Argue for or against the proposition that, in the context of wealthy and powerful transnational corporations, it is inappropriate to assume that each company in a group is a separate legal person.

In Jones v Lipman the veil was lifted on the basis that the company was a sham incorporated solely for the purpose of defeating Jones’ right to the land.  This was also the case in Gilford Motor v Horne where the veil was lifted when the company was found to be a sham to enable Horne to evade his legal obligations.  

Agency

It has been argued that in some circumstances a subsidiary company can be an agent of its holding company.  The issue is usually over whether an agency relationship can be inferred, as the presence of an agency relationship is consistent with the principle of separate legal personality.

Smith, Stone & Knight v Birmingham  The court laid down guidelines to establish whether an agency relationship could be implied in the form of six tests:  

1) Were the profits treated as profits of the parent company?

2) Were the persons conducting the business appointed by the parent company?

3) Was the company the head and brain of the trading venture?

4) Did the company govern the venture, decide what should be done and what capital should be embarked on the venture?

5) Did the company make the profits by its skill and direction?

6) Was the company in effectual and constant control?

It was held that, in this case, it was possible for a company to carry on business as an agent for its shareholders.  

In Creaseyit was held that, in the interest of justice, the veil should be lifted.  However, this was overruled by Ord where it was stated that the veil should only be lifted where the corporate form is used for manifestly fraudulent purposes.

Statutory exceptions

Under statute fraudulent and wrongful trading are the main exceptions to the Salomon principle of separate legal personality.

Fraudulent trading

This can be construed as both a civil and criminal offence.  It must be established that the trading was done with intent to defraud.  “Any persons who were knowingly parties to the carrying on of the business” should have acted both unreasonably and dishonestly. 

In Re Patrick Lyon Ltd this was extended to “actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame”.  Mere preference to repay one creditor over another is not enough to establish intent. 

Wrongful trading 

This occurs where Directors continue to trade when the company is known to be insolvent.  An application can only be made if a company has gone into insolvent liquidation.  A double test was developed and then verified in Re Produce Marketing Consortium (No 2):

A Director of a company ought to reach the same conclusions of a diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has.

Other jurisdictions

The USA approach to separate legal personality is not consistent with that of the UK.  It is believed that multinationals have deep pockets and so, where justice and fairness requires it, they should deepen their pockets and give more money.  

There is some similarity with the English approach in that the veil will be lifted where companies are being used fraudulently.  This can be shown in US v Milwaukee Refrigerator Transit Co- “Where the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons.”

 

Adams v Cape- provides an example of the application of the Salomon principle.  Several hundred employees of the group headed by Cape Industries had been awarded damages for injuries received as a result of exposure to asbestos dust.  The injuries had been received in the course of their employment.  The damages had been awarded in a Texan court.  The English Court of Appeal held that the awards could not be enforced against Cape even though one of the defendant’s was a subsidiary of Cape and there was evidence that the group had been restructured so as to avoid liability.

The courts consistently repeat the finding in Cape that the veil cannot be lifted ‘simply because the consequences of not doing so are unfair or even absurd’.  Also, where companies are insolvent, the separate legal existence of each company within the group becomes more, not less important. 

German law takes a different approach to English law.  The law on groups is governed by statute.  The Konzernrecht, which was used to develop the model on the draft EC Ninth Directive on Company Law, is used and makes a distinction between contractual and de facto groups of companies.  The subsidiary companies are encouraged to act in the interests of the group of companies as a whole, even if this is in contradiction with their own.

 

Conclusion

There is significant confusion surrounding the concept of separate legal personality.  Mitchell stated in his article that it is not possible to predict the outcome of cases on the issue of separate legal personality by using the precedent of previous cases.  This is a strong indication that the law is unclear on the matter.  However, his findings can not be relied upon without taking into consideration the fact that he came to this conclusion using a very small sample of only 400 UK companies.

The courts have been faithful to Salomon but, as illustrated in the case law, have also tried to find alternative routes in order to help companies recover some money.  It could be considered that to give each branch of a transnational corporation a separate legal personality would be effective in that it enables the parent company to avoid liability for its members.  However, the prevention of separate legal personalities within a group could enable stronger internal control throughout the companies.  

 

It can therefore be concluded that the common law is quite unclear on the issue of separate legal personality.

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