The Defence of the Corporate Veil - Parent Companies Beware!

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Much interest has recently been shown in the potential consequences of the judgment given in Stocznia Gdanska SA -v- Latvian Shipping Co and others, which was substantially upheld by the Court of Appeal on 21 June 2002. Although the case related to Shipbuilding Contracts, the result has reinforced the traditional view that the Courts will not countenance any further erosion of the fundamental principle of English Company Law that a company is to be regarded as a legal entity with a separate legal personality, distinct from that of its members. However, the case has highlighted potential alternative sources of liability for parent companies establishing wholly owned single-purpose subsidiaries - in many industry sectors, including shipping, property and big-ticket asset finance.

The basic principles

The principle of separate corporate personality has been established for over a century. In the leading case of Salomon -v- Salomon & Co. (1897), the House of Lords held that, regardless of the extent of a particular shareholders interest in the company, and notwithstanding that such shareholder had sole control of the companys affairs