Lecture 1.
4
Principle of Lifting
the Corporate Veil
Course: Laws of
Company and
Banking
Course Teacher:
Mohammed Tahmidul
Islam
Topics of Discussion
01 Introduction to the concept and the meaning
of 'Lifting Corporate Veil'
02 Cases when Corporate Veil is lifted
03 Case Discussion on [Salomon v. Salomon
and Co. Ltd. (1897) A.C 22]
04 Conclusion
01
Lifting Corporate
Veil
A company has its own legal entity which is distinct from
its members legal entity. However, in cetain cases, the
court may decide to pierce the corporate veil to reach
the person behind the veil or to reveal the true form and
character of the concerned company to see who has
been acting behind the copmany's legal entity
The court uses this principle because the law forbids the
use of a company for illegal personal gains. In those
circumstances in which the court feels that the
corporate form is being misused it will rip through the
corporate veil and expose its true character and nature.
02
Cases When Corporate
Veil is Lifted
The court lifts the corporate veil of a company if only
these specific conditions are found in a suit:
a) Under express statutory provisions
b) Fraudulent trading
c) Wrong description of the companies
d) For establishing the relationship of a holding and
subsidiary company
e) In case of an investigation of the affairs of the
company
f) In case of an investigation of the ownership of a
company
03
Case Discussion on
[Salomon v. Salomon and
Co. Ltd. (1897) A.C 22]
Salomon v Salomon and Co. Ltd. is a landmark case
that emphasizes on separate legal entity of a company.
In this case, Salomon transferred his business of boot
making, initially run as a sole proprietorship, to a
company (Salomon Ltd.), incorporated with members
comprising of himself and his family.
The price for such transfer was paid to Salomon by way
of shares, and debentures having a floating charge
(security against debt) on the assets of the company.
Later, when the company’s business failed and it went
into liquidation, Salomon’s right of recovery (secured
through floating charge) against the debentures stood
aprior to the claims of unsecured creditors, who would,
thus, have recovered nothing from the liquidation
proceeds.
03
Case Discussion: Continued
To avoid such alleged unjust exclusion, the liquidator,
on behalf of the unsecured creditors, alleged that the
company was sham, was essentially an agent of
Salomon, and therefore, Salomon being the principal,
was personally liable for its debt. In other words, the
liquidator sought to overlook the separate personality of
Salomon Ltd., distinct from its member Salomon, so as
to make Salomon personally liable for the company’s
debt as if he continued to conduct the business as a
sole trader.
In that company, Salomon was the majority
shareholder, and accordingly, was sought to be made
personally liable for the company’s debt. Hence, the
issue was whether, regardless of the separate legal
identity of a company, a shareholder/controller could be
held liable for its debt, over and above the capital
contribution, so as to expose such member to unlimited
personal liability.
03
Case Discussion: Decision
The Court of Appeal, declaring the company to be a myth, reasoned
that Salomon had incorporated the company contrary to the true intent
of the then Companies Act, 1862, and that the latter had conducted
the business as an agent of Salomon, who should, therefore, be
responsible for the debt incurred in the course of such agency.
The House of Lords, however, upon appeal, reversed the above ruling,
and unanimously held that, as the company was duly incorporated, it
is an independent person with its rights and liabilities appropriate to
itself, and that “the motives of those who took part in the promotion of
the company are absolutely irrelevant in discussing what those rights
and liabilities are”.3 Thus, the legal fiction of “corporate veil” between
the company and its owners/controllers4 was firmly created by the
Salomon case.
01
Conclusion
Separate legal entity is an intrinsic characteristic of a limited stock company in Bangladesh. However, that does not mean that
members can use their company to do illegal acts. Thus, although the Solomon case established the norm of separate legal entity,
when the situation demands, for the ends of justice, the court shall lift the corporate veil and look into the real culprits of an irregularity.
