I will now give examples of company law cases and the circumstances under which the veil of incorporation can be lifted by the courts.
In national emergency cases, in times of war or other emergency where economic sanctions may be imposed, the courts may have to lift the corporate veil to reveal the nationality of a company. This was done in Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd where shares in an English company were held by German nationals, who were treated as an enemy concern in the First World War. So, the judicial lifting of the corporate veil can happen in times of national emergency, however, it is dependant upon the state of hostility between the UK and some other nation.
The courts are prepared to pierce the corporate veil to combat fraud. They will not allow the Salomon principle to be used as an engine of fraud. For example, in the case of Gilford Motor Co Ltd v Horne, an employee had entered into an agreement not to compete with his former employer after ceasing employment. In order to try to avoid his restriction the employee set up a company and acted through that. The court held that this manoeuvre would not be tolerated, the veil would be lifted and an injunction would be issued against the company too.
The court has on occasions lifted the veil of incorporation to allow a group of companies to be regarded as one economic entity. This is because in reality they were not independent either in human or commercial terms. For example, in the case of DHN Food Distributors Ltd v Tower Hamlets LBC, the company operating the business was the holding company and the premises were owned by the company’s wholly owned subsidiary. Compensation was only payable for disturbance of the business if the business was operated on land owned by the company. Lord Denning was of the opinion that, “…for all practical purposes the three companies should be treated as one entity and consequently the payment for disturbance should be made to DHN...”
It was held that the ownership of a lease and of the business which used the premises divided between two companies of the same group was treated as if owned by the same person. According to Lord Denning the separate legal identity of each company in the group could be disregarded where the ownership and control of the two subsidiaries were wholly in the hands of the holding company.
In a more recent case, Adams v Cape Industries, there has been a restatement of the basic Salomon principle. The Court of Appeal refused to treat the UK parent company, its US subsidiary, and an independent US corporation through which it marketed asbestos in the USA, as a single economic entity, or to lift the veil of incorporation (as opposed to the DHN case). The Court of Appeal stated that the veil would not be lifted simply on the ground that the company was formed to avoid future obligations and liabilities. The case concerned claims for damages for injuries sustained by exposure to asbestos dust and it was brought against the UK parent company because its US subsidiary had no assets. The court recognised that Cape’s intention in setting up the corporate structure was to enable the sales of asbestos in the USA to be made while eliminating the appearance of any involvement therein of Cape itself. This could reduce its exposure to claims, as well as reducing its liability to taxation. The court said that there is nothing illegal in the defendants using their corporate structure to ensure that future legal liabilities to third parties would fall on another member of the group rather than on the defendants. The refusal of the court to lift the veil of incorporation or to treat the group of companies as a single economic entity meant that the plaintiffs, even if successful in their action against the US subsidiary, would receive no compensation since the subsidiary had no assets. In this case Lord Justice Slade said, “Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities”. This means that sometimes a director can take advantage of the corporate veil to relieve himself of a liability that he would otherwise fall under. However, Lord Hoffmann stated, “No one can escape liability for his fraud by saying ‘I wish to make it clear that I am committing this fraud on behalf of someone else and am not to be personally liable’”. So we can learn that there are different interpretations as to how the judges see the circumstances for the veil to be lifted.
Agency is another theme which comes under this topic. Often, the veil will be lifted where an agency is found to exist. In Salomon itself, agency, in the sense that the company was the agent of the shareholder, had been rejected by the House of Lords as reflected in Adams v Cape Industries too. The circumstances which may give rise to lifting the corporate veil in cases where a group of companies can be regarded as one economic entity may in some instances also substantiate a finding of an agency relationship between the holding company and subsidiary. For example, in the case of Smith, Stone and Knight Ltd v Birmingham Corporation, Smith, Stone and Knight Ltd incorporated a wholly owned subsidiary company called Birmingham Waste Co. Ltd, which nominally operated the waste-paper business, but it never actually transferred ownership of the waste-paper business to that subsidiary, and it retained ownership of the land on which the waste-paper business was operated. Atkinson J held that, “…the subsidiary was the agent or employee; or tool or simulacrum of the parent…” and lifted the veil to enable a subsidiary company operating business on land owned by the holding company to claim compensation on the ground of agency. So, in this case the key point is that even though there is no agency agreement between the holding and subsidiary company with regard to the transaction, in such situations the holding company is liable for the actions of the subsidiary and there is no division between them.
Can the corporate veil be lifted for justice’s sake? In order to answer this question it is important to note that the case law has shown a general reluctance upon the part of the judiciary to define a specific set of instances by which the corporate veil may be dislodged; but note the Court of Appeal’s judgment in Adams v Cape Industries. Although Lord Denning supported that a court’s power to lift the corporate veil should be viewed as an optional power as opposed to a tool which can only be employed in specific and defined circumstances. For example, in the case Littlewoods Mail Order Stores Ltd v McGregor, Lord Denning stated that:
‘The doctrine laid down in Salomon’s case has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But this is not true. The courts can and often do draw aside the veil. They can and often do pull off the mask and look to see what really lies behind.’ (p1254)
So, we can see that if the judiciary possesses a general discretion to draw aside the corporate veil, then such discretion gives validity to the view that the individual merits, the justice of a case, may ultimately justify a court in disturbing the corporate veil.
More recently, in Trustor v Smallbone and Introcom, Smallbone was a director of Trustor AB, a Swedish registered company. Without the consent of the other directors, he transferred large amounts of corporate funds into a company controlled by him, Introcrom Ltd. He then removed some of these funds from Introcrom Ltd’s bank account into his own name. Being aware of all the circumstances, Smallbone was found to be jointly and severally liable with Introcrom Ltd for those sums received by him from its bank account. The court then had to consider whether Smallbone was liable for sums paid from that account to other persons. Here, where a person had used a company merely as a façade for receiving monies the court would use its powers to pierce the corporate veil in order to achieve justice. Such cases are a salutary reminder that where a company is simply a façade, or there has been impropriety, the court can hold directors personally responsible for the company’s actions.
According to Palmer, “…where the Court considers it appropriate to issue a freezing injunction it will use its power to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the corporate situation under consideration...”
So we can learn that in the interest of justice the corporate veil can be lifted to see the true and most real connection between people and entities to reflect a fair case.
I will now give examples of company law cases and the circumstances under which the veil of incorporation can be lifted by the various statuary provisions such as Section 24 of the Companies Act (CA) 1985.
Section 24 of the CA 1985, is the only statutory provision which seeks to dislodge the corporate veil by imposing an additional liability on a member of a company. The section provides that if a public company carries on business for more than six months with less than the statutory minimum of two members, then any person who was a member of the company during that time and knew that it was carrying on business with less than two members, will be liable with the company for the company’s debts during that period.
Section 117 of the CA 1985 is an example of a statutory provision which disturbs the corporate veil by, when applicable, imposing liability on the directors of a public company. The section provides that where a public company fails to obtain a trading certificate in addition to its certificate of incorporation before trading and borrowing money, then the company’s directors are liable for any obligations incurred.
Section 349(4) of the CA 1985 provides that if a company officer misdescribes the company in a letter, bill, invoice, order, receipt or other document, then the officer may be made personally liable for the amount specified on the document, unless the company agrees to discharge the liability. The section also imposes criminal liability in the form of a fine. Section 349(4) imposes a strict form of liability.
There are statutory exceptions, for example, sometimes an Act of Parliament provides instances when the veil of incorporation will be lifted. The court will shift the veil when it appears that the company’s business has been carried on with intent to defraud creditors then the court may declare that the directors who were knowingly parties to the fraud shall be personally responsible. A director may also be liable to contribute to the company’s assets if found guilty of wrongful trading. This is known as the Insolvency Act 1986, namely, s 213 and more especially s 214.
In conclusion, I think that although there are varying views from the judges in the context of the different circumstances such as single companies as established in Salomon’s case to groups of companies by a comparatively recent decision of the Court of Appeal in Adams v Cape Industries, it is not necessarily becoming increasingly difficult to predict in a case, that the courts will or will not adhere to the principle of separate corporate personality as confirmed in Salomon v Salomon & Co Ltd. However, I do feel that the veil of incorporation, even though not lifted at times, is becoming more ‘transparent’ in modern company jurisprudence. I agree with Dr. K. R. Chandratre that, ‘…the ghost of Saloman’s case still visits frequently the hounds of Company Law…’, but the veil has been pierced in many situations as discussed above. In the expanding horizon of modern jurisprudence, lifting of the corporate veil is acceptable and its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The aim of the legislation is to do justice to all parties and so we can conclude that the horizon of the doctrine of lifting of corporate veil is expanding.
BIBLIOGRAPHY
REFERENCES AND FURTHER READING
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Cavendish Lawcards Series (2002) Company Law (3rd edn), Cavendish Publishing, London.
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Farrar, J and Hannigan, B (1998) Farrar’s Company Law (4th edn), Butterworths, London.
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Griffin, S (1996) Company Law Fundamental Principles (2nd edn), Financial Times Pitman Publishing, London.
WEBSITES
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Cadwallader, N (2002) Lifting the Corporate Veil: Principles [online] (cited 26 December 2003) Available from <URL:http//www.exchangechambers.co.uk/lifting.htm>
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Chandratre, K (2003) Piercing the Corporate Veil to Catch the Real Culprits [online] (cited 25 December 2003) Available from <URL:http//www.bcasonline.org/articles/artin.asp?52>
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Dryland, C (2001) Liability of Directors [online] (cited 3 January 2004) Available from <URL:http//www.walkermorris.co.uk/expertise/press100b.htm>
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Griffiths, M (2003) Lifting the Corporate Veil: Mike Griffiths Discussed Lifting the Corporate Veil [online] (cited 17 December 2003) Available from <URL:http//www.acca.co.uk/publications/corpsecrev/44/895748>
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Small Business Development: The Concept of Legal Personality [online] (cited 3 January 2004) Available from
<URL:http//www.law-online.co.za/sbd/legalpersonality.htm#index>
Word count: 2,556
See www.law-online.co.za/sbd/legalpersonality.htm#index
Farrar, J and Hannigan, B (1998) Farrar’s Company Law (4th edn), p.75
Cavendish Lawcards Series (2002) Company Law (3rd edn), p.15
Griffin, S. (1996) Company Law Fundamental Principles (2nd edn), p.19
Farrar, J and Hannigan, B (1998) Farrar’s Company Law (4th edn), p.71
[1969] 3 All ER 855 at 860, CA.
Griffin, S. (1996) Company Law Fundamental Principles (2nd edn), p.24
See www.walkermorris.co.uk
See www.exchangechambers.co.uk/lifting.htm