In Gilbert and Sullivan’s ‘Utopia’, the conception of a cramped company is described, rather poetically:
“Some seven men execute an Association (If possible, all Peers and Baronets), The originate off with a public declaration To what extent they mean to pay their debts. That’s called their Capital; if they are wary They will not quote it at a sum spacious. The figure’s immaterial–it may vary From eighteen million down to eighteenpence. I should attach it rather low; The reliable sense of doing so Will be evident at once to any debtor. When it’s left to you to say What amount you mean to pay, Why, the lower you can set aside it at, the better……
They then travel to trade with all who’ll trust ‘em Quite irrespective of their capital (It’s shady, but it’s sanctified by custom) ; Bank, Railway, Loan, or Panama Canal. You can’t embark on trading too tremendous– It’s strictly splendid, and based on accepted sense– If you succeed, your profits are stupendous– And if you fail, pop goes your eighteenpence”.
How does the thought of separate correct personality and little liability give rise to the circumstances Gilbert and Sullivan recount? Does you judge that the law goes far enough in disregarding, or avoiding the consequences of, separate proper personality, when justice requires it to do so? This article explains further.
An incorporated company, “united or combined into an organised body”, is recognised by law as a separate factual entity, or ‘legal person’ determined from the separate personalities of the members of the body. The law treats it like “any other independent person” having rights and liabilities. A company, as a true person, may enter into contracts, bear property and even commit crimes. It is this view of the Company being a fictitious person (then under the ‘Stock Company Act’ ) ‘Utopia’ ridicules, where Gilbert, in his libretto, toys with the view that there could be a convergence of natural persons and true entities.
Where a private company little by shares owes money, and becomes insolvent, the law holds that since its creditors dealt with the Company – not its individual members – regardless of “the ideas or schemes of those who brought it into existence”, the extent of financial liability of its members is little to the amount the members agree to pay for their shares: their “public declaration.. to what extent they mean to pay their debts”. Gilbert’s words satirize the consequences of this: if the Company becomes insolvent, the creditors do not pick up paid, regardless of the personal financial situations of its members. This can be contrasted with a partnership or sole proprietorship, where the owner would be held responsible for all debts of the corporation.
Conversely, where a company owns assets, those assets belong to the Company, not its members: in dissimilarity with a partnership or sole proprietorship, where the owner(s) of the assets are the partners or the proprietor. Members cannot claim an interest as the assets were purchased by the Company, as fair owner which, as in Macaura can be to the detriment of the member.
On occasions, the law is prepared to circumvent the usual consequences of proper personality by ‘lifting’ or ‘piercing’ the mask of incorporation – for example, where a company’s shareholders are using the Company as a way to avoid their responsibilities. In Jones v Lipman, Lipman transferred a property to his company, to avoid having to transfer the property to Jones. The Court held the Company was a “design and a sham, a camouflage which [Lipman] holds before his face in an attempt to avoid recognition by the scrutinize of equity”.
This does not mean that the Courts will always prefer the corporate shroud wherever justice requires it. The Courts have vigorously fought against any attempt to allow anyone, let alone themselves, “gawk under the skirts of a company”. In Adams v Cape Industries, a company that marketed asbestos spot up subsidiaries so that if a customer sued for asbestos-related claims, only the subsidiary would be liable. The bankruptcy of a subsidiary would not affect Cape. The Court held that Cape were entitled to “organise affairs.. so that it would have the… support of the group’s asbestos trade in the USA without the risks of tortuous liability”.
Similarly, in Ord and another v Belhaven Pubs tiny a defendant company that was not trading, transferred all of its assets to other companies in its group, and consequently claimants attempted to sue those other companies for the debt the defendant owed. The court dismissed the claim, stating that the transactions were overt and “conducted in accordance with the liberties conferred upon corporate entities by the Companies Act”.
In unique times, the advance would seem to be that the Court will go to any length to avoid any determined penetration of the corporate screen. In Allen v Amalgamated Construction Co Ltd the European Court of Justice examined the workings of a company to investigate whether transfers between subsidiaries were trustworthy of being a transfer under the TUPE regulations. Similarly, in Pirelli Cable Holding NV v IRC the Court, whilst denying that it was lifting the screen, “availed itself of a jolly capable rummage around the internal workings” in order to put a question to positive facts.
The Courts have on occasion held directors personally liable for their actions. In C Evans & Sons petite v Spritebrand Ltd, the Court held that, in every case it is important to seek information from with care what portion the director played personally with regards to the act complained of. The Court declined the opportunity to formulate a comprehensive definition of circumstances that would always give rise to liability.
More recently, in MCA Records Inc, whilst not setting out general principles, the Court held that per CBS Songs Ltd and Unilever plc v Gilette (UK) Ltd, liability may arise where the individual ‘intends and procures and shares a favorite perform that an infringement takes place’. Consequently, these cases attach that directors can sometimes be personally liable for torts for which the company is also liable. quiet, the Courts have retained the principles of separate honest personality and shrimp liability, and defended the protection they offer. Whilst permitting some ‘rummaging’ under the screen to attach facts, they have severely miniature any encroachment on those principles.
We have seen how the principles of separate upright personality and petite liability sometimes result in circumstances that may seem favourable to the Company’s shareholders and detrimental to its creditors. On one hand, there are genuine reasons for retaining these principles. The Courts feel that to subject individual shareholders or directors to onerous personal liabilities would discourage commercial enterprise. Additionally, whilst creditors are exposed to risk, they are fully aware of this risk: the Company’s Memorandum, a public document, freely states that the company is runt by shares, the liability of its members is minute, and by how great. So when the Company “proceed[s] to trade with all who’ll trust ‘em”, the risk creditors seize is easily calculable.
On the other hand, there are cases where, if it were not for company law, other principles would require the Courts secure individual members liable for their debts and actions. Cases such as Adams v Cape Industries, where members have deliberately arranged their affairs to avoid liability if sued, are difficult to correlate with equitable principles of justice. The law is keen towards introducing provisions to prevent members abusing the principles to avoid liability for serious crimes and should go further to introduce provisions preventing the avoidance of liability for serious losses.
Materials referred to:
Payne, J, MA (1998) Lifting the Corporate shroud, Company Law Gilbert, W S – Utopia, small Halsbury’s Laws of England from LexisNexis – Corporations (Volume 9(2) (2006 Reissue) Halsbury’s Laws of England from LexisNexis – Companies (Volume 7(1) (2004 Reissue) Hill, C, Hubble, P, Longshaw, A, Morgan, T & Roberts, S (2007) W223 Company Law and Practice, Oxford University Press, Oxford original Law Journal from LexisNexis – von Wachter, V (13 July 2007) The Corporate screen, 157 NLJ 990 fresh Law Journal from LexisNexis – Pedley, P (6 May 2005) Hints for hungry litigators, 155 NLJ 702
CASES:
Adams v Cape Industries (1990) Ch 433 Allen v Amalgamated Construction Co Ltd: C-234/98 [1999] ECR I-8643, [2000] All ER (EC) 97 Jones v Lipman (1962) 1 All ER 442 Macaura v Northern Assurance Co Ltd (1925) AC 619 Ord and another v Belhaven Pubs small (1998) BCC 607 Salomon v A Salmon and Co Ltd (1897) Ac 22 [1895-99] All ER accumulate 33
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