The company went into liquidation and the liquidator argued that the debentures that Salomon used as security for the debt were invalid, and said they were on the grounds of fraud. This argument was accepted by the judge Vaughan Williams J. saying that since Salomon had created the company just to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors.
Salomon didn’t agree with the decision and decided to appeal in The Court of Appeal which also ruled against Mr. Salomon, but this time on the grounds that Salomon had abused the privileges of incorporation and limited liability, The lord justices of appeal described the company as a myth and said that this is a scheme which Salomon done in order to carry on with the business as before with limited liability.
Salomon still didn’t agree with the decision of The Court of Appeal and decided to appeal in the House of Lords. This time it was different though as the House of Lords overturned the appeal, rejecting the arguments brought forward by the lower courts relating to agency and fraud, and said that the companies act 1862 created limited liability companies as a legal person that is separate from the shareholders. It concluded with Salomon winning the case and wasn’t required to pay of any debts incurred by the company.
The Salomon case is still widely used to make decisions in cases today, and this is because it clearly states that there is a difference between the shareholders and the company itself.
There was no need to lift the veil in the Salomon v Salomon & Co case but recent cases have had the requirement for the veil of incorporation to be lifted.
Even though the Salomon case proved that the company and the shareholders have two separate entities, there are some circumstances and cases that show that a parent company can be regarded as an agent conducting the entire business and that it is possible for an agency relationship to exist. This is seen in the Smith Stone and Knight Ltd v Birmingham Corporation (1939) case. Compensation was due to be payable by a local authority due to a compulsory purchase when a property was acquired. A subsidiary company was operating on it and appealed to the local authority that they should receive compensation too. Birmingham Corporation refused to pay. However after all the facts were considered decided that the relationship between the parent and the subsidiary was such that the business and the profits belonged to the parent company.
Another situation that makes lifting the veil of incorporation even more complicated from where it originally started in Salomon v Salomon happens in DHN Food Distributors Ltd v Tower Hamlets (1976). DHN was the holding company that traded in a premises owned by an alternative company. The alternative company received a order for a compulsury purchase from Tower Hamlets Borough Council. The alternative company then was qualified to receive compensation for any disturbances and for the land. However, then it was decided by the borough council that due to the fact the alternative company does not trade from the premises they are not qualified to receive that compensation.
A more recent decision through the Court of Appeal is DHN Food Distributors v Tower Hamlets (1976), which emphasizes the complexity of lifting the corporate veil. Since the first case Salomon v Salomon Ltd, there have been remarkable extensions to the original ‘exception’ of lifting the veil. Lord Denning MR introduced the theory of ‘single economic unit’. DHN was the holding company, which that traded using the premises owned by an alternative company, Bronze Ltd. The litigation on this recent case began when the registered owner of the premises, Bronze Ltd. received a compulsory purchase order from Tower Hamlets Borough Council. Due to formality Bronze Ltd was therefore qualified to receive compensation for the land and any disturbances to the landowner’s business. However, latter to this, the Council announced, that due to the fact Bronze Ltd does not trade from those premises, they were unqualified to receive compensation. The Court of Appeal disagreed with the decision, and a suggestion was made by Lord Denning MR that these companies should be regarded as a ‘Single Economic Unit’ and they should be treated as one.
Later it was argued by Goff LJ that because the land has been used by DHN, but still owned by the alternative company, it is enough for them to be able to qualify for compensation due to the disturbance of their business. The corporate veil we lifted in this case.
Woolfson v stratchclyde Regional Council (1978) case argued with the decision made in DHN, which suggested that veil should not have been lifted. The reason that a veil should had been lifted is if the company was classed as a façade.
The courts will definitely lift the veil of incorporation if they find out that fraud is or could be perpetrated behind the veil. The case Gilford motor company ltd v. Horne shows how fraud was handled by the courts. Mr. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company. To defeat this MR Horne Incorporated a limited company in the name of his wife and solicited the customers of the company. Gilford motor company found out and took action against. The courts said that it was clear that the intention of MR. Horne was to perpetrate fraud, and this lead to the lifting of the veil.
Enemy Corporation is when the shareholders of a company are from an enemy nation in this case the courts have the ability to pierce the veil of incorporation. This is done to find out that the characteristics of the shareholders. This was done in the case of Daimler Co Ltd v Continental Tyre and rubber Co Ltd (1916). The courts lifted the veil during the First World War to check whether the company was an ‘enemy’ as the shareholders were German, the courts doubts were right as they found out that the company was an enemy.
Adams v Cape industries plc is one the most famous recent cases where a multinational company was involved in the mining and milling of asbestos in South Africa. Claims were made against the company for failing to take procedures to ensure that safe working practices and precautions were taken to secure the workers from the asbestos. The majority claimed saying they suffered from asbestosis.
The subsidiary company that mined the asbestosis in South Africa was unable to pay the damages, so the plaintiffs decided to claim against the English company in the American courts. The English company said it cant pay of the debts as it had no assets in USA. So the claimants decided to appeal in the English courts stating that the subsidiary was the agents of that English company. American courts decided if action was to be taken against the English parent company they had to be present in the USA. It was later found out that the subsidiary had its own business its own premises, the only thing was that the parent company had funded it. This gave the subsidiary no power to bind the parent company into a contractual obligation.
It was decided that even though cape had funded this company to lower its tax it was not seen as a fraud or to be illegal. And it was also decided that two companies can be worked together but not known as a ‘single economic unit’. The courts decided that the veil would not be lifted off cape industries.
The Adams v Cape industries plc case changed a couple of things including the ‘Single economic Unit’ rule, the courts said that there is no general principle that all companies in one group are to be regarded as one single unit, they all have their separate entities.
The courts ability to lift the corporate veil changed and said that it will only be lifted in special circumstances such as if the company is seen as a ‘Enemy corporation’ or when the company structure is a mere façade concealing the true facts.
After past cases and decisions which have been made such as all companies that are part of one group are seen as a ‘single Economic Unit’ which was then changed in the Adams v Cape industries case to every company has their own single entity.
I think that the courts ability to lift the veil of incorporation is now ‘Limited’ to cases involving an ‘Enemy’ corporation and when the company is a mere façade. the veil should be lifted when the company is trying hide behind the veil of incorporation and trying to breach the law, and trying to do a fraud.
Overall other Situations where the veil had been lifted is not necessary, doesn’t require the veil to be lifted anymore as it has been proved that there are other ways out. The courts now cannot lift the corporate veil just because they think that justice requires it, or it is regarded to the economic reality.
References
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Hannighan, Company Law, Butterworths, 2003
Hicks & Goo, Cases and Materials on Company Law, 5th edition 2004
Lowry & Dignam, Company Law 2nd Edition Butterworths Core Text Series 2003
