Company Law

However, there are exceptions where the corporate veil could be lifted:

1.  Fraud/ Pretence: The courts have been prepared to lift the veil of incorporation where it is deemed that the company has been used as a ‘sham’ or ‘façade’ to hide another, dishonest purpose.

An example of Fraud is the Jones v Lipman [1962] case. Lipman contracted to sell a plot of land to Jones. He changed his mind and in order to avoid completion, conveyed the land to a company the he owned and controlled. Lipman claimed to be unable to complete the original sale on the basis that he no longer owned the land as it belonged to the company as a result of the transfer. The House of Lords decided that the company was a ‘sham’ or ‘façade’ to prevent having agreement to transfer the land.

Another case is Re Bugle Press there were three shareholders in Bugle Press Ltd. Two of these shareholders who each owned forty-five per cent of the shares wanted to buy out the owner of the remaining ten per cent of the shares. The two major shareholders formed a company with a share capital of £100, which then made a take-over bid for Bugle Press Ltd. The two major shareholders accepted this bid and then served notice on the third shareholder compelling him to sell his shares under the take-over procedures in the English Companies Act. The court held that this was ‘a bare-faced attempt’ by the majority shareholders to remove the minority through the formation of a company, and this device failed.

The take-over bid could not go ahead.

In our case Chablis Ltd. and Muscadet Ltd. are wholly owned Brandy’s plc. subsidiaries, which were operating for a long time. Therefore we cannot say that these subsidiaries were ‘façade’ for Brandy plc. So we think that Fraud exception is not relevant for our case.

2. Agency: An agent is person who acts on behalf on the principal. While the fundamental principle is that a company is an entity distinct from, and not the agent of, its shareholders, there are exceptions to the principle, namely: where, on the facts, an agency relationship does exist between a company and its shareholders and where the corporate structure is a mere façade concealing the true facts. There are couple of interesting cases where the corporate veil was lifted and was taken action against the parent companies.

In Smith, Stone & Knight Ltd v. Birmingham Corporation [1939], SSK a paper manufacturing company, acquired a waste paper business and registered it as a subsidiary company. The parent company had total control over the activities of the subsidiary company. When  the local authority exercised its powers of compulsory purchase to take the land occupied by the subsidiary company, the parent company claimed compensation for disruptive to its business. However, the council argued that the proper claimant was the subsidiary company, which was separate legal entity. The House of Lords decided that the subsidiary was operating as the agent of the claimant and therefore, the claimant was entitled to the compensation as it was real occupier of the land.

Similarly, in Firestone Tyre & Rubber Co Ltd v Lewellin [1957], an American company which operated through a wholly owned subsidiary in England was held liable to pay United Kingdom tax as the American company was carrying on business in the United Kingdom through the subsidiary.

Our case is very similar to Smith, Stone & Knight Ltd v. Birmingham Corporation [1939] and in order to recover creditor’s money we need to relate it in the court. In our case Brandy plc, which is the parent company had a complete control over its subsidiaries: Chabis Ltd and Muscadet Ltd. Therefore these two subsidiaries were operating as agents of Brandy plc. According to the Agency exception Chabis and Muscadet creditors need to seek their money from Brandy plc.

3. National Emergency- Is not related with our case because it can appear only in exceptional circumstances.

The court for example in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd (1916) lifted the veil to determine whether the company was an ‘enemy’ during the First World War. As the shareholders were German, the court determined that the company was indeed an ‘enemy’.

4. Justice - Lord Denning seemed to be on a crusade to encourage veil lifting.

An important case here is DHN Food Distributors Ltd v. Tower Hamlets [1976]. A parent company, DHN, ran its business through two wholly owned subsidiaries. Like Brandy plc. and its subsidiaries: Chabis Ltd and Muscadet Ltd. The directors and shareholders Of DHN were the same in all three companies. One subsidiary owned the premises, which were compulsorily purchased by Tower Hamlets to build houses on the land. Statutory compensation for the land value but refused to pay for disturbance of the business. They argued that the business was owned by the parent, DHN, and, therefore, the subsidiary had no business to disturb. DHN was allowed to claim the compensation as the three separate companies were treated as one group enterprise. To treat the companies as separate entities would have denied DHN the compensation on technical point. So Lord Denning decision was: “If justice requires it, we will not hesitate to pierce it we will not hesitate to pierce the corporate veil” and that ‘ 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… The three companies 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, DNH, should be treated as that one. So DHN are entitled to claim compensation accordingly.’ The veil pierced NOT because of the general application but common sense reasoning. The Lord Denning decision to treat the companies as ‘single economic entity’ was made because of some key factors such as:

• The degree of control from the parent company over its subsidiaries.
• The complete ownership of all the shares in the subsidiary company by the parent company.

In Woolfson v. Strathclyde Regional Council [1978] the House of Lords decision was different. Limited company ‘A’ carried on a retail business at a shop comprising five premises. Three of the premises were owned by Woolfson and the other two by another limited company ‘B’. When the premises were compulsory acquired by the local authority, both Woolfson and the company ‘B’ jointly sought compensation from the Lands Tribunal which held that they were not entitled to such compensation. However, the House of Lords ruled that Woolfson and its subsidiary were not a single economic unit.

We need to prove in the House of Lords that Brandy plc has a complete control over its subsidiaries. That should not be so difficult because Muscadet Ltd and Chabis Ltd are wholly owned subsidiaries, all profits made from the two subsidiaries have been paid directly to the parent company, the subsidiaries’ directors have been nominated by the parent company’s directors, all Chabis and Muscadet’s decisions were required first to be approved by the parent company and all overdrafts and other liabilities were guaranteed by Brandy plc. We need to prove that the subsidiaries are bound ‘hand and foot’ to the parent company.

 

Section 213 of the Insolvency Act 1986 and s 993 of the Companies Act 2006 and 214 are part are one of the permitted statutory exceptions in lifting the corporate veil.

• Section 213 talks about fraudulent trading. Sections 213-
  ‘(1) If in the course of winding up of a company it appears that any business of the company has been carried on with the intend to defraud creditors of the company or creditors of any other person or for any fraudulent purpose...then
  (2) The court on application of the liquidator may declare that person in who were knowingly parties to the carrying on of business in that manner are liable to make such contributions (if any) as the court thinks proper’

 One very essential case in the company law is Adams v. Cape Industries plc. The main defendant was an English registered company presiding over a group of companies whose business was in the mining, and marketing, of asbestos. The company had become the subject of a  lawsuit in the United States, and the company tried to avoid fighting the case in the American courts on jurisdictional grounds. The Plaintiffs obtained a judgment against the English company in the American courts, but as Cape had no assets left in the U.S., they then sought to enforce the judgment against the principal company in the group in the English courts. The court accepted that the purpose of the corporate group structure set up by Cape Industries had been used specifically to ensure that the legal liability of a particular group would fall upon the particular group and not the defendant company in England. So the motive of the defendant is a significant element for the court to consider.

Like we already said when we talked about Fraud exception, Chamlis and Muscadet were not a façade for Brandy plc. Therefore we think that Section 213 is not relevant to our case.

 

• Wrongful trading is dealt with in section 214 of the insolvency act and has similar provisions to section 213.However this section operates only in cases of insolvent liquidation and the declaration can be made only against a person who at some time before the commencement of winding up, was a director of the company and knew or ought to have concluded at that time that there was no reasonable prospect that the company would avoid going into liquidation.

The first reported case was Re Produce Marketing Consortium Ltd; the company was operating in the fruit importing business. From a relatively healthy position of solvency the company gradually drifted into a position of insolvency with losses. The business was run by two directors, their remuneration for the last three years were around £20,000 per annum. For various reasons it was held that they should have put the company into creditors’ voluntary liquidation earlier than they did and were jointly ordered to pay liquidator £75,000. So if you have evidence that Brandy plc. knew that its subsidiaries will go bankrupt then we can mention Section 214. Anyway from our case study we can see that Brandy plc. made substantial loans to Muscadet LTd. and Chablis Ltd., too and we cannot really predict poor harvest. Therefore we do not think that Section 214 is relevant.

REFERENCE:

1. Mortimer, T. & Byrne S., 2009. Company Law. Great Britain: Pearson Education Limited.
2. Taylor, C., 2009.Company Law. China: Pearson Education Limitation 2009.
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