Personal Liability Case Study

Personal Liability Case Study

Assessment of the likelihood of Sid and Kenny avoiding personal liability for

the debts of the company.

This question deals with directors avoiding personal liability for

debts of a company, especially within the category of fraud, which is

applicable to this scenario. This question also deals with lifting the

corporate veil as if the directors are found to be liable the veil

will need to be lifted, so as to expose the members whom are found to

be liable.

When a company is incorporated it is treated as a separate legal

entity distinct from its promoters, directors, members, and employees

and hence the concept of the corporate veil, separating those parties

from the corporate body has arisen.

The company as a separate entity was firmly established in the

landmark decision in Salomon v. Salomon &Co Ltd[1]. In this case

Salomon, a sole trader, sold his manufacturing business to Salomon &

Co Ltd. (a company which he incorporated) in consideration for all but

six shares in the company, and received debentures worth £10,000. The

other subscribers to the memorandum were his wife and five children

who each took up one share. The business subsequently collapsed, and

Salomon made a claim, on the basis of the debentures held as a secured

creditor. The liquidator argued that Salomon could not rank ahead of

other creditors due to Mr. Salomon and the company was one. The House

Of Lords held that Salomon & Co Ltd. was not a "sham". As the debts of

the corporation were not the debts of Mr...

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...1990] BCLC 454

[8] Referred to as the "fraud exception"

[9] Gilford Motor Co. v Horne [1938] Ch 935 (CA).

[10] Jones v Lipman [1962] 1 ALL ER 442

[11] Lawrence L.J.

"…I agree with the finding by the learned judge that the defendant

company was a mere channel used by the defendant Horne for the purpose

of enabling him, for his own benefit, to obtain the advantage of the

customers of the plaintiff, and that therefore the defendant company

ought to be restrained as well as the defendant Horne"

[12] Jones v. Lipman [1962] 1 ALL ER 442

[13] Adams v Cape Industries Plc (1990) 2 WLR 657;

[14] Creasey v Breachwood Motors Ltd [1993] B.C.L.C 480 (QBD

[15] Jones v Lipman [1962] 1 ALL ER 442

[16] Gilford Motor Co. v Horne [1938] Ch 935 (CA).

[17] Gencor ACP Ltd v. Dalby [2000] 2 BCLC 734 (ChD)