Piercing the corporate veil: an uncertain and unprincipled doctrine
Despite the influence of the Salomon principle, in practice, there have been circumstances where the artificial separate personality of a company was ignored (French and Mayson et al., 2013) The phrase “piercing the corporate veil” is often used in case law to describe this situation (Piercing the corporate veil, 2014)
Lifting veil by statute
The statute is able to provide that the separate legal personality of a company should be ignored in certain circumstances. One example is failure to obtain a trading certificate (Companies Act 2006, s 761). Phoenix companies are also prohibited under Section 216 of the Insolvency Act 1986. Moreover, the person enter into a pre-incorporation contract has personal liability for it (Companies Act 2006, s 51) Landlord and Tenant Act 1954 s 30(3) sets out that if landlord has controlling interest in company then in certain circumstances business carried on by company treated as business carried on by member. Especially, members, directors or any other persons who was knowingly involved in fraudulent trading and wrongful trading may be declared liable (Insolvency Act 1986, s 213 and s 214) However, there are difficulties in applying this provision because “fraud” demands a high standard of proof (Nyombi, 2014, pp. 66--81). Statutory provisions appear not to be sufficient in order to support the courts occasional decision to pierce the veil (Nyombi, 2014, pp. 66--81).
Approach of the courts
Due to the fact that the courts lack guidance on when to lift the veil, courts have been taken a fact-based approach (Nyombi, 2014, pp. 66--81). Generally, there are four main grounds on which the court can lift the corporate veil, namely single economic unit, sham or mere façade, agency and tort.
Single economic unit
In DHN Food Distributors Ltd v Tower Hamlets London Borough Council (1976), one subsidiary owned land and buildings that were used not by the subsidiary but by the parent company. Land compulsorily purchased and therefore business had to close. Lord Denning decided that the companies were in reality a group, and should be treated as one, so the parent company that carried on the business was entitled to the additional compensation. However the view of the judges subsequently changed and Salomon is considered really important even in the context of groups. Decision of Lord Denning was criticised in Woolfson v Strathclyde Regional Council (1978). Furthermore, in Adam v Cape Industrial plc it is held that “the court is not free to disregard the principle of Salomon v Salomon & Co Ltd … merely because it considers that justice so requires”. Hence, the choice to lift the veil is very limited.
Sham or a mere façade
Sham or mere façade relate to the alleged use of a corporate form to evade a legal or fiduciary obligation. In Trustor AB v Smallbone (No 2) (2001) where a managing director had transferred money to a company under his control, Morrit V-C held that the court would be “entitled to pierce the corporate veil and recognise the receipt by a company as that of the individual(s) in control of it if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of those individual(s)”. Mere façade and sham were also successfully used to lift the corporate veil in a number of other cases such as Gilford v Horne and Jones v Lipman (1962). As far as this ground is concern, the courts are willing to lift the veil albeit in a restrictive way.
Agency
If a “shareholder or parent company has a degree of effective control to qualify as a principle the acts of the company are then deemed to be acts of the shareholder or parent company”. In Re F.G. (Films) Ltd, US company incorporated UK company with no assets and no employees to produce a film to take advantage of certain legislation in the UK. The court considered UK company to be agent of US company. However, in practice, most cases are not factually straight-forward, as seen in Salomon, and the courts seem to be reluctant to recognise the existence of a principle-agent relationship. There are occasional successes such as in Smith Stone Knight where Atkinson J. identified characteristics determining agency such as the parent company treating the profits of its subsidiary as its own, appointing the persons conducting the business of the subsidiary, directing all that was done within the subsidiary and maintaining effectual and constant control over the subsidiary. However, Adams v Cape Industries plc made clear that agency cannot be presumed from the closeness of operations between a parent company and its subsidiary. In fact, it is very unlikely that an agency relationship will be “found on the facts”.
Tort
A consequence of limited liability, as regards tortious liability, is that the company is vicariously liable for torts committed by its agents (Pettet and Lowry et al., 2012). The problem is the persons behind the veil who commits the act also needs to bear the personal (or joint) liability. In Lennard's Carrying Co. Ltd v. Asiatic Petroleum Co. Ltd34, the appellant ship-owners were sued for the loss of cargo caused by a ship running aground due to being unseaworthy because of defective boilers. The House of Lords ruled that the necessary fault and privity to establish liability could be identified in respect of the company where the fault or privity existed in the mind of a person who was “the directing mind and will” of the company. However, the courts have generally been reluctant to impose tortious liability on those behind the corporate (Williams v. Natural Life Health Foods Ltd). Judges’ decision in the recent case of Chandler v Cape plc (2012) suggests a new aspect of the corporate relationship which is the parent company’s assumed duty of care to the subsidiary’s employees. This case opens up the possibility for involuntary creditor to sue company members of insolvent company, which has been difficult by law (Imanalin, 2011, p. 89)
Petrodel Resources Ltd v Prest [2013]
This is the most recent case which provides significant statements on the law of lifting the corporate veil. The case concerns whether companies owned and control by Mr Prest could be ordered to transfer the assets to Mrs Prest in their divorce settlement. Although Mrs Prest won not by lifting the veil of incorporation, the Supreme Court provide some useful clarification of veil-lifting. Lord Sumption explicitly acknowledges the existence of a veil-lifting jurisdiction which had been doubted in VTB Capital plc v Nutritek International Corp. Nevertheless, similar to Ben Hashem v Al Shayif (2009), veil lifting should be a remedy of ‘last resort’. In particular, Lord Sumption provided further guidance on the circumstances when piercing the veil can happen, distinguishing ‘evasion cases’ and ‘concealment cases’. Lifting the veil is restricted to only evasion (Peter Bailey, 2014). Although “piercing the veil yet again did not apply” (Peter Bailey, 2013) on the basis of these new clarifications, it is also expected that the court will not allow an individual who seeks to evade an existing liability by interposing a company escape on the basic of the corporate personality doctrine (Piercing the corporate veil).
In conclusion, this essay has looked at the magnitude of the separate legal personality as well as the possibility of the veil being lifted by statute and court decisions. It is evident that statute does not provide so much help and there is some measure of uncertainty. Courts have been occasionally persuaded to ignore the separate legal personality principle in order to avoid its unexpected result in different circumstances. On the other hand, there is a tendency in recent court decisions, especially in Prest v Petrodel Resources Ltd (2013) not to lift the corporate veil except where there is an abuse of the corporate form. It appears that Salomon principle still maintains its central role in terms of corporate personality.
References
- Cases
Adam v Cape Industrial plc [1990] Ch 433
Ben Hashem v Al Shayif [2009] 1 FLR 115
Catherine Lee v Lee's Air Farming Limited , [1961] AC 12
Chandler v Cape Industries plc [2012] 1 WLR 3111
DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852
Gilford v Horne [1933] Ch 935
Jones v Lipman [1962] 1 WLR 832
Lennard's Carrying Co. Ltd v. Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705
Macaura v Northern Assurance Company [1925] AC 619
Petrodel Resources Ltd v Prest [2013] EWCA Civ 1395
Re FG Films Ltd [1953] 1 WLR 483
Salomon v A Salomon & Co Ltd [1897] AC 22 HL
Smith Stone & Knight Ltd v Birmingham Corporation [1939]4 All ER 116
Trustor AB v Smallbone (No 2) [2001] 1 WLR1177
VTB Capital plc v Nutritek International Corp [2013] UKSC 5
Williams v. Natural Life Health Foods Ltd [1998] 1 BCLC 689
Woolfson v Strathclyde Regional Council [1978] SC (HL) 90
- Acts of Parliament
Companies Act 2006, s 16(2). Retrieved from
http://www.legislation.gov.uk/ukpga/2006/46/pdfs/
ukpga_20060046_en.pdf
Companies Act 2006, s 7(1). Retrieved from
http://www.legislation.gov.uk/ukpga/2006/46/pdfs/
ukpga_20060046_en.pdf
Companies Act 2006, s 761. Retrieved from
http://www.legislation.gov.uk/ukpga/2006/46/pdfs/
ukpga_20060046_en.pdf
Companies Act 2006, s 51. Retrieved from
http://www.legislation.gov.uk/ukpga/2006/46/pdfs/
ukpga_20060046_en.pdf
Joint Stock Companies Act 1844 [online] Available at: http://0-www.justis.com.lib.exeter.ac.uk/document.aspx?doc=f7jsrUrxA0LxsKjIoYudm1ytn3WIivLerIOJitrvqJedo0qZiXedmJeZiWmco3eJiSiIs1jxAZrwAJrxAV5wsKjIoW0ha&relpos=0 [Accessed: 14 Mar 2014].
Joint Stock Companies Act 1856 [online] Available at: http://0-www.justis.com.lib.exeter.ac.uk/document.aspx?doc=f7jsrUrxA0LxsKjIoYudm1ytn3WIivLerIOJitrvqJedo0qZiXedmJeZiWmco3eJiSiIs1jxAZrwAJrxAV5wsKjIoW0ha&relpos=0 [Accessed: 14 Mar 2014].
Insolvency Act 1986, s 261. Retrieved from
Insolvency Act 1986, s 213 and s 214. Retrieved from
Landlord and Tenant Act 1954 s 30(3). Retrieved from
Limited Liability Act 1855 [online] Available at: http://0-www.justis.com.lib.exeter.ac.uk/document.aspx?doc=f7jsrUrxA0LxsKjIoYudm1ytn3WIivLerIOJitrvqJedo0qZiXedmJeZiWmco3eJiSiIs1jxAZrwAJrxAV5wsKjIoW0ha&relpos=0 [Accessed: 14 Mar 2014].
- Books
French, D., Mayson, S. W. and Ryan, C. L. 2013. Mayson, French &Ryan on company law. Oxford: Oxford University Press.
Pettet, B. G., Lowry, J. P. and Reisberg, A. 2012. Pettet's company law. Harlow, Essex, England: Pearson Education.
3. Journal articles
Imanalin, A. 2011. Rethinking Limited Liability. Cambridge Student L. Rev., 7 p. 89.
Machen, A.W. (1910), “Corporate personality”, Harvard Law Review, Vol. 24, pp. 253-257
Nyombi, C. 2014. Lifting the veil of incorporation under common law and statute. International Journal of Law and Management, 56 (1), pp. 66--81.
Peter Bailey, P. 2014. That was the year that was in company law.
Peter Bailey, P. 2013. Lifting the veil becomes a remedy of last resort after Petrodel v Prest in Supreme Court
Piercing the corporate veil. 2014. Private Client Business, Available at: http://0-login.westlaw.co.uk.lib.exeter.ac.uk/maf/wluk/app/document?&srguid=ia744cc6400000144c0d7856045fb5256&docguid=IDF040530902111E3A673CD57CDB7CEA0&hitguid=IDF040530902111E3A673CD57CDB7CEA0&rank=5&spos=5&epos=5&td=432&crumb-action=append&context=74&resolvein=true [Accessed: 14 Mar 2014].
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