The ‘corporate veil’ is a legal terminology. According to Grier. (2005, p.24)
It refers to the imaginary barrier that separates the company from those who direct it (the directors), and from those who own it (the members). ‘Piercing or lifting the corporate veil’ can also be called “circumstances when the legal personality of the company will be ignored”, where liabilities will directly fall on the company’s directors or members. Generally speaking, there are two regimes of piecing the corporate veil: by statutes or by common law.
Statutes
Generally speaking, the court is rare to lift the corporate veil if a statute is ambiguous. In the case of Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 W.L.R. 67, the court held that, ‘the tow subsidiaries were separate entities and the picketing was unlawful, and stressed that if there is any lack of clarity in the language of the statute, it would be interpreted so as not to pierce the corporate veil.’
However, with the development of the legal system, an incremental number of statutes have been set up. For example, under Insolvency Act 1986 s. 213 (Fraudulent Trading), when a company is in liquidation, the court may make anyone, who was intentionally party to the fraud, liable to contribute to the company’s assets. Unfortunately, fraudulent requires evidence of dishonest intent, which is hard to prove.
Another vital example is Insolvency Act 1986 s. 214 (Wrongful Trading), although this section can only be used to convict directors or shadow directors, and it doesn’t require prove of mens rea. Instead, it should only be proved that the directors should have known the company was insolvent and stopped trading, and did not take sufficient steps to minimize creditors’ loss, and this section was first used in Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520.
There are more examples in Appendix 1.
Common Law
In terms of common law, it is no easier to lift the corporate veil than it in statutes. As Stephen Griffin (1991, p.6) once said, ‘it is difficult to perceive in what form they are conceived other than by the generalized and indefinable equitable spirit of fairness and justice.’ Tough it is, some exceptions still have been set up, such as: fraud or façade, agency, single economic unit and some other jurisdictions.
Fraud, Façade or Sham
The court will not allow that the corporation was either formed or used for some illegal, fraudulent or unjust purpose (Nygh, 2006, p.66), otherwise, the legal personality of the company should be ignored.
In the case of Gilford Motor Co v Horne [1933] CH, Horne had been the employee of Gilford Motor Co, and was bound by a contract restricting him to compete with the company. He tried to evade the covenant by setting up a new company to carried on business. Lord Hanworth stated that, ‘This company was formed as a device, a stratagem, in order to mask the effective carrying on of a business by Mr. Horne.’ As a result, the court was prepared to lift the corporate veil and issued an interdict.
In the case of R. v Seager (Mornington Stafford) [2010] 1 W.L.R. 815, after being disqualified, Seager continued negotiating a lease for the former company, and signing documents on its behalf with the former company's bankers through a family company owned by himself. It was held that, ‘the lifting of the corporate veil had been appropriate and that the companies; assets had properly been treated as having been held by the defendants.’
Agency
According to Grier (2005, p.27),
Historically the courts sometimes tried to lift the corporate veil by saying that the company was acting as an agent for its members, thus making the members liable for the company’s actions, and in particular a holding company liable for its subsidiaries acting as the holding company’s agents.
Therefore, to argue by this concept, we should go through the legal document and contract made by parent company with subsidiaries, and figure out if an agency relationship exists.
In Firestone Tyre & Rubber Co v Llewellin (Inspector of Taxes) [1957] 1 W.L.R. 464, the court held that, ‘the US company was carrying on business in the UK through its subsidiary acting as its agent and the US parent company was made liable to UK tax.’
Single Economic Unit
‘Single economic unit’ is a legal term, it is applied where a group of companies to be regarded as one single entity, if the subsidiary is fully controlled by its parent company.
In Akzo Nobel NV v Commission of the European Communities (C-97/08 P) [2009] E.C.R. I-8237, it was held that, ‘where a parent company had a 100 per cent shareholding in a subsidiary, there was a rebuttable presumption that the parent company exercised a decisive influence over the conduct of its subsidiary. In those circumstances, the parent company was regarded as jointly and severally liable with its subsidiary for infringements of competition law.’
Other arguments
In some specific cases, there is other arguments can be used to plea the court to pierce the veil, such like: state of hostility and justice.
In time of war, courts may regard a company as an enemy alien if it is controlled by enemy nations.
In Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd, it was held, ‘thought the nationality and domicile of a company is normally deter minded by location of its registered office, in this case the company would be regarded as a German company and an enemy alien’
On the other hand, Courts have occasionally been prepared to lift the corporate veil in the interests of justice.
Difficulties to lift the corporate veil
In practice, the judicial movement in support of piercing the corporate veil to achieve justice has been firmly suppressed by several influential cases concerned with Salomon doctrine (Descheemaeker, 2010, p.3). For example, in Adams v Cape Industries Plc [1990] Ch. 433, the factory workers in Texas obtained judgment against the parent company Cape, and blamed Cape for their illness. Three argument were put forward:
- The agency Argument-----that the subsidiaries were merely agents making contracts for their parent company.
- The Single Economic unit argument
- The Façade argument-----that the separate identities of the subsidiaries were merely a façade concealing the true facts.
The court held, ‘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 Salomon & Co Ltd merely because it considers that justice so requires.’ Therefore, all three arguments were rejected. We can see from this case that court rarely chooses to pierce the veil, if there is any alternative way to do it.
Conclusion
The concept of separate legal personality works as a double-edged sword. On one side, it does provide a more secure environment for directors to operate their business, and contribute to the booming of economy. On the other side, people can suffer unfair loss because it conceals the true entity of a corporation. By lifting the corporate veil, we can get rid of these companies, which are used merely as a vehicle to fraud, therefore to achieve better justice.
In some area, the rate of piercing the corporate veil is as high as 45% (Kenway, 2008). It dramatically breaks the illusion of safety for these directors, who merely try to use the Salomon concept as a shield to gain illegal profits, and make them personally liable. As a modern company’s director, he/she should not forget this motto:
‘He that respects himself is safe from others. He wears a coat of mail that none can pierce.’
--------- Henry Wadsworth Longfellow
Appendix:
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Under Company Act 2006 s. 767(3), where a public company trades without a trading certificate, personal liability can fall on the directors.
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Under Company Act 2006 s. 399, A parent company must prepare consolidated and individual accounts for the whole group, otherwise would be personal liable.
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Under Insolvency Act 1986 ss. 216& 217, Personal liability will be induced, it a director re-use the same name, that have been used by a insolvent company within 5 years.
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Under Company Directors Disqualification Act 1986 s. 15, A director will be jointly and severally liable along with the company for its debts if he takes part in the management of a company while disqualified, or allows another director to do so.
References:
Bisacre, J. And Weinstein, S. (2009) Smith and Keenan’s company law, 2nd ed., London: Pearson Longman
Descheemaeker, P. (2010) ‘Piercing the corporate veil’, European Lawyer [online], pp.46-48. Available from: (Accessed 27 February 2011)
Griffin, S. (1991) ‘Holding Companies And Subsidiaries – The Corporate Veil’, Company Law, 1 September, pp. 16-17
Nygh, P. (2006) ‘The Liability of Muli-national Corporations for the Torts of Their Subsidiaries’, European Business Organisation Law Review 3, pp. 66-67
Pettet, B. (2005) Company Law, 2nd ed., London: Longman
Rowley, D. (2008) Nevada Corporate Headquarters – Piercing the Corporate Veil in California [online]. Available from:
(Accessed 28 February 2011)
Bibliography
Bisacre, J. And Weinstein, S. (2009) Smith and Keenan’s company law, 2nd ed., London: Pearson Longman
Descheemaeker, P. (2010) ‘Piercing the corporate veil’, European Lawyer [online], pp.46-48. Available from: (Accessed 27 February 2011)
Griffin, S. (1991) ‘Holding Companies And Subsidiaries – The Corporate Veil’, Company Law, 1 September, pp. 16-17
Pettet, B. (2005) Company Law, 2nd Edition, London: Longman
Nygh, P. (2006) ‘The Liability of Muli-national Corporations for the Torts of Their Subsidiaries’, European Business Organisation Law Review 3, pp. 66-67
E.g. Under article 6, accompanies can have the right to a fair trial.
Sometimes, it does necessarily need an agency contract to establish an agency relationship.