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Assess the likelihood of Sid and Kenny avoiding personal liability for the debts of the company

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Introduction

Student I.D. 11207984 Question 3 Assess the likelihood of Sid and Kenny avoiding personal liability for the debts of the company. [20 Marks] Answer This question deals with directors avoiding personal liability for debts of a company, especially within the category of fraud, which is applicable to this scenario. This question also deals with lifting the corporate veil as if the directors are found to be liable the veil will need to be lifted, so as to expose the members whom are found to be liable. When a company is incorporated it is treated as a separate legal entity distinct from its promoters, directors, members, and employees and hence the concept of the corporate veil, separating those parties from the corporate body has arisen. The company as a separate entity was firmly established in the landmark decision in Salomon v. Salomon &Co Ltd1. In this case Salomon, a sole trader, sold his manufacturing business to Salomon & Co Ltd. (a company which he incorporated) in consideration for all but six shares in the company, and received debentures worth �10,000. The other subscribers to the memorandum were his wife and five children who each took up one share. The business subsequently collapsed, and Salomon made a claim, on the basis of the debentures held as a secured creditor. ...read more.

Middle

Lipman10. On these authorities, the court will disregard corporate personality where the corporate form is used exclusively as a device to evade an existing, fully crystallised contractual or other legal obligation. In the Gilford Motor Company case, the Court of Appeal was clear that "the company was formed as a device, a stratagem, in order to mask the effective carrying on of business of Mr. Horne"11. In the later case of Jones v. Lipman, it was held that the company here was a "mask that Mr. Lipman holds before his face in an attempt to avoid recognition by the eye of equity"12. When applying the fraud exception to pierce the veil of incorporation, there are a number of issues, which have to be considered in order to apply the exception. The issues that need to be considered are the motives of the fraudulent person, the character of the legal obligation being evaded and the timing of the incorporation of the devise company. The first issue regarding the motive of the fraudulent person(s) is important to establish, as an element of deception is necessary in the fraud exception. In Gilford Motor Co v. Horne and Jones v. Lipman the defendants clearly intended to deceive the plaintiff by using the corporate form to deny the plaintiff by using the corporate form to deny the plaintiff a legal right. ...read more.

Conclusion

3 Smith Stone & Knight Ltd. v. Birmingham Corporation [1939] 4 ALL ER 116 (KBD) 4 DHN Food Distributors v LB Tower Hamlets [1976] 1 WLR 852. However subsequent application of the groups' approach has been limited. The House of Lords has limited The application of this approach to wholly-owned subsidiaries in the later decision of Wilson v Strathclyde Regional Council (1978) SC (HL). 5 Gencor ACP Ltd & Ors v Dalby [2000] 2 BCLC 734 (ChD). 6 Re Produce Marketing Consortium (No.2) [1989] 5 BCC 569 7 Re Todd Ltd [1990] BCLC 454 8 Referred to as the "fraud exception" 9 Gilford Motor Co. v Horne [1938] Ch 935 (CA). 10 Jones v Lipman [1962] 1 ALL ER 442 11 Lawrence L.J. "...I agree with the finding by the learned judge that the defendant company was a mere channel used by the defendant Horne for the purpose of enabling him, for his own benefit, to obtain the advantage of the customers of the plaintiff, and that therefore the defendant company ought to be restrained as well as the defendant Horne" 12 Jones v. Lipman [1962] 1 ALL ER 442 13 Adams v Cape Industries Plc (1990) 2 WLR 657; 14 Creasey v Breachwood Motors Ltd [1993] B.C.L.C 480 (QBD 15 Jones v Lipman [1962] 1 ALL ER 442 16 Gilford Motor Co. v Horne [1938] Ch 935 (CA). 17 Gencor ACP Ltd v. Dalby [2000] 2 BCLC 734 (ChD) ?? ?? ?? ?? ...read more.

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