Essay on The Principle of Separate Corporate Personality

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The Principle of Separate Corporate Personality

The principle of separate corporate personality has been firmly established in the common law since the decision in the case of Salomon v Salomon & Co Ltd[1], whereby a corporation has a separate legal personality, rights and obligations totally distinct from those of its shareholders. Legislation and courts nevertheless sometimes "pierce the corporate veil" so as to hold the shareholders personally liable for the liabilities of the corporation. Courts may also "lift the corporate veil", in the conflict of laws in order to determine who actually controls the corporation, and thus to ascertain the corporation's true contacts, and closest and most real
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The 'veil of incorporation' can be described as being the separation between a company and its members. Due to the separate legal status of a company from its members this is usually very strictly maintained. However, there are certain circumstances when the courts will deny the people who run the company the advantage of hiding behind the corporate veil. In these instances the veil of incorporation is said to be 'pierced' or 'lifted', i.e. the barrier between a company and its members is removed so there is no legal separation between them. There instances are however, difficult to predict as the reasons depend on the judges interpretation of "fairness" or "policy" or of how a particular statute should be interpreted.

In the leading case of Salomon v Salomon & Co Ltd, Salomon incorporated his boot and shoe repair business, transferring it to a company. He took all the shares of the company except six, which were held by his wife, daughter and four sons. Part of the payment for the transfer of the business was made in the form of debentures (a secured loan) issued by the company to Salomon. Salomon transferred the debentures to Broderip in exchange for a loan. Salomon defaulted on payment of interest on the loan and Broderip sought to enforce the security against the company. Unsecured creditors tried to put

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