Veil of Incorporation. Under the Companies Act 2006[1], the effect of registering a company gives it its own legal personality which becomes distinct from its members and creators.

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Under the Companies Act 2006, the effect of registering a company gives it its own legal personality which becomes distinct from its members and creators. This separates the individuals within the company from legal liability; the veil of incorporation safeguards the company as a separate legal entity thus holding its own rights and responsibilities. The basis of the veil of incorporation comes from the concept of limited liability which requires the distinction between the assets of the individual shareholder and the assets of the company itself.  

The importance of the corporate veil is that a shareholder or owner does not acquire the debt of the company. Further to this, shareholders can only lose the amount they each invested if the company is sued and judgment is against the company. Various common law demonstrates that the veil is respected by the judiciary. However, there are situations where the individual will be held liable and the veil is lifted. Courts have lifted the veil in cases where companies have been established or used for fraudulent trading and also cases where an individual has executed wrongful or fraudulent trading.

When looking at the veil of incorporation, a key case is Salomon v Salomon & Co Ltd which is described to be the case which best demonstrates the distinction of a company being a separate legal person from its shareholders (corporate personality). The case demonstrates that a person can carry on trade, exclusive of the threat of personal insolvency if the business is unsuccessful; Salomon was a sole trader who decided to form a business and register it as a limited company in which he held the majority of the shares. Salomon then sold his business to the company which was partly paid for by a secured debenture of £10,000. Shortly after formation, the company went into liquidation and it was argued that the debenture was not valid as Salomon and the company were one. If this were so, it would mean the debenture signified a debt to himself which was unfeasible in law, if Salomon had not formed the company he would have become bankrupt. The House of Lords held that the debenture was valid as the company was a separate legal entity which was distinct from its members and so could therefore owe money to its members.

The decision in Salomon has become the foundation for the judgment of many cases with regard to upholding the veil of incorporation. For example, in Macaura v Northern Assurance Co, Macaura attempted to claim under an insurance policy which he had taken out in his own name to cover the destruction of the property which he had sold on his estate to a company of which he was the majority shareholder.  The insurance company refused to pay out with the argument that the property belonged to the company and not to Macaura. The House of Lords held that the insurance company was correct and that the company should have insured the property as it was a separate legal person from the individual. Macaura demonstrates that even a majority shareholder of a company has no legal or equitable title over the company’s property. This notion is also demonstrated in the more recent case of Hashim v Sheyif & Anor where it was held that even a 100% shareholder should not handle the company’s assets and liabilities as his own.

Lee v Lee Air Farming Ltd further demonstrates the extent to which the veil is respected by the judiciary by establishing that a person could be the majority shareholder, a managing director, whilst also having a contract of employment with their own company. Lee held 2,999 of the company’s 3,000 issued shares, he was the sole governing director and employed under a contract of employment. He was killed in a work-related accident and his wife sought to claim insurance. Under the New Zealand Workers’ Compensation Act it was held that Lee could not be a ‘worker’ as he owned so much of the company, if he were considered a ‘worker’ he would have to be contracted with himself. This decision was appealed, following the principle of Salomon; it was held that the company was a separate legal entity and therefore could employee Lee so his wife was entitled to compensation.

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The case of Re Noel Tedman Holdings PTY Ltd helps to demonstrate how the judiciary further respects the veil of incorporation. The case concerns a husband and wife who were recognised as sole shareholders and directors of two companies. They were both killed in an accident, nevertheless the companies carried on in existence as the company and the individuals are considered as separate legal entities. The veil in this instance protects the company as well as the workers within that company.

As discussed, the veil of incorporation serves to protect the physical person, however, in a similar way ...

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