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Company Q&A: The company as a legal entity

Companylaw

Key Issues

Before answering the following questions, you should be familiar with these issues:

  • The meaning of “corporate personality” or the “corporate veil”, as set out in s 15 of the Companies Act 1993 and Salomon v Salomon & Co Ltd [1897] AC 22;
  • The consequences of a company being a separate entity from its shareholders, in terms of liability for company obligations and ownership of company property;
  • The meaning and consequences of a court “lifting the corporate veil”; and
  • The principles the New Zealand courts have applied when considering whether or not to lift the veil, as expressed in cases like Re Securitibank Ltd (No 2) [1978] 2 NZLR 136 and Chen v Butterfield (1996) 7 NZCLC 261,092. It should be noted that the New Zealand courts have, in general, been unwilling to lift the veil except in the most exceptional circumstances.

Common Pitfalls

In problem questions on the “corporate veil” it is important to note the arguments that could be raised by both sides. Even if the facts of a question superficially resemble those of a case like Salomon or Lee, the issue of whether the veil might be lifted should also be considered.

It has been noted by the New Zealand courts that it would be undesirable to attempt to categorise the sorts of situations when the corporate veil may be lifted. The various “categories”, such as a sham or facade situation, and the avoidance of one’s legal obligations, are probably best viewed as examples of how the general principle, set out in Re Securitibank and Chen v Butterfield, has been applied. They should not be treated as an exhaustive list of the circumstances where a court may lift the veil.

Care should be taken with overseas cases on this issue; for example, cases from the UK, such as Littlewoods Mail Order Stores Ltd [1969] 3 All ER 855, indicate a greater willingness to lift the corporate veil than is evident in New Zealand.

Question 1

Much academic writing has been devoted to discussing when and why it is permissible to look behind the corporate veil. Despite these attempts to chart the waters, … the courts have continued to voyage along their own paths, without paying much attention to principle, but meeting the demands of justice as perceived by each individual Bench.

(A Beck “The Two Sides of the Corporate Veil” in J Farrar (ed) Contemporary Issues in Company Law (CCH New Zealand, Auckland, 1987) at 71.)

What is the “corporate veil”? What happens when a court “looks behind” or “lifts” the veil? Does this quotation accurately reflect the current approach of the New Zealand courts to lifting the veil?

Answer Plan

You need to consider the following in your answer:

  • An outline of the concept of corporate personality, the authority for it, and its consequences;
  • What it means to “lift the veil”, and the consequences thereof; and
  • An analysis of the recent New Zealand cases dealing with the issue of veil lifting, in light of the quotation.

Question 2

Max holds 800 out of 1000 issued shares in Northland Motels Ltd. He and his wife Susan have separated, and Max has transferred most of his valuable assets to the company in return for the issue of a further 100 shares, with the object of ensuring that these assets are not subject to the property division provisions of the Property (Relationships) Act 1976.

Is Susan entitled to a share of these assets?

Answer Plan

You need to consider the following in your answer:

  • The arguments likely to be put forward by Max and Susan respectively, based on the separate legal personality of the company in Max’s case; and the common law rules on lifting the veil in Susan’s; and
  • Of particular relevance is the approach of the New Zealand courts to the use of the corporate form to avoid one’s own legal obligations.

 

For the full sample answers and more see Berkahn Questions and Answers: Company Law (3rd ed, LexisNexis, Wellington, 2014).