Separate Legal Person
A company has a separate legal personality. This means that it is a separate legal person. It can sue and be sued. It can hold property. It incurs liability for a civil wrong or breach of contract. It is a different legal person to its shareholders and directors. The effect is that generally, they are not liable for the company’s debts and obligations. Only the company’s assets may be pursued and taken in order to enforce its legal obligations.
The separate legal personality of a company is a cornerstone of company law. The principle was firmly established at the end of the 19th Century in the famous Solomon case. The House of Lords, overturning the decision of the lower court, held that the separate existence of a company must be respected, notwithstanding that the company was a “one-man” company, controlled by its sole shareholder.
An individual had formed a company to which he transferred his existing business, in return for shares and debt. The debt was secured by a charge over all of the company’s assets. The owner of the company successfully asserted his entitlement to the company’s assets in priority to its creditors. Arguments that the company was a sham, a cloak or an abuse were rejected. The House of Lords affirmed the principle of the company’s separate legal existence.
A “one-person” company is valid, notwithstanding that it is controlled in every respect by that individual. Accordingly, an employment contract between the company and its controller is valid. The control of a company, no matter how complete, does not of itself negate the separate corporate existence.
Consequences of Separate Identity
There have been cases in which shareholders who have disregarded the separate legal identity of their company, have suffered significant losses, on the basis of an apparent technicality. However, if a person mixes up his assets and the company’s assets, there may be serious legal and taxation consequences.If a person decides to incorporate and take the benefit of trading through a company, he must take care to treat the company’s assets as separate from his personal assets.
It is possible for the shareholder, even the sole shareholder, to steal and misappropriate assets from “his” company. Any removal of company assets other than as lawful drawings is unlawful and can be reclaimed by the company. This may be enforced upon the later liquidation of the company.
The fact that a company is a separate legal entity has significant taxation consequences. The company is itself liable to tax on its income and gains. Most payments to a shareholder are treated as a taxable dividend. The company must usually withhold tax at the standard rate and pay to tax to Revenue. The recipient may have a further tax liability for which he must account.
So-called “close” companies are subject to further rules. Many benefits received from a close company, that are not labelled as dividends are potentially taxable. Where the company is under the control of a relatively small number of people (the definition covers the vast majority of private companies), almost all payments and benefits to the shareholders, other controllers or persons connected with them, are treated as if they were dividends. They are subject to income tax. The company must withhold and pay tax for them at the standard rate to the Revenue. There may be further tax payment and compliance obligations for the recipient.
Courts Piercing Veil I
The company is a separate legal entity. The general rule is that a company is not “looked through”, so as to make its shareholders or directors personally liable for its actions. Occasionally, the courts set aside the separate identity of the company and hold the underlying shareholders or directors liable and responsible for its acts and debts. This occurs in a relatively limited category of cases only.
There are a number of established types of cases and circumstances, in which the separate identity of the company may be disregarded by the courts. It appears that the courts have become less willing to disregard the separate existence of companies in recent decades. The courts appear to be cognisant of modern legislation which provides for personal liability, in certain circumstances in which directors have abused the privilege of limited liability.
The courts will not permit companies to be used for fraudulent purposes. Companies may not be set up simply to avoid an existing legal obligation. In such cases, the court may characterise the company as a “sham” or device through which the court will look. This is referred to as “piercing the corporate veil”. Where a company is used as a sham or as an attempt to evade an existing legal responsibility, the separate identity of the company may be ignored.
When a company runs a business, it controllers must follow the basic requirements of the Companies Act. It must clearly act as a separate and distinct entity. It cannot be a mere sham which is put forward when it suits, by its controllers. It must be clear that the company is the entity which is entering transactions and contracting debts.
Courts Piercing Veil II
There have been a number of cases in which the failure to maintain a distinction between the acts and affairs of the company and those of its shareholders/ directors, has led the court to find that the third parties in fact dealt with those latter persons, rather than the company.
It can be difficult to rationalise the distinctions made by the courts in cases where they have upheld the separate corporate existence as legitimate, and other cases in which they have classified the use of the company is a sham. The action need not be fraudulent in a criminal or intentional sense or illegal, in order for the “corporate veil” to be pierced. There may be “equitable fraud” which, in broad terms means inequitable behaviour.
There are elements of subjective judgment in deciding in marginal cases, whether or not to “pierce the corporate veil”. It appears that the courts have regard to the legitimacy of the conduct or arrangements in a business sense. The presence of some illegal or immoral element to the conduct may cause the court to “pierce the corporate veil”.
Some courts have suggested that the “corporate veil” may be pierced, where this is necessary in order to do justice. However, the consensus is that this would put the principle far too broadly. Separate legal personality is respected in most cases, and cannot be readily set aside.
Company as Agent or Trustee of Controllers I
It is possible in principle for a company to be the agent of its shareholders or directors. The directors are usually the agents of the company. However, exceptionally, the company itself may act on behalf of its shareholder or directors in which case they may be liable personally as principal for the acts of their agent company.
The court may find that in the particular circumstances of the case, that the company is the agent of the shareholders, directors or of another company. The former’s acts, profits and liabilities may be directly attributed to the latter, so that they are liable for the former’s obligations and liabilities incurred, when it acted or appeared to act on behalf of the former.
The courts are more likely to find a relationship of agency in a group context. Companies are often structured in groups. A holding company may hold shares in a number of subsidiary companies, each of which conducts a separate business/ trade or different elements of the same trade. There are important tax benefits for groups, which facilitate their treatment as a unit, at least to some extent. However, each company remains a separate legal entity, with all the legal consequences that follow.
Company as Agent or Trustee of Controllers II
The courts may be willing to hold that one company is the agent of another associated or group company. If one company is treated as if it was part of the other, as if one controls the other or if its separate existence is ignored from a corporate procedural point of view, then it may be held that one company is the agent of the other. Common control is often a feature of groups.
The courts sometimes find that group companies have been treated as a single entity, where the controllers have not taken care to distinguish the acts of various group members, particularly where to find otherwise, would cause injustice to outsiders. The court may hold that the third party dealt with the group company or that one company was the agent of the other.
The courts have decided in some cases that there is a single entity, where a business has been carried on as if it was undertaken by a single company, in the names of several companies. A subsidiary may be held out as trading on behalf of the holding company which controls it. Some courts consider what constitutes the real economic entity. They seek to find the economic entity which carries on business, particularly in the context of a group of companies.
Finding of Trust
Exceptionally, the court may hold that the company is trustee on behalf of its shareholders. The scenarios are similar to those of an alleged agency, save that a property interest is typically involved. It may be claimed that the company is a trustee of another “true” owner, typically in order to avoid an unfavourable consequent that would otherwise follow (e.g. the property is in “A”s name but the insurance policy or some statutory right is held by B).
It is possible in principle that A is “really” a trustee on behalf of B so that B is the beneficial or “true” owner. However, the courts will not readily find this to be so. A company is not a trustee or even a fiduciary in respect of its shareholder, save in very particular and relatively unusual circumstances.
There must be circumstances to justify the finding of a constructive or express trust relationship. There may be scope to find a constructive trust where there is some equitable fraud or illegal/ improper purpose in relation to property. n some cases, it may be possible to find an express or resulting trust, on the basis of the facts which have occurred.
Statutory Limitations I
A director may be made personally liable for the company’s debts in an insolvent liquidation if as an officer of the company, he was knowingly a party to the carrying on of the business of the company in a reckless manner. Others, even if not officers, may also be made liable if they were knowingly a party to the carrying on of the business of the company with intent to defraud its creditors or for any fraudulent purpose. There is a separate wider basis for the imposition of personal liability where there has been fraudulent trading.
In the above cases, the directors (or others) can be made personally liable without limitation for the debts incurred. A liquidator may review the pre-liquidation circumstances and make an application to have the director held personally liable by the court, on the basis of having traded recklessly or fraudulently.
Directors and others may be made personally liable by the courts, for the company’s debts where they have not kept proper books of accounts. The court must find that proper books of account had not been kept and that this has contributed to a shortfall or uncertainty in its assets or impeded the orderly winding up of the company.
Statutory Limitations II
A director may be made liable in a voluntary winding up where a declaration of solvency has been improperly given under the summary approval procedure.
If a company is being wound up in insolvent liquidation, the court can determine on application by the liquidator that the company concerned and another, be wound up together and have their assets pooled, where it appears that they carried on business in a way that did respect their separate identities.
Formerly, in the case of a public limited company, if its members fell below seven in number, the remaining members could be held liable for the company’s liabilities, after six months. Where the business is carried on for longer than this period, every person who was a member during that time, and was aware that it was operating in this manner, was liable for the debts contracted in that period.
The provision cannot now apply to a PLC or a private company. Each may now function with one member only. Prior to 1994 reforms, a minimum of two members had been required for private companies. After the 2014 Act, one member also suffices in the case of a PLC.
Criminal law does not generally respect the corporate veil. Although companies themselves may be guilty of offences, most criminal offences may also be committed by their directors and officers. Company law cannot be used to avoid criminal or regulatory obligations.
In the case of the “classic” crimes against the person, property and public order, the directors and employees will usually be capable of committing the crime, or at least being an accessory to it, by the terms of the crime itself.
In the case of most regulatory legislation, the legislation which creates the offence provides that any director, officer, manager who consents to, participates in, ratifies or approves the particular act, may also be prosecuted for the offence. A company cannot be used as a shield from criminal liability.
The directors or others who consent to, connive at or approve the offence, are typically guilty of a separate offence. Where an offence is committed by the company, each of them and the company may be prosecuted separately. Each may be independently guilty of a separate offence. Each may be prosecuted independently or in conjunction with the company. The wording of the particular statutes varies and will govern the position.
References and Sources
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Courtney
Keane on Company Law 5th Ed. (2016) Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law