Incorporation

• Author: Suzanne Ffolkes Goldson
• Profession: Attorney-at-Law and Senior Lecturer in the Faculty of Law at The University of the West Indies, Mona
• Pages: 10-26

1. Incorporation

A fundamental principle of company law is that of the separate legal entity

doctrine. e doctrine states that on incorporation, a company is a separate (albeit

ctitious) legal person, separate from its members. e doctrine was established in

the seminal case of Salomon v Salomon,1 which was a case of a de facto one-man

company, as Mr Salomon held 20,001 of the 20,007 shares issued, and the remaining

6 shares were held by his wife and ve children as nominees for Salomon.2 Mr

Salomon had operated a successful business for over thirty years, and the purchase

price was secured by a debenture to him. e company became insolvent less than a

year after incorporation, and Mr Salomon wished to enforce his debenture ahead of

the unsecured creditors. e liquidator counterclaimed that Salomon was personally

liable for the debts of the company, as the incorporation and subsequent debenture

was a fraud on the unsecured creditors, and that in eect, the company was his agent

or nominee. e House of Lords, in overturning the decision of the Court of Appeal,

which had found in favour of the Liquidator, conrmed that the company was a

separate legal entity:

e company is at law a dierent person altogether from the subscribers…and

though it may be that after the incorporation the business is precisely the same as

it was before, and the same hands receive the prots, the company is not in law the

agent of the subscribers or trustee for them. Nor are the subscribers, as members

liable, in any shape or form, except to the extent and in the manner provided by

the Act.3

e Privy Council conrmed in AG v Antigua Times,4 that a company is a legal

person, even for purposes of the constitution where the term ‘person’ includes a body

corporate.

Since the decision in Salomon, the case law has been littered with attempts to

variously ‘lift’, ‘peek behind’ or ‘pierce’ the ‘veil’ of incorporation where the corporate

form has been used as an instrument of fraud or as a cloak or sham, and to nd that

the company and the member are one and the same.5 ere have also been instances

where the veil has been lifted based on agency, trust, tax, statute, or where the company

is part of a group which is a single economic unit. It is arguable, that some of these

cases reveal instances where the doctrine simply does not apply, and in others, that

1. [1897] AC 22 Eng. HL.

2. e UK Companies Act 1862 required a company to have a minimum of seven members.

3. [1897] AC 22 Eng. HL. 31.

4. [1975] 3 All ER 81, [1975] 3 WLR 232.

5. Donovan Crawford v FIS SCCA Nos. 64 & 88 of 1999, delivered July 31, 2001(unreported).

there has been no consistent principle for ignoring the separate legal entity doctrine.

More recently, after much judicial and academic criticism, the courts have displayed

a reluctance to ignore the separate legal entity doctrine and will lift the veil only in

exceptional circumstances. e Supreme Court of Canada in Constitution Insurance

Co. of Canada v Kosmopoulos6 refused to lift the veil of a one-man company in order

to avail the sole member of the insurance from damage to the company’s property,

which was in his name. e Supreme Court of Canada did, however, nd that he

could benet from the insurance as he had an insurable interest in the property. e

UK Supreme Court case of Prest v Petrodel,7 without overruling the many cases that

had lifted the veil, conrmed the doctrine as espoused in Salomon and refused to lift

the veil where there was no evidence that incorporation of the companies was for a

fraudulent purpose.

…e corporate veil may be pierced only to prevent the abuse of corporate legal

personality. It may be an abuse of the separate legal personality of a company to use

it to evade the law or to frustrate its enforcement. It is not an abuse to cause a legal

liability to be incurred by the company in the rst place. It is not an abuse to rely

upon the fact (if it is a fact) that a liability is not the controller’s because it is the

company’s. On the contrary, that is what incorporation is all about.8

e Jamaican Court of Appeal embraced Prest in International Hotels (Jamaica)

Limited v Proprietors Strata Plan No 4619 where it was held that a subsidiary could,

and did, acquire an interest against its parent company by adverse possession. In UDC

v Jacitar,10 the Court of Appeal arrived at a similar conclusion regarding parent and

subsidiary companies, where the parent company, UDC was sued by Jacitar, to whom

it had leased commercial premises and provided 24-hour security as part of the lease

agreement for damages and/or negligence when the premises was burgled. However,

Urban Maintenance Ltd, a subsidiary of UDC, was the company which contracted

with the security company. It was therefore held, that having regard to the principle

of separate legal entity, the security guards were contracted to Urban Maintenance

Ltd and not UDC. Although the court did not cite Prest or International Hotels, the

Salomon principle was conrmed.

Since Prest, however, there appears to be a retreat from Salomon/Prest whereby

Courts in the UK11 have lifted the veil on grounds reminiscent of the words of

Cumming-Bruce LJ in Re A Company where he stated, ‘the court will use its powers

6. [1987] 1 SCR 2.

7. [2013] 4 All ER 673.

8. [2013] UKSC 34 [34]. See also Yaiguaje v Chevron Corporation [2018] ONCA 472 where

the Ontario Court of Appeal armed Prest v Petrodel.

9. [2008] SCCA 135, delivered December 4, 2013 (unreported).

10. [2017] JMCA Civ. 1, delivered January 27, 2017 (unreported).

11. JCA BTA Bank v Ablyazov and others [2014] EWHC 455; Lakatamia Shipping Co. Ltd.

v Su and others [2014] EWCA Civ 636; JSC Mezhdunaroniy Promyshlenny Bank [2016]

EWHC 248 Ch.

Incorporation

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