Corporate Personality and Lifting the Corporate Veil

Question 1

What does limited liability mean?

Answer 1

s 74 Insolvency Act
The liability of shareholders to pay debts incurred by the company is limited. This means that shareholders are not liable to pay debts which the company owes to its creditors because it is the obligation of the company (usually through a contract) to pay its creditors. So the creditors to whom the company owes money must claim against the company. If the company has insufficient funds to meet its liabilities, creditors cannot pursue their claims against the shareholders.
If their company becomes insolvent, shareholders will be liable to lose the money
that they have invested in subscribing for the company’s shares. If applicable, they are also liable to make payment for any shares they have not fully paid for, but that is the extent of their liability.

Question 2

Are the ‘owners’ of the company the same as the company?

Answer 2

No - a company is a legal entity that is distinct from its owners - the shareholders - as well as from its directors, creditors and employees. It has a separate legal personality.

Question 3

Who do directors owe their duties to?

Answer 3

The company, not the shareholders.

Question 4

What is the concept of limited liability fundamental to?

Answer 4

1. passive investment
2. why many entrepreneurs seek to conduct business through the medium of a limited liability company
3. why groups of companies have developed

Question 5

Key limited liability case?

Answer 5

Salomon v A Salomon & Co Ltd [1897]

Question 6

Key facts of Salomon?

Answer 6

Salomon was sole trader - leather boots.
Incorporated as ltd comany in 1892 - Salomon & Co Ltd. - sold sole trader business to Salomon company.
7 shareholders - family.
Company ran into financial difficulty - sold debenture for £5,000 to Mr Broderip (B).
Insolvent - B could not claim full debenture - B brought claim against S saying he was personally liable.

Question 7

Key decision of HoL in Salomon case?

Answer 7

!!”the company was validly incorporated and therefore had a separate legal personality. S was liable neither to the Salomon Company nor to creditors of the Salomon Company.”
From the moment it is incorporated the company is at law a separate legal entity and not the agent of the subscribers or trustee for them.

Following this judgment, it is clear that a company is a separate person and not the agent or trustee of its controller. The fact that some shareholders may take no part in the management of the company is irrelevant. Companies can therefore be validly used by individuals to carry on what is in economic reality the business of an individual.

Question 8

3 key consequences of separate legal personality?

Answer 8

1. The company owns its own property (not shareholders) Macaura v Northern Assurance Co [1925]
2. The company enters into its own contracts Lee v Lee’s Air Farming Ltd [1961]
3. The company sues and is sued on its own liabilities Adams v Cape Industries plc [1990]

Question 9

Current position of legal personality? CA section?

Answer 9

s 16 CA 2006: company becomes a body corporate (so a legal person) capable of exercising the functions of an incorporated company from the date of incorporation
Shareholders: pay for shares - ‘own’ company but do not have day to day control
Directors: day to day control under MA 3.

Question 10

Limited liability – justifications (3) and issues (2)?

Answer 10

Justifications:

1. encourages investment and encourages businesses to take risks
2. Creditors will be aware that they are contracting with a limited company as the requirements of s 59 and s 60 CA 2006 are that all company names must end with ‘Ltd’ or ‘plc’
3. Transparency - creditors can assess financial viability of a company by checking Companies House.

Issues:

1. Creditors of companies and claimants in court actions risk being unable to receive monies (corporate veil concept)
2. Accounts are only filed once a year so may not represent the current position.

Question 11

Does the doctrine of piercing the corporate veil exist? What case?

Answer 11

There was some uncertainty and inconsistency in the case law and even as to whether the doctrine of piercing the corporate veil in fact existed.
The Supreme Court in Petrodel however clarified that the doctrine does exist and can be invoked on public policy grounds but in EXTREMELY narrow circumstances where there is no alternative remedy.

Question 12

When can the Court pierce the veil following Petrodel?

Answer 12

The court may pierce the corporate veil only where a person under an existing legal obligation or restriction deliberately evades or frustrates that obligation or restriction by setting up a company.

Question 13

What 3 categories can ‘piercing the veil’ cases up until 2013 be divided into? (not necessarily lifting the veil..)

Answer 13

1. Application of statute
2. Common law
3. Application of a contractual term (intention of parties – rare).

Question 14

What are the 1. statutory examples? (3)

Answer 14

NOT for piercing the veil, but instances in which those behind company can be treated by statute as liable.

1. Taxation
2. Employment
3. Corporate Insolvency – s 213 – 215 Insolvency Act 1986

Question 15

What are the 2. common law examples? (4)

Answer 15

1. Façade or sham
2. Single economic entity
3. Agency
4. Tort

Question 16

Examples of 1. Façade or sham? (3)

Answer 16

Court has lifted the veil.

1. Gilford Motor Co Ltd v Horne (1933): set up company to solicit former employers (was bound by covenant not to do so)
2. Jones v Lipman [1962]: sale of land - changed his mind - transferred land to company.
3. Trustor AB v Smallbone (No 2) [2001]: transferred funds from company to company

Question 17

Examples of 2. Single economic entity?

Answer 17

Claims where C sought to make parent companies liable for debts.
Now established that parent companies are NOT liable for their subsidiaries other than in specific statutory circumstances i.e. single economic entity argument is not a basis for piercing the corporate veil.
1. DHN Food Distributors Ltd v Tower Hamlets [1976] - single economic unit
2. Woolfson v Strathclyde Regional Council [1978] SLT 159: doubted DHN; veil upheld unless sham/facade
3. Adams v Cape Industries PLC [1990] Ch 433: refused to lift for parent company

Question 18

Examples of 3. Agency?

Answer 18

Although possible that company may act as an agent for its parent company or shareholder, no presumption that this is the case. Cases will turn on their facts and are based on the common law of agency, not the doctrine of lifting the corporate veil.

Question 19

Examples of 4. Tort?

Answer 19

Parent companies may be liable to those dealing with their subsidiaries on the basis of tort, but again this is not an example of lifting the corporate veil.

1. VTB Capital plc
2. Adams v Cape Industries PLC [1990] - but also note Chandler v Cape; Asbestos health issue.
   - Liability rarely established.

Question 20

Facts of key case Prest v Petrodel Resources Ltd [2013]?

Answer 20

Family law case concerning distribution of assets on divorce. The husband wholly owned and controlled a group of companies which owned a number of residential properties worth over £50 million, including the matrimonial home. The wife sought an order to transfer the properties to her on the basis that they were held by the companies on trust for her husband.

Question 21

According the Petrodel, what are the two principles in which the court will look behind the separate legal personality of a company?

Answer 21

1. Concealment principle:
   - This doesn’t involve piercing the corporate veil. It describes cases where the corporate structure conceals the real actors, where the court will look behind the corporate structure to discover the real facts.
2. Evasion principle:
   - The court may pierce the corporate veil if a person deliberately attempts to evade an existing legal obligation he is under by interposing a company which he controls. (Gilford)

Question 22

What did Lord Sumption conclude regarding piercing the veil?

Answer 22

“Limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.”

If there is another legal remedy then piercing corporate veil will not be necessary
or available.

Question 23

Following Prest v Petrodel - does the doctrine have any real application?

Answer 23

In summary, where other routes to infer liability on shareholders are available, such as tortious liability or the law of trust or agency, which do not ignore the company’s separate legal person, the courts will infer liability on these principles.