There are four ways in which corporate veil can be lifted.
Analysis
Even if there is much effort in trying to explain courts’ decision on when the courts will lift the corporate veil, none however are satisfactory. It remains true that it is very difficult to predict whether the courts will lift the veil. Perhaps, the most accurate assumption on this is that sometimes the court will lift the veil and sometimes it refuses to.
Timeline
From 1897(the year where decision for Salomon was passed) until 1966, it is known as the ‘classical veil lifting’ period. The principle of separate personality set out in Salomon was dominating. Limited liability stays intact with companies.
It is submitted that the House of Lords could not overrule its own previous decision during that time. This was set out in London Street Tramways v London County Council and this restraint veil lifting.
However, there are still cases where the courts had lifted the veil. For example, in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd, Gilford Motor Co Ltd v Horne, Jones v Lipman and Re Bugle Press, courts had lifted the corporate veil. Pre- 1960s, courts had lifted the veil in 54.76% of cases.
It is suggested that such situation occurs because judicial discretion allows court to disregard the limited liability principle where there’s injustice. Although HOL’s decisions are binding, results clearly shown that it is not ready to stand by when injustice is the result. Even in Salomon itself, judgments have indicated that there are exceptions to the limited liability concept.
Next, from 1966 until 1989, is ‘the interventionist years’. During this period, courts seemed to be more willing in lifting the corporate veil. Lord Denning was on a crusade to encourage veil lifting. In his judgment for Littlewoods Mail Order Stores Ltd v IRC and DHN Food Distributors Ltd v Tower Hamlets, clearly showed his passion for lifting. In 1970s, statistic result shown that courts had lifted the corporate veil in 56.67% of the cases. This is the highest reading so far.
This is due to the introduction of Practice Statement in 1966 where House of Lords can depart from previous decision when it ‘appeared right to do so’. Thus, by invoking Practice Statement, veil of incorporation can be lifted.
However after two years decision for DHN was passed, House of Lords had a completely different legal response for limited liability. The tergiversation means that companies and its members enjoy limited liability. Woolfson v Strathclyde Regional Council laid down that the veil of incorporation would be upheld unless it was a façade. By late 1980 after the Court of Appeal gave its judgment in National Dock Labour Board v Pinn and Wheeler Ltd, legal responses moved firmly against lifting the veil.
Analysis drawn for such movement is that the courts might now realise that lifting the veil can have negative impacts on the other aspects of the law. For example, director’s duty to the company as a whole and taxation principle might be disturb.
Lastly, legal responses from 1989 to present are such that the Court will go to any length to avoid any obvious penetration of the corporate veil. This can be seen in Adams v Cape Industries Plc.
It is recommended that, reasons for the courts to allow such restrictive approach in Adams to survive is unclear. But, what is obvious is that where members have deliberately arranged their affairs to avoid liability will not be find guilty, seem difficult to correlate with equitable principles of justice.
Veil Lifting by Categories
The “Single Economic Unit” Argument
Can separate personality of companies in a group of companies be ignored? On one hand, The Albazero thought that each company in a group is a separate entity. On the other, DHN treat companies in a group as one. D.H.N. Food Distributors Ltd claimed compensation for disturbance to its business owing to a compulsory purchase of land. The land however belonged to, Bronze Investment Ltd., it’s wholly owned subsidiary company. It was contended that no compensation for disturbance was payable because D.H.N., had no interest in the land. The court of Appeal however upheld D.H.N’s claim by lifting the veil of incorporation. D.H.N entitled for compensation.
Beside the introduction of Practice Statement mentioned above, it is suggested that the reason the Court of Appeal had lifted the corporate veil in DHN, is due to the case of Harold Holdsworth & Co. (Wakefield) Ltd. v Caddies. Lord Denning describe that case as a “striking instance of the tendency to ignore the separate legal entities of various company within a group”. Next reason would be the prevention of injustice argument. His lordship held that the companies should not be defeated on a “technical point”.
But after DHN, there’s one whole strands of authority, which show that companies in a group are rather separate from one another. The leading case, which shows this situation, is Woolfson. Here, the House of Lords refuse to accept that the parent and subsidiary company are one entity. Besides, Multinational Gas and Petrochemical Co. v Multinational Gas and Petrochemical Services Ltd and Others had also cast further doubt on DHN.
As a result of studies and analysis, it was found that there are many reasons on why the courts retreat from DHN. Firstly, there are too many doubts on why Lord Denning allowed the veil to be lifted. He held that Professor Gower in Modern Company Law, 3rd ed. (1969), at pg. 216 says: “there is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead at the economic entity of the whole group.” However, if read closely, what Gower meant was a conclusion, which might ‘perhaps’ be drawn, and nowhere in the book suggested that separate personality of companies should be disregarded. The reason Lord Denning gave in Harold was also found to be defective. In Harold, his Lordships merely agreed that the appellant company owned all the shares in its subsidiary company. Judges in that case had never suggested that separate personae of the parent companies and the subsidiary could be ignore. Secondly, perhaps judgment in other countries which shown great reluctant in lifting veil when involving group enterprise, resulted fear in lifting too. For example, The High Court of Australia in Industrial Equity Limited and Others v Blackburn and Others had cast doubts on DHN. Decisions of courts in other commonwealth countries are always persuasive precedent for England courts. Lastly, it is submitted that there will not be injustice for upholding the Salomon principle. The parties who come before the courts to challenge this principle are those who had full knowledge of the consequences of a corporate personality. Thus, by agreeing to deal with such companies, they are accepting those consequences.
Facade, Sham or Fraud
When a company is incorporated to conceal the true facts, the company will be known as a ‘sham’. Courts are normally prepared to examine beyond the facade in order to prevent one from evading legal obligations. In Gilford, Mr. Horn, the managing director entered into a covenant not to solicit Gilford Motors’ customers. However, after he left, he formed a company to do so. Court held that Horn’s company is a sham to cloak his own wrongdoings and to avoid his legal obligations. Hence, the injunction to restraint Mr. Horn from enticing away the claimant’s customer was extended to the company as well. Again, in Jones v Lipman, court said that the company was a “sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.”
As noted, courts are willing to disregard the veil when a company is use as a ‘sham’ to prevent injustice. Analysis drawn is that courts demonstrate no reluctance in setting aside the separate personality principle when injustice would be the result. When it is appropriate, courts never hesitates to do what they need to do to achieve justice. Even in Woolfson, where the House of Lords had been so unwilling to lift the veil, had stated that it is appropriate to pierce the corporate veil when there are façade.
The Agency Argument
In Salomon itself, it had been decided that if a company is acting as an agent, veil of incorporation could be lifted on the basis that the principal will be responsible for all agents’ action. However, it is very difficult to find that such relationship actually exists. This exception can be illustrated in Smith, Stone and Knight Ltd v Birmingham Corporation. An authority compulsorily acquired premises occupied by Birmingham Waste Co, a wholly owned subsidiary company of Smith, Stone and Knight Ltd. The parent company needs to prove that the subsidiary is acting as an agent in order for it to succeed in claiming for disturbance of business. Atkinson J found that the subsidiary was indeed acting as an agent for the parent company. Hence, parent company entitle to both the value of the land and disturbance of business. In Firestone Tyre and Rubber Co Ltd v Lewellin agency was once again the trigger for lifting the veil where a British company manufacturing tyres for an American holding company was held to be its agent.
It is submitted that one of the reasons why the courts had been less reluctant to lift the veil when there’s an agency relationship is that the courts are merely applying the rule of agency rather than piercing the corporate veil. According to the agency principles, a principal will be responsible in full for his agent’s actions. Next reason is found in Lord Denning’s words in Wallersteiner v Moir (No.1) where Lord Denning had put an equal sign in between of puppets and agents. It is suggested that agents have no say at all and are bound hand and foot by the principal. Hence, it is just that the principals will be responsible for their actions, since they are exercising full control over them.
Interest of Justice
There were times when the courts specifically stated that lifting is for prevention of injustice. For example, in Re a Company, it was held that “the court will use its power to pierce the corporate veil if it is necessary to achieve justice.” However, since Adams, courts are not free to displaced limited liability principle jus because it is in the interest of justice.
It is recommended that this is the situation because courts are not ready to disregard limited liability unless there is very clear evidence of injustice. Besides, it might be that courts are now more concerned about the economy. What it wishes to achieve is to provide the public with a sense of certainty that limited liability will not simply be displaced. If this is successful, there will have more members from the public that are willing to invest by taking comfort that they will enjoy limited liability. Lastly, the courts had allowed Adams to survive in order to prevent the ‘floodgates’ of litigation. If courts had shown willingness to lift the veil of incorporation, there will have inculpable, unmeritous cases coming before the courts claiming to lift the veil. Thus, it is submitted that in order to prevent this, courts decided to take the stricter approach.
Other Legal responses
Other than legal responses discuss above, courts are also more reluctant to lift corporate veil when numbers of shareholders in a company increases. It is recommended that the smaller the number of shareholders, the higher the chance that a company is acting as a ‘puppet’ for the members.
To lift the veil of a public company is also much more difficult than lifting the veil of a private company. This can be justified by economic explanations of limited liability. As explained, limited liability will reduce monitoring cost of the Board of Directors of a company. This argument is more relevant to a public company, which consist of a wide range of small shareholders. The importance of limited liability to ensure the operation of public share market is also more relevant to a public company.
Next, courts had been most unwilling to lift corporate veil for tortious claim. Courts only lifted corporate veil in 27.78% of cases for tortious claim compare to 42.86% for contractual claims and 55.56% for criminal claims. It is suggested that this should not be the situation. Courts should be more prepare to lift the veil for tort cases as the victim of negligent act, for example, has no choice as to which corporation had harm them while a contracting parties enter into contract knowing the consequences of limited liability.
IS THE RELUCTANCE OF THE UNITED KIGDOM COURTS TO LIFT THE CORPORATE VEIL HEALTHY?
On one hand, it can be argue that the reluctance to lift corporate veil is most healthy. Firstly, this is because of the economy argument mentioned. When the public have confident that they will enjoy limited liability throughout, they will be much more willing to invest and economy will grow. Parent companies too can take comfort that they can reduce risk by setting up subsidiaries. Secondly, the discussed ‘floodgates’ argument ensures that cases, which come before the court, are claims that are worth considering. Thirdly, other commonwealth countries had also shown much confusion as to when to lift the corporate veil. But recently, they too are moving towards rigidity when considering lifting. For example, Australia court had criticised veil lifting through the case of Tate v Freecorns Property Ltd. Australia had only lifted 24% of its cases compared to 47% in the UK. In New Zealand, in Savill v Chase Holdings (Wellington) Ltd held that veil will not simply be lifted because the operations of a parent and a subsidiary company over lapses. Hence, with support from other commonwealth countries UK’s reluctance to lift the corporate veil is considered as healthy.
On the other hand, it is also true that the reluctance possess, is not healthy. Firstly, can courts achieve justice if it is so reluctant to lift the corporate veil even when justice requires it to do so? In Adams, it is arguable whether the Court of Appeal did justice when it refused to lift the veil even when the British parent company was exercising full and extensive control over the United States subsidiary company. Now, courts cannot merely lift the veil because of interest of justice. If that also a court cannot do, where exactly justice lies? Secondly, the reluctance is also not healthy due to the willingness of United States to lift corporate veil. For example, in Swanson v Levy, US made it easier to establish an agency relationship. It is submitted that US, as the strongest country will not stray too far from the correct thing to do. Hence, it is left with the question- is UK’s reluctance really healthy in the light of the US’s position?
After analysis, it is suggested that the reluctant of the court is actually healthy. It is untrue to say that courts refuses to lift the veil at all, it merely made it stricter. When circumstances are appropriate, such as when there’s fraud or very clear injustice, veil will still be lifted. Thus, reforms are needed in order for the courts to have a better way to deal with such reluctance of lifting corporate veil. One reform could be that, application of the six criteria set out in Smith to determine whether one is another’s agent, is restricted to those cases where their facts are identical. Hence, when facts differ from Smith, hopes of lifting are not high. Secondly, it is about time that the courts should draw a very clear line on what amounts to a “sham” or a “façade”. With that, only cases within these definitions will be allow in succeeding.
CONCLUSION
In the most recent case of Newton Sealy v Armorgroup, which came before the High Court this year in order to lift the corporate veil, courts had confirmed its reluctance to lift. Thus, the current legal response of the court is very clear. In the near future, it is predicted that unless there’s exceptional circumstances, court will stick close with the principles set down by Salomon.
BIBLIOGRAPHY
BOOKS
Alan Dignam and John Lowry, “Company Law,” (5th edition, 2008 ), Oxford University Press.
Mayson, W.S, Derek French and Christopher L. Ryan, “Company Law,” (25th Edition, 2008), Oxford University Press.
Paul L. Davis, “Principles of Modern Company Law,” (8th edition, 2008), Thomson, Sweet & Maxwell.
INTERNET SOURCES
Anusuya Sadhu, “Lifting the Corporate Veil”, 18th November 2008, <http://www.legalserviceindia.com/articles/corporate.htm>.
George Draffan , “Quotes about Corporation”, 19th November 2008, <http://www.endgame.org/primer-quotes.html>.
ARTICLES
Charles Mitchell, “Lifting the Corporate Veil: An Empirical Study” (1999) 3 CFILR 15.
H. Hansmann and R. Kraakman, “The Essential Role of Organizational Law” (2000) 110 Yale L.J. 387.
H. Hansmann and R. Kraakman, “Towards Unlimited Shareholder Liability for Corporate Torts” (1991) 100 Yale LJ 1879.
Lynn Gallagher and Peter Ziegler, “Lifting the Corporate Veil in the Pursuit of Justice,” (1990) JBL 292.
S. Ottolenghi, “From Peeping Behind the Corporate Veil to Ignoring it Completely” [1990] 53 MLR 338.
George Draffan, “Quotes about Corporation”, 19th November 2008, <http://www.endgame.org/primer-quotes.html>.
Anusuya Sadhu, “Lifting the Corporate Veil”, 18th November 2008, <http://www.legalserviceindia.com/articles/corporate.htm>.
Anusuya Sadhu, “Lifting the Corporate Veil”, 18th November 2008, <http://www.legalserviceindia.com/articles/corporate.htm>.
Salomon v A Salomon and Co Ltd [1897] A.C. 22.
Mr. Salomon was the major shareholder in the company as he holds 20,001 of the company’s 20,007 shares. He had sold his business to the corporation for more than £39,000 of which £10,000 was a debt to him in the form of a series of debentures, which gave him a floating charge on the company’s assets.
The members of ‘A Salomon and Co. Ltd’ are Mr. Salomon himself, his wife, and five of his children. The Companies Act 1862 at that time required a minimum of 7 members to form an incorporated company. It was obvious that this arrangement of Mr. Salomon’s family members as shareholders was simply to allow the incorporation requirements to be fulfilled.
This mean that the liquidator argued that Mr. Salomon should be made to pay all the debts of the company and not taking money from it, just like what he would have do as a sole proprietor.
The House of Lords rejected both approaches. As to the first instance decision, Lord Herscell said that: “A. Salomon… is not another name for the same person; the company is ex hypothesi a distinct legal persona. As little am I able to adopt the view that the company was the agent of Salomon to carry on his business for him. In a popular sense, a company may in every case be said to carry on business for and on behalf of its shareholder; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholder liable to indemnify the company against the debts within it iccurs”
As to the decision in Court of Appeal, the House of Lords pointed out that Mr. Salomon’s action had not been prohibited by the Act.
Mayson, W.S, Derek French and Christopher L. Ryan, “Company Law,” (25th Edition, 2008), Oxford University Press, 119-120.
Paul L. Davis, “Principles of Modern Company Law,” (8th edition, 2008), Thomson, Sweet & Maxwell, 37- 40.
Mayson, W.S, Derek French and Christopher L. Ryan, “Company Law,” (25th Edition, 2008), Oxford University Press, 120.
Paul L. Davis, “Principles of Modern Company Law,” (8th edition, 2008), Thomson, Sweet & Maxwell, 194.
H. Hansmann and R. Kraakman, “The Essential Role of Organizational Law” (2000) 110 Yale L.J. 387.
Alan Dignam and John Lowry, “Company Law,” (5th edition, 2008 ), Oxford University Press, 47.
Paul L. Davis, “Principles of Modern Company Law,” (8th edition, 2008), Thomson, Sweet & Maxwell, 194-195.
H. Hansmann and R. Kraakman, “The Essential Role of Organizational Law” (2000) 110 Yale L.J. 387.
Ibid. There are two forms asset partitioning. Namely, “affirmative” asset partitioning and “defensive” asset partitioning. The former is where corporation’s creditors have first claim on the corporation’s assets where creditor’s claim must be satisfy first. Besides, member’s personal creditors have no claim towards company’s assets. The latter, in turn, is found in the rule of limited liability that bars the corporation’s creditors to have any interest on the shareholder’s personal assets.
H. Hansmann and R. Kraakman, “The Essential Role of Organizational Law” (2000) 110 Yale L.J. 387.
S. Ottolenghi, “From Peeping Behind the Corporate Veil to Ignoring it Completely” [1990] 53 MLR 338. Ways of lifting a veil: Firstly, ‘peeping behind the veil’ where the veil is lifted to get information of the members. Next, ‘penetrating the veil’ where the courts disregard the veil and imposes responsibility on the members for the company’s acts. Thirdly, ‘extending the veil’ where a group of companies is treated as one legal entity and lastly, ‘ignoring the veil’ where the veil of incorporation is completely ignore by the courts.
Charles Mitchell, “Lifting the Corporate Veil: An Empirical Study” (1999) 3 CFILR 15.
Salomon v A Salomon and Co Ltd [1897] A.C. 22.
Alan Dignam and John Lowry, “Company Law,” (5th edition, 2008 ), Oxford University Press, 35.
Salomon v A Salomon and Co Ltd [1897] A.C. 22.
[1898] A.C. 375. This case held that certainty in law was more important than the possibility of individual hardship being caused through having followed a past decision.
[1916] 2 A.C. 307. In this case, the House of Lords had peeped behind the veil to determine whether the defendant company which comprise of German directors and shareholder can be regard as an ‘enemy’ during the First World War.
Charles Mitchell, “Lifting the Corporate Veil: An Empirical Study” (1999) 3 CFILR 15. This shows that courts had been lifting the veil quite often despite the fact that it is suppose to follow strictly Salomon’s principle.
Salomon v A Salomon and Co Ltd [1897] A.C. 22.
Lynn Gallagher and Peter Ziegler, “Lifting the Corporate Veil in the Pursuit of Justice,” (1990) JBL 292.
Alan Dignam and John Lowry, “Company Law,” (5th edition, 2008 ), Oxford University Press, 35- 36.
[1969] 1 W.L.R. 1241. per Lord Denning at pg. 1254, “cast a veil over the personality of a limited company through which the courts cannot see. The courts… can and often do, pull off the mask. They look to see what really lies behind”
[1976] 1 W.L.R. 852. per Lord Denning M.R. at pg. 860, “We all know that in many respects a group of companies are treated together for the purpose of general accounts, balance sheet, and profit and loss account. They are treated as one concern.”
Charles Mitchell, “Lifting the Corporate Veil: An Empirical Study” (1999) 3 CFILR 15.
DHN Food Distributors Ltd v Tower Hamlets [1976] 1 W.L.R. 852.
[1977] AC 774. per Roskill LJ at pg.807, “long established and now unchallengeable by judicial decision… that each company in a group of companies… is a separate entity…”
DHN Food Distributors Ltd v Tower Hamlets [1976] 1 W.L.R. 852.
[1976] 1 W.L.R. 852 per Lord Denning at pg 860: “These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says… This group is virtually the same as a partnership in which all the three companies are partners. They should not be treated separately so as to be defeated on a technical point. They should not be deprived of the compensation which should justly be payable for disturbance. The three companies should, for present purposes, be treated as one, and the parent company. DHN, should be treated as that one. So DHN are entitled to claim compensation accordingly.”
[1976] 1 W.L.R. 852, 860.
Woolfson v Strathclyde Regional Council 1978 S.C. (H.L.) 90.
Id, The appellants, Solomon Woolfson and Solfred Holdings Limited, were the owners of five adjacent premises, forming a business run by M & L Campbell (Glasglow) Ltd. The premises occupied by the M & L Campbell had been compulsorily acquired by the respondents. Woolfson, Solfred and Glasglow Corporation jointly claimed for compensation for the value of land and disturbance of business of M & L Campbell relying on DHN. House of Lords dismiss the appeal because there’s no evidence to prove that Woolfson is the true owner of Campbell. Lord Keith at pg 96 said, “no basis consonant with principle upon which on the facts of this case the corporate veil can be pierced to the effect of holding Woolfson to be the true owner of Campbell’s business or of the assets of Solfred”.
Ibid, per Lawton L.J. at 269, “ Multinational is at law a different legal person from the subscribing oil company shareholders and was not their agent.”
Harold Holdsworth & Co. (Wakefield) Ltd. v Caddies [1955] 1 W.L.R 352.
Id. Per Mason J at pg. 577, “modern requirements as to consolidated or group accounts argument, which Lord Denning had raised, can scarcely be contended [to] operate to deny the separate legal personality of each company in a group.”
Gilford Motor Co Ltd v Horn [1933] Ch. 935, CA.
[1962] 1 W.L.R. 832. Lipman had agreed to sell land to Jones. But, before the sale could be finalised, Lipman changed his mind. In order to avoid any obligations, Lipman transfer the land to a company where he and a nominee were the sole members. Court ordered specific performance of the contract of sale against both Lipman and the company by lifting the veil of corporation.
Woolfson v Strathclyde Regional Council 1978 S.C. (H.L.) 90.
Ibid. per Lord Keith at pg. 96, “special circumstances exist indicating that [it] is a mere facade concealing the true facts”.
Lynn Gallagher and Peter Ziegler, “Lifting the Corporate Veil in the Pursuit of Justice,” (1990) JBL 292.
For example, as established in Garnac Grain Co Inc. v H M F Faure and Fairclough Ltd, there must have consent from both party, hence, being a member of a company does not make him a principal of the company. Besides, the fact that one company is a subsidiary of its parent company does not make it an agent of its parent company.
This is because ownership of the land was never transfer to the subsidiary and the waste paper business was the business of the parent company.
[1974] 3 All ER 217. per Lord Denning at pg. 238. “ Even so, I am quite clear that they were just the puppets of Dr. Wallersteiner. He controlled their every movement. Each danced to his bidding…Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil….”
There is no obvious pattern on when the courts will lift the veil of incorporation. All the courts were trying to do was to achieve justice in every case. Hence, it is suggested that one should not even start categorising circumstances when the veil will be lifted. This is because as a result of analysis, categories proposed as the reason for lifting can be cleanly fall into one category- the interest of justice.
Adams v Cape Industries Plc [1990] Ch. 433.
Ibid. 536, “the court is not free to disregard the principle of Salomon v A Salomon and Co Ltd merely because it considers that justice so requires.”
Charles Mitchell, “Lifting the Corporate Veil: An Empirical Study” (1999) 3 CFILR 15.
H. Hansmann and R. Kraakman, “Towards Unlimited Shareholder Liability for Corporate Torts” (1991) 100 Yale LJ 1879.
Charles Mitchell, “Lifting the Corporate Veil: An Empirical Study” (1999) 3 CFILR 15.
[1972] WAR 204. In this case, court had refused to pierce veil merely because a parent company had control over its subsidiary
Charles Mitchell, “Lifting the Corporate Veil: An Empirical Study” (1999) 3 CFILR 15.
Adams v Cape Industries Plc. [1990] Ch. 433.
H. Hansmann and R. Kraakman, “The Essential Role of Organizational Law” (2000) 110 Yale L.J. 387.
Smith, Stone and Knight Ltd v Birmingham Corporation. [1939] 4 All E.R. 116.
Salomon v A Salomon and Co Ltd [1897] A.C. 22.