Daimer co. ltd vs. Continental Tyre and Rubber Co. (Great Britain) ltd 1916 AC 307 : (1916-17) ALL ER rep 19132 

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Keywords

Control, enemy, character, lifting the veil 

Facts of the case 

Most shareholders and all of the directors of Continental Tyre & Rubber Co Ltd. were German citizens. It was an English secretary. Daimler purchased tires from Continental Tyre and Rubber Co Ltd, but Daimler was hesitant to pay because doing so may violate both a proclamation and the common law crime of trading with the enemy.  Due to the First World War, Daimler launched a lawsuit to see if payment could be made. 

When a company is formed for a specific purpose, it is anticipated that it will be impartial and independent from its owners; nevertheless, during times of war, this is not always the case, and the shareholders may exert influence over the firm’s decisions. This particular case deals with a similar subject, and the ruling clarified several contentious issues. It also serves as a model for similar situations. 

Issues

1. Whether trade with the enemy would constitute paying the debt because the corporation was an outsider?
2. Is removing the corporate veil appropriate in urgent situations?

Judgment

The House of Lords accepted the appeal and determined that even though the firm is a separate artificial entity from its shareholders, it will take on an enemy character if its shareholders or controlling agents are citizens of an enemy nation.

When there is peace or no war, the court believed that the character of individual shareholders cannot affect the character of the company. However, during a war, it is important to consider any agents or people who are following orders from such shareholders who are from an enemy nation to assess the character of the company.

Because the secretary only owns one of the company’s 25000 shares, which are from England, and the rest are from Germany, the court strongly held that it is the responsibility of the company to demonstrate that the secretary was not acting on instructions from other shareholders from an enemy nation.

Conclusions 

The historic decision questioned the conventional wisdom that a company is a distinct legal entity. Business operations may be affected by shareholder loyalties in times of conflict when the bulk of shareholders are from an adversary nation. The corporation was able to act in the best interests of shareholders because the court correctly understood that measures taken against a company owned by an enemy could have serious repercussions. The ruling of the House of Lords demonstrates the dynamic interaction between businesses and shareholders, as seen in a situation when all but one share was owned by a foe (Germany). 

This article is submitted by Prakriti Mitra of Techno India University.

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