On the facts of this case, merely being a controlling shareholder will not override the statutory effect of incorporation. There is no reason why a company cannot be the agent of its controlling shareholder, however, and, in such cases, the shareholder, as principal, is liable for debts contracted by the company as his agent under the normal rules of contract. See, for example, Smith, Stone and Knight v Birmingham Corpn (1939), where the degree of day to day control exercised by the holding company meant that the subsidiary was regarded as its agent.
The effects of separate legal personality, about which Lord Denning seemed to be somewhat ambivalent, are many, as we have been the member are not liable for the debts of the company other than to the extent that statute provides, that is, to pay the nominal value on winding up, except to the extent that it has already been paid. Since most shares are issued, fully paid up shareholders have, effectively, no liability for the company’s debt. Separate legal personality allows a company to sue and be sued in its own name, to hold property in perpetual succession distinct form the property of members, to issue freely transferable shares, to create floating chares and, perhaps, to minimize the tax liability of shareholders; nor are the directors or shareholders liable for criminal or tortuous acts of company. For example, in Richardson v Pitt-Stanley (1995), the Court of Appeal declined to hold a director liable to an injured employee who suffered economic loss through the failure by company to take out compulsory insurance against accidents at work. To do so would be, said the court, ‘a case of piercing the corporate veil with a vengeances’. There are drawbacks to separate legal personality, in that the property of the company, not being that of the members, cannot be insured by a member and the company cannot claim on an insurance effected by a person on property which he then owned but subsequently transferred to the company (see Macauran v Northern Assurance 1925)
Parliament, as Lord Denning indicated, has, in a very limited number of cases, restricted the effect of incorporation. Is there any theme behind these exceptions which might indicate areas in which the courts should lift the veil of incorporation? And, perhaps more importantly, do these exception indicate that the courts ought to be more willing to lift the veil? There a number of minor provisions. For example, s 24 makes a person makes is a shareholder, after a six month period in which the company has had less than two shareholders, jointly and severally liable for the company’s debts. Section 349(4) imposes liability upon an officer of the company who has signed company cheques, etc, on which the name of the company does not appear in full. However, the most important provisions are those relating to fraudulent or wrongful trading and the special rules for groups of companies. Sections 213 and 215 of the Insolvency Act 1989 impose liability for the debts of a company where a person has engaged in fraudulent or wrongful trading.
The rules on group accounts are immensely complicated; broadly, they are design to ensure that the accounts of associated companies are looked at as a whole to provide a ‘true and fair view’. What can we discern as the concern of parliament in providing exception to Salomon’s case? It is clear that an element of wrongdoing or impropriety should disqualify a person from the manifold benefits of corporate personality (particularly that of limited liability) and the courts have been reluctant to follow this lead. Such cases seem currently to be called cases changes with the years. The veil has been lifted to prevent a person escaping specific performance of a contract by selling the contracted land to a company which he controlled (Jones v lipman 1962), ant to prevent a person from evading the effect of a valid restraint clause (Gilford Motor Co Led v Horne 1933). A further example of the public policy approach to lifting the veil is Daimler court, during the First World War, had regard to the nationality (German) of the shareholders of a British-registered company. The principal difficulty with this approach is knowing when the court will regard the corporate form as a mere façade. Motive may be important (see Adams v Cape Industries plc 1990), but even this is of limited help. Is forming a company to minimize your tax liability a case where your motive should cause the courts to lift the veil?
Leaving aside the ‘façade’ cases, is there, ad Lord Denning suggested, good reason and parliamentary encouragement to disregard legal personality in other cases? In Littlewood Mail Order Stores Ltd v IRC 1969, Lord Denning suggested that it would not be inappropriate for the courts to lift the veil between individual companies which form part of an economic group. This approach is well recogised Germany and, German law being the preeminent influence on EC draft directives, is provided for in the Ninth Draft Directive on Company Law – albeit in an unworkable fashion.
Limited support for Lord Denning’s approach can be found in a number of cases which were reviewed in Adam v Cape industries plc 1990, a case on enforcement of a foreign judgment against English company. For example, in Scottish CWS v Meyer (1959), the appellant company controlled a subsidiary in which M was a substantial shareholder. The subsidiary, at the behest of the CWS, sought to destroy itself, thereby reducing the value of M’s shareholding. The House of Lords had no difficulty in finding that M had been subject to oppression as a member (contrary to s 210 of the companies Act 1948) by CWS, despite the fact that he was not a shareholder in CWS. The court looked to the business realities of the situation and not the strict legal position. M was effectively a member of the CWS group. This case could be explained as demonstrating a purposive approach to the statute (as could some others), rather than a recognition of the integrity of the economic grouping. The same cannot be said of DHN Food Distributors Ltd v Tower Hamlets LBC (1976). In this case, DHN had two wholly owned subsidiaries. One owned the land which DHN used under licence for its business and the other owned the transport used in the business. The land was subject to a compulsory purchase order and the Lands Tribunal fixed the compensation payable at a minimal level, having ruled that DHN had merely lost a licence and deprivation of the land did not affect the business of the business of the subsidiary, since it had none. The Court of Appeal ignored the separate legal status of the three companies and treated them as one economic grouping, so that compensation was payable for the disruption of the business of the group. The court took the view that it should look at the realities of the relationship rather the legal structure under which the business had chosen to trade.
This approach was doubted in the House of Lords in Woolfson bv Strathclyde Regional Council 1978, in which a single retail units and incorporated them into the original shop by knocking doorways through walls. The original shops, having been acquired at different times, were leased to different companies, all if which were effectively controlled by W. however, the structures and shareholdings of the various companies were not identical. Consequently, the house of lords was able, on the facts, to distinguish DHN, where had been a complete coincidence of shareholding. Nevertheless, the House went further and doubted the correctness of DHN other than as an interpretation of the particular statute authorizing compensation.
Thus, whatever the merits of the economic reality approach, it seems unlikely to find favour in British courts in the near future. That strict adherence to the legal structures can cause unfairness to shareholders has been recognize and ameliorated by the courts in the case of the winding up of quasi-partnership companies (Ebrahimi v Westbourne Galleries Ltd 1970) and in the interpretation of unfair prejudice in the context of s 459. Such strict adherence may cause loss to creditors (as when a company abandons its insolvent subsidiary) and, as yet, this position has not been ameliorated by the courts (see the somewhat caustic comment on this by Templeman LJ in Re Southard & Co Ltd 1979). However, such reforms are probably best left to parliament- the potential imposition of liability for wrongful trading upon a shadow director may prove a more effective means of controlling the use of high risk subsidiaries than the possibility of subsequently lifting the veil. If parliament does not intervene, we may find that the implementation of amended Ninth Directive requires the recognition of economic reality, regardless of the primacy of the principle of separate legal personality.
Could illustrate the strength of the Salomon case by referring to other illustrative cases, for example, Lee v Lee Air Farming Ltd 1961, and give the facts of some of the ‘lifting the veil’ case. Greater discussion of wrongful trading could be useful.