Chapter 1 - Case Flashcards
Salomon v Salomon & Co Ltd
Mr Salomon owned a business which was subsequently sold to a company at an excessive price. Mr Salomon held most of the shares of the company.
When the business failed, the creditors sued for Salomon to personally pay the debts. The House of Lords held that Mr Salomon and the corporation are both seperate legal entities and he is not liable to repay the debts of the company. The fact that most shares are held by himself does not make them the same person.
Macaura v Northern Assurance Co Ltd
(Unable to claim as timber not under his name.)
Mr Macaura sold his business to a company which he was paid 42,000 fully paid shares of £1 each. He effected an insurance policy on the inventory in his own name.
When a fire destroyed the timber, it was ruled by the court that Macaura has no insurable interest. Under the Salomon principle, the company is considered a separate legal entity from its owner(s).
Gramophone & Typewriter Co Ltd v Stanley
The company is not an agent of the shareholders.
Buckley LJ: “The Court decided not long since, in Automatic Self-Cleansing Filter Syndicate Co Ld v Cunninghame, that even a resolution of a numerical majority at a general meeting of the company cannot impose its will upon the directors when the articles have confided to them the control of the company’s affairs.”
Owning all the shares in one company does not make the company an agent of the individual. As long as the directors are empowered by the articles, the company will be treated as working on its own as an individual and thus the corporate veil will not be pierced in such circumstances.
Adams v Cape Industries plc (Separate Legal Entity)
Each company in a group is a separate legal entity.
Cape is an English company that mined and marketed asbestos. It is a material used as fire retardant, however it is harmful to the body when it enters into the lungs of anyone. The Plaintiff sought to take action against Cape Industries plc and their subsidiaries.
Court ruled that the companies within a same group should not be treated as one single entity. Each company is a persona at law and should be treated a separate legal entities.
Smith, Stone & Knight & Co v Brimingham Corp
(Business is considered to be part of the parent company and so have to compensate)
Getting around the Salomon Principle - Pleading “Agency”
Smith, Stone & Knight owned some land, and a wholly owned subsidiary company (Birmingham Waste) operated on this land. Birmingham Corp issued a compulsory purchase order on this land. Any company which owned the land would be paid for it, and would reasonably compensate any owner for the business they ran on the land. Since the subsidiary company did not own the land, Birmingham Corp claimed they were entitled to no compensation.
The court held that an implied agency existed between the parent and subsidiary companies so that the parent was considered to own the business carried on by the subsidiary and could claim compensation for disturbance caused to the subsidiary’s business by the local council.
DHN Food Distributors v Tower Hamlets London Borough Council
Getting around the Salomon Principle - Pleading “Agency”
A subsidiary company of DHN owned land which LBTB issued a compulsory purchase order on. The courts held that DHN was able to claim compensation because it and its subsidiary were a single economic unit.
Re FG (Films) Ltd
(Filming Overseas and wanted to register in UK)
Getting around the Salomon Principle - Pleading “Agency”
In the case of Re FG Films, the company, FG Films made a film called “Monsoon”. The company had no premises except its registered office and no employees. Film Group Incorporated (FGI), an American company was the one who provided the finance and all the facilities necessary to make the film. FG Films sought to have the film registered as a British Film. This is a sham or facade as the company was not the maker of the film. Therefore, the courts are willing to lift the company veil when fairness and justice are demands so that to make FG Films prohibited from enjoying the benefits given by British government as the film was not made by the company themselves, it is just a sham of the Film Group Incorporated (FGI).
Woolfson v Strathclyde RC
Piercing the Corporate Veil where the company is a mere facade.
Lord Keith: “The one situation where the veil could be lifted was whether there are special circumstances indicating that the company is a ‘mere façade concealing the true facts’.
Adams v Cape Industries plc (Piercing Corporate Veil)
Piercing the Corporate Veil where the company is a mere facade.
The Plaintiff argued that Cape Industries created a few subsidiaries in order to limit potential liabilities unto them (the subsidiaries) and he wishes that the court would lift the corporate veil and treat the whole group as one single entity.
However, in order to lift the corporate veil, 3 things have to have been met. The corporate structure attempts to evade:
- Limitations imposed on his conduct by law;
- Such rights of relief against him as third parties already possess; and
- Such rights of relief as third parties may in the future acquire
As the corporate did not attempt to do any of the above, the court ruled that it would not lift the corporate veil.
Trustor AB v Smallbone (No 2)
()
Piercing the Corporate Veil where the company is a mere facade.
OR
Piercing the Corporate Veil where corporate structure has been used to evade rights of relief which third parties already possess. (Not if structure has been adopted to minimize liabilities)
Mr Smallbone had been the managing director of Trustor AB, and it was claimed that in breach of fiduciary duty, transferred money to a company that he owned and controlled. Trustor AB applied to treat receipt of the assets of that company as the same as the assets of Mr Smallbone. It argued that Smallbone’s company was a sham to help breaches of duty, it had been involved in improper acts and he interests of justice demanded the result. The case against Mr Smallbone was eventually dropped by Trustor AB as there was no breach of fiduciary duty.
The court held that there was enough evidence to lift the corporate veil and hold Mr Smallbone accountable on the basis that the company was a “mere façade”.
Gilford Motor Co v Horne
()
Piercing the Corporate Veil where the corporate structure has been used to evade limitations imposed on conduct by law.
Horne was formerly the MD of Gilford Motor Co Ltd. His employment contract stipulated that he should not solicit customers of the company if he were to leave the employment of Gilford. Mr Horne was subsequently fired and thereafter he set up his own business and undercut Gilford’s prices. Upon receiving a legal advice saying he might be acting in breach of contract, he set up a company in which his wife and a friend were the sole shareholders and directors and continued working on it. Gilford Motor brought an action alleging that the company was used as an instrument of fraud to conceal his actions.
Lord Hanworth MR: “I am quite satisfied that this company was formed as a device, a strategem, in order to mask the effect carrying on of a business of Mr EB Horne. The purpose of it was to enable him, under what is a cloack or sham, to engage in business which, on consideration of the agreement…”
The corporate veil was lifted and an injunction was granted against Mr Horne.
Jones v Lipman
(Refuse to complete sale of house. Chose to transfer property to company)
Piercing the Corporate Veil where the corporate structure has been used to evade limitations imposed on conduct by law.
Lipman sold a house to Jones but ultimately refused to complete the sale. In order to ensure that he would not have to sell the house to Jones, Lipman executed a sham transfer of the house to a company controlled by him just before completion of the sale contract to Jones.
Russell J: “The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity”
Ord v Belhaven
(Misrepresented profitability and requested for a different company to pay compensation. Court rejected the request)
Corporate Veil cannot be pierced if it was adopted onto to minimize liabilities.
Mr and Mrs Ord ran the Fox Inn in Stamford, Lincolnshire. They were in an ongoing dispute with the freehold owner, Belhaven Pubs Ltd, for misrepresentation about the level of profitability of the pub. However Belhaven Pubs Ltd was part of a company group structure that has been reorganized, and had no assets left. Mr and Mrs Ord requested that a company with money, Ascott Holdings Ltd, be substituted for Belhaven Pubs Ltd to enforce the judgment. At first instance the judge granted this order. Belhaven Pubs Ltd appealed.
The Court of Appeal overturned the judge and held that the reorganization was a legitimate one and not done to avoid an existing obligation. Hobhouse LJ argued that the reorganization, even though resulted in Belhaven Pubs Ltd having no further assets, was done as part of a response to the group’s financial crisis. There was no ulterior motive.
Prest v Petrodel Resources Ltd
Piercing of Corporate Veil should be used as a last resort
Yasmin was married to Mr Prest and they subsequently divorced. Under the Matrimonial Causes Act, Mr Prest is required to transfer half the value of his assets to Yasmin.
Yasmin claimed that a property of an offshore company solely owned by the defendant is beneficially owned by Mr Prest and thus should also be split.
The Supreme Court held that Mr Prest beneficllay owned the assets under a resulting trust because he contributed to their purchase price. There was no need to pierce the corporate veil which could only be done in limited situations.
Piercing of corporate veil should only be used as a last resort
Ebrihimi v Westbourne Galleries
Courts may sometimes ‘peep around’ the corporate veil to determine if the company is in fact, a type of partnership in reality, if not form.
Mr Ebrahim and Mr Nazar incorporated a business and were the sole shareholders. Mr Nazar’s son was later appointed as a director. After a falling out, Mr Nazar and son removed Mr Ebrahimi as a director. Ebrahimi applied to court to have the company wound up.
The House of Lords stated that as a company is treated as a separate legal entity, the courts normally would not entertain such an application. However as its operations were very similar to a partnership, they created what is now known as a quasi-partnership. The company was wound up and Ebrahimi received his capital interest.
