Mr Salomon then took the case to the court of appeal, again he lost, but this time on the grounds that he had abused the system and that the only reason for changing it in to a company was so that he could carry on as before but with limited liability.
The House of Lords overturned the decision of both the liquidator and the court of appeal, rejecting the argument on grounds of agency and fraud. They stated that there was nothing in the “companies’ act 1862” about whether the shareholders should not be anyway involved with the majority shareholder. He stated it was not the job of the judges to read into the statue limitations and for them to make a judgement on what was considered to be incorrect.
The House of Lords noted:
"Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not."
"The company is at law a different person altogether from the [shareholders] ...; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in the manner provided for by the Act” (1)
Since the Salomon case, many cases have had the corporate veil lifted by disregarding the companies separate legal entity, especially in cases where crime or fraud have been committed.
Some examples of when the veil has been lifted are as follows:
In the case of “Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd (1916)” the courts decided to lift the veil to reveal the nationality of the company. Shares in the English company were held by German people, and as it was during the First World War the courts were concerned about the enemy state.
In the case of “Gilford Motor Co Ltd v Horne (1933)”, again the veil was lifted as there were concerns over fraud and whether it a façade, they did not want the same thing to happen as per the “Salomon” case. Horne was the managing director the company, there was a clause in his contract that stated if he left he must not poach he customers. When Horne did leave he set up a company, to try and avoid this clause. The courts found this to be a fraud case as it was a misuse of company form.
In the case of “DHN Food Distributors Ltd v Tower Hamlets London Borough Council (1976)” the veil was lifted so a group a companies could be regarded as single economic unit. The company operating the business was the holding company and the premises owned by the subsidiary. Compensation for the disturbance of the business would only be payable if the business was operated on land owned by the company.
Lord Denning opinion on this case was:
“for all practical purposes the companies should be treated as one entity and consequently the payment for disturbance should be made to DHN” (2)
According to “Lord Denning” the separate legal identity of each company could be disregarded where the ownership of the subsidiaries were in the hands of the holding company.
In the case of “Smith, Stone & Knight v Birmingham Corporation (1939)”, the court decided to lift the veil on the grounds that the subsidiary company was in fact the agent. Smith, Stone & Knight incorporated a subsidiary company called Birmingham Waste Co Ltd. This company solely operated the waste paper business; however Smith, Stone & Knight never actually transferred the ownership to subsidiary, therefore still owning the land on which the business was run.
So even though there was no agency agreement set up between the holding and subsidiary company, in this case the holding company is liable for the actions of the subsidiary.
In the case of “Adams v Cape Industries plc (1991)”, the court of appeal took the opportunity to look at the way the corporate veil had been lifted in the past and how they could do so in the future.
The key issue here is whether Cape Industries could be subject to judgement under the US law. The claimant obtained a judgement against Cape industries; however as they had no assets left in the US the case was unable to be heard and therefore had to be heard under English law.
The court accepted that the purpose of the group structure set up had been used only to ensure that the limited liability would fall with a particular group and not the company held in England.
“The court held that:
"Whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law. ... in our judgement Cape was in law entitled to organise the group's affairs in that manner ..." (3)
The courts looked at whether the veil could be lifted on the grounds of façade, as per the case of “Gilford Motors v Horne”, the courts decided that Cape had not acted illegally, he had good reason for structuring his US business that way, and therefore the veil could not be lifted in this case.
They then looked at whether the veil could be lifted on the grounds a single economic unit as per the “DHN Food Distributors Ltd v Tower Hamlets LBC”, case. The courts decided that even though the companies’ structure was designed to minimise taxation, they had not actually done anything illegal, therefore could not be classed as a single economic unit. As a result they could not lift the veil.
The courts finally looked at whether the veil could be lifted on the grounds that Capes subsidiaries were in fact its agents, as per the case of “Smith, Stone & Knight v Birmingham Corporation”. The courts found that the subsidiaries were independent businesses and the parent company had no control over them. Again they were unable to lift the veil.
Even though the veil had been lifted in the above cases, when the courts looked at the “Adams V Cape Industries Plc” case they could not find any justification to lift the veil.
“Adams has significantly narrowed the ability of the courts to lift the veil of incorporation. Gone are the wild and crazy days when the Court of Appeal would lift the veil to achieve justice” (4)
In conclusion, although there has been many cases where the veil has been lifted, some of which are discussed above, The lifting of the veil has now been limited to cases involving “Enemy Corporation” as per the case of Daimler Co Ltd v Continental Tyre & Rubber Co” and if a company is found to be a façade as per the case of “Gilford Motors v Horne”
“The court cannot lift the corporate veil merely because it considers that justice requires it. Nor can it have regard to the economic reality, and regard a group of companies as a single entity.” (5)
I agree that the lifting of the veil is now limited as there are no known cases since the “Adams v Cape” of any it being lifted due to a single economic argument and an agency argument.
References:
- Company Law – Fundamental Principles – Steven Griffin
- Company Law – Alan Dignam & John Lowry
