The principle pf separate legal personality has been confirmed by more recent cases. For example, Lee v Lee’s Air farming Ltd 1960. The husband (Mr. Lee) of the plaintiff was the controlling shareholder and director of a company formed by him. He was also employed by the company as a pilot. The company had employer's liability insurance. He was killed in an accident when flying a company plane on company business and his wife claimed compensation from the company (effectively claiming from the insurers). Her claim was successful. It was held that Lee and the company had separate legal personalities and the deceased could, as director, enter into a contract on behalf of the company between the company and himself as an employee.
A company is distinct as a separate legal person from its members, so members have limited liability and do not have to pay the debts of the company. This fact that members are ‘hidden’ in this way is referred to as the ‘veil of incorporation’. Literally, the members are ‘veiled’ from view.
It is sometimes necessary by law to look at who the owners of a company are. This referred to as lifting the veil. It can be done by identifying the company with its members and directors or treating a group of companies as a single commercial entity (if the company is owned by another company). The main instances for lifting the veil are:
The lifting of the veil in times of national emergency; for example, Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd (1916) After war broke out with Germany, the tyre company, which was registered in England and had its registered office there, sued Daimler for the cost of goods supplied before war broke out. Daimler claimed that, as the members and officers of the company were German, paying the debt would amount to trading with the enemy, therefore the matter should not be permitted to go to trial. Held: The action should not go to trial. Though the domicile and nationality of a company is normally determined by its place of registration and the situation of its registered office, the court was prepared to lift the corporate veil to determine who was in control of the company. If the company was controlled by enemy aliens, the company could also be regarded as an enemy alien.
Lifting the veil in fraud or facade cases; a company may be identified with those who control it to determine its residence for tax purposes or to determine it real nationality.
The case Unit Construction Co Ltd v Bullock 1960 is an example of taxation by residence. There are three companies, wholly owned by a UK company, were registered in Kenya. Although the companies’ constitutions required board meetings to be held in Kenya, all three were in fact managed entirely by the holding company. However, the companies were resident in the UK and liable to UK tax. The Kenyan connection was a sham, the question being not where they ought to have been managed, but where they were managed.
The question of nationality may also arise in peacetime, where it is convenient for a foreign entity to have a British façade on its operations. Re F G Films Ltd 1953: an English company was formed by an American company to ‘make’ a film which would obtain certain marketing and other advantages from being called a British film. Staff and finance were American and there were neither premise nor employees in England; the film itself was produced in India. Here the British company was the American company’s agent and so the film did not qualify as British. Effectively, the corporate entity of British company was swept away and it was exposed as a ‘sham’ company.
The veil may also lift where the members use the veil to evade their legal obligations by creating sham companies.
Gilford Motor Co v Horne (1933)
Horne had been employed by Gilford Motor Company under a contract in which he undertook not to compete with the company. He tried to evade the covenant by getting his wife to set up a company. All the shares in the company were held by Horne's wife and an employee. The new company then carried on business in competition with Horne's employer. The court was prepared to look behind the corporate identity and issued an injunction to prevent the company trading in competition with Gilford Motor Co. Lord Hanworth said: "I am quite satisfied that this company was formed as a device, a stratagem, in order to mask the effective carrying on of a business by Mr. E B Horne.
In each of these cases the veil was lifted to identify a company with its members. It can also be raised so as eliminate the distinction between companies, that is to treat groups as a single entity. In Firestone Tyre and Rubber Co v Lewellin (1957), for instance, the veil was lifted to reveal a subsidiary acting as an agent of its holding company. Under the Companies Act, groups have to prepare consolidated accounts: s 229. However the case of Adams v Cape Industries (1990) stressed that the distinction would be eliminated only in limited circumstances. In this case, tree reasons ere put forward to identifying the companies as one, and lifted the veil of incorporation. They are:
- The subsidiary is acting as agent for the holding company
- The group is to be treated as a single economic entity.
- The corporate structure is being used as a facade (or sham) to conceal the truth.
Adams v Cape Industries Ltd (1990)
Cape was an English company which mined asbestos in South Africa. Products were marketed in the USA through a complex range of subsidiaries. Factory workers in Texas who had contracted illnesses through exposure to asbestos dust obtained judgment in Texas against the holding company, Cape. They sought to have the judgment enforced against Cape in England, arguing that Cape had been present, through its subsidiaries, in the USA. Three arguments were put forward:
- The agency argument - that the subsidiaries were mere agents making contracts for their principal, Cape.
- The single economic unit argument - that Cape and its subsidiaries were really one economic unit, and
- The "facade" argument - that the separate identities of the subsidiaries were merely a facade concealing the true facts.
All of the arguments failed. The court stated that: "Save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v A Salomon & Co merely because it considers that justice so requires.
Statute also provides other instances of the lifting of the veil.
- Insolvency can lead to director and other offices becoming personally liable for a company’s debts, if they engage in fraudulent or wrongful trading: s213-214 Insolvency Act 1986.
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Generally a company’s name distinguished it and it must be correctly and completely displayed on documents: s349. Failure to do so can lead to the individual who signs a cheque bearing and incorrect name becoming personally liable. For example: Penrose v Martyr 1858
- If a pubic company enters into a reading transaction in contravention of the provisions which require it to obtain a certificate before doing business, the directors of the company are jointly and severally liable to any third party injured in consequence of such breach: s117-8.
- If a public company carries on a business without having at least two members and doses so for more than six moths, anyone who is a member of the company and knows that it is carrying on business with only one member, may be jointly and severally liable with the company for debts contracted by the company during the time the was a member of the company: s24.
The veil of incorporation has been considered in Trustor AB v Smallbone (2001). The significance in this case lies in the way counsel for the claimant invited the Court of Appeal to lay down rules as to when the veil of incorporation may be lifted.
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.
Trustor AB, the claimant company, sought to obtain the lifting of the veil of incorporation of Introcrom Ltd under three headings:
- the company was a sham with no unconnected third party involved
- the company was involved in the impropriety
- It was necessary that the veil should be lifted in the interests of justice.
The Court of Appeal was content to lift the corporate veil on the first two grounds but not the third. It was stated that there was no general power to lift the corporate veil simply because it was necessary in the interests of justice.
Again the case of Adams v Cape Industries plc was cited with approval. The veil should not be lifted merely because legal technicalities resulted in injustice.
The court will sometimes reject the people who run the company the advantage of hiding behind the corporate veil. The instances are however, difficult to predict as the reasons depend on the judges interpretation of fairness or policy or of how a particular statute should be interpreted. It is probably fair to say that the courts will not lift the veil to impose liability on a shareholder for the company’s debts and the lifting of the veil must under conditions (like what we discuss above).
References:
Handouts from Lecturer Mary
Mayson French and Ryan on Company Law 19th Edit.
Mike Griffiths discusses lifting the corporate veil
Janet Dine on Company Law 1991
