Exceptions to Limited Liability Flashcards
What is the Salomon principle in company law?
The Salomon principle establishes that a company has a separate legal personality from its shareholders, as recognized in Salomon v. A. Salomon & Co Ltd [1897]. This protects shareholders’ personal assets from the company’s liabilities.
What does ‘piercing the corporate veil’ mean?
Piercing the corporate veil means disregarding the company’s separate legal personality to hold shareholders or directors personally liable for the company’s obligations, typically in cases of fraud or abuse.
What are the main grounds for piercing the corporate veil identified in the lecture?
- Evasion
- Fraud
- Sham or façade
- Statutory exceptions (e.g., ss.213-214 Insolvency Act 1986)
- Agency relationships
How did the case of Prest v Petrodel Resources Ltd [2013] clarify the law on veil-piercing?
The Supreme Court limited veil-piercing to cases of evasion, where a company is interposed to frustrate or evade an existing legal obligation. It reinforced that veil-piercing is exceptional and typically unnecessary due to other legal remedies.
What is the distinction between ‘evasion’ and ‘concealment’ as clarified in Prest v Petrodel Resources Ltd?
- Evasion involves using the company to frustrate an existing legal obligation.
- Concealment involves using the company to obscure facts, but the court can ‘look behind the veil’ to uncover those facts without actually piercing it.
What role does the DHN Ltd. v Tower Hamlets [1976] case play in veil-piercing jurisprudence?
Lord Denning treated a group of companies as a single economic entity to provide compensation for disturbance of business. However, this approach was later disapproved in Woolfson v Strathclyde R.C. [1978].
What did the Supreme Court say about veil-piercing in Prest regarding its general applicability?
The court expressed skepticism about the doctrine’s necessity, noting that no consistent or coherent approach exists for its application and that most cases can be resolved using other legal principles.
How does s.213 of the Insolvency Act 1986 relate to veil-piercing?
Section 213 deals with fraudulent trading, where individuals involved in carrying on a company’s business with intent to defraud creditors can be held personally liable.
What does s.214 of the Insolvency Act 1986 provide for, and how does it differ from s.213?
Section 214 addresses wrongful trading, holding directors personally liable if they continue trading when they knew or should have known there was no reasonable prospect of avoiding insolvency. Unlike s.213, intent to defraud is not required.
What is the significance of Adams v Cape Industries Plc [1990]?
It reaffirmed the Salomon principle, emphasizing that courts should only lift the corporate veil in limited circumstances, such as when a company is a façade or an agency relationship exists.
What factors determine parent company liability for a subsidiary’s torts, as set out in Chandler v Cape Plc [2012]?
- Similarity of business operations between parent and subsidiary.
- Parent’s superior knowledge of health and safety risks.
- Unsafe practices by the subsidiary known to the parent.
- Reliance by the subsidiary or its employees on the parent’s expertise.
How does the ‘agency’ exception to the Salomon principle operate?
A parent company may be held liable if a subsidiary is proven to act as its agent, which requires evidence of control and authority granted by the parent.
What was the court’s finding in Trustor AB v Smallbone (No 2) [2001]?
The court pierced the veil on the façade exception, emphasizing that impropriety alone is insufficient; there must be a connection between the impropriety and the use of the corporate structure.
What does the Williams v Natural Life Health Foods Ltd [1998] case say about directors’ personal liability?
Directors are not personally liable for a company’s negligent misstatements unless they assume personal responsibility, creating a special relationship with the claimant.
What are the consequences of fraudulent trading under s.213 Insolvency Act 1986?
Individuals involved can be ordered to contribute to the company’s debts and may face criminal liability under s.993 Companies Act 2006.
What is the ‘mere façade’ exception in veil-piercing?
The corporate veil may be pierced if the company is a mere façade concealing the true facts, often to evade legal obligations (Jones v Lipman [1962]).
How does Gilford Motor Company Ltd v Horne [1933] illustrate the façade exception?
A former employee set up a company to breach a non-solicitation covenant. The court found the company to be a façade used to evade obligations and granted an injunction.
What were the key findings in Lubbe v Cape Industries Plc [2000]?
The House of Lords allowed the case to proceed in England, finding that denying claimants access to justice in South Africa would amount to injustice.
What does the case Re Produce Marketing Consortium Ltd (No. 2) [1989] illustrate about wrongful trading?
Directors were held liable under s.214 Insolvency Act 1986 for failing to liquidate the company after realizing there was no reasonable prospect of avoiding insolvency.
What is the significance of Chandler v Cape Plc [2012] for parent company liability?
It established that a parent company could owe a duty of care to a subsidiary’s employees if the parent assumed responsibility for health and safety policies.
What test for parent company liability was set out in Thompson v The Renwick Group [2014]?
The parent must have superior knowledge to protect the subsidiary’s employees from harm, and the subsidiary must rely on the parent to deploy that knowledge.
What does s.993 of the Companies Act 2006 address?
It imposes criminal liability for fraudulent trading, complementing s.213 of the Insolvency Act 1986.
How did Ord v Belhaven Pubs Ltd [1998] clarify legitimate corporate restructuring?
The Court of Appeal ruled that reorganizations for financial reasons were legitimate and not a façade to avoid liabilities, overruling Creasy v Breachwood Motors Ltd [1993].
What principles were reinforced in Lungowe v Vedanta Resources Plc [2019]?
The Supreme Court emphasized that parent liability depends on the extent of intervention in the subsidiary’s operations, applying general tort principles.
What approach did HRH Okpabi v Royal Dutch Shell [2021] take to parent liability?
The Supreme Court found the Court of Appeal erred by overemphasizing control, stressing that liability depends on actual intervention or omissions by the parent.
What does R v Boyle Transport (NI) Ltd [2016] demonstrate about sham companies?
The court found no case for veil-piercing despite the company engaging in tachograph tampering and asset transfers, as the company was not merely an alter ego of the directors.
What impact does tort liability have on the Salomon principle?
Liberal imposition of tort liabilities risks undermining the separate legal personality of companies by indirectly holding parents or directors liable.
What does VTB Capital plc v Nutritek International Corp [2013] say about fraud and veil-piercing?
The Supreme Court confirmed that fraud does not justify creating new liabilities through veil-piercing when alternative legal remedies (e.g., deceit claims) are available.
How does s.214 Insolvency Act 1986 address shadow directors?
Parent companies acting as shadow directors can be held liable under s.214 if they direct the actions of the insolvent subsidiary without proper regard for creditors.
What did Re Patrick & Lyon Ltd [1933] clarify about proving fraudulent intent under s.213 Insolvency Act 1986?
It established a high standard for proving ‘actual dishonesty’ involving moral blame, making successful claims under s.213 rare.
