HK company lawcorperation Veil.doc

Veil of IncorporationObjectivesl To understand the separate legal principle and its implication to the development of economyl To appreciate the merits and demerits of the Salomon principlesl To understand the circumstances under which the veil of incorporation will be uplifted by courts and by statutes and the protection to creditors.. A company is a legal device adopted to carry on a business or to carry out certain non-profit making activities. Once incorporated, a company is in law an independent person separate from its members and officers i.e. it has a separate personality from its members and officers.The principle of separate corporate personality prevents outsiders from taking action against the members and officers of a company personally even if they control and manage the business of the company. It therefore is being described as a ‘veil’ of the company. However, statutes (e.g. the Companies Ordinance) and the courts will lift the veil of incorporation under specific circumstances.Separate Legal Entity Concept1. Separate Legal Entity/Corporate PersonalityA company is an association of its members. However, in law, a company is a legal person with a personality separate from its members. Where business is conducted in the name of the company, its business affairs are kept separate from the personal affairs of those human beings (e.g. directors, employees) who conduct it.Same as a natural person, a company has legal rights, obligations, duties and liabilities. A company can (through its agents e.g. directors) enter into contracts (e.g. employ people, buy and sell goods) in its own rights and in its name. It can own properties, take legal action, be sued, commit crimes and torts in its own name.It is due to the separate legal existence of the company that it is possible for the members to have limited liability i.e. once they have paid for their shares in full they cannot be required to contribute towards the payment of the company’s debts if it cannot pay them from its assets. This is only possible because the company’s debts are not the debts of the members. The company has an unlimited liability for its debts and must pay them so long as it has assets to do so. Corporate personality gives the company perpetual succession so that the death or bankruptcy of a member does not affect the continued existence of the company. The holding of property is made possible because the company can take ownership in its own name... Salomon v Salomon & Co Ltd [1897] AC. 22FactsMr. Salomon had, for more than 30 years, carried on a successful business as a sole trader in the manufacture of boots and shoes. In 1892, he sold his business to a private limited company entitled 'A. Salomon & Co Limited'. He and his wife and children became members of the company. As partial consideration for the sale of the business, A. Salomon & Co Limited issued to Mr. Salomon new shares and mortgage debentures (i.e. debentures which were secured by a floating charge on its assets). After the sale of the business, Mr. Salomon continued to run the boot-making business in his capacity as a director of A. Salomon & Co Limited. He was entitled to receive debenture interests and dividends payable by A. Salomon & Co Limited in his capacity as a debenture holder and a member respectively.Due mainly to strikes by workers in the boot trade, A. Salomon & Co Limited fell on hard times and was put into liquidation. Its assets were insufficient to pay all its debts in full; however, it was able to repay Mr. Salomon (the secured creditor) if he can enforce the floating charge created in his favour. In that case, the unsecured creditors would get nothing. The liquidator (on behalf of the unsecured creditors) suggested to the court that A. Salomon & Co Limited was Mr. Salomon in another form, hence, he should not be paid in his capacity as a debenture holder. The liquidator wanted the court to ignore the fact that Mr. Salomon had sold his business to a separate person with the name 'A. Salomon & Co Limited'. JudgementIt was held that once a company is legally incorporated, it must be treated like any other independent person with its rights and liabilities. The company is in law a different person altogether from the subscribers to the memorandum of association (i.e. the founder members of the company). Though the same person manages the business and receives the profit of the business after the incorporation of the company, the company is in law a separate person from its members. Consequently, the business was owned by the company i.e. A. Salomon & Co. Limited and its debts were liabilities of the company. Although Mr. Salomon owned beneficially all the issued shares of the company, he could also be a secured creditor with enforceable rights against the company in that capacity. CommentThe court would not have ruled as it did if there had been fraud. There was no。