relieves the investors because they do not have to worry about the personal wealth of other investors as they will not be held liable, jointly or severally, for the company’s debts. Hence the corporate personality safeguards the personal wealth of shareholders and saves the monitoring costs of monitoring any personal assets.
As a separate legal entity a company can own its own properties where the members does not have direct right to it. It has full contractual capacity to make contracts and can also be held liable for any breach. A company can also be subject to crime subject to the limitations as follows;
-
Where a physical act of driving a vehicle is required (Richmond London Borough Council v Pinn and Wheeler Ltd.7 )
- Where imprisonment is the only available sentence.
7. [1989] R.T.R 354
Court may regard the intensions of the individuals in control of the company as the intensions of company, where mens rea is required in a conviction as shown in Tescos Super Market v Natrass8. A company can also be a victim of a crime, e.g. where goods stolen by the company’s shareholders R v Philippou9.
The feature of separate personality allows the company to continued existence without having to windup in case of the death of its members, and gives it a right to borrow any debts.
The kind of a company has to be considered when the limited liability rule is applied as S13 of CA198510 is restricted to certain categories, hence would be burdened by the companies that use the limited liabilities rule as a shield. The Company Law Review rejected this suggestion with a view that it was creating a barrier to the organic growth of small companies.
Looking into a view of Asset partitioning11 that was designed to prioritise creditors claims on assets and is considered to be a good suggestion in the light of organisation law. There are many ways in which the owners can avoid liability using asset partitioning, but they might not do so to increase their credibility. Alterenatively the creditors might arrange the contract with company so that they can hold both the corporation and shareholders liable for the debts. This usually happens in small companies where the company may not have a high net value. Similarly in the situation of a group, the parent issues a “letter of comfort” as a guarantee to creditor who is willing to deal with their undercapitalised subsidiary.
8. [1972] AC 153
9. 89 Cr App R290
10. Companies Act 1985 S13
11. H. Hansmann and R Kraakman, “The Essential Role of Organisational Law”, (2000) 110 Yale L.J 387
Although the limited liability is subject to various abuses, The Company Law review did not view dissent from this position, neither any serious commentators spoke on the abuses and how they could be resolved. There has also been an increase in the number of corporate scandals where one company hides behind another with the help of corporate veil12. However, knowing the defects of the rule never adequate without remedies.
Lifting of the Corporate Veil
Veil of incorporation is a mechanism that is used to separate the company from its members that makes the company liable for its actions. Lifting it allows the court and public to look behind the curtain to discover the underlying reality and hold whoever is liable.
S24 of the Companies Acts13 that is no longer applicable on Private Limited Companies states that “there cannot be less than two shareholders in a company for more than six months, the sole member knowingly continue to trade in this circumstances will be held responsible for company’s debs”. As per S17 (8)14, “the directors of a company will be liable for any third party loss if the public companies trade without obtaining certificate and fail to comply with any obligations under a transaction within twenty one days”. Rigidly enforced in Durham Fancy Goods v Micheal Jackson (Fancy Goods) Ltd., S34915 holds “the one signing on any monetary transactions document for which the company’s name is wrongly stated, liable for the amount that the company fails to pay”.
12. Plesch, Dan and Blankenburg, Stephanie, “Corporate Rights and Responsibility: Restoring Legal Accountability”, 1 December 2008.
13. Companies Act 1985 S24
14. Companies Act 1985 S17 (8)
15. Companies Act 1985 S349
[1968] 2 Q.B. 839
The Insolvency Act 1986 also governs the veil lifting, IA S21316 where the companies being wound up and the business carried out to defraud creditors made the person behind it liable. IA S21417 is applied where the company is in insolvent liquidation and the directors who have the knowledge of it did not take sufficient measures to minimise the creditors’ losses. IA S216 and S217 bar a director who was director of an insolvent liquidated company from becoming the director of any other company with similar name for a period of five years and hold him liable for debts incurred18. IA S1519 also makes the company’s Manager liable for company’s debt if he is under disqualification order. The Cork Committee’s Report20 made the statutory relatively important after the insolvency reform in 1980.
The common law position of lifting the veil remains uncertain as it on the discretion of the judges to decide on case by case basis. These are discussed in the categories below;
Fraud – Under this category individuals use the company as a shield to do something that he will not be allowed to do as an individual or to evade liability.
- Avoiding Existing Legal Obligations
-
Contractual Obligations – in Gilford Motor Co v Horne21 where the Chancery Division lifted the veil and barred the defendant on grounds that the company was a mere ‘sham’ to evade his obligations. Furthermore, in Jones v Lipman22 the court lifted the veil because the company was incorporated just to buy the house from defendant himself so that the plaintiff will not be able to purchase it. However, in Electric Light and Power Supply Co Ltd v Cormack23 that had similar facts, the New South Wales Supreme Court refused to lift the veil because there was no fact to show the sale of house by defendant to evade his obligation.
16. Insolvency Act 1986 S213
17. Insolvency Act 1986 S214
18. Insolvency Act 1986 S216, 217
19. Insolvency Act 1986 S15
20. Insolvency Law and Practice, Cmnd. 8558 (1982)
21. [1933] Ch 935
22. [1962] 1 WLR 832
-
Tortious Obligation – Companies are although held vicariously liable for any torts committed by its agents24.
-
Avoiding Future Legal Obligations – The House of Lords refuse to lift the veil here as using the corporate structure to avoid the future obligation is inherent in English Corporate Law25.
Agency – The House of Lords lifted the corporate veil Firestone Tyre & Rubber Co. & Lewellin26 and perceived that the wholly owned subsidiary was acting as an agent for the parent corporation in US ans as a result the parent company in US should pay the taxes to UK government. Subsequently in Smith Stone & Knight & Birmingham Corporation27 the court listed six criteria that has to be met for a subsidiary to be an agent for its parent.
Single Economic Unit
Court lifts the veil here when the group corporations are concerned. Lord Denning in DHN Food Distributors v Tower Hamlets perceived28 regarded the parent and its subsidiary companies as single economic unit and served them the promise, where his decision relied on Harold Holdsworth & Co. (Wakefield) Ltd. v Caddies29 and quoted Gower on the presence of evidence to assume them as one unit. Although Lord Denning’s decision was criticised by Lord Keith in Woolfson v Strathclyde Regional Council30, the perception reasoned from the rational taken by the High Court in Australia in Industrial Equity Ltd. and Others v Blackburn31.
23. [1911] 11 S.R 350
24. [1904] A.C 423
25. Adams v Cape Industries Plc [1990]2 WLR 657
26. [1957] 1 WLR 464
27. [1976] 1 WLR 852
28. [1976] 1 WLR 852
29. [1955] 1 WLR 352
30. 1978 S.C (H.L) 90
Justice and Equity
Here the veil is lifted in the interest of justice, as in case of Re A Company32 and later in case of Creasy v Breachwood Motors Ltd. However in Ord v Belhaven Pubs Ltd33. the Court of Appeal did not lift the veil. The whole procedure consumes a lot of time and money. The court in case of Adams v Cape Industries Plc34 upheld the decision making the parent corporation not liable for the torts of its subsidiaries.
Conclusion
At times the courts are reluctant to pierce the corporate veil and this may cause injustice. Although Lord Keith in Woolfson said that façade is the only way to life the veil, there is still the uncertainty as the word has unclear meaning. There exists a need to draw a clear line between real and fiction. However, due diligence should always be practiced by the company and its members.
31 [1977] 137 C.L.R 567
32 [1985] BCLC 333, 1BCC 99
33 [1998] BCLC 447
34 [1990] 2 WLR 657
BIBLIOGRAPHY
Books
-
Davies, Paul L, Gower and Davies’ Principles of Modern Company Law, (8th ed. ,2008) Sweet and Maxwell
-
French, Derek, Stephen Mayson and Christopher Ryan, Company Law, (25th ed., 2008) Oxford University Press
Articles
-
Mitchell, Charles “Lifting the Corporate Veil, An Empirical Study”(1999) 3 CFILR 15, 15.
- H. Hanmann and R. Kraakman, “Towards Unlimited Shareholder Liability for Corporate Torts”, (1991) 100 Yale LJ 1879
- H. Hanmann and R. Kraakman, “The Essential Role of Organisation Law”, (2000) 110 Yale LJ387
- F.G. Rixon “Lifting the Veil between Holdong and Subsidiary Companies” (1991) 102 LQR 415
- Lynn Gallagher and Peter Zieglar, “Lifting the Corporate Veil in Pursuit of Justice” (1990) JBL.
Internet Sources
- Plesch, Dan and Blankenburg, Stephanie, “Corporate Rights and Responsibility: Restoring Legal Accountability”, 1 December 2008.
- Griffiths, Mike, “Lifting the Corporate Veil Revisited”, 1 December 2008
