Daimler co v. Continental Tyre and Rubber co

Name of the caseDaimler Company v. Continental Tyre and Rubber Company
Citation(1916) 2 A.C. 307  
Year of the case1916
AppellantDaimler Company
RespondentContinental Tyre and Rubber Company
Bench/ JudgesEarl of Halsbury, viscount Mersey, lord Kinnear, lord Atkinson, lord shaw of Dunfermline, lord parker of Waddington, lord Sumner, and lord paramour.
Acts InvolvedCompanies Act, 1905, Trading with the Enemy Act 1914.
Important ProvisionsArticle 102, Article 15 of the Companies Act, 1905

There are few principles under company law that make companies registering under it enjoy the benefits from other types of incorporations and one of the main principles is the corporate veil nature of the company which allows the company to differentiate itself from its shareholders. Although the corporate veil is important and provides a lot of benefits to the company and its shareholders, sometimes it is necessary to lift the corporate veil. In this article, the author has analyzed one of the important decisions by the House of Lords in lifting the corporate veil in war times and listed the concepts the case highlighted and its importance in company law.

Background of the Case

A company has a separate legal entity and acts as an artificial person and the shareholders cannot be asked to pay for the company’s liability beyond their pocket. These principles were prevailing but in this judgment, the lifting of the corporate veil is seen as an important thing to do because at the end of the day shareholders take the decision for the company and when there is a war between two companies in which the nationality of shareholders are in the war, then the corporate veil is lifted. After the judgment, even today this case acts as a precedent for the lifting of the corporate veil and it will act as a precedent in the future as well because the dynamic conditions and situations keep on arising, and this case will act as precedent when the lifting of corporate veil is discussed shortly.

Introduction:

When a company is incorporated for a particular purpose, it is expected to be neutral and be separate from its shareholders but during wartime, it is not so and the shareholders might influence the decisions of the company. This particular case deals about the same and the judgment made it clear about a lot of controversial things and it acts as a precedent to the same issue.

Facts of the Case

A company was incorporated in England to sell tires in England, made in Germany by a German company. The shareholders were all German expect one who was born in Germany and had become a naturalized British citizen. After the outbreak of the first world war between England and Germany, continental tire being the German company did not pay any amount claiming that it would amount to trading with an enemy nation thus violating trading with enemy act 1914. the secretary initiated an action against the same. The same was adjudged in favor of the German company meaning that the company had an enemy character. The secretary approached the house of lords against the decision of the court of appeal.

Issues

  1. Whether the company was an alien company and that payment of the debt would be trading with the enemy?
  2. Whether lifting the corporate veil can be used in emergencies?

Related Cases

  • Saloman v. Saloman[1] where it was held that a company is different from its shareholders.
  • Netherlands South African Ry.Co v. Fisher[2] where it was held that the company’s acts are those of its servants and agents acting within the scope of authority.
  • Bank of United States v. Deveaux[3] where it was held that for certain purposes a court must look behind the artificial persona and the corporation and take account and be guided by the personalities of natural persons, the corporators.
  • Gramophone and Typewriter Ltd. v Stanley[4] where it was held that where the company is incorporated does not matter and a company reside where the business is carried on.
  • Amorduct Manufacturing Co v. Defries & Co[5] where it was held mere payment to the benefit of the corporators who are alien enemies doesn’t restrict that company’s right to sue.

Related Provisions

  • Article 102, sub-section of the 17 Companies (Consolidation) Act, 1908 the directors are empowered “(1.) To institute, conduct, defend, compound, or abandon any legal proceedings by or against the company or its officers, or otherwise concerning the affairs of the company
  • Article 14(1) of the Companies (Consolidation) Act, 1908 The memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member. 
  • Article 115(1) of the Companies (Consolidation) Act, 1908 If at any time the number of members of a company is reduced, in the case of a private company, below two, or, in the case of any other company, below seven, and it carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months, and is cognizant of the fact that it is carrying on business with fewer than two members, or seven members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and maybe sued for the same, without joinder in the action of any other member.

Judgment

The house of lords allowed the appeal and held that though the company is a separate artificial person from its shareholders when the shareholders or the agents who are having the control of the company are from the enemy country, then the company will assume an enemy character and not otherwise. The court thought that the character of individual shareholders cannot affect the character of the company when everything is at peace or when it is not wartime, but when it is wartime, the agents or anyone who is taking instructions from such shareholders who is from an enemy country is important to consider to determine the character of the company as a whole. The court very strongly held that in this case, it is presumed that the company to have enemy character, being the secretary holding just 1 share out of 25000 shares who is from England and the rest being from Germany, the court held that the onus is one the company to prove that the secretary was not taking orders from other shareholders from an enemy country. 

The Ratio decidendi, in this case, is that the court established that the action and character of the shareholders can influence the actions of that particular company and the company can acquire enemy character because if the shareholders who are from the enemy country take decisions for the company.

Concepts Highlighted

This judgment established the corporate veil has to be lifted during the war and other such emergency times between the nationality of the shareholders and the company which will affect the nature of the company. The court in this case, clearly said the company is presumed to be in a good state but when its shareholders who are dominant as in this case where 24999 shares were held by German nationals, during the wartime their decisions can be influenced by this and the company will have an enemy character eventually. In such a situation, the concept of the corporate veil should be lifted.  

Conclusion

The judgment was a landmark judgment in many ways, where it went beyond the classical theory where the company is a separate legal entity and established that sometimes, particularly during wartime where the majority of the shareholders are from an enemy country, the functioning of the business may be affected accordingly. In such times, having transactions against the enemy company may result in consequences and the court has rightly established that in such wartime, the enemy company may act according to its shareholders. If it is not established in this way, the transactions would be legal but in reality, the company will act as an enemy country and that is not what anybody wants here and thus, the House of Lords has rightly accepted the appeal and changed its decision which was a right decision and something that shows that the companies are dynamic and its functioning is always not separate from its shareholders and the same can be influenced by the shareholders wherein the present case all the shares were being held by an enemy country (Germany) except 1 share, thus it can be understood, that the company’s activity is influenced by its shareholders who are from the enemy country.

References

Daimler Company v. Continental Tyre and Rubber Company.[6]


[1] [1897] A. C. 22, 30.

[2] (1901) 18 Times L. R. 116.

[3] (1809) 9 U. S. (5 Cranch) 61, 81

[4] [1908] 2 K. B. 89.

[5] (1914) 31 Times L. R. 69.

[6] (1916) 2 A.C. 307

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