BETWEEN TORT CREDITORS AND SHAREHOLDERS OF CLOSELY HELD COMPANIES: ANOTHER LOOK AT THE DOCTRINE OF SHAREHOLDER IMMUNITY

Abstract

Introduction

Globally, the registered company is unquestionably recognized as the dominant and most widely used business form.¹ Possessing a separate personality from its founders/members, it can borrow money, acquire property, litigate in its name, and generally, its securities are freely transferable.² But its most outstanding feature is the fact that by default, its members are immune from its liabilities and obligations, making it naturally suited for large business endeavours and multinational enterprise.³ And perhaps with the fraud exception, the principle of shareholder immunity has remain unassailed in many Commonwealth countries ever since it received judicial approval in the celebrated case of Salomon v Salomon and Co Ltd.⁴ There is however ongoing debate among legal scholars, whether shareholder immunity should apply where a corporate tort is committed by a closely held company.⁵ One reason for this call is the assertion that unlike contract or voluntary creditors, tort or involuntary creditors, are not in a position to adequately protect themselves ex ante against corporate actions that give rise to those torts, in the first place, or to contract out of the implications of incorporation.⁶