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Addressing the abuse of corporate personality through the doctrine of piercing of corporate veil

Addressing the abuse of corporate personality through the doctrine of piercing of corporate veil
Outline of principle points of discussion

Corporate personality: Meaning and nature

Corporate personality or the fiction that the company is a separate person in the law was decisively laid down in Salomon v Salomon Co Ltd. In this case, the House of Lords held that a company has its own legal personality. Since then, the concept of corporate personality has come to be entrenched as an important concept in the English company law. Even prior to Salomon, the principle of separate legal personality was applied in Foss v Harbottle, in the context of the company being the proper plaintiff in cases in its name. The gist of these early cases is that corporate personality is an established fiction as per which the rights and liabilities of the company are its own.

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Abuse of corporate personality

The Salomon case exemplifies how corporate personality can be used by shareholders to gain unfair advantages over third parties as well. A common abuse of corporate personality by shareholders is where company is created as a way for shareholders to evade their legal obligations. An example can be found in Gilford Motor Company v Horne Ltd, where the company was incorporated for the purpose of avoiding the shareholder’s contractual obligation of non solicitation from his previous employer.

Piercing of corporate veil- the jurisprudence

Courts developed the jurisprudence of doctrine of piercing of corporate veil to address the abuse of corporate personality. Different decisions exemplify the way in which the doctrine has been used to counter the adverse effects of corporate personality abuse by the shareholders. In Moore Stephens v Stone & Rolls Ltd, the court used this doctrine to attribute liability for fraud to the sole director. In Jones v Lipman, the court used it to declare a company as a sham when the purpose of the company was to evade contractual liability. In Thorne v. Silverleaf, the court declared a company to be a sham when it was incorporated for evading liability.

How doctrine of corporate personality can address the abuse of corporate personality

Courts have used the doctrine as an exception and this is an important point to note because the rule remains the one laid down in Salomon. In Prest v Petrodel Resources

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  1. Salomon v Salomon Co Ltd [1896] UKHL 1.
  2. D French, C Ryan & S Mayson, Mayson, French & Ryan on Company Law (Oxford: Oxford University Press 2016); L Linklater, 'Piercing the Corporate Veil: The Never Ending Story' (2006) 27 Comp Law 65.
  3. Foss v Harbottle [1843] 67 ER 189.
  4. Salomon v Salomon Co Ltd [1897] AC 22.
  5. Gilford Motor Company v Horne Ltd [1933] Ch 935.
  6. Moore Stephens v Stone & Rolls Ltd [2009] UKHL 39.
  7. Jones v Lipman [1962] 1 WLR 832.
  8. Thorne v. Silverleaf [1994] BCC109.
  9. Limited, the court held that the doctrine is applicable only where corporate structure is being abused by the members of the company. Similarly, in Ben Hashem v Ali Shayif, the court held that impropriety is essential to be shown for application of the doctrine.
  10. Prest v Petrodel Resources Limited [2013] 1 BCLC 30.
  11. Ben Hashem v Ali Shayif [2008] EWHC 2380.

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