Corporate personality and lifting the corporate veil Flashcards
define limited liaiblity
- the liability of shareholders to pay debts is limited
- the shareholders of a limited company (are generally) not liable to a liquidator in insolvency (Insolvency Act 1986)
- This is as the company is distinct from its owners
Salamon v A Salamon & Co Ltd: what are the key facts and principles?
FACTS:
* S incorporated his business as a limited company
* S put his family members as shareholders to satisfy the company’s act (they had no active role)
* S sold a debenture to B
* The company became insolvent (of no fault of S) and defaulted on the debenture
* liquidator sought to assert S was personally liable to B
- HIGH COURT:
* the company was the agent of S
* S was personally liable - COURT OF APPEAL:
* the company was a trustee of S (the beneficiary)
* the members of the company should have been active (purposive interpretation)
* the company was not properly incorporated and S was personally liable
3. HOUSE OF LORDS:
* company was validly incorporated (literal interpretation)
* once registered a company is not an agent of members (i.e. S was not the principal)
* B was aware he was dealing with a company
* S was not personally liable
The 3 consequences of separate legal personality
- the company owns the property - e.g. insurance taken incorrectly (Macaura v Northern Assurance Co)
- The company enters into its own contracts - i.e. benefits + liabilities belong to company (Lee v Lee’s Air Farming Ltd)
- The company sues and is sued on its own liabilities (Adams v Cape Industries Plc)
Overview: piercing the corporate veil
- Piercing the veil = courts go behind separate legal personality to make shareholders liable.
- It can be invoked on public policy grounds, but only where there is no alternative remedy.
- Petrodel: court may only do so where a person under an existing legal obligation/restriction deliberately evades or frustrates that obligation or restriction by setting up a company
note: pre petrodel cases are divided in 3 categories - application of statute, common law, and application of a contractual term
statutory examples of piercing the veil
these examples are not piercing the veil - just instances where by statute, those behind a company are treated as liable
1. taxation - group structures are treated differently
2. employment - protecting employee rights
3. corporate insolvency - e.g. fraud and wrongful trading
Common law examples of piercing the veil: overview
these are old categories used to evaluate if piercing the veil is necessary, they can be useful but Prest is more important:
1. facade/sham
2. single economic entity
3. agency tort
Common law examples of piercing the veil: facade/sham
When a company is a deliberately created facade, shareholders can be held liable.
-
Gilford Motor Co Ltd v Home
* ex-employee bound by restrictive covenant
* set up a company to avoid it
* injunction was issued to prevent trading
2.Jones v Lipman
* L formed a company to avoid a contractual transaction with J
* this was a facade - courts granted an order for specific performance
-
Trustor AB v Smallbone
* former MD of T transferred money to a company he controlled
* Held that the company was a sham and the MD was liable
Common law examples of piercing the veil: single economic entity
this is not a basis to pierce the veil, and it is now established that parent companies are not liable for subsidiaries subject to specific statutory circumstances
-
DNH Food Distributors Ltd v Tower Hamlets (now irrelevant)
* a group of companies is a single economic unit and should be treated as such -
Woolfson v Strathclyde Regional Council
* held the veil will be upheld unless it is a sham or facade created for avoiding liability -
Adams v Cape Industries
* veil not lifted + liability placed on subsidiaries
Common law examples of piercing the veil: agency
This is based on the law of agency and is not an example of piercing the corporate veil (Salomon v Salomon). There is no presumption that a company is an agent, and it is difficult to establish in the absence of an express agreement.
Common law examples of piercing the veil: tort
Parent companies may be liable to those dealing with subsidiaries on tort basis - this is not piercing the veil.
-
VTB Capital Plc v Nutritek International Corp and others
* the veil was not pierced due to an alternative remedy -
Adams v Cape Industries
* court refused to allow the veil to be lifted
* subsidiary was separately liable -
Chandler v Cape Plc
* parent company liable for asbestor related injuries in subsidiary
* 4 necessary conditions:
a. both companies in the same line of biz
b. parent company had much experience + superior knowledge of health and safety
c. subsidiaries system of work was unsafe + parent knew this
d. parent should have foreseen the subsidiary would rely on it for protection -
Lungowe v Vedanta Resources Plc
* overseas parent held to tort
* considerations included that parent was responsible for:
a. establishing group wide standards
b. the implementation of standards
c. monitoring/enforcement of standards
d. there was a management agreement between parent and subsidiary -
Okpabi v Royal Dutch Shell plc
* parent held to tort
* this depends on the extent to which the parent assumes responsibility or control for the subsidiaries activities
* parent considerations:
a. maintaining groupwide policies/guidlines imposing mandatory standards
b. parent monitors/reports on standards
c. parent’s CEO has overall responsibility for implementing standards
Prest v Petrodel Resources: facts and principles
FACTS:
* Husband owned company group owning properties including matrimonial home
* Upon divorce wife sought to transfer the properties to her
DISCUSSION (sup court):
* Salomon affirmed - a company is a separate entity
* two principles established
1. concealment principle (lifting): the court looks behind corporate structure to discover the real facts
2. evasion principle (piercing): courts may pierce (and make shareholders liable) if a person deliberately attempts to evade an existing legal obligation he is under via a company he controls (**Gilford Motor Co **)
note: only pierce if there is no alternate remedy
HELD:
* an order was given for the sale of the property - remedy without piercing
* PRINCIPLE 1: corporate veil only pierced when someon evades liability and frustrates the enforcement of an alternative remedy by putting a company into place
* PRINCIPLE 2: in such a case the veil can be pierced only for the purpose of depriving hte company or its controller of the advantage they would otherwise have obtained
