Lifting of the Corporate Veil

By George Vassiliades

“Lifting” and “Piercing” the corporate veil are two different sides of the same coin. Lord Staughton explains in Atlas Maritime Co. SA v Avalon Maritime Ltd (No. 1)[1] that “lifting or peeping behind the corporate veil” [2] means “having regard to the shareholding in a company for some legal purpose".[3] Lifting the veil can be merely described as “least offensive to separate entity theoy”’ and as an “act of curiosity”.[4] Therefore, “lifting of the corporate veil” cannot in any way override the principles laid down in “Salomon v Salomon”.[5]

Furthermore, “piercing the corporate veil” describes a situation when the courts completely ignore the company’s separateness and consider the “rights and liabilities of the company” as they are that of the shareholders, which means that the “separate legal personality” principle is overlooked.[6] This paper attempts to analyse and understand the situations in which the courts are compelled to “pierce the corporate veil” and ignore the Salomon principles, the rationale behind this departure from the status quo and their present legal position. Moreover, is it possible to have a consistent legal principle?

This paper will analyse the origin of the corporate veil and the examples under common law when the veil has been lifted. This area of law is perplexing and uncertain due to absence of any legislative support. Since, the Parliament has created laws on the requirement of registration of companies; it is pointed out that it should take another step and legislative on this vital area of law. Moreover, in Bank voor Handel en Scheepvaart NV v Slatford Lord Devlin explains that: "the legislature can forge a sledgehammer capable of cracking open the corporate shell."[7] 

INTRODUCTION

Hypothesis

The hypothesis can be explained as the corporate veil is used to describe the effect of the legal principles of separate legal personality and limited liability.[8] Despite the vital importance of the decision in Salomon v Salomon and the protection given to it by the courts, there are occasions when the veil is lifted.[9] However, these occasions are uncertain and inconsistent and therefore codification of this area of law is needed.[10]

Summary and Methodology

This study discuses the conclusion which was reached after critical analysis of the origin of the “corporate veil” principle, the courts’ views regarding the doctrine and the writings of academics.  The motivation of the court to “lift the corporate veil” in many situations will help to understand the principle’s standing in the English common law.[11] These findings will be accompanied by understanding the scholarly opinions on the issue. The paper aims to suggest the changes that can be introduced into this area of law and advocates the reasons behind legislative action being the best way forward. Library based research has been carried out to write this paper; therefore, no methodology section has been added.

The separate legal personality of companies

The principle of “separate legal personality” is described as “the foundation of modern company law.”[12] An incorporated company is considered as a “separate legal entity” from its directors and shareholders; however, it is not completely different.[13] The case of Salomon v. Salomon & Co Ltd [14] laid down this principle. The expression “separate legal entity” explains the difference between the shareholders of the company and the company itself. [15] Consequently, the company can also be referred to as a “nexus for contracts”: as a party to numerous contracts which form the foundation of the business. [16] In order to maintain credibility, the company must enjoy independent control over a pool of the company’s assets which is protected from interference from its shareholders, (i.e. the shareholders do not exercise direct proprietary rights over those specific assets or all the assets in the pool). [17]

This asset separation is the basis for a “separate legal personality” of companies.  The protection of the company’s assets from the claims by the creditors of the shareholders is the major function of this separation and is called “entity shielding” by American scholars. [18] This “separate legal entity” is shaped to differentiate between the company and its shareholders to determine liabilities. [19]

The concept of “entity shielding” has two direct implications. First, the distribution of the assets of the company on insolvency priority is given to creditors over the members of the company. [20] Secondly, the company is shielded against insolvency brought by the shareholders’ actions; this involves protection against the shareholders’ creditors when such shareholders are declared bankrupt or (if a legal person is a shareholder) insolvent. It also includes protection from the shareholders withdrawing their capital at will. [21]

Limited liability of members of companies

“Limited liability” goes together with “separate legal personality” but differs in one respect, where “separate legal personality” protects the company by shielding it from claims, for example claims of the shareholders’ creditors. “Limited liability” shields the company’s members from the creditors of the company. [22] If for any reason, the company incurs any loss or difficulties, the personal wealth of the members is not at stake except to the extent of their investment. Therefore, “limited liability” provides a protection for the personal wealth of the investor in face of the company or its management incurs any losses or failures.

According to English jurisprudence, and academic debates led by scholars of common law the amalgamation of “limited liability” and “separate legal personality” constitute the “corporate veil”. [23] The concept of “corporate veil” established protection for the members of the company which was hitherto considered radical. It must be kept in mind that even though limited liability has become indispensable for the conduct of business, [24] it is not considered just or socially viable in some circumstances. 

CHAPTER 1 – The effect of Salomon v Salomon 

 This chapter covers the origin of the principle of “separate legal personality” and the complementary standard of “limited liability” in English jurisprudence. A critical analysis of the “legal development” of the concept will be followed by considering the judgments of the “House of Lords” and the “Court of Appeal” in the Salomon v Salomon case.

Legal landscape leading up to Salomon v Salomon

Since the beginning of the 18th century, the principles raised in this case have been acknowledged in English law. However, they existed in a rudimentary form. According to Harris, during the period from 1720[25] to 1844 there was an inconsistency between the developing economy and the business law governing the “conduct of business.” [26]

A “royal charter” or “private act” could create companies which largely constrained the different forms of “business organizations” available to public, for instance, unincorporated associations or partnerships. These businesses did not have the protection of the principles of “separate legal entity” and “limited liability”. 

This was recognized by the Victorian legislature which culminated into the Joint Stock Companies Act 1844 which allowed a company to be formed by 20 individuals. [27] The Limited Liability Act 1855 provides a “statutory footing” to the principle of “limited liability” of the companies’ shareholders. The Companies Act of 1862 joined the two concepts and laid the foundation of the “corporate veil”.

The facts of Salomon v Salomon

Aron Salomon manufactured and traded leather products and shoes until 1982 when he transferred his business to a newly formed company and decided to make use of the protections and benefits under the corporate form. Ultimately, the company ran into difficulties and was unable to fulfil its debts.     

The company’s creditors sued and a liquidation order was passed. This was followed by the appointment of a liquidator. The amount left to be distributed after the liquidation was only around £1055 and Mr Salomon claimed that amount as a “beneficial owner” of the debentures. If his claim was accepted, no funds would be left to satisfy the unsecured creditors’ debts.

The Court of Appeal in the case of Broderip v Salomon[28] opined that “the formation of the company … and the issue of debentures to Aron Salomon … were a mere scheme to enable him to carry on business … with limited liability.”[29] The court considered this as a contradiction of the purpose of the Companies Act 1862 and did not accept the “separate legal personality” of the company. [30] Hence, he was not given the advantage of “limited liability”. He brought an appeal against this order in the House of Lords.  

The decision of the House of Lords analysed

The Court of Appeal’s conclusion about the intention behind the legislation was overridden by the House of Lords. Lord Halsbury claimed that nothing in the Companies Act supported such arguments. Furthermore, he clarified the absence of any provision which prohibits the company members from being related or which prohibits the members from taking “disproportionate shareholdings” in the company. [31] Lord MacNaghten further explained that “one man companies” are not "contrary to the true intention of the Act of 1862, or against public policy, or detrimental to the interests of creditors."[32]

This follows that the requirement of seven members to incorporate a company is just a procedural formality and the other members can be nominees to the true owner (for example, Mr Salomon), this interpretation reflects the present position. Now, a company can be easily incorporated by just one person. [33] At this juncture it can be easily pointed out that the arguments by both the “Court of Appeal” and “House of Lords” were policy decisions even though they were statutory interpretations. However, the House of Lords decision based on statutory interpretation alone is a literal interpretation of the text and does not accord any hidden meaning to it. The Court endowed the company with all the essential characteristics to become a capitalist force.

The Court of Appeal considered another argument based on the overpriced sale of the business to the Company, which was interpreted to be fraudulent. The House of Lords agreed with the business being overvalued, but this was declared to be a company matter to be decided by the shareholders; who knew the facts and raised no objections. [34] It was further noted that there was no one except the shareholders that could have been affected by the overvaluation. This view can be criticized because the shareholders are just nominees and the creditors have to bear the brunt of the losses.

Many other arguments were considered. During trial, Vaughan Williams J pointed out that the company was Mr Salomon’s agent, and therefore the transfer of the business cannot be termed as a sale because the business was merely transferred to his own agent for profit.[35] Conversely, Lindley LJ redefined this approach and brought another view that the company in question is nothing but a “trustee improperly brought into existence by [Mr Salomon] to enable him to do what the statute prohibits”.[36] The House of Lords did not agree with any of these arguments. According to Lord MacNaghten, “it may be that after incorporation the business is precisely the same as it was before … the company is not in law the agent of the subscribers or trustee for them”.[37] Lord MacNagthten premised that that company cannot be an “agent” or “trustee" of its shareholders without overlooking the “separate legal personality” of the company.

Lord Halsbury LC described Vaughan Williams J’s argument as misleading because according to him, if the company was a “legal entity” then, “the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent at all.”[38] This sheds light on the fact that the “House of Lords” denied the possibility that a company which legally existed could have its “legal personality” curtailed through the conditions that existed when the company was incorporated.  

The arguments of the “House of Lords” about the “agent” and “trustee” provide a reasonable assessment of the facts of the case from a company law standpoint. The “High Court” and the “Court of Appeal” both failed to analyse the principle of “separate legal personality”.  However, this is not surprising because this principle was just emerging as a core principle during that time.

For the aforesaid reasons, the “House of the Lords” overruled the judgement of the “Court of Appeal”. The principle of “limited liability” was acknowledged and Mr. Salomon had successfully established a company which had “separate legal personality”. It was held that Mr. Salomon must be given preference over the “unsecured creditors” for the amount which was left after liquidation of the company. This decision is applauded for its conceptual clarity. Thus, it can be concluded that coherence and lucidity of arguments made this a landmark decision and foundation of modern company law. [39]    

Ensuing judicial decisions

The Salomon v Salomon principles were reiterated by English courts again and again. Lord Parker in Daimler Co Ltd v Continental Tyre and Rubber Co Ltd,[40] said that: “no one can question that a corporation is a legal person distinct from its incorporators.”[41] It was further clarified that the association between the shareholders and the company is not that of a trustee or a beneficiary or an agent. The company is the sole owner and the shareholders cannot claim ownership to any of the assets of the company nor can they be held liable for the acts of the company. After twenty years of the Salomon v Salomon decision, the propositions discussed are now considered unquestionable law. [42]

Subsequent decisions further acknowledged and confirmed the Salomon v Salomon principles. Hence, it has been laid down that even if there is one shareholder controlling the company; it does not give any sufficient grounds to overlook the “separate legal personality” of the company. [43] Moreover, the company’s property is not the members’ property.[44] Furthermore, the company is not a trustee of some or parts of its shares [45] and the company is not an agent of its shareholders, unless such relationship is clearly evidenced. [46] The principle of “separate legal personality” was given further encouragement when the company was allowed to bring an action for “defamation”.[47]

It can be pointed that such extensive acceptance of these principles is not extraordinary, as it would be impossible to criticise the Salomon v Salomon without questioning the wider corporate structure. Hence, although that are cases that have questioned the limits of “corporate veil” in many circumstances, the broad principles have not been directly questioned the broad principles by any case.

Difficulty in the Salomon Principle

The controversial nature of “limited liability” arises from the fact that it shifts the risk of business from the investor(s) to the creditor(s). This is generally seen as unfair. [48] It is often argued that “limited liability” must be available for a “one man company” which can be easily used as a medium of fraud. [49]

Khan-Freund questioned the Salmon decision and called it  a ‘calamitous decision’[50] and said that the continued support of the courts for “separate legal personality” and “limited liability” showed that companies had “often become a means of evading liabilities, and of concealing the real interests behind the business.”[51] [52] This can be undoubtedly classified as an attempt to undermine the strength of the principle as it is supported by the premise that “the metaphysical separation between a man in his individual capacity and his capacity as a one-man-company” can be used to the disadvantage of creditors.[53]

A typical example of this could be where subscribers incorporate a undercapitalized “limited liability” company. The owners of this company would then incur large debts with no possibility of being able to meet these demands. On a call for repayment, these owners try to escape liability on the grounds that the company has a “separate legal personality” and therefore, the debtor is the company. Khan-Freund suggests that some boundaries must be introduced to the corporate veil principle, and if these boundaries are overstepped that court must then be allowed to “pierce the corporate veil” freely. [54] 

In 1953, Cataldo pointed out that “limited liability” is the “most precious characteristic” of a company and this has been the most instrumental in the evolution of enterprises more than any other principle in company law. [55] From a current perspective, after a century of this principle’s dominance, it is impossible to view business and investment functioning without this concept. No investor will gamble his home or savings in hope of profits.

Even modern academics, like Mitchell, acknowledge the importance of the principles laid down by the “House of Lords” in Salomon v Salomon, that the clear division between the shareholders and the company is the basis of English company law. [56] He further asserts that any other interpretation by the “House of Lords” would have “destroyed the statutory limited liability principle”.[57] It can be argued that the principle would have not been completely destroyed but in the absence of this interpretation it would have grown in a curtailed form. For example, it would have been buried under rules, regulations and procedures where the company would have had to go to great lengths to prove that the company was incorporated properly by the promoters.

Spender provides a fresh perspective on the case of Salomon v Salomon by noting that the verdict was “in sharp contrast to the fragile legal personality possessed by Mrs Salomon” and other family members.[58] It can be pointed out that this gender study point of view sheds some light on some significant weaknesses of the society in the 19th century. But, it does not tackle the real issue before the “House of Lords”, i.e. “one-man-companies” and the claim of their shareholders to “limited liability”.

Ziegel notes that “limited liability” encouraged by the “House of Lords” decision promotes undercapitalism of companies and “excessive reliance on outside credit.”[59] He argues further that the principle of “separate legal personality” permits the shareholders to become their own company’s secured creditors, which according to Ziedgel is “disconcerting”.[60]

The Salomon principle with “limited liability” provides an illusionary benefit to the small businesses, because creditors have developed ways to circumvent the principle. [61] Moreover, as Lord Denning said: “The courts can and often do draw aside the corporate veil. They can, and often do, pull off the mask. They look to see what really lies behind.”[62] 

CHAPTER 2 - Salomon v Salomon a Policy consideration?

As discussed in the previous chapter, the academic reception of the Salomon v Salomon decision has been diverse. Many scholars, for example Kahn-Freund, have expressed dissatisfaction with the judgment and the wider theoretical structure of corporate law established. However, there is a strong judicial support to these concepts, and the courts rarely challenge these principles and “lift the corporate veil”. This chapter will analyse the reasons behind the stance of the courts.

Moore argues that the English courts “have steadfastly refused to affirm the validity of any alleged exceptions to the principle in Salomon”, which underlines their disinclination to question the “corporate veil doctrine” and the superiority of the “corporate form”. [63]  It will be seen subsequently that Moore has drawn the proper conclusion as the courts have kept the issue of “lifting of the corporate veil” very flexible so as to consider every case on its own merits.   

Hicks and Goo further support this argument by claiming that even though there are cases where the courts want to “lift the corporate veil”, the Salomon v Salomon principles “remain extremely strong and almost without exception.”[64] Lord Justice Slade further reinforces this by stating that “the court is not free to disregard the principle of Salomon merely because it considers that justice so requires.”[65] Sealy claims that the principle of “limited liability” is always respected even though sometimes the courts digress from the “separate corporate personality” doctrine (when piercing the corporate veil), the principle of “limited liability” has always been followed.[66] Nonetheless, it can be pointed out that this analysis does not explain the reason behind the courts’ willingness to enforce these principles so fervidly.

Furthermore, the ongoing support for “Salomon v Salomon principles” can be attributed to the policy considerations that the courts contemplate while delivering their judgments. To understand this point, it is important to analyse the benefits that constant implementation of the principles will bring to the objectives of corporate law.

General Objectives of Corporate Law

From a narrow point of view the increase in the shareholder value is perceived as the primary purpose of corporate law. This view in corporate governance would be called the “shareholder primacy theory” and has found acknowledgment in English jurisprudence. [67] This narrow approach can be broadened to include the company’s important and long term relations with suppliers, customers, employees and even the local community. The Companies Act 2006 incorporates this approach which is called the “enlightened shareholder value” principle. [68]

Certain jurisdictions, for example Germany and Japan have taken an additional step and embraced a “stakeholder” or “co-determination” approach in which the aforesaid groups are not only given credit when the company takes decisions but they are also given substantial powers to be a part of the decision making process (for example, board membership for employee representatives).[69]

The Policy of the Salomon principle

The primary argument in support of the “limited liability” principle is that it increases the eagerness of individuals to invest in companies which leads to the development of the economy. [70]  Halpern, Trebilcock and Turnbull argue that “public companies” with “limited liability” would never attract the investors. [71] Only the investors with time and resources to monitor the fiscal status and prospects of the companies would be in a position to invest. Individuals without such resources or without insurance [72] would not be in a position to out their personal wealth at risk to invest in companies. It is further explained that this would lead to monopolies being formed, for example, Virgin, which would lead to distortion in a competitive market.

Halpern’s, Trebilcock’s and Turnbull’s argument proposes that investors are apprehensive about the identity and financial status of the other investors in the company and this would influence their contribution to the company. Thus, the share prices of the company will be affected by the identity of the shareholders. [73]It can easily be concluded that this is a situation to avoid:  when the wealthy investors start selling their shares in a company it will have a ripple effect on the remaining investors and the share prices will drop. Presumably, the borrowings of the company (to finance the company’s ongoing activities) will increase due to negative publicity which would ultimately lead to mid or longer term liquidation. 

The partly paid shares of high denomination being traded in the English equity market is an excellent example of the aforesaid point.[74] At that time, the public companies (often with limited liability) issued only a nominal amount of shares out of their total denomination, this enabled them to ask their shareholders to pay the outstanding amount of capital on shares during financial difficulties. The financial crisis fuelled by the “Panic of 1866”,[75] led to many investors paying their partly paid up shares; which raised serious concerns about the traditional practices of the English “equity market” and led to its reformation. Therefore, by the end of the 19th century, the custom of distributing partly paid up shares stopped. [76] The above mentioned point is an excellent example of the repercussions of moving away from the “corporate veil principle”.

Frank, Mayer and Renneboog make another point. According to them, the “corporate veil principle” incentivises the shareholders and the company’s creditors to make sure that the company is managed responsibly and professionally.[77] However, due to the fact that the shareholding in modern companies is much dispersed, the shareholders cannot possibly keep a track of the actions taken by the management; even if problems are raised at a general meeting of a company it is virtually impossible to take a resolute action with a dispersed shareholder base. Hence, the only options left to pursue are to make personal changes to the management. [78]  When large credit facilities are made available to corporate borrowers, the lending banks have a vested interest in the management of the company. Hence, the syndicate of banks have the means and incentive to keep the management in constant check. Financing agreements underline conditions which require the company to observe a number of financial covenants, the ratios are calculated from the financial figures of the company’s annual, quarterly and monthly accounts. [79] This enables the lenders to keep a check on the management of the company and gives an impetus to good business practices.

Another advantage of the “corporate veil principle” is related to the borrowing costs for shareholders and companies, and most importantly, to the fact that the lenders can easily monitor the companies’ affairs and shareholders. One aspect of “separate legal personality” and “limited liability” of the company’s members is called “asset partitioning”. “Asset partitioning” shields the shareholders of the company from the creditors by dividing the financial affairs of the company from its shareholders, but more essentially, by protecting the company from the members’ creditors.[80] Hence, the company’s creditors and shareholders must only be concerned with the fiscal performance of one entity or a particular individual’s financial affairs. This makes monitoring more cost effective and reduces overhead costs to be borne by the creditors, and translates into cost saving for individuals and companies. [81]

This argument can be further associated with legal relationships and division of assets amongst corporate groups. Asset partitioning also leads to isolation of different lines of business by using subsidiaries. Posner explains that, this allows the subsidiaries to create personal relationships with lenders who would be more comfortable in taking their chances with that particular subsidiary, hence making it relatively easy to obtain credit which leads to more cost- cutting. [82]

A theory propounded by Blumberg[83] and Rosenberg,[84] and which was elaborated upon by Widen,[85] notes that even though subsidiaries lead to reduction in cost of borrowing, the lenders look for the whole creditworthiness of the company. This is done by “intra-group guarantees”, upstream (by the subsidiary) or downstream (by the parent),), or cross-stream (two or more subsidiaries).[86] The use of guarantees highlights the degree of importance creditors give to the subsidiary structure. It can be easily deduced that, in reality, only a small number of highly successful “corporate borrowers” who can force their lenders to lend substantial amounts of money to particular subsidiaries, without intra- group guarantees.

Even though the theory that lenders are not concerned with the “corporate veil relationships” within the group of companies is logically fitting; it does not explain the reason behind the companies creating subsidiaries to benefit from the “corporate veil principle”. Squire provides an answer to this dilemma, according to him, “the creation of subsidiaries can be explained by the shared interests of the subsidiaries within a group”. [87] This practice when associated with the “corporate veil principle” reassigns the value from the “unsecured creditors” of the corporate group to the shareholders. The group’s solvency lowers the interest rate on “guaranteed loans” which helps the shareholders. But, as Squire points out, when the group faces insolvency, “the triggering of the guarantees makes no difference to the shareholders, because their equity stakes in the guarantor entities are wiped out anyway.”[88]Accordingly, the only parties suffering loss are the unsecured creditors, whose returns are further reduced due to the insolvency. This becomes a hindrance for management of the group structure, as it is costly and is time consuming and also provides no benefits to the whole group. However, it can be pointed out here that different jurisdictions have different approaches to groups of companies. For example, under German law, the “corporate veil principle” is ignored in a wider range of circumstances as opposed to under English law.

The last but most important point on the policy of “corporate veil principle” is that it lets the company to divide the benefits and risks among the different investors. The highest risk is taken by the shareholders (as they can lose all their money when the company becomes insolvent), but receive the highest returns as well (as they receive dividends). The lowest risks are taken by the secured creditors but their returns are “proportionally” lower than the others. There are many “risk- return ratios” open to debt holders which would have never been possible to enforce without the “corporate veil principle”.

It is submitted that the courts and the legislature are well versed with these benefits and since these questions have policy implications, they are not explicitly mentioned in the judgments. The academic debate surrounding the effects of the “corporate veil principle” is still alive, the judicial and academic attitude to the wider framework of corporate law is improbable to change in the near future owing to the overwhelming benefits of the principle in question. This however does not prevent the framework from being amended. The situations and circumstances where the courts have not been disposed to depart from the principles have been analysed in the subsequent chapter.

CHAPTER 3 - Salomon v Salomon and the Common Law

The courts have decided to “lift the corporate veil” in many cases despite the importance given to the principles propounded in the case of Salomon v Salomon. As Professor Davies explains, it is important to differentiate between cases where the “corporate veil” is challenged due to a statue interpretation or a contract and cases where it is challenged based on “common law”. [89]

Ottolenghi points out that there is no limit on the amount of cases when the court has “lifted the corporate veil”.[90] He emphasizes that the judgments that digress from the “Salomon principle are an exception to the rule”.[91] He suggests a re- categorization of the current terminology and delineates four different ‘perspectives’ taken into consideration while deciding whether to “pierce the corporate veil” or not. [92]

Piercing the corporate veil at common law

The courts have not been able to develop a uniform method for deciding what circumstances warrant overlooking the principles of “separate legal personality” and “limited liability”, which would mean “piercing the corporate veil”. The lack of a conceptual threshold in the legal approach has attracted a lot of censure from legal scholars. According to Moore, this is “confusing” and “contradictory”.[93]

Other scholars like Farrar and Hannigan have gone a step further from Moore and have concluded that the reasoning of the courts does not follow a logical pattern and that “it is difficult to start to rationalise the cases except under the broad, rather question-begging heading of policy”.[94] Even though this argument rings true, that the judgments lack “conceptual consistency”, the cases in which the court has lifted the “corporate veil” can be divided under broad headings.  

The “corporate veil” has been lifted under the following labels: (1) “Single economic unit”, (2) “Agency”, (3) “Justice”, (4) “Fraud”, (5) “State of National Emergency”, (6) “Saving legal costs” and (7) “Statute”. The conditions where the “corporate veil” is lifted are not exhaustive. Hence, the margins are ambiguous and unclear. Moreover, as the subsequent case analysis will show, judicial decisions are hard to be categorised under one label.

The exceptions used by the court will be critically analysed to provide a basis for a clearer understanding of the courts’ reasoning. The relevant cases and academic opinion will be considered for this analysis. Currently, the most relevant case on “lifting the corporate veil” is Adams v Cape Industries Plc.[95]

The “Court of Appeal” considered arguments about discounting the principles of “corporate personality” and “limited liability” but eventually dismissed all the arguments.  It is vital to understand the facts of the case in order to understand the court’s reasoning.

Adams v Cape Industries Plc

Cape, an English multinational company having subsidiaries around the world, headed asbestos- related businesses. [96] In late 1970s, the American companies were declared insolvent after facing class- actions. Subsequently, a suit was brought against the company in England. The issue was, if a “parent company” would be considered liable “in a jurisdiction in which its wholly owned subsidiary carried on business”.[97]

To answer this question it will be imperative to overlook the incorporation veil and therefore the principles set out in Salomon will also ignored. What needs to be pointed out at this juncture is that the circumstances in the case necessitated that the “Court of Appeal” focus on interpreting “common law”. The parties did not have a contract and the case did not have any statutory provisions to interpret. This has major repercussions.

“Single economic unit”

The counsel for the claimant in Adams v Cape claimed “single economic unit” as the first argument. This approach was conceptualized by Lord Denning and used in many cases, the most important case being DHN Food Distributors Ltd v London Borough of Tower Hamlets.[98]

The issue to be considered by the court was whether the parent is eligible to claim compensation for losses suffered due to the failure of business under a subsidiary’s “compulsory purchase order”. The “Court of Appeal” assented to this point and opined that the group must be acknowledged as a “single entity” and therefore must be paid fully pursuant to the aforementioned order. It is interesting to note that each of the judges based their judgement on dissimilar reasons.  

Lord Godd showed his inclination to “pierce the corporate veil” on the “realities of the situation” but also pointed out that “the veil cannot be simply ignored with every corporate entity”. [99] The major factor considered by Lord Godd was that Bronze Ltd was owned wholly and had “no separate business operations whatsoever”.[100]

Lord Shaw also emphasized the importance of having a “single group entity”, which can be depicted by having the same directors and a successful business run smoothly by the various other companies in the group. He says, regarding the companies as separate entities is rather unjust as “nobody at all could have claimed compensation”.[101] The issue here is, even though both the judges reached a just conclusion, they did not substantiate their findings with an authority.

Lord Denning MR supported his argument on economics rather than on legal principles. He referred to a passage written by Professor Gower, which claims that when a “common commercial interest” is represented by a “single economic entity”, this leads to “general tendency to ignore the separate legal entities” within the entire group.[102] He also referred to Harold Holdsworth & Co (Wakefield) Ltd v Caddies,[103] where it was opined that the “corporate veil” could be lifted within “corporate groups”.

Lord Denning further solidified his stance by stating that various companies which belong to one group are “treated as one concern” including questions of balance sheets, profit and loss accounts and consolidated group accounts,[104] In his words they “are bound hand and foot to the parent company”.[105]  The economic oneness between the various companies belonging to a single group creates agency relationships between these companies.   

The verdict in “DHN Food Distributors”, challenged the “single economic unit” argument. The “House of Lords” conclusion in “Woolfson v Strathclyde Regional Council”[106] focused the principle subsidies which were owned fully. Lord Keith explained: the “corporate veil must only be lifted where the company is a façade” (a point which will be explained later), but did not completely override the “single economic entity” argument and differentiated the facts of the case in “DHN Food Distributors”. [107]

In spite of initial setbacks, the “single economic unit” argument found flavour with the judiciary and DHN Food Distributors was subsequently agreed with in the following cases: “Amalgamated Investment and Property Co Ltd v Texas Commercial International Bank Ltd”[108] and “Lewis Trusts v Bambers Stores”.[109]

In “Amalgamated Investment” Lord Denning upheld that “single economic unit” principle is authoritative.[110] In “Lewis Trusts” Dillon found “DHN Food Distributors” to be a good case to overturn the conclusion of the judge of the trial court, who did not want to “pierce the corporate veil” in an intellectual property dispute.[111]

The other academics, however, did not take kindly to Lord Denning MR’s new concept, Sugarman and Webb claimed that the decision in “DHN Food Distributors” gives the option to the courts to “disregard Salomon whenever they feel that it is just and equitable to do so”.[112] Rixon went so far as to claim that this case must be considered an “aberration”.[113] It is concluded that these criticisms are true to a large extent. Even though Lord Denning’s approach produced an objective result based on the facts of DHN Food Distributors. The principle’s regular use by the courts in all kinds of circumstances is hard to envision. The introduction of one ground for “piercing the corporate veil” will infuse certainty here.

Supporting the criticism of the legal writers, the courts started opposing this developing principle. In another case of “Bank of Tokyo v Karoon”,[114]  which involved a “banking dispute”, Lord Goff overruled the “single economic unit” which ironically he created in “DHN Food Distributors”. He clarified that the principal objective for rejecting this was that the courts “are concerned not with economics but with law.”[115]

Following a lengthy authority analysis, Lord Slade in “Adams v Cape” quoted the above quote from “Bank of Tokyo” to compellingly discard the suggestion that the “veil of incorporation” could be lifted when “separate legal personality” within a group is a “technicality” , and  where the group exists as one entity even financially.[116] Even though the judgment in “DHN Food Distributors” has never been categorically superseded, the “single economic unit” principle has been successfully overridden by Slade LJ.

Agency

The fiasco of the “single economic unit” principle does not mean that relationships based on agency have ceased to exist within a “corporate group”. As seen by case law[117] and academics[118], Professor Davies submits that a principal (parent or the subsidiary) will always be liable for its agents’ actions.[119] Nonetheless, as discussed, the “contract of agency” leaves the “corporate veil” unharmed (as the parties have contracted out of it).

A virtual “veil-piercing” tool would be when the courts suppose an “agency relationship” when there is no precise contractual arrangement connecting the parties. This was nearly the same way in which the “single economic unit” principle was used ahead of being discarded. A few observations made in the judgment of Adams v Cape, will help us consider the issue of agency in great detail.

Firstly, the elimination of the “single economic unit” principle demonstrates that the courts will not assume a “contract of agency” in the absence of it expressly being mentioned in the contract between the parties, based on the “economic reality” within the “corporate group”. Secondly, Lord Slade stated in “Adams v Cape” that the foothold of agency is “the correct one” when in search of legal responsibility from the parent company in a “corporate structure”.[120] Thirdly, Lord Slade further explained that even though the court is guaranteed to consider the relationship between the “subsidiary” and the “parent” company, there was no presupposition that a “subsidiary” was the extension of the company. This specifies that the presence of a “contract of agency” needs to be established based on evidence and cannot be presumed from the company’s control or the shares’ ownership. Lord Slade then progressed to examine the “contract of agency” in that case in great detail, but was factually unsuccessful in doing so.[121]

It is confounding that his Lordship did not take into consideration, the case of “Smith, Stone & Knight Ltd v Birmingham Corp”,[122] which  is regarded by commentators such as Harris and Griggs as the ground-breaking case on an inferred “contract of agency”.[123] In “Smith, Stone & Knight” Lord Atkinson held that in these particular circumstances the “parent” was held eligible to claim compensation under a “compulsory purchase order”.

Atkinson J came with a six-point test which would be appropriate in deciding whether in a particular situation a subsidiary can be considered as an agent for its parent, which would then permit the court from “piercing the corporate veil”.  Sealy suggests that “to make such an inference where one has not been expressly stated dilutes the Salomon principle”.[124]

 The question of agency is question of degree and fact. In Smith, Stone & Knight, the subsidiary gave unhampered access to the parent to its “books of accounts”, only a single employee (a manager), worked at the premises of the parent who worked without remuneration. There was no substantial confirmation of its “autonomous existence” apart from imprinting on its stationery. This according to Lord Atkinson fulfilled the “six-point test”. His Lordship acknowledged that the companies had the relationship of agency amongst themselves and therefore the “corporate veil” was allowed to be pieced.  

It must be emphatically pointed out at this point that the both the “House of Lords” and the “Court of Appeal” in Saloman have categorically explained that a relationship of agency cannot be presumed between a shareholder and the company.  French and Ryan suggest that the Salomon case can be differentiated from “Smith, Stone & Knight” as even though the business was run by the subsidiary in the latter case, it was never properly reassigned to it.  Hence, it was always under the property of the “principal member[125] Furthermore, in Salomon, the shareholder was not a company but an individual. Moreover, the relationship between the two companies led to the conclusion made by Atkinson J.

In another case, “Re FG (Films) Ltd”,[126]  it was held that there was a “contract of agency” between the two companies in question, an American company and its British subsidiary. The British subsidiary was formed so that the films produced could be recognized as British, which would make them eligible for public subsidy. Lord Vaisey further emphasised that the facts point to the “subsidiary” being just the “nominee of and agent for” the parent company.[127] The judge did not quote any case authority specifically and hence it is hard to rationalise this conclusion based on either the “contract of agency” or “statutory interpretation”. Another approach could be that the British subsidiary was formed as a sham or façade to avoid the provisions of Cinematograph Films Acts 1938 and 1948. This would then be categorised as the “façade or sham” exception, which will be considered later on in the chapter.

The “six-point test” established by Lord Atkinson has not been helpful. Lord Slade did not consider it in “Adams v Cape”, although the test would have been appropriate under the circumstances of the case. Lord Toulson in “Yukong Line Ltd v Rendsburg Investments Corporation (No. 2)”[128] did not follow Lord Atkinson’s approach either. He explained that that Lord Atkinson’s decision was contrary to the verdict in Salomon.[129] It can be inferred this is probably true because had the “House of Lords” followed the “six-point” test they would have reached a very different conclusion.

The “six-point test” was discarded again in two cases settled by the Canadian courts: “Alberta Gas Ethylene Co Ltd v MNR” [130] and “Gregorio v Intrans-Corp”.[131] The courts held in the cases that the test was not strong enough; hence, there are cases where even when all the points of the test are satisfied the “corporate veil” will not be lifted. Even, English courts broadly hold the same view; however, they word their arguments differently.

According to Moore, the area of agency has generated a great amount of confusion.[132] This can be attributed to the mistaken understanding of some academic writers that the agency method is used to pierce the “corporate veil” only at common law.  It is proposed that, technically, the fact that the subsidiary and the parent have a “contract of agency” must be established by a tangible contract between the parties, where they agree inter alia to establish an agency relationship.

Davies explains that in the “absence of an express agreement” between the companies in the “corporate group”, it will be highly unlikely that the court will find a “contract of agency” between the companies in that “corporate group”.[133] Moreover, Sealy rightly points out that making a presumption about an agency will expressly defeat the Salomon principle.[134] The decision in “Adams v Cape” explains that finding an implied agency will only happen in exceptional cases. The main question is till what extent is the case of “Smith, Stone & Knight v Birmingham Corporation” still relevant? Hence, agency should not be regarded as a method of “piercing the corporate veil” but more like a tool the courts use when they consider it pragmatic.

Justice

 Is the “interest of justice” a valid reason to “lift the corporate veil”?  Lord Denning started the idea of “lifting the corporate veil” in the interest of justice in “Wallersteiner v Moir.”[135] He suggested that the court should look into the motives of the incorporator and must have the power to “lift the corporate veil” in order to prevent injustice.[136] This reasoning resonated with his earlier affirmation in “Littlewoods Mail Order Stores Ltd v IRC”[137] that the corporate has “to be watched very carefully”. The decision in “DHN Food Distributors” can also be easily molded into this component of reasoning by the judiciary. Even though, the court based their analysis on “economic interrelationship” within the “corporate group”, the essential reason for their decision for justice. This can be explained on the grounds that even though the judges based their arguments on the “economic interrelationship” within the “corporate group”, the fundamental idea for their conclusion was wholly based justice. Most importantly, it must be kept in mind that very rarely will the “corporate veil” be lifted based on justice alone.

The judgement of the “House of Lords” in “Woolfson v Strathclyde Regional Council”[138] indicated that the “corporate veil” can be lifted in “special circumstances”. But, these “special circumstances” were not explained. Ziegler explains that this indecision curtailed the possibility of justice becoming a “veil- piercing” method.[139]

In another case[140], “Re Polly Peck International plc” (in administration)[141]  the court’s unwillingness to endorse justice as a ground for “piercing the corporate veil” has been described. The decision of Lord Robert Walker submits that the courts will not go so far as to “lift the corporate veil” only on the grounds that there has been some injustice[142]. The attempt to control “limited liability” can be extremely intricate, which is already shown by cases trying to “pierce the corporate veil” solely on the grounds of justice.

The final nail in the coffin of the “justice argument” came with the decision in “Adams v Cape”. Slade LJ explicitly stated that the court is not required to “pierce the corporate veil merely because it considers that justice so requires.”[143] Hence, it can be safely concluded from the above discussion that the courts prefer to steer away from the murky waters of the “justice approach”, usually when dealing with principles like “limited liability” and “separate legal personality”.

Façade or sham

Lord Slade in “Adams v Cape” endorsed that when the “corporate structure” is used as a “facade” to obscure true facts the “corporate veil” should be pierced.[144] The word facade has been synonymously used with “puppet”, “device”, “sham”, “mask”, “stratagem” and “cloak” to emphasize that the company has been misused by a member for his own means, which involves “abuse of the corporate form”. [145] Even though his Lordship explained that this exception is a valid one, it will not be applicable in the present case. He further clarified that in order for the exception to be applicable there must be some form of misconduct or ill regularity on the behalf of the doer.[146] Some academics believe that the confusion has been cleared after the Court of Appeal’s ‘important decision’ in “Adams v Cape Industries Ltd.”[147]

To understand the genesis of the principle, it is vital to mention the case of “Gilford Motor Co v Horne.”[148] The case involved an effort to avoid a non- solicitation agreement by incorporating a new company and trying to do business with the customers of the older company.   The “Court of Appeal” allowed the “corporate veil” to be pierced and allowed the claimant to claim not only against the fraud company but also against the defendant. This action would not succeded if the “separate legal personality” principle would have been considered.

In the case of “Jones v Lipman”,[149] the defendant tried to defeat a order of “specific performance” for sale of land, by incorporating a company and transferring the land to the newly formed company. Russell J in his well-known statement explained that the new entity was “the creature of the first defendant, a device and a sham, a mask which he held before his face.”[150] He therefore pierced the “corporate veil” and gave “specific performance” orders against both the defendant and fraud company. It can be easily concluded that the conclusion in this case was able to achieve justice between the parties and the facts are a true portrayal of the scenarios that can occur within this exception.

Sir Andrew Morrit pointed out in “Trustor AB v Smallbone”,[151] that companies “are often involved in improprieties”. He went on to claim, per curiam, that a company was formed for an ulterior motive or improper objective does not automatically render the company fraudulent. [152]  Hawke and Redgreaves further clarify this point by adding that this exception is a “question of fact and degree”. [153] According to the law as it stands today, this is the accurate conclusion. Conversely, this increases the ambiguity already present in this issue.

It has been claimed that this is the only real exception to lawfully “pierce the corporate veil”. Hawke and Redgreaves opine that even though the courts have explained the sham exception, they have not provided a satisfactory answer to the question: “what is a sham company?”[154] They further explain that even Slade LJ in his “Court of Appeal” judgement did not provide a proper answer to this question. It is important to explain at this juncture that the courts have kept this definition fluid for a reason. This allows them to apply this definition whenever they deem fit, as opposed to forming a narrow test.

National Emergency

Another ‘label’ or ‘exception’ used by the courts to “lift the corporate veil” is “national emergency”. The case of “Daimler v Continental Tyre and Rubber Co”[155] is a perfect example of action being taken by the court under this exception. A company that was incorporated in England was considered to be a foreign company due to the nationality of the shareholders of the company. The scope of this exception is limited largely to this single case.    

It can be concluded that this ‘label’ does conceptually make sense and it would be better explained as “policy”. It must be used in situations when the policy of the nation demands overriding the law of corporations. It can be easily deduced that the courts must apply an established exception to the “corporate veil principle”. And, it can be also claimed that the courts must wait for legislative action prescribing them to use this exception in times of “national emergency”.     

Saving Legal Costs

Ryan and French have suggested another exception to the Salomon Principle in their textbook.[156] According to them in many cases the courts have taken the decision to “pierce the corporate veil” to avoid avoidable legal costs. One example of the courts’ eagerness to “lift the corporate veil” while deciding multifaceted and expensive cases in insolvency. In “Re Bank of Credit and Commerce International SA (No 3)”[157] it was decided that a number of companies’ assets must be united to overcome avoidable expenditure on professional fees and other costs. Another case, Taylor[158] shows that insolvency can also be on a small scale. In this case, a couple who owned two relatively small companies pooled the companies’ resources together.

It is submitted that a more appropriate ‘label’ would be “insolvency”, as opposed to “saving legal costs”. This is because during “insolvency” the creditors’ interests of the company and not the interests of the shareholders come to the fore. Consequently, the courts must be free to lift the veil to protect the interests of the creditors and when it causes no injustice to any other party. These steps will not only be a way to save costs, it will also be efficient from the judicial resource management vantage point.  

Statute

In addition to the exceptions listed above, the courts have “pierced the corporate veil” if the statute permits. Lord Diplock stated in “Dimbleby v National Union of Journalists” [159] that for the veil to be pierced there must be “clear and unequivocal language.”[160] Section 767 of the Companies Act 2006 (CA 2006) states that, the veil of incorporation must be automatically lifted when business is carried out by a company without a trading certificate. Therefore, the directors will be held responsible for any losses suffered by any other party a when the company defaults in complying with its obligations.  

Under the Insolvency Act 1986, the court can be presented with a “winding- up petition” based on “just” and “equitable grounds”.[161] In Ebrahimi v Westbourne Galleries[162], the court disregarded the “corporate veil” on such a winding- up petition.[163] Sections 213 and 214 of the aforementioned act, dealing with “fraudulent trading” and “wrongful trading” respectively, also permit the courts to “lift the corporate veil”. Section 213 relates to a third person who is party to the fraudulent dealings, whereas under section 214, relates to the director of the company who despite the knowledge of possibility of “insolvency” continues trading. 

Chapter 4 – Recent developments in the Common Law

This Chapter will evaluate critically the consequences and ramifications of “Prest v Petrodel Resources Ltd”[164] decision on the “corporate veil doctrine”. This chapter will show that the decision has not harmed the Salomon principle. It will illustrate the Law Lords’ view of the “doctrine” which was not lucid. This will follow a detailed analysis of the Supreme Court’s view of the “doctrine”. This will be followed an analysis of the “concealment and evasion” principle propagated by Sumption LJ. Then the reconciliation of the old “corporate veil” cases will be examined.     

The question of when to “pierce the corporate veil” and override Salomon principles has always occupied judges, lawyers and academics. Prest gave an opportunity to the Supreme Court to clarify the question of “lifting the corporate veil” even though it was not completely successful in answering the question.

Piercing the corporate veil - No Such Doctrine

Astonishingly, Neuberger LJ claimed[165] that a precise doctrine for “piercing the corporate veil” has never existed since it was invoked in “Gilford Motor Co Ltd v Horne”.[166] This can be the primary reason it has received so much criticism.[167] It can be also surmised that it a principle that many have failed to categorize and it is not even a doctrine.  Lord Sumption[168] referred to “lifting the corporate veil” as an exception to the Salomon principles and said that it is “simply a label used to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a body corporate”. Neuberger LJ and Clarke LJ refer to it as a “doctrine”. Mance LJ calls it “a metaphor”[169] and Walker LJ claimed “it is not a doctrine at all, in the sense of a coherent principle or rule of law.” 

Even the terms “veil”, “mask”, “façade” and “sham” have been unsuccessful in removing the uncertainty. Furthermore, Sumption LJ[170] used “façade” and “sham” like “protean” terms. What it means is that “piercing the corporate veil” can be in many forms and shapes. Neuberger LJ  who quoted C Mitchell, in “Lifting the Corporate Veil in the English Courts: An Empirical Study”[171] observed that “courts have often used conclusory terms to express their decisions on the point, which for all their vividness tell us nothing about the reasoning which underpins these decisions.”

The Origins of the principle

Lord Sumption in the Supreme Court surveyed all the cases in this area to overcome ambiguity and to understand the principle that underlines the “doctrine’s invocation”. He claimed that “law defines the incidents of most legal relationships between persons (natural or artificial) on the fundamental assumption that their dealings are honest.” [172]   Furthermore, he quotes Denning LJ in “Lazarus Estates Ltd v Beasley” [173] who stated: “Fraud unravels everything”.  The decisions emphasized a principle that “governs cases in which the benefit of some apparently absolute legal principle has been obtained by dishonesty”. According to Sumption LJ the cases depict situations where the company is used as a medium to escape law and for fraudulent purposes. 

After analysing family and non- family cases on “piercing the corporate veil”, Munby J in the case of “Ben Hashem v Al Sharif” [174] created six principles to be applied in “piercing the corporate veil”.[175] The court would then “pierce the corporate veil” in exceptional situations to provide justice. It was claimed that these aforementioned six principles must only be used after the traditional principles do not solve the issue. The “Court of Appeal” in the case of “VTB Capital v Nutritek International Corpn”[176] disagreed about the principles being used as a last resort remedy. Lord Neuberger made the position more clear, “I agree that, if the court has power to pierce the corporate veil, Munby J was correct in “Ben Hashem v Al Shayif” [177] to suggest that it could only do so in favour of a party when all other, more conventional, remedies have proved to be of no assistance (and therefore I disagree with the Court of Appeal in VTB,[178] who suggested otherwise.”[179] Furthermore, the “Court of Appeal” when accepting the six principles stated: “the relevant wrongdoing must be in the nature of an independent wrong that involves the fraudulent or dishonest misuse of the corporate personality of the company for the purpose of concealing the true facts.”[180]

Concealment and Evasion

 Sumption LJ categorically emphasized that the principle of “concealment” was “legally banal” and did not require “lifting or piercing the corporate veil”. Hence, this principle was only used when the company’s controllers were concealing their true identity behind the corporate veil, the court would then look behind the “facade” to find out the truth. Ottolenghi[181] claims that here the court is just “peeping behind the veil” and where the Salomon principle is temporarily suspended to determine who really controls the company. He maintains that it is solely an “act of curiosity” and is the “least offensive to the separate entity theory”. This does not pose many problems for the principles laid down in the Salomon case. 

The evasion principle comes into play when the individuals behind the company use its separateness to escape their legal liability. By shielding themselves behind the “corporate structure” and the company’s “separate legal personality” they attempt to escape their own responsibility. Hence, the court decided to “lift or pierce the corporate veil” in these circumstances.    

This scenario is completely different. Here the court does not temporarily overlook the Salomon principles but denies it completely. However, it not easy to tell which principle is at play in a given situation, Lord Sumption believes that numerous cases have fallen into both the situations simultaneously. What needs to be pointed out at this juncture is that, the differentiation between the two remains vital because this will lead to the court deciding how to “pierce the corporate veil.”[182] Lord Clarke contends that this distinction between evasion and concealment should not be “definitively adopted unless and until the court has heard detailed submissions upon it.”[183]

Reconciling Corporate Veil cases

When Sumption LJ analysed the case of “Gilford Motor Co v Horne”[184]he explained that the action against Mr Horne, the company’s controller was taken under the “concealment principle.” Thus, the separateness of the “corporate structure” was suspended momentarily to gauge the truth “behind the corporate veil”. Nonetheless, when the relief was delivered against the company this took the “evasion principle” into account and pierced the corporate veil. This was further clarified by Lord Sumption as: “Mr Horne's personal creditors would not, for example, have been entitled simply by virtue of the facts found by Farwell J, to enforce their claims against the assets of the company.”[185] Similarly, in the case of Jones v Lipman[186] the judge passed a specific performance degree under the “concealment and evasion principle” and reference was made to the decision in Horne.

In all the above cases, Lord Sumption pointed out that the relief was granted under the “concealment principle” and not the “evasion principle.” Therefore, the issue of “piercing the corporate veil” did not arise. For the “evasion principle” to come into the picture the company’s controllers must use the separate legal character of the company to escape their personal obligations. In Lipman and Horne both, the companies’ controllers were personally liable, and this liability was distinct from the company’s liability. But by involving the separateness of the company they have invoked the “invasion principle” which allows the courts to “lift the corporate veil”.   

This reflects the primary principle that the “lifting or piercing of the corporate veil” may only be done to thwart the attempt to abuse “corporate legal personality”. This principle is sacrosanct in corporate law and needs to be protected if the effectiveness of the law needs to be maintained.  However, it must be born in mind that it is not an abuse per se if “legal liability” is incurred by the company. Moreover, if the liability can be actually attributed to the company then relying on this would also not be termed as an abuse.[187] Sumption LJ agreed with Munby LJ in “Ben Hashem v Al Sharif” and said that “piercing the corporate veil” is an important doctrine although has a limited place in English law.”[188]

The Other Law Lords

The other Lords basically agreed with Sumption LJ. However, Lord Neuberger opined that in both Horne and Lipman solely the “concealment principle” came into the picture, and hence there was no need to “pierce the corporate veil.” Lord Neuberger believes that this makes a very useful instrument for the Courts. According to him it is a “potentially valuable judicial tool to undo wrongdoing in some cases where no other principle is available”, however the main point to be noted here is that a coherent approach must be followed. The doctrine must be reconciled with the old decisions and used as a “practical solution”.[189] On the other hand, Lady Hale was not convinced that the “doctrine” could be divided into neat boxes of “concealment and evasion”, but they can be used as broad principles for conducting business properly.  Even Lord Mance agreed that this differentiation is too narrow to encapsulate all the issues that can occur in this area of law. He considered “piercing the corporate veil” as “a final fall-back” explanation which would occasionally arise.[190] Finally, Clarke LJ claimed that this distinction had not been subject of submissions and it needed to go through this route before being fully accepted.

CHAPTER 5 – Legislation needed to depart from Salomon v Salomon

It can be easily deduced from the above analysis that the principles framed over the years are exceptionally intricate, not correlated and have not reached a consensus. From the point of view of legal certainty the discrepancies involved in judicial judgements creates a difficulty. The assessment of judicial developments in law will be considered to provide reasonable resolution of the issue.

Can veil-approach be considered as an apt method?

It is presented by the legal writers that the judicial courts synthetically create the issue that whether it’s suitable to “lift the corporate veil” or not. French and Ryan mention numerous instances of cases where the courts took into consideration the “separate legal personality” concept when actually it was irrelevant.[191]

In “Littlewoods Mail Order Stores Ltd v IRC”[192] and “Wallersteiner v Moir”,[193] Denning LJ highlighted the issue of “veil-piercing”. This is regarded as his failed attempt to introduce justice in line with the common law rules regarding “legal personality”. An interesting point to be observed is that in all individual cases the judges concluded that “veil-piercing” was not needed yet they arrived at the same conclusion. The repetition of this situation was seen in the case decided by “Court of Appeal” in “Amalgamated Investment and Property Co Ltd v Texas Commercial International Bank Ltd”[194] where Denning LJ was the only one to hold that the amount of the subsidiary shall be treated as that of the parent’s company even though it is the money of its subsidiary by overlooking the corporate veil.

The same point was more broadly explained in the case Jennings v Crown Prosecution Service[195] where the judge opined that “lifting the corporate veil” of incorporation was reasonable where the employee acting as an agent of the company, committed fraud on the customers of the company. Nevertheless, French and Ryan pointed out that the act of the agent and not of the company attracted liability. Hence, it can be said there was no necessity of overlooking the “separate legal personality” of the company in that issue.

From the above analysis it is recommended to the courts that whenever it is possible, they need not raise the issue of “piercing the corporate veil”. As discussed in Chapter 2, the “separate legal personality doctrine” is sacred to English company law and must be adhered to as often as possible. It is argued that few judges in many cases have been quick to overlook the Salmon principles even though there was availability of other grounds to reach a “just and equitable” outcome.  

Even though French and Ryan are right to a large extent, it is ludicrous to propose that ignoring “veil piercing” can be a solution to the issue. Moreover, there are situations where piercing the corporate veil is the only answer to the legal quagmire. As discusses previously, the case of Adams, has narrowed down the scope of the courts to “pierce the corporate veil” and deviate from “separate legal personality” as espoused in “DHN Food Distributors” by Lord Denning. 

New developments in bypassing separate legal personality

Lord Slade has expressed strong views in the Adams case that if an express agency agreement does not exist, then the “lifting of corporate veil” can only happen in the event of a  “sham” or “façade”. From then onwards the courts begin to explore other means and grounds to overlook the principle of “separate legal personality.” One such attempt failed but others have had sustained support from the judiciary. These improvements will be discussed in this part to focus on the means to advance this part of law.

The origin of the initial attempts can be traced to Burton J’s decision in the case of “Gramsci Shipping Corp v Oleg Stepanovs”[196]. The judge decreed that since the parent company is controlling master mind of its subsidiaries it cannot be exempt from being a party to the charterparties.[197]

The principle that can be derived from the current judgment of Burton J is that if the “corporate veil” is pierced there is a risk of overlooking another radical doctrine under the English law i.e., privity of contract, which means that the parent company would be considered as a party to the contract entered by its subsidiary but not by the company itself. Burton J while sitting as the High Court judge applied the approach in “Alliance Bank JSC v Aquanta Corp & ors”,[198] that involved choice of complicated forum requests, connected with “corporate personality issues.”

From the outset, the proposition that “lifting the corporate veil” would overthrow the principle of “privity of contract” garnered attention and controversy.[199] As expected, this approach was abandoned in the “VTB Capital plc v Nutritek International Corp & ors”[200] by the “Court of Appeal”. Further in the judgement the “Court of Appeal” established the third parties in dispute as controlling "puppeteers" of the company.[201] Nonetheless, the court disregarded the view that those who exploited the corporate structure legitimising the “lifting of the corporate veil” could also be considered as part of the contracts entered into by the company and third parties. Burton J’s stand and explanation in the case of “Gramsci Shipping” and in Alliance Bank JSC[202] was disagreed by Lloyd LJ. The overruling of both the decisions can be hailed as a positive step as it clears the hazy picture of the law to some extent.

Mitchell claims that the argument put forward by Burton J was contradicting the fundamental principles of English contract law and hence raised a conceptual issue.[203] Arthur, however, argues that a point can be made that in many circumstances it is not easy to delineate borders among various law areas which may push the courts to accept exceptions in another area of law.[204] Moreover, it can be recommended that the “Court of Appeal” in “VTB Capital v Nutritek” was correct in supporting Mitchell’s argument as opposed to that of Burton J, as the proposition of the latter questioned the primary principle contract law, the privity of contract.

Another change seen in the recent times in the “law of corporate veil piercing” can be attributed to two cases adjudicated by the House of Lords: “Connelly v RTZ Corp Plc”[205] and “Lubbe v Cape Plc”.[206] In both the cases, court was eligible to “pierce the corporate veil” and impose “tortuous liability” on the parent company. But these rulings were largely restricted to the “choice of forum” and did not give any clarification on the merits of the above proposition.

This matter was brought before the courts very recently. In Chandler v Cape plc,[207] the Court of Appeal explicitly expressed that there exists a duty of care on the parent company towards the employees of its subsidiary company. The employees suffered lung diseases due to working in a hazardous environment and the company failing to provide basic safety equipment. The court in deciding the case opined that the parent company had undertaken the responsibility for the subsidiary company’s actions.

Lady Justice Arden acknowledged through her speech in Chandler that if certain laid down conditions are met then the parent company can be held responsible for the health and safety of the employees of the subsidiary.  This tortuous liability’s conditions are: the business of parent and subsidiary company being significantly similar and the parent possessing superior knowledge of safe systems in the given industry. Moreover, the parent company must be aware of the subsidiary’s dangerous work environment and that the employees of the subsidiary company are likely to rely on the parent company’s knowledge.[208]

The above mentioned conditions are relevant only in case of “tortuous liability”. Further, Arden LJ clarified that the situations in front of her were not “in any way concerned with what is usually referred to as piercing the corporate veil.”[209] She stated that the reason behind imposing the liability is because of the existence of “duty of care” and not because one company was a parent and other a subsidiary company.[210] It can be concluded that this method theoretically recognises the basic doctrine that companies in a “corporate group” are separate entities.

It can be safely deduced that the recent cases discussed above are a step in the right direction as they are taking the law of the “corporate veil” forward. The now famous approach adopted by Burton J that questioned not one but two fundamental principles of English law, “separate legal personality” and “privity of contract” has been out rightly rejected. The promising doctrine of “tortuous liability” for parent companies has been received with judicial and academic applause.[211] It can be pointed out at this juncture that this is similar to the generic approach propagated by French and Ryan, i.e. to avoid “lifting the corporate veil” if other approaches can solve the issue without violation of the fundamental principles of company law.

It should be taken into considered that from a practical perspective the outcome gained by “lifting the corporate veil” and using “tortuous doctrine” is very similar. From an abstract point of view the latter is seen to be more consistent and sophisticated. As explained above, in certain situation “lifting the corporate veil” will be non- negotiable. And it is in such cases that the law appears vague and ambiguous and therefore codifying the law in this area might make things easier.

General Ultimate Purpose Test

Marc Moore in his article “A temple built on faulty foundations”[212] has suggested codifying and expounding the law relating to the “piercing of the corporate veil.” He suggested a harmonised test that would take the place of the existing number of judicial approaches to overcome the difficulty of “separate legal personality” of companies.

Moore points out an issue and explains that courts previously used the “sham” exception in many cases to highlight the abusive usage of “separate legal liability” doctrine. Conversely, in Adams case the scope for “lifting the corporate veil” was strictly narrowed under this umbrella. Moore claims this to be “doctrinally unsustainable”, as the lower courts are bound by the decision.[213] The argument put forth seems widely accepted[214] since the rule laid down in Adams  aims to fill the gaps created by strictly following the radical approach to “piercing of the corporate veil.”

Moore claims that a new uniform test which would encompass all the “corporate veil” cases will solve the problem. The General Ultimate Propose test (GUP) is used for determining whether the decision to “lift the corporate veil” is justified. The test is two- folded. Firstly, it must be found out that whether the company in question was incorporated to protect the incorporate from escaping legal responsibility. Secondly, it has to be proven that this escape from liability and not a “longer-term strategic goal” is the true reason for the company’s incorporation.[215] When these two conditions are proved, only then the “separate legal personality” of the company will be dismissed.

Moore admits that the first step of the test is easily proved in case of all “limited companies”; since, the Salomon principle acknowledged that the protection of the shareholder and the incorporator is the main objective of starting a business.[216] The second lap of the test has the potential to improve the area of law. Moore explains that this approach will override one important problem. Previously, the courts have focused on authorities which have been arbitrarily selected and adjudicated on the fundamental principle of “separate corporate personality.” This led to the establishment of theoretically hollow doctrines such as “justice” and “single economic unit” exceptions to the “corporate veil principle.” The major attraction of the GUP test is in the lucidity and precision of its definitions. This will deter the courts from creating new perspectives to “lift the corporate veil” in the absence of any strong authority. Moreover, if this test is introduced by the legislature, the courts would not have to struggle with the question which demands the precise meaning of a “sham” company.

However, it can be pointed out that the GUP test still leaves a lot of room for judicial interpretation. The various concepts of “sham” and “facade” would be replaced by the requirement to find out the true meaning of “ultimate purpose”. The second lap of the test is really subjective and it is difficult to provide a definite answer to this question. Moore answers such objections easily by saying that the challenges faced by the GUP test are very less compared to the current state of law. It can be pointed out here that the uniform test may not be applicable in every case. This may to be true to a certain extent, but the test appears to be more   elastic and broad than the current widely accepted heading of “sham” and “facade”. The GUP test, however, leaves the situations of bad faith outside its scope. As noted above, this may be most efficiently and effectively be carried out though legislation.

Should legislative action be taken?

The emerging debate about codification of this area of law has thrown up many difficult questions about how this can be accomplished successfully. If the courts had wished to legislate on the issue of “corporate veil” they could have easily raised the discussion during the passage of the Companies Act 2006. Hence, it can be argued that the decision-makers felt the importance of establishing an approach to override the Salmon principle (leaving scope for new ideas). Conversely, the legislative decisions are more often than not based on the matters of policy and policies can be easily changed if good reasons warrant the change.  

Another risk associated with legislating in this area deserves to be mentioned here. If the was a codification, it will become easier for the companies in question to override their liability by finding loopholes in the statue, like it is done in tax law. Nonetheless, if the text is drafted widely by the legislature and the judiciary shows flexibility in its interpretation it could provide a reasonable deterring effect to such misuse of corporations. Defining the right of the courts to create new ideas and perspectives that do not involve “lifting the corporate veil” but which lead to similar outcomes requires considerable importance. The “tortuous liability” principle where the parent companies are made responsible for the safety of the employees of its subsidiaries which was conceptualised in Chandler is one instance of an approach which does not touch the Salomon principles.  

Apparently, the courts have been unsuccessful in establishing an all-encompassing principle to clarify the situations in which the courts can legitimately “lift the corporate veil”. Moreover, the circumstances in which the exceptions can be used are also ambiguous and blurred. Justice is only reached when the means of achieving it are clear principles which can be easily relied upon. Lord Parker explained in “Daimler v Continental Tyre”:[217] that the “legislature might, but no court could possibly, lay down a hard and fast rule”.[218] Lord Parker was right over a century ago and still is even now. The law in this area needs to be revised and made more certain. The Parliament must accept its role and legislate precise rules which will establish a more certain jurisprudence in this area of law.

CONCLUSION

This paper had depicted that the present state of the law in “lifting the corporate veil” is far from perfect. As stated right at the beginning the principles of “limited liability” and “separate legal personality” are the foundations on which English company law is based. It is the basis on which not only the companies in England & Wales but all global companies operate. From this vantage point, the dilemma faced by the Courts when considering matters regarding the “corporate veil” becomes even more important.   

On one hand, the courts have shielded and guarded the Salomon principle. Considering justice and equity issues in the face of these well laid rules becomes more difficult and cerebrally challenging as opposed to blindly following the principles laid down in the celebrated case. On the other hand, some judges supported views that ignored the Salomon principles and abstractly undermined the law. It has been recommended by this paper (in Chapter 2) that there are multifarious policy considerations that have to be borne in mind when establishing rules that question the “separate legal personality” and “limited liability” doctrines. Hence, it can be suggested the legislature is better equipped to deal with this problem and the courts are better equipped to shape the future interpretation of this law.

The various realistic situations that may require the “lifting of the corporate veil” or any other associated solution have been examined. This has been discussed in Chapter 3. These various circumstances have been categorized under various labels and headings; a comprehensive classification has not been successful. Therefore, a uniform resolution, the “General Ultimate Purpose Test” propounded by Moore has been suggested. However, it must be explained at this juncture that some flexibility must be allowed for the judges to encompass all the situations that could arise under the same circumstances, especially when justice could be reached without “piercing the corporate veil”.

The decision of the Supreme Court in the case of “Prest v Petrodel Resources Ltd” has been revolutionary on two levels: a) going beyond the confusing language like “facade”, “sham” and “justice” which was the focus of English jurisprudence till this time b) the earlier exceptions and grounds have been re-categorized into the “concealment and evasion principle”. This has attempted to bring some semblance of clarity into this area which has been riddled with ambiguity. However, as already discussed above in the paper, in practice it is sometimes difficult to differentiate between the “concealment and evasion principle” because they overlap with each other. 

The Supreme Court endeavoured to analyse the decision in Prest and upheld that fraud or abuse of law will not be tolerated. The approach in Prest moves away from the “facade” or “sham” perspective which is difficult to prove to the “concealment and evasion principle” which makes more commercial sense. This decision strikes a balance between principle and policy, principally adhering to questions of “justice” where the courts try to achieve “substantive justice” by making sure that the corporate form is not being misused. These rules will bring about more clarity in the law.

The limits of the exceptions to “separate legal personality” and “limited liability doctrine” have undergone numerous changes since the decision in Salomon. Additionally, the new developments have led to a constantly changing area of law. If the lack of lucid rules is considered, it is hardly surprising that over the decades new grounds to overcome the principles have surfaced. Nonetheless, the demand for legal precision in the current state of affairs has necessitated the need for legislative action setting out clear rules to undertake “veil piercing”. 

This can be carried out easily. Devlin JL opined in “Bank voor Handel en Scheepvaart NV v Slatford”, "the legislature can forge a sledgehammer capable of cracking open the corporate shell."[219]  Moore’s “General Ultimate Purpose Test” can be the starting point, but it must be pointed out that it is one of the many legislative solutions that can be implemented. Public consultation and the law commission can generate reasonable and acceptable legislative proposals. No single solution is ever ideal. It has been pointed out in this paper that even though the legislative approach also has its weaknesses, it is the best course of action in the present state of affairs.

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Footnotes

[1] [1991] 4 All ER 769

[2] As referred to by Ottolenghi, S., ‘From Peeping behind the corporate veil to ignoring it completely’, [1990] 53 MLR 338

[3] Ibid. at p. 779 per Staughton LJ

[4] Ottolenghi, op.cit. p. 340

[5] This point is arguable, but for the benefit of this paper lifting the veil is not regarded as having a significant effect on the Salomon principle.

[6] Ibid. at p. 779 per Staughton LJ

[7] [1953] 1 QB 248, 278 (Devlin LJ).

[8] Hansmann, Henry, and Reinier Kraakman. "What is corporate law?." (2004): 1-19.

[9] Bourne, Jane. "Lifting the corporate veil." Juta's Bus. L. 10 (2002): 114.

[10] Bainbridge, Stephen M. "Abolishing veil piercing." J. Corp. L. 26 (2000): 479.

[11] Gevurtz, Franklin A. "Piercing Piercing: An Attempt to Lift the Veil of Confusion Surrounding the Doctrine of Piercing the Corporate Veil." Or. L. Rev. 76 (1997): 853.

[12] Williams, ‘Fraudulent Trading’ [1986] 1 Companies and Securities Journal 14 at p. 14

[13] Pickering, Murray A. "The Company as a separate legal entity." The Modern Law Review 31.5 (1968): 481-511.

[14] (1897) AC 22 HL

[15] This principle was already discussed in the earlier authority of R v. Arnaud (1846) 9 QB 806

[16] J.Armour (n.1) p.6; G. Mitchell, “Piercing the corporate veil to impose contractual liability on a director” [2012] 3 JIBFL p.149

[17] Pettet, B., ‘Limited Liability- A Principle for the 21st Century?’ [1995] CLP 125, p.151

[18] H. Hansmann, R. Kraakman & R. Squire, “Law and the rise of the firm” (2006) 119 Harvard Law Review p.1333

[19] H. Hansmann & R. Kraakman, “The essential role of organisational law” (2000) 110 Harvard Law Review p.387

[20] J. Armour (n.1) p.7

[21] H. Hansmann & R. Kraakman (n.13) p.411-413; cf capital reduction provisions in the Companies Act 2006, s.642-644

[22] B. Pettet, „Limited Liability – a principle for the 21st century?” (1995) 48 Current Legal Problems p.125-136

[23] See e.g. J. Birds, Boyle and Birds’ Company Law, 8th ed (Jordan Publishing Limited, 2011) p.55; Kahn-Freund, “Some reflections on Company Law Reform” (1944) 7 MLR 54 p.55; D. Millon, “Piercing the corporate veil, financial responsibility, and the limits of limited liability” (2007) 53 Emory Law Journal p.1309-1310; B. Pettet (n.10) p.136; J.S. Ziegel, “Is incorporation (with limited liability) too easily available?” (1990) 31 Les Cahiers de Droit p.1089-1091

[24] Under English law, limited liability is not only the attribute of companies, but also of other legal forms, such as limited liability partnerships (LLPs)

[25] Marking the enactment of the Bubble Act 1720

[26] R. Harris, Industrialising English Law: Entrepreneurship and Business Organisation 1720–1844 (Cambridge University Press, 2000) p.2-3

[27] The Limited Liability Act 1855 (until the enactment of the Companies Act 1862) provided the possibility of acquiring limited liability only to companies with at least 25 members

[28] [1895] 2 Ch 323

[29] Broderip v Salomon (n.29) p.340 Lindley LJ

[30] Broderip v Salomon (n.29) p.345 Kay LJ

[31] Salomon v Salomon (n.2) p.38-39 Lord Watson

[32] Salomon v Salomon (n.2) p.49

[33] Companies Act 2006, s.7(1)

[34] Salomon v Salomon (n.2) p.46-47 Lord MacNaghten

[35] Broderip v Salomon (n.29) p.330-331

[36] Broderip v Salomon (n.29) p.338

[37] Salomon v Salomon (n.2) p.51

[38] Salomon v Salomon (n.2) p.31

[39] Williams, ‘Fraudulent Trading’ [1986] 1 Companies and Securities Journal 14 at p. 14

[40] [1916] 2 AC 307

[41] Daimler Co Ltd v Continental Tyre and Rubber Co Ltd [1916] 2 AC 307 338

[42] Ireland, P., ‘The Triumph of the Company Legal Form, 1856-1914’, in Adams, J., (ed), Essays for Clive Schmitthoff, (1983), p.30 and [42] Gower, Gower's Principles of Modern Company Law, (5th ed), (London: Sweet & Maxwell, 1992), p 88.

[43] Lee v Lee’s Air Farming Ltd [1961] AC 12; Tunstall v Steigmann [1962] 2 QB 593

[44] Bank voor Handlen Scheepvaart NV v Slatford [1953] 1 QB 248; Coleg Elidyr (Caerphill Communities Wales) Ltd v Koeller [2005] 2 BCLC 379 401

[45] Butt v Kelsen [1952] Ch 197

[46] Ebbw Vale UDC v South Wales Traffic Area Licensing Authority [1951] 2 KB 366; Pegler v Graven [1952] 2 QB 69; J.H. Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1989] Ch 72 (CA), [1990] 2 AC 418 (HL)

[47] D & L Caterers & Jackson v D’Ajou [1945] KB 364; South Hetton Coal Co v North Eastern News Association [1984] 1 QB 133

[48] Ireland, P., ‘The Triumph of the Company Legal Form’, 1856-1914’, in Adams, J., (ed), Essays for Clive Schmitthoff, (1983), p. 32 – 33.

[49] Khan-Freund, ‘Some Reflections on Company Law Reform’, (1944), 7 MLR 54 at p. 56

[50] Ibid. p. 54.

[51] Kahn-Freund p.55

[52] Goulding, S., Principles of Company Law (1996), London: Cavendish Publishing Limited, p. 49

[53] Kahn-Freund (n.50) p.56

[54] It will be seen in Chapter 3 whether any such boundaries have been introduced since the date of his article

[55] B.F. Cataldo, “Limited liability with one man companies and subsidiary corporations” (1953) 18 Law and Contemporary Problems p.473-474

[56] G. Mitchell, “Piercing the corporate veil to impose contractual liability on a director” [2012] JIBFL p.149

[57] Pettet (n.10) p.135

[58] P. Spender, “Resurrecting Mrs Salomon” (1999) 27 Fed L Rev p.217

[59] Ziegel (n.11) p.1082

[60] Ibid

[61] For example, the requirement, for small-incorporated companies to give guarantees in respect of the company’s indebtedness.

[62] Littlewoods Mail Order Stores Ltd. v. Inland Revenue Commissioners [1969] 1 W.L.R. 1241 at 1254 per Lord Denning M.R.

[63] M. Moore, “A temple built on faulty foundations: piercing the corporate veil and the legacy of Salomon v Salomon” (2006) JBL p.181

[64] A. Hicks & S.H., Cases and Materials on Company Law, 6th ed (Oxford University Press, 2008) p.103

[65] Adams v Cape Industries [1990] Ch 433 536

[66] L.S. Sealy, “Personal liability of directors, and officers for debts of insolvent corporations: a jurisdictional perspective (England)” in J Ziegel , “Current Developments in International and Comparative  Corporate Insolvency Law” (1994) Ch.21 & 22

[67] e.g. Greenhalgh v Arderne Cinemas [1951] Ch 286 291; Company Law Review, “Modern Company Law for a Competitive Economy: Strategic Framework” (1999) para.5.1.12; Davies (n20) para16.25-16.26

[68] Companies Act 2006, s.172; French, Mayson & Ryan (n.23) p.32-33

[69] M. Yavasi, “Shareholding and board Structures of German and UK companies” (2001) 22 Co Law p.47; P.L. Davies, “Board Structure in the UK and Germany: Convergence or Continuing Divergence?” (2000) 2 Intl Comp Corp LJ p.453-455

[70] French, Mayson & Ryan (n.23) p.55

[71] P. Halpern, M. Trebilcock & S. Turnball, “An economic analysis of limited liability in corporation law” (1980) 30 UTLJ p.117

[72] Insurance companies would, in turn, be reliant on the engagement of wealthy investors in the monitoring of the companies’ performance

[73] Ibid.

[74] J.B.Jefferys, “The denomination and character of shares, 1855-1885” (1946) 16 Economic History Review p.45

[75] J.B. Jeffreys (n.67) p.45

[76] J.B. Jeffreys (n.67) p.46-47

[77] J. Frank, “Who disciplines management in poorly performing companies?” (2001) 10 Journal of  Financial Intermediation p.209

[78] J. Frank p.225-227

[79] J. Frank p.230-231

[80] H. Hansmann & R. Kraakman, “The essential role of organisational law” (2000) 110 Harvard Law Review p.387

[81] J. Armour, “What is Corporate Law?” in R Kraakman, The Anatomy of Corporate Law: A Comparative and Functional Approach, 2nd ed (Oxford University Press, 2009) p.1 &10

[82] R. Posner, “The Rights of Creditors of Affiliated Corporations” (1976) 43 University of Chicago Law Review p.507-509 & p.516-17

[83] P.Blumberg, “Intragroup (upstream, cross-stream, and downstream) guaranties under the Uniform Fraudulent Transfer Act” (1987) 9 Cardozo Law Review p.685 & p.728

[84] R. Rosenberg, “Intercorporate Guaranties and the Law of Fraudulent Conveyances: Lender Beware” (1976) 125 University of Pennsylvania Law Review p.235

[85] W.H. Widen, “Corporate form and substantive consolidation” (2007) 75 George Washington Law Review p.265

[86] Under accounting standards, these are known as “contingent liabilities” on the balance sheet of the relevant company 

[87] L De Alessi, RPH Fishe, Why Do Corporations Distribute Assets? An Analysis of Dividends and Capital Structure, JSTOR, Vol. 143, No. 1, March 1987

[88] R. Squire, “Strategic liability in the corporate group” (2011) 124 Harvard Law Review p. 607-608

[89] Davies (n 20) paras 8.5-8.6.

[90] ‘[T]here can be no numerus clauses’, Ottolenghi, op.cit. p. 354

[91] Ibid. 338

[92] ‘Pepping Behind the veil’, ‘Penetrating the Veil’, ‘Extending the Veil’, and ‘Ignoring the Veil’.

[93] Moore (n 57) 183.

[94] JH Farrar and BM Hannigan, Farrar's Company Law (4th edn, Butterworths, 1998) 69-70.

[96] Adams v Cape (n 59) 443-444 (Scott J).

[97] Ibid, 475.

[98] (1976) 1 WLR 852.

[99] Ibid p. 861

[100] DHN Food Distributors (n 90) 861 (Goff LJ).

[101] DHN Food Distributors (n 90) 867 (Shaw LJ).

[102] LCB Gower, Principles of Modern Company Law (3rd edn, Stevens 1969) 216.

[103] [1955] 1 WLR 352.

[104] DHN Food Distributors (n 90) 860 (Lord Denning MR)

[105] Ibid.

[106] (1979) 38 P&CR 521.

[107] Ibid, 525-226 (Lord Keith).

[108] [1982] QB 84.

[109] [1983] FSR 54.

[110] Amalgamated Investment (n 98) 119.

[111] Lewis Trusts (n 99) 470-471.

[112] Sugarman and Webb, ‘‘Three in One’: Trusts, Licenses and Veils’ (1977) 93 LQR 170, 174.

[113] Rixon, ‘Lifting the Veil Between Holding and Subsidiary Companies’ (1986) 102 LQR 415, 422.

[114] [1987] AC 45.

[115] Bank of Tokyo (n 103) 64 (Goff LJ).

[116] Adams v Cape (n 59) 538 (Slade LJ).

[117] Citizens' Life Assurance Co Ltd v Brown [1904] AC 423.

[118] Ziegler, ‘Lifting the corporate veil in the pursuit of justice’ [1990] JBL 292, 304.

[119] Davies (n 20) para 8.10.

[120] Adams v Cape (n 59) 545 (Slade LJ).

[121] Ibid, 548.

[122] [1939] 4 All ER 116.

[123] Harris, ‘Lifting the Corporate Veil on the Basis of an Implied Agency: A Re-Evaluation of Smith, Stone and Knight’ (2005) 23 and Griggs, 'The Veil of Incorporation – When Will it be Lifted?' (1996) 26 QLSJ 575, 580;

[124] L.S Sealy, Cases and Materials in Company Law, 6th ed (Butterworths, 1996) p.62. 

[125] French and Ryan (n 23) 129.

[126] Re FG (Films) Ltd [1953] 1 WLR 483.

[127] [1953] 1 WLR 483

[128] [1998] 1 WLR 294.

[129] Ibid, 304.

[130] (1998) 24 FTR 309.

[131] (1984) 18 OR (3d) 527 (CA).

[132] Moore (n 57) 183.

[133] Davies (n 20) para 8.10.

[134] LS Sealy, Cases and Materials in Company Law (6th edn, Butterworths 1996) 62.

[135] [1974] 1 WLR 991.

[136] Wallersteiner (n 122) 1013.

[137] [1969] 1 WLR 1241 at 1254

[138] (1978) SLT 159

[139] Ziegler (n 107) 297.

[140] Nakajima, ‘Lifting the veil’ (1996) 17 Co Law 187, 187.

[141] [1996] BCC 486.

[142] Polly Peck (n 128) 498.

[143] Adams v Cape (n 59) 536 (Slade LJ).

[144] Woolfson v. Strathclyde Regional Council [1978] S.L.T. 159 at 161 per Lord Keith of Kinkel

[145] Schmitthoff, ‘Salomon in the shadow’ [1976] JBL 305

[146] Adams v Cape (n 59) 540 (Slade LJ).

[147] Griffiths, M., ‘Lifting the Corporate Veil’, ACCA: Corporate Sector Review, (2003) issue 44 at www.acca.co.uk/publications/corpsecrev/44/895748

[148] [1933] Ch 935.

[149] [1962] 1 WLR 832.

[150] Ibid 836.

[151] Trustor AB v Smallbone (No 2) [2001] 2 BCLC 436

[152] [2001] 1 WLR 1177, [23].

[153] Hawke and Hargreaves, ‘Corporate Liability: Smoke and Mirrors’ (2003) 14 ICCLR 75, 82.

[154] Ibid, 82.

[155] [1916] 2 AC 307

[156] French and Ryan (n 23) 145.

[157] [1995] 1 BCLC 362.

[158] [1993] SLT 375.

[159] [1984] 1 WLR 427.

[160] Ibid. 435 (Lord Diplock).

[161] Insolvency Act 1986, s 122(1)(g).

[162] [1973] AC 360.

[163] Ibid. 379 (Lord Wilberforce).

[164] [2013] UKSC 34

[165] [ 2013]  UKSC 34, see paragraph 79

[166] [1933] Ch 935

[167] Easterbrook and Fischel, “Limited Liability and the Corporation” (1985) 52 Univ Chicago L Rev 89; Farrar, “Fraud, Fairness and Piercing the Corporate Veil” (1990) 16 Can Bus LJ 474; C Mitchell, in “Lifting the Corporate Veil in the English Courts: An Empirical Study” (1999) 3 Co Fin & Ins LR 15; Neyers “Canadian Corporate Law, Veil-Piercing, and the Private Law Model Corporation” (2000) 50 Univ Toronto LJ 173; D Michael in “To Know a Veil” (2000) 26 J Corp Law 41; and Ramsay and Noakes, “Piercing the Corporate Veil in Australia” (2001) 19 C & SLJ 250

[168] [ 2013]  UKSC 34, see paragraph 16

[169] [ 2013]  UKSC 34, see paragraph 98

[170] [2013]  UKSC 34, see paragraph 28

[171] (1999) 3 Co Fin & Ins LR 15, p.16

[172] [2013]  UKSC 34, see paragraph 18

[173] [1956] 1 QB 702  at 712

[174] [2009] 1 FLR 115

[175] “(i) Ownership and control of a company were not enough to justify piercing the corporate veil; (ii) The court cannot pierce the corporate veil, even in the absence of third party interests in the company, merely because it is thought to be necessary in the interests of justice; (iii) The corporate veil can be pierced only if there is some impropriety; (iv) The impropriety in question must…be linked to the use of the company structure to avoid or conceal liability; (v) To justify piercing the corporate veil, there must be both control of the company by the wrongdoer(s) and impropriety, that is (mis)use of the company by them as a device or façade to conceal their wrongdoing; and (vi) The company may be a façade even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions.”

[176] [2012] 2 Lloyds Rep 313

[177] [2009] 1 FLR 115

[178] [2012] 2 Lloyd's Rep 313, para 79,

[179] [2013]  UKSC 34, see paragraph 62

[180] [2012] 2 Lloyds Rep 313, see paras 79—80

[181] Ottolenghi, S., ‘From Peeping behind the corporate veil to ignoring it completely’, [1990] 53 MLR 338

[182] [2013]  UKSC 34, see paragraph 28

[183] [2013]  UKSC 34, see paragraph 103

[184] [1933] Ch 935

[185] [2013]  UKSC 34, see paragraph 29

[186] [1962] 1 WLR 832

[187] [2013]  UKSC 34, see paragraph 34

[188] [2013]  UKSC 34, see paragraph 35

[189] [2013] UKSC 34, see paragraph 80

[190] [2013] UKSC 34, see paragraph 100

[191] French and Ryan (n 23) 146.

[192] See n 128 (Littlewoods Mail Order case)

[193] See n 126 (Wallersteiner case)

[194] See n 98 (Amalgamated Investment and Property Co Ltd case)

[195] [2008] UKHL 29.

[196] [2011] EWHC 333 (Comm).

[197] Ibid [16] – [17]

[198] [2011] EWHC 3281 (Comm).

[199] Mitchell (n 3) 151.

[200] [2012] EWCA Civ 808.

[201] Ibid [89] (Lloyd LJ).

[202] Ibid [91].

[203] Mitchell (n 3) 151.

[204] Arthurs, ‘To pierce or not to pierce? The Court of Appeal protects the corporate veil’ (2012) 44 Co LJ 17, 19.

[205] [1998] AC 854.

[206] [2000] 1 WLR 1545.

[207] [2012] EWCA Civ 525.

[208] Ibid [80] (Arden LJ).

[209] Ibid [69] (Arden LJ).

[210] Ibid [80] (Arden LJ).

[211] Macey, ‘Bad parenting’ (2012) 107 PILJ 12.

[212] Moore (n 57).

[213] Moore (n 57) 203.

[214] Griffiths, M., ‘Lifting the Corporate Veil’, ACCA: Corporate Sector Review, (2003) issue 44 at www.acca.co.uk/publications/corpsecrev/44/895748

[215] Ibid 203.

[216] Ibid 200.

[217] Daimler v Continental Tyre (n 41)

[218] Daimler v Continental Tyre (n 41) 346 (Lord Parker).

[219] [1953] 1 QB 248, 278 (Devlin LJ).