StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Circumstance and Consequence of Lifting the Veil of Incorporation - Essay Example

Cite this document
Summary
The paper "Circumstance and Consequence of Lifting the Veil of Incorporation" is a great example of a law essay. There are only to defend directors in order to escape liability for insolvent trading. First, the director may conclude that the debt was executed devoid of their authority or consent and or at the time when the debt was being executed, they didn’t have any justifiable…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97.1% of users find it useful

Extract of sample "Circumstance and Consequence of Lifting the Veil of Incorporation"

PART A Introduction During the period of high liquidity adversity, the directors are required by law to exercise the duty of special care in dealings outside those of the business. The directors must ascertain the company’s ability in repaying their obligation as and when they fall due for repayment. This is relevant when the business if facing a high liquidity catastrophe and where some form of financial structure is depicted in the business[Hel08]. Where director depict that the company would be in deficiency of capacity to repay the debt or after repaying the debt, the director must ensure that the company do not incur further debt. Section 588G-Z contains some key provisions of the corporation act concerning the regulation of insolvent trading. Duty Sections 588G (1) impose an obligation on directors from getting into activities that would make the company engage in insolvent trading. The section is relevant and applies when; When the director was acting as a director at the time of incurring such debt. The business is insolvent at the time of incurring such debt or turn to be insolvent when it incurs such liability. There is a justifiable ground to conclude that the insolvency is consequential from the debt incurred. By directors failing to prevent the company from incurring such debt, he/she will be held liable if at the time of incurring such debt, the director is aware of the consequences that the debt will bring to the business. Statutory defense for director There are only to defend for directors in order to escape liability for insolvent trading. First, the director may conclude that the debt was executed devoid of their authority or consent and or at the time when the debt was being executed, they didn’t have any justifiable cause to anticipate that the business wouldn’t be in a position to pay its debt. Circumstance and consequence of lifting the veil of incorporation The rule of legal entity is a basis of the company law. Salomon v Salomon & Colimited (1897) shed a veil involving a corporation and its shareholders[Chr84]. Several time the, veil is unclear through which an individual cannot figure out the members of the company. nevertheless extremely in some occasion, both the government and the court ignore the legal entity nature of the business and look to the actualities behind it with a scrutiny to inflict legal responsibility on the shareholders, rather than the business, more often than not in the importance of the public. This method is called lifting the veil of corporation. Whether and when the business veil ought to be lifted is a decision that is taken exceptionally; to take it lightly or liberally may destroy in the mainly basic method the exceptionally basis on which the structure of the corporation law stands. The commercial veil does not cover up the internal issues of the business from view[Muz08]. On the opposite, the government has for all time made it an indispensable situation of the acknowledgment of legal entity that it must go with the broader publicity. The third parties may not have an option in opposition to its shareholders although they are however permitted to spot who these shareholders are, the portion they hold, list and names of directors, what its constitution is, the capital and structure is and how it has been acquired as well as its income statement account What fundamentally the commercial veil does is to defend shareholders from individual legal responsibility for the debts of their corporation. The following are some of the factors that can be lead to lifting the veil of incorporation Reduction in number of directors Where the number of company directors falls below two and the company is still in operation for the next six months, then every director who with full consent of the reduction in the number continues with business operation after a period of six months shall be held liable jointly for the company’s debt during that period[Jul07]. the provision provides that a registered corporation ought to have a minimum of two directors and where the directors falls to less than two and the company continues with the operation for a period of more than six months then the court may lift the veil of incorporation Declaration of shares by substantive shareholder of a company Every individual who holds substantial shares in a company shall give notice in writing of their full names, address, number of shares held in a company. Failure to comply shall warrant the court to lift the veil of incorporation. Where the shares of a corporation are held by a trust and the management of the business is in the hands of the trusts, the court may as well lift the veil of incorporation in order to reconcile the company’s assets with the terms of the trust. In The Abbey, Malvern Wells Ltd. v. Ministry of Local Government Planning,Dankwerts J. was ready to acknowledge the reality that a corporation held the entire of its assets on benevolent trust when all the shares in it were so held and its articles of association provided that the trustees were to be its prevailing body. Fraudulent Transactions by the Company after Winding Up Where at the process of wounding the business, it emerges that the company didn’t not prepare proper books of accounts for a period of 2 years straight away prior to the start of the winding up of the stage involving incorporation and beginning of winding up whichever is the shorter every representative of the corporation who is in default, unless he shows that he acted truthfully, shall be legally responsible to a penalty. where the business is in the process of wounding up and the court is contented that the business has been executed with the main motive of defrauding the company’s creditors or for whichever fraudulent activities, the court my on application of the authorized receiver or creditor affirm that any individual of the company who executed the transaction knowingly shall be held liable devoid of the limitation of liability for the entire debt of the company has the court may order. PART B The directors According to section 9 of the corporation act, it define the director of a company as any person who occupies or act in the capacity of a director by whatsoever name called as well as whether or not legitimately elected or approved and whatsoever person in accordance with whose directors r instruction are accustom to act as defacto director. OHS solution is currently facing a serious predicament due to director’s fault. It is evidence that the business has been operating for more than six months and the company’s directors are fully aware of the IT problem the company is current facing[Jul07]. The consequence of the IT problem would lead to insolvency to the business since, the clients using the company’s website will shun aware from the company due to poor website. In this regards, Satish will be held responsible for the insolvency trading due to poor management of the company’s IT system. Sections 588G (1), impose provision that bestow an obligation on directors from getting into activities that would make the company engage in insolvent trading. The law section 588G-Z provides that when a business has a liquidity emergency, its executives and executive must assume an extraordinary concern in their trade with those outside the business. Directors should deem their corporation’s aptitude to forfeit the entire its money owing as and when they turn out to be due. This is chiefly so when the business is in financial complicatedness and some structure of financial organization arrangement is in place[Ram95]. If a sensibly knowledgeable manager would give a final verdict that the business is in deficiency of the capability or would be in short of that aptitude after sustaining the arrears, they must not cause the business to sustain additional debts. Case study In RMS Glazing Pty limited v The Proprietors of Strata Plan No 14442 The court heard the dispute based upon the benefit of fairness in relative to piercing. An entity company took legal action against the plaintiff corporation and Mr Lo Surdo (an executive as well as the shareholder of the plaintiff) for loss consequential to indenture entered into with the plaintiff. The company worn on a number of its allegation as well as, on the matter of expense sought an order in opposition to Lo Surdo individually. The entity business disputed that the corporation was a ‘body of straw’ and that, for the reason Lo Surdo had played an vigorous part in the case and had a portion in the conclusion, the focal point of fairness mandated that an order be made against Lo Surdo. Cole J differed, finding that with the corporation’s documentation of cost-effective business it might not be thought to be a body of straw. It can therefore be concluded from the case study and the provision that the director of OHS solution Satish is fully liable for the insolvent trading and thus satish must bare the liability of the company since, the law (588G (1) provides that the director must prevent the company from being insolvent when their consent are clear about the company’s present dealings that might lead to bankrupt and insolvency[Rom02]. The exemption to the ruling is that, where the business incur liability without the consent of the directors, then they will not be held liable for the company’s insolvency. Improper accounting documentation The company failed to observe business ethics such as proper documentation of the accounting books and its is eminent that the business is having poor accounting system and they are all messed up and thus, Emma was unable to table the financial information to the shareholders during the board February meeting. It is the duty of the fiancé director to ensure that the business is having a proper financial accounting and are up to date in order to save the business from insolvency trading. In this regards, Emma the finance director is about to breach the duty to prevent insolvency trading Case study Windeyer J, in Peate v Federal Commissioner of Taxation, 65 stated that: “If a business is accordingly incorporated and listed under the Act and the appropriate accounts are documented in due form and the agreed returns are completed, it persist to subsist as a lawful body. In that logic it is an actuality and not a sham.” Ying is about to breach the contract of preventing insolvent trading since, Ying is a director and has gone guarantor to OHS solution for $50,000.This act is considered an option of saving the company out of bankruptcy[Fio13]. It can be observed in the OHS predicament that Ying who is non-executive director is intending to make a move towards acquiring OHS solution due to its financial liquidity problem. The move is considered has breaching the duty to prevent insolvent trading since, Ying is part of the directors of the company and thus Ying is bound by the duty of trust and that of ensuring that going concern assumption of the company is guaranteed. The court under paragraph 1229 of section 588(M) states that “court might be anticipated to view at two distinct concerns when ascertaining whether the duty of preventing insolvent trading had been breached by the directors. The first issue would be the situation that specific business was in inclusive of the company’s size, the type of business, the nature of the business, the provision of the articles, the content of the board as well as the allocation of job amongst the board and other employees. The second issue that the court be anticipated to look at would be, in the point of view of the situation referred to, what might be a justifiable person considered the director of the company usually be anticipated to guarantee that he/she might be well conversant of any insolvency predicament facing the business. Case study Creasey v Breachwood Motors limited (1992) 10 ACLC 3052, Creasey worked for Breachwood Welwyn limited as its general manager pursuant to a written indenture. This corporation carried on the trade of a garage trading in cars from premises owned by Breachwood Motors Ltd. F and S were the shareholders and directors of both these business In 1988, Creasey was sacked by Breachwood Welwyn limited and he claimed compensation for unlawful removal from office against this corporation. In November 1988, Breachwood Welwyn limited stopped doing business and in December 1988 Breachwood Motors limited acquired its business and sustained its business under similar business name. This takeover was carried out devoid of consideration to the separate body of Breachwood Welwyn limited and the centre of concern of its debts holders particularly Creasey, if his assert for illegal removal from office were to be successful. As a consequence of the accomplishment of F, S and Breachwood Motors Ltd, Creasey found himself with a judgment against Breachwood Welwyn Ltd, an insolvent corporation, the source of which had been detached to Breachwood Motors Ltd. Breachwood Motors limited declined to meet any part of the verdict. One of the inquiries which had to be determined was whether the corporate veil could be pierced. The Court held that the corporate veil could be pierced[Ram95]. Not anything might give good reason for F and S's demeanor in intentionally changing Breachwood Welwyn Ltd's resource and trade into Breachwood Motors limited in entirety taking no notice of their responsibilities as directors and shareholders. This predestined that Breachwood Motors limited were legally responsible for the liability of Breachwood Welwyn. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Circumstance and Consequence of Lifting the Veil of Incorporation Essay Example | Topics and Well Written Essays - 2250 words, n.d.)
Circumstance and Consequence of Lifting the Veil of Incorporation Essay Example | Topics and Well Written Essays - 2250 words. https://studentshare.org/law/2083470-assignment-of-corporation-law
(Circumstance and Consequence of Lifting the Veil of Incorporation Essay Example | Topics and Well Written Essays - 2250 Words)
Circumstance and Consequence of Lifting the Veil of Incorporation Essay Example | Topics and Well Written Essays - 2250 Words. https://studentshare.org/law/2083470-assignment-of-corporation-law.
“Circumstance and Consequence of Lifting the Veil of Incorporation Essay Example | Topics and Well Written Essays - 2250 Words”. https://studentshare.org/law/2083470-assignment-of-corporation-law.
  • Cited: 0 times

CHECK THESE SAMPLES OF Circumstance and Consequence of Lifting the Veil of Incorporation

Company Law: Sole Proprietorship and Limited Liability Companies

Company law Name: Instructor: Task: Date: Introduction Company law represents an enormous legislation that seeks to govern diverse aspects of corporations.... The legislation provides a legal structure for corporations.... The legislation is an all-encompassing since it governs formation, extent of operations, management and dissolution of companies1....
11 Pages (2750 words) Coursework

Legal Entity as Embodied in Salomon v Salomon & Co Ltd

In as much as the Salomon case upholds the notion of separate legal personality, courts sometimes go to the extent of lifting the veil of corporation to establish the human faces behind the companies.... According to the paper courts in England have generally been reluctant to pierce the veil of the incorporation instead preferring to protect the doctrine of separate legal entity.... The Court of Appeal rejected the notion of treating the corporations as a single economic entity and held that the interest of justice did not feature as criteria for lifting the veil....
12 Pages (3000 words) Essay

Company Law and director incapacity

he Companies' Act 1985 and the Insolvency Act of 1986 has laid down certain provisions for considering the fiduciary duties and responsibilities of Directors and the circumstances under which the courts will pierce the veil of the incorporation.... A company upon incorporation becomes a separate legal entity, which is distinct from its shareholders and directors.... Corporate veil implies that the incorporation of a company raises a separate legal liability in the company, which is different from that of its directors and shareholders....
11 Pages (2750 words) Case Study

Salomon vs Salomon & Co Ltd

If these circumstances are not evident, then it seems that the courts apply it or not at whim, and the Salomon case is at the mercy of the court and its view of whether the veil should be lifted in the particular circumstances or not.... This topic is linked to clarity – if one can arrive at a clear set of circumstances under which the corporate veil will not be lifted, then one can arrive at the conclusion that the Salomon decision is safely applicable....
9 Pages (2250 words) Case Study

Company Law in Salomon v Salomon

However, there are certain circumstances in which this artificial existence is not allowed but the veil of incorporation is lifted for ascertaining liability or any other legal issue that have necessitated such action.... In other words, this verdict has provided a veil between an owner and a company and through this veil the owner would not be personally blamed or persecuted if corporate actions have been taken on behalf of the company; Thereby, the company would itself be For example, the verdict of this case law also highlights that the company can also be sued or can sue others as well....
10 Pages (2500 words) Essay

The Decision by the House of the Lords in the Case of Salomon versus Solomon

Under this case, the House of Lords firmly established that after incorporation, a new and separate artificial organization comes into existence.... These people are always obscured by the concept of the corporate veil, which normally surrounds the company.... corporate veil refers to a legal concept that is responsible for separating the personality of that of a corporation, from the personality of the shareholders of a corporation.... ased on these facts, the courts may hold the shareholders liable, and hence lift up their protection, under a concept referred to as lifting of the corporate veil....
11 Pages (2750 words) Assignment

Business Law - Veil of Incorporation and Its Consequences

The author of the particular paper "Business Law - veil of incorporation and Its Consequences" will begin with the statement that one of the major purposes of incorporating a company is to separate the individuals from legal liabilities of that company.... This separate legal entity of the company is referred to as the 'veil of incorporation' (Blackwell's, 2014).... The discussion will revolve around arguing the fact about considering 'veil of incorporation as one of the decisive notions in the field of Company Law with a focus on the case of Salomon v A Salomon & Co Ltd [1897] AC 22 as well as the practical consequences that are derived from being a separate legal entity....
6 Pages (1500 words) Essay

Company Law: The Judiciary Should be Prepared to 'Lift the Corporate Veil' in the Interests of Justice

It starts with an understanding of the concept and purpose of the veil of incorporation and develops into arguments when the veil of incorporation may not be applicable in the interest of justice.... Under said law is the doctrine of the veil of incorporation.... The first means that the court may pierce or disregard the veil 'if, however, the veil of incorporation is used to facilitate wrongdoing, this behavior will not result in a benefit for society....
10 Pages (2500 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us