Essay on The Principle Of Limited Liability And The Corporate Veil

Essay on The Principle Of Limited Liability And The Corporate Veil

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Corporation is an artificial entity and in law is treated as a "legal person" as being the owner of property and being party to a contract. The principle of limited liability and the corporate veil, which is a metaphor described the principle of separate legal personality, was established in Salomon v Salomon . The decision in Salomon confirmed that the company has a separate legal personality from the subscribers to the memorandum and it allows people to ‘trade without committing their personal fortune to a venture’. However, courts are very protective of the Salomon principles and they only lift the veil in a small number exceptional cases, without clear rules or guidelines. Consequently there are no conclusive answer to the question of when the courts will lift the veil is to be welcomed or it could be necessary to laid down specific rules by legislature.

However, The House of Lords reveal the precision of Gooley’s observation that the separate legal entity doctrine was a “two – edged sword”. Salomon’s principle was of vital importance as it encouraged individuals to provide money for businesses within the safety buffer of limited liability, leading to increase the country’s economic prosperity. Hicks believes that the success of Western capitalism linked directly by limited company and with the progress of industry and commerce. Therefore, Butler went so far as to say, “The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are far less important than the limited liability corporation”. However, the establishment of this principle does not come without its disadvantages as it is said that limited liability does not provide sufficient protection for creditors. ...

... middle of paper ...

... conventional remedy available. Therefore, the courts may hold shareholders liable for the company’s liabilities and lift the veil, according the statutory provisions such as section 761 of the Companies Act 2006 , sections 213 and 214 of the Insolvency Act 1986.

However, the House of Lords state in Woolfson v Strathclyde Regional Council that the courts should only pierce the veil in special circumstances without defined what exactly these circumstances were. It can be argued that there is not a true exception in Salomon principles but there are, merely, examples where the principles applies. However, the principle of limited liability is important for promote the prosperity and economic growth of company but it required a fine legislative balance to avoid the abuse by the unscrupulous and lawyers’ support that the legislature should lay down definite rules.

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