (from the Latin ‘corpus’ meaning body, so literally meaning to ‘create a body’) the
order.
Seal of Perpetuity……………………………………………………………………..
11th to 16th Century:
 Process of corporatization, with time, extended to local authorities and commercial
organizations such as Guild of Merchants.
 They attained monopoly through Charters and played by their own rules but observed strictly
the rules of the Guild.
 Two forms were predominantly used were: commenda and societas.
 Societas has developed into the modern day partnership. While commendas developed into the
limited liability partnership.
 In the fourteenth century, for the first time, the word “company” was used by trading members
to trade overseas with foreign countries.
Greater Role of the Parliament:
The changing nature of the power relationship between Parliament and the Crown was also
reflected in the way a charter was obtained. As Parliament became more powerful the grants
had to be first confirmed by Parliament and eventually a charter could only be granted by an Act
of Parliament.
Trends in the 18th Century:
By the start of the 18th century there was an active market in the trading of shares in these
companies. However a period of irrational speculation in these markets led to a stock market
crash known as the South Sea Bubble (after the South Sea Company formed in 1711 and which
became most associated with the speculative behavior). Clumsy attempts by the Government to
intervene to check the speculative mood caused panic and led to the crash in which many
investors were ruined. The Bubble had an enormous effect on the granting of charters over the
following century because officials were very wary of granting them and when they did they
often placed restrictive conditions in the grant.
Market Response:
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Businesses started to take matters in their own hands.
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The use of trust as instrument to confer many privileges of incorporation became common
place.
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This new era with more power to businesses led to a new kind of chaos as many unincorporated
“Deed of Settlement” companies became vessels through which fraud was easily committed
Government Intervention:
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Series of legislations to regulate which to-date form the basis of the company law in the UK.
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The Joint Stock Companies Act of 1844 provided for incorporation by simple registration,
safeguards against fraud by insisting on complete publicity and provided for the Registrar of
Companies to maintain the public records of the companies.
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The Act of 1844, while it conferred corporate status, still held members liable for the company’s
debts.
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The Companies Act of 1862 was the first enactment to bear the title “Companies Act”.
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In India, it was Companies Act of 1860.
Limited Liability:
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With different regimes now regulating businesses; it created more confusion.
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Charter companies (created by an act of parliament) and Deed of Settlement Companies (by
legal complexity) had achieved limitations on member’s liability.
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Limited Liability Act of 1855 (later subsumed into Joint Stock Companies Act of 1855)-The Limited
Liability Act of 1855 was the first United Kingdom statute to allow companies to be registered
with limited liability. The aim of the 1855 Act was to encourage investment in businesses by
limiting the liability of investors. In law, registered companies have a separate legal personality
from their shareholders. Since 1855, a shareholder's liability for a company's debts is limited to
the amount of capital that he has invested.
Objective Separate Legal Personality sought to achieve?
Limited liability is a form of legal protection for shareholders and owners that prevents
individuals from being held personally responsible for their company’s debts or financial losses.
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It can carry out business in its own name
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It can sue and be sued in its own name
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It can hold property in its own name
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It can incur losses/profits that are its own and not that of the members.
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It should have a seal of perpetuity.
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It should have “limited liability” i.e. liability of the shareholders should be limited to the extent of
their shares in the company. Limited liability simply means no liability beyond the shares bought.
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Separate legal personality and limited liability are not the same thing—limited liability is the
logical consequence of the existence of a separate personality
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It is possible to form registered company with unlimited liability under the Companies Act, 2006
in the UK & Whales (s. 3(4)).
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Unlimited Company means a company not having any limit on the liability of its members
Companies Act, 2017
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Section 14 of the Companies Act, 2017 provides for the formation of unlimited company
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Note here that the ‘Ltd’ or ‘PLC’ refers only to the members’ liability and not that of the company.
The company itself is liable for its debts but once its assets are exhausted the creditors cannot go
after the members’ assets.
Lee v Lee’s Air Farming: (Example)
 Mr. Lee incorporated a company, Lee Air Farming Ltd. in August 1954.
 The nominal capital of the company was 3000 shares of 1 dollar each.
 Mr. Lee held 2,999 shares while his lawyer held the final share.
 New Zeland Companies Act at the time required two shareholders at least
 Mr. Lee was the sole governing director for life.
 In addition, Mr. Lee also appointed himself as the chief pilot of the company. Article 33 of the
Articles of Association stated:
“The company shall employ the said Geoffrey Woodhouse Lee as the chief pilot of the company at
a salary of £1,500 per annum from the date of incorporation of the company and in respect of such
employment the rules of law applicable to the relation of master and servant shall apply as between
the company and the said Geoffrey Woodhouse Lee.”
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Mr. Lee wore three hats for the company. He was the sole governing director, majority
shareholder and also an employee of the company.
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1956, the company’s plane Mr. Lee was flying, stalled and crashed, leaving him dead.
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Mr. Lee was survived by a widow and four infants who were totally dependent on him.
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The company was paying, as part of statutory obligations, the insurance policy, to cover claims
brought under Workers’ Compensation Act of 1922. She claimed compensation as widow of the
“worker”
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The New Zealand Court of Appeal found against her.
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However, when the case went to the Privy Council in London, they held, that since Mr. Lee and
his company were distinct legal personalities, therefore, they were capable of entering into legal
relations. As such they had entered into a contractual relationship where rules of master and
servant applied. The widow was therefore entitled to the compensation.
Macaura v Northern Assurance Co (1925): (Example)
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Mr. Macaura was the owner of Killymoon estate in county Tyrone
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In 1919 he agreed to sell the entire timber on his estate, felled and standing, to Irish Canadian
Saw Mills Ltd
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In return Irish Canadian Saw Mills Ltd agreed to give Mr. Macaura the entire share capital of the
company to be held by him and his nominees.
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In addition, he gave the company a license to enter the estate, fell the remaining the trees and
use the sawmill.
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By August 1921, the entire trees on the estate were cut down by the company and had passed
the timber through the mill.
Corporate Personality: a double edged sword:
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The timber, which represented the entire assets of the company were then stored at the estate.
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On February 6, 1922 policy insuring the timber was taken out in the name of Mr Macaura.
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On February 22, a fire destroyed the timber on the estate.
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Mr. Macaura sought to claim under the policy he had taken out.
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The company claimed Mr. Macaura had no insurable interest in the timber as it belonged to the
Company and not him.
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The case proceeded through the Northern Ireland Court System
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And eventually arrived at the House of Lords in 1925
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Lords affirmed the contention of the Company and held that even though Mr. Macaura owned all
the shares in the Company, he had no insurable interest in the timber, that was the property of
the Company
“Even if he holds all the shares is not the corporation and…neither he nor the creditor of
the company has any property legal or equitable in the assets of the corporation”
Lifting the Veil of Incorporation:
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It refers to situations when the legislature and the courts decided separation of members and
personality of the company is not to be maintained.
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They thus lift the veil of incorporation.
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Pertains to both straight forward shareholder limitation of liability to the more complex
corporate group structures.
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Parent Company A Ltd., has three subsidiaries, X Ltd., Y Ltd., Z Ltd.
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A controls all its subsidiaries
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In reality it is one big business which is spread across four separate legal entities.
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So if Z conducts risk prone activities through Z and then things go wrong, A being shareholder in
Z with limited liability cannot technically be touched.
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Google’s restructuring with Alphabet as the holding company is a case in point.
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It presides over a collection of companies, the largest of which will be Google, a wholly owned
subsidiary of Alphabet Inc.
Statutory examples:
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7. Powers and functions of the Commission.—(1) The Commission shall exercise such powers
and perform such functions as are conferred on it by or under this Act.
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221. Inspection of books of account by the Commission.—(1) The books of account and books
and papers of every company shall be open to inspection by any officer authorised by the
Commission in this behalf if, for reasons to be recorded in writing, the Commission considers it
necessary so to do
DISQUALIFICATION OF DIRECTORS BY THE COMMISSION
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172. Disqualification orders.—(1) In any of the circumstances stated hereunder, the
Commission may pass a disqualification order against a person to hold the office of a director of
a company for a period up to five years beginning from the date of order d) the business of the
company in which he is or has been a director, has conducted to defraud its creditors, members
or any other persons or for a fraudulent or unlawful purpose, or in a manner oppressive of any
of its members or that the company was formed for any fraudulent or unlawful purpose.
Classical Veil Lifting, 1897-1966:
Veil lifting did occur in exceptional circumstances during this period. The court for example in
Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd (1916) lifted the veil to
determine whether the company was an ‘enemy’ during the First World War. As the
shareholders were German, the court determined that the company was indeed an ‘enemy’.
Jones v Lipman (1962): (Example)
In Jones v Lipman (1962) Mr. Lipman had entered into a contract with Mr Jones for the sale of
land. Mr. Lipman then changed his mind and did not want to complete the sale. He formed a
company in order to avoid the transaction and conveyed the land to it instead. He then claimed
he no longer owned the land and could not comply with the contract. The judge again found the
company was but a façade and granted an order for specific performance.
The interventionist years, 1966-1989:
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In this time period, lead by crusader Lord Denning, the Court went bonkers.
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Lord Denning held in Littlewoods Mail Order Stores v IRC (1969)
“The Courts can, and often do, pull off the mask. They look to see what really lies behind.”
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Re a Company (1985), Court of Appeal stated:
“The court will use its power to pierce the corporate veil if it is necessary to achieve justice
irrespective of the legal efficacy of the corporate structure under consideration.”
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Interest of justice argument illustrated the peak of intervention
Back to the basics, 1989 – present Adams v Cape Industries Plc (1990):
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Case concerned enforcement of foreign judgment in the UK
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Key issue before the Court was whether Cape Industries could be regarded as falling under the
jurisdiction of US and therefore be subject to its jurisdiction.
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Until 1979, Cape, an English Company, mined and marketed asbestos.
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Worldwide marketing subsidiary was another English company, Capasco
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Also had a US marketing subsidiary incorporated in Illinois, NAAC
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In 1974, 462 people sued Cape, Capasco and NAAC in Texas for personal injuries arising out of
installations of asbestos in factories.
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Though Cape contended Texas had no jurisdiction, nonetheless, it settled the actions
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In 1978, NAAC was closed down by Cape for the purposes of reorganizing business in the USA
and also to avoid tax and other liabilities.
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Between 1978 and 1979, another 206 similar actions were commenced against Cape.
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Cape took the same earlier position and this time did not settle.
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Default judgments were entered against Cape and Capasco.
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1979 Cape sold its asbestos mining and marketing business and therefore had no assets in the
USA.
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Claimants sought to enforce the judgment in England where Cape had most of its assets.
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That could only occur if; the court lifted the veil of incorporation either treating Cape as one
entity or holding subsidiaries of Cape were a mere façade or agents of Cape.
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First the Court considered if Cape was single economic unit. The Court held that in all cases
where it concluded corporate structures were one single economic unit they interpreted
documents or statutes. So a lack of clarity either in the statute or contract would allow the
Court to reduce the corporate structure as single economic unit.
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The Court held that Cape was not a single legal entity.
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Secondly, The Court then turned to lifting of the veil point and held that it could pierce the veil
of incorporation in special circumstances to examine the facts ordinarily concealed behind the
veil and to gauge the motives of those behind alleged façade.
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Motives of Cape’s structuring of business in the US through its subsidiaries; to minimize tax and
other liability.
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Held nothing wrong.
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Third, the Court turned to “agency argument”. It observed that if it could be established that the
subsidiary acted as agent of the parent company that had apparent or actual authority then its
actions would bind the parent company.
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The Court concluded that the subsidiaries acted independently with the parent company having
no actual or apparent control over the operations of the subsidiaries. Therefore, agency
argument too was found in favor of the Cape.
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And so the default judgments entered into against Cape in the US could not be enforced in the
UK.
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Court of Appeal’s decision in Adam’s Case leaves three scenarios in which the veil of
incorporation can be pierced.
I.
If the Court is interpreting a statute or a document.
II.
Special circumstances exist indicating that it is a mere façade concealing true facts.
III.
Agency Principle.