An Exceptional Concept of Doctrine of Separate Legal Personality

Introduction

It is said that the standard of separate legal personality shapes the establishment of current company law. Any exceptions to this rule should therefore be viewed as challenges to those establishments. This essay explores the exceptional concept of the doctrine of separate legal personality, its statutory recognition, and circumstances under which courts may lift the corporate veil.

An Exceptional Concept of Doctrine of Separate Legal Personality

As a general principle, corporations are recognized as legal entities separate from their liability of the entity and not of the shareholders, directors, or officers who own and/or act for the entity. This principle is fundamental to modern company law, providing businesses with the capacity to operate independently of their owners. However, this separation can sometimes be exploited, leading to legal challenges.

Lifting the Corporate Veil

The manner by which the law challenges the principle of separate legal personality is through a procedure called lifting the corporate veil. Section 9 of the Companies Act, 2013, codifies that a company is a legal entity in its own right. However, it was the landmark UK case of Salomon v Salomon & Co. Ltd in 1897 (Salomon v. Salomon & Co. Ltd, 1897) that initially addressed the issue of separate legal personality in the court. This case established the guidelines and standards of separate legal personality and ultimately decided that the legal analogy of the corporate veil was to be acknowledged at law.

Statutory Benefit and Misuse

The separate identity of a company is a statutory benefit and must be utilized for genuine business purposes only. When a fraudulent and unscrupulous use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. The Court will penetrate the corporate shell and apply the rule of what is called "lifting of or piercing the corporate veil." The Court will look behind the corporate entity and act as if no separate entity from the individuals existed, making the individuals or the controlling people liable for the obligations and commitments of the company.

Statutory Recognition of Lifting of Corporate Veil

The Companies Act, 2013, itself contains several provisions [Sections 7(7), 251(1), and 339] which lift the corporate veil to reach the genuine powers of action. Section 7(7) deals with the penalty for incorporation of a company by furnishing false information; Section 251(1) deals with liability for making a fraudulent application for the removal of a company's name from the list of companies, and Section 339 deals with liability for fraudulent conduct of business during winding up (Companies Act, 2013).

Court Hesitation and Exceptions

Since the decision in Salomon v. Salomon and Co. Ltd., (1897) A.C. 22, courts have often been hesitant or, at the very least, extremely cautious about lifting the veil of corporate personality to see the real individuals behind it. Nevertheless, courts have found it necessary to disregard the separate personality of a company in certain circumstances. This includes cases of fraud, evasion of legal obligations, or when the company is used as a facade to cover wrongful acts. These exceptions highlight the delicate balance the law maintains between respecting the corporate entity and ensuring justice is served.

Conclusion

The doctrine of separate legal personality is a cornerstone of modern company law, providing significant benefits to businesses while also posing challenges when misused. The ability to lift the corporate veil serves as a crucial legal tool to address these challenges, ensuring that the separate legal personality is not used as a shield for wrongful actions. Understanding the circumstances under which this doctrine can be challenged is essential for both legal professionals and business entities.

References

Companies Act, 2013. Sections 7(7), 251(1), and 339.

Salomon v. Salomon & Co. Ltd, 1897. (1897) A.C. 22.