Lifting the Veil of Incorporation Cases Flashcards
Gilford Motor Company Ltd v Horne [1933] Ch 935
Facts
Mr Horne was a former managing director of Gilford Motor Home Co Ltd (Gilford). His employment contract prevented him from attempting to solicit Gilford’s customers in the event that Horne left Gilford’s employ. Horne was fired and he subsequently set up a competing company which undercut Gilford’s prices. Gilford did not have any legal restraints upon Horne’s company, only Horne himself. Gilford commenced proceedings against Horne individually, claiming that Horne’s company was an attempt to evade legal obligation (not soliciting customers).
Issues
Had Horne violated his non-compete clause by setting up his competing company?
Held
The English Court of Appeal held that the company was set up to evade Horne’s contractual obligations. The Court “pierced the corporate veil” and ordered an injunction against Horne. Courts can “pierce the corporate veil” if a company is simply a mere device to evade legal obligations, though this is only in limited and discrete circumstances.
Quote
“I am quite satisfied that this company was formed as a device, a stratagem, 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 cloak or sham, to engage in business which, on consideration of the agreement…”
(Lord Hanworth MR)
Jones v Lipman [1962] 1 WLR 832
Facts
Lipman agreed to sell a property to Jones for £5,250, but subsequently changed his mind. He then formed his own company, which had £100 in capital, and made himself the director and owner. He then transferred the land, which he had agreed to sell to Jones, to this sham company for £3,000. To enable such a transaction, Lipman had borrowed over half the money needed by way of a bank loan, and the remainder was owed to other sources. Under the Rules of the Supreme Court Order 14A, the purchaser applied for specific performance to be carried out against the vendor and the vendor’s company for the transfer of the property in question.
Issues
The court was required to decide if an order of specific performance could be enforced in the circumstances. Specifically, it was important for the court to assess the company that Lipman had created and the transaction of the sale of the property to see if it was equitable. The court also had to establish whether it was appropriate for the Rules of the Supreme Court to be applied to the circumstances.
Decision/Outcome
Firstly, the court held that the Rules of the Supreme Court could apply to the circumstances. Further to this, it was found that the defendant’s company was created by the defendant as ‘a mask to avoid recognition by the eye of equity’ (at p.836) and on this basis, a requirement of specific performance could not be avoided. It was clear that the defendant had control of the sham company which held the property, and therefore Lipman was the only individual who could perform the agreement.
DHN Ltd v Tower Hamlets [1976] 1 WLR 852
The corporate veil may be pierced where groups of companies can be treated as partners.
Facts
DHN was the holding company in a group of three companies. There were two subsidiaries, wholly owned by DHN. One subsidiary owned land used by DHN, the other owned vehicles used by DHN. The land was subject to compulsory purchase, and DHN sought compensation for disturbance of its business.
Decision / Outcome
In the Court of Appeal, Lord Denning MR said:
“These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says… This group is virtually the same as a partnership in which all the three companies are partners. They should not be treated separately so as to be defeated on a technical point.” (at 860)
It was therefore held that DHN was entitled to claim. The separate corporate personality doctrine was overridden. However, this is likely to only be followed where the subsidiaries are wholly owned and serve no purpose other than to own the parent company’s assets. The case has not been applied to make one company in a group liable for the debts of another – Re Southard and Co Ltd [1979] 1 WLR 118.
Woolfson v Strathclyde RC [1978] SLT 159
Woolfson v Strathclyde Regional Council: HL 15 Feb 1978
The House considered the compensation payable on the compulsory purchase of land occupied by the appellant, but held under a company name.
Held: The House declined to allow the principal shareholder of a company to recover compensation for the compulsory purchase of a property which the company occupied. the separate personality of a company is a real thing. Lord Keith observed that ‘it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts.’
Where the evidence shows that a company has been used as a vehicle or device for receiving monies wrongly paid out of a claimant company in breach of a defendant’s duty to that company, the receipt by the third party vehicle will be treated as the receipt by the defendant.
Wilberforce, Fraser of Tulleybelton, Killowen, Kinkel LL
Adams v Cape Industries plc [1990] 2 WLR 657
Case Analysis
“Adams v Cape Industries was an excellent decision from a business perspective”.
Full Case Name: Adams v Cape Industries plc (1990)
Introduction: Fundamental Principles
The principle of separate corporate personality is long established and a central pillar of modern company law. In the celebrated case of Salomon v Salomon & Co. (1897)[1], the House of Lords ruled that, irrespective of the degree of an individual shareholder’s interest a company, and regardless of the fact that the shareholder may exercise complete de facto control of the company’s affairs as its governing director, the company’s acts should not be deemed his acts, and that its liabilities cannot be considered his liabilities.
Therefore it is submitted that the fact that one shareholder wholly controls a company in practice is not at law a sufficient reason for ignoring the legal personality of the company. It should be noted that the operation of the Salomon principle will not always be to the advantage of the dominant individual within the company. In Macaura v Northern. Assurance Co.(1925) [2] recognition of the separate corporate personality caused the company’s director and major shareholder to suffer huge losses after he insured company property erroneously in his own name. That said, the separate legal persona of a company is sometimes conceptualised as a “veil of incorporation” and the general rule is therefore that it will not be pierced or lifted by a court so as to apportion the liabilities or rights of a company to its shareholders.
Adams v Cape Industries plc
The fundamental principle established in Salomon in relation to single companies was applied in the context of a group of companies by the Court of Appeal in the case under discussion in this paper, Adams v Cape Industries plc (1990)[3]. Cape Industries, a company registered in England, was engaged in mining asbestos in South Africa. The company’s products were marketed in the United States of America through a complicated network of subsidiaries and associated companies. In a series of class actions a number of factory workers who had contracted disease after inhaling asbestos dust managed to secured judgment in an American court against Cape (the holding company presiding over the corporate group).[4]
However, the litigants were subsequently unsuccessful in enforcing the judgment against Cape in the English Courts. The Court of Appeal held that an English trading company would only be treated as having been present and a possible a party to an action abroad if it had established a fixed place of business there at its own cost and either it or its representative had carried on business there for more than a minimal time.
Three arguments were raised (all unsuccessfully) in an effort to establish that Cape had been present in the United States. As discussed by Hicks and Goo, the first of these was a single economic unit argument contending that Cape and its subsidiaries were in reality one economic unit which should be treated by law as such. The second was a corporate veil argument – namely that the corporate form was nothing more than a façade concealing the true facts of a situation and which could be drawn aside if legally expediency dictated such a move appropriate. The third submission was an agency based argument (that the subsidiaries were merely agencies making contracts for their principal, the holding company).[5]
As stated, each argument failed. The Court of Appeal found that, on grounds of pure legal doctrine, it was not entitled to lift the corporate veil against a defendant company, which was a member of a corporate group, simply on the grounds that the corporate structure had been used so as to ensure that legal liability in regards to the particular future activities of the group would fall on another member of the group rather than on the defendant company. In practical effect, the Court of Appeal dismissed the contention that a corporate veil should be pierced merely because a group of companies operated as a single economic entity in terms of business reality.
On a strict application of the Salomon principle Cape was held not to have been present in the United States and as a consequence the judgments delivered in the American courts were deemed to be unenforceable in England.
To address the statement posed in the title directly, it is clear that Adams v Cape Industries was indeed an excellent decision for companies wishing to manipulate the structure of corporate groups for the purpose of diverting rights and liabilities. In that specific regard it is submitted that the ruling was highly beneficial to companies with a certain agenda, but whether that was the original intention of the Salomon court is dubious.
The Adams decision: the legal context
Prior to the seminal decision of Adams v Cape Industries Ltd the courts were confronted with two opposing decisions, which suggested that the Salomon principle was disposable in the interests of justice and alternatively that it was sacrosanct and deserving of almost universal application. The first decision was delivered by the Court of Appeal in DHN Food Distributors v Tower Hamlets London Borough Council.[6] In this case the company’s trading premises where compulsorily acquired. However, given that the premises in question were owned by a wholly owned subsidiary of the company, the local authority employed the Salomon principle to contend that the business of the owner had not been disrupted. The Court of Appeal, led by Master of the Rolls Lord Denning, unanimously held that it was entitled to look at the realities of the situation and lift the corporate veil. As a consequence, the company although not actually the owner, was able to recover for loss of trade. Quoting the eminent academic authority Gower, Lord Denning argued that there was evidence of a general trend to disregard the separate legal entities of various companies within a group, and to deal instead collectively with the economic entity of the whole group.
Lord Denning was an influential and gifted judge. He choose to remain as Master of the Rolls in the Court of Appeal, refusing offers of promotion to the House of Lords, because he felt he could influence the law better as leader of the busy lower court. He was not the kind of man to let strict legal principle get in the way of the ‘right’ decision in a particular case. Rather than blindly apply fundamental rules of English law Denning sought ways to circumnavigate them or elaborate on them where he deemed that such would be in the interests of justice in a case. In the context of Salomon, Denning recognised the importance of the principle but saw weakness and iniquity in its blinkered and slavish application.
The opposing decision to DHN Food Distributors was the ruling of the House of Lords in the case of Woolfson v Strathclyde Regional Council[7]. It was a case on all fours with DHN Food Distributors on its facts. Like DHN before it, Woolfson involved the compulsory acquisition of trading premises by a local authority and a claim for the loss of business by the trading company, notwithstanding the fact that the company did not own the premises itself.
Woolfson was distinguished from DHN Food Distributors by the Law Lords on the grounds that the company owning the property was only partially, rather than wholly, owned by the claimant company. Moreover, the House of Lords indicated that the decision in DHN Food Distributors was incorrect. Inter alios, Lord Keith speculated as to whether the Court of Appeal in DHN Food Distributors had improperly applied the guiding principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that the veil is a mere façade concealing the true situation.
However, although Woolfson was a House of Lords decision, it was uncertain as to whether the case laid down a binding precedent for English courts in light of its Scottish provenance (where a separate legal system operates). Lord Denning’s supporters in the Court of Appeal failed to acknowledge it in subsequent cases where it was held, that the court should pierce the corporate veil whenever justice so requires. This set the scene for Adams several years later, which was decided at a point after Denning’s retirement when his influence on the law had waned considerably.
Analysis
Although uncertainty still persists, Adams v Cape Industries seems to have delivered a decisive word (at least for the time being) on the argument provoked largely by Denning’s intervention in the 1970s. The judgement given in Trustor AB v Smallbone and Others (No 2) (2002)[8] appears to confirm that the modern Courts will not countenance any further erosion of Salomon’s fundamental principle of English company law that a company is to be regarded as a legal entity with a separate legal personality, distinct from that of its members. Trustor, alongside cases such as North West Holdings v Backhouse (2001)[9], clarifies that the piercing of a corporate veil can only be justified in three categories. These include: (a) where the company is a sham or façade; (b) where the company is an instrument in impropriety; and (c) where it is necessary to do so in the interests of justice.
It is submitted that the title under discussion is a matter of opinion rather than a statement of fact. Adams is undoubtedly a seminal case. However, whether its contribution to the development of the law was positive or negative or a blend of the two is contestable. In taking a stand against Lord Denning’s more proactive and pragmatic line of authority, as best evidenced in the case DHN Food Distributors, and restating the purist policy of upholding the Salmon principle Adams is certainly a decision that can be celebrated by so-called ‘black letter’ lawyers.
However, Lord Denning was perhaps one of the greatest and deepest thinking judges of the twentieth century and his jurisprudence in this field should not be dismissed out of hand. The ‘business perspective’ mentioned in the title entails a broad and amorphous concept and perhaps it would be foolish to seek to assert that there is indeed one collective or unitary ‘business perspective’ in reality. In practice the so-called ‘business perspective’ is comprised of many interests, some collective but some diverging and many competing with each other. By way of example, the business perspective in Salomon was very different from that in Macaura so one should not rush to make broad statements on generalisations.
The Adams decision is clearly advantageous to companies seeking to avoid liabilities in certain situations, but it is far less useful and arguably even obstructive to those companies seeking to enforce rights in certain situations. It is submitted that Denning’s approach and attitude to Salomon at least brought with it the universal advantage of flexibility, which is perhaps something that should be elevated above those considerations of certainty, predictability furthered by dogmatic adherence to principle. On this ground it is argued that Adams v Cape Industries is far from a panacea for business, there is a darker, rigid face to the decision that will deny many companies rights and freedoms that they have a good practical and moral case to argue for.
The legacy of Adams v Cape Industries has failed to secure a compelling and all-encompassing principle as to when a court is able to tiptoe around Salomon to pierce a corporate veil. At the end of 2005, the circumstances in which the courts will apply the three exceptions stated in Trustor remain unclear.
The principles of the single economic entity and agency, notwithstanding the fact that they have been narrowly defined and limited in scope, in theory allow the court to circumvent the Salomon principle of the separate corporate entity, irrespective of the absence of mala fides or bad faith. That said the principle of lifting the corporate veil appears to have been limited to cases in which there has been a fraudulent attempt to conceal the identity of the incorporator in order to circumnavigate or deflect certain legal obligations.
Although the precise scope of the principle remains uncertain it appears that the court will be unwilling to lift the corporate veil in the absence of bad faith. Salomon will not be set aside simply because justice demands it. It remains to be ultimately decided by the courts as to whether it is desirable to reduce their power in such a way.
Lord Denning’s approach may now have fallen out of vogue in the courts, but it is submitted by this commentator that it is indeed appropriate to the strive for the development of the principle of piercing the corporate veil where justice demands it. Adams v Cape Industries, although ostensibly helpful to holding companies and corporate groups on its particular facts, represents an sclerotic and inflexible stance in general, and one from which companies may ultimately come to suffer as the law and commerce develops around it.
In closing it is argued that the flexible, equitable attitude expressed in DHN Food Distributors is still to be preferred over the black-letter dogma of Adams v Cape Industries and that a far stronger moral case, which should surely be the basis of all law, can be advanced for the former than for the latter. What is fundamentally wrong with the notion of adopting such a rule on a case-by-case basis and allowing justice to succeed in each individual case?
The arguments that justice can only be achieved when parties are able to depend upon clear and certain principles, and that it is impossible to encompass justice within an uncertain rule are simply not accepted by this commentator. By way of personal observation and to address the title directly Adams v Cape Industries was good for business in precisely the same way that chocolate is good for children.
Creasey v Breachwood Motors Ltd [1992] BCC 638
Creasey v Breachwood Motors Ltd
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Creasey v Breachwood Motors Ltd
Citation(s) [1993] BCLC 480
Creasey v Breachwood Motors Ltd [1993] BCLC 480 is a UK company law case concerning piercing the corporate veil.
Contents
1 Facts 2 Judgment 3 Significance 4 See also 5 Notes 6 References
Facts
Mr Creasey was dismissed from his post of general manager at Breachwood Welwyn Ltd. He claimed that this constituted wrongful dismissal, in breach of his employment contract. However, before he could claim, Breachwood Welwyn Ltd ceased trading, and all assets were moved to Breachwood Motors Ltd, which continued the business. Other creditors were paid off, but no money was left for Mr Creasey’s claim, which was not defended and held successful in an order for £53,835 against Breachwood Welwyn Ltd. Mr Creasey applied for enforcement of the judgment against Breachwood Motors Ltd and was successful. Breachwood Motors Ltd appealed.
Judgment
Mr Richard Southwell lifted the corporate veil to enforce Mr Creasey’s wrongful dismissal claim. He held that the directors of Breachwood Motors Ltd, who had also been directors of Breachwood Welwyn Ltd, had themselves deliberately ignored the separate legal personality of the companies by transferring assets between the companies without regard to their duties as directors and shareholders.
Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447
Facts
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 had been reorganised, 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.
Judgment
The Court of Appeal overturned the judgement and held that the reorganisation was a legitimate one, and not done to avoid an existing obligation. Hobhouse LJ argued that the reorganisation, even though it 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.
Hobhouse LJ also held, specifically, that the earlier case of Creasey v Breachwood Motors Ltd was wrong.
Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577
Williams v Natural Life Health Foods Ltd [1998] UKHL 17 is an important English tort law, company law and contract law case. It held that for there to be an effective assumption of responsibility, there must be some direct or indirect conveyance that a director had done so, and that a claimant had relied on the information. Otherwise only a company itself, as a separate legal person, would be liable for negligent information.
Facts
Mr Williams and his partner approached Natural Life Health Foods Ltd with a proposal. They wanted to get a franchise for a health food shop in Rugby (i.e. they wanted to use the Natural Life brand to run a new store and pay Natural Life Ltd a fixed fee). Mr Williams was given a brochure with financial projections. They entered the scheme. They failed, and lost money. So Mr Williams sued the company, alleging that the advice they got was negligent. However, before the suit could be completed, Natural Life Health Foods Ltd went into liquidation. So Mr Williams sought to hold the company’s managing director and main shareholder personally liable. This was Mr Mistlin, who in the brochure had been held out as having a lot of expertise. Mr Mistlin had made the brochure projections, but had not been in any of the negotiations with Mr Williams.
The High Court allowed Mr Williams claim, and so did the Court of Appeal by a majority. The company and Mr Mistlin appealed to the House of Lords.
Judgment
The House of Lords held unanimously that Mr Williams’ claim would fail. They emphasised that there had been no separate assumption of responsibility directly to Mr Williams, and no requisite reliance. Lord Steyn’s judgment was as follows.
What matters is not that the liability of the shareholders of a company is limited but that a company is a separate entity, distinct from its directors, servants or other agents. The trader who incorporates a company to which he transfers his business creates a legal person on whose behalf he may afterwards act as director. For present purposes, his position is the same as if he had sold his business to another individual and agreed to act on his behalf. Thus the issue in this case is not peculiar to companies. Whether the principal is a company or a natural person, someone acting on his behalf may incur personal liability in tort as well as imposing vicarious or attributed liability upon his principal. But in order to establish personal liability under the principal of Hedley Byrne, which requires the existence of a special relationship between plaintiff and tortfeaser, it is not sufficient that there should have been a special relationship with the principal. There must have been an assumption of responsibility such as to create a special relationship with the director or employee himself.
The practical application of the extended Hedley Byrne principle
Not surprisingly, opposing counsel approached the application of the principle of assumption of risk from different perspectives. Counsel for the respondents (the plaintiffs) concentrated in his argument on the pivotal role of Mr. Mistlin in the affairs of the company. Counsel for Mr. Mistlin (the defendant) concentrated on the absence of direct dealings between the respondents and Mr. Mistlin. The practical application of the extended Hedley Byrne principle was not agreed. Before I turn to the facts of the present case it is therefore necessary to explore this aspect. Two matters require consideration. First, there is the approach to be adopted as to what may in law amount to an assumption of risk. This point was elucidated in Henderson by Lord Goff of Chieveley. He observed, at [1994] 2 AC 145, 181B-C:
"... especially in a context concerned with a liability which may arise under a contract or in a situation 'equivalent to contract,' it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff"
The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said or done by the defendant or on his behalf in dealings with the plaintiff. Obviously, the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff. Sometimes such an issue arises in a simple bilateral relationship. In the present case a triangular position is under consideration: the prospective franchisees, the franchisor company, and the director. In such a case where the personal liability of the director is in question the internal arrangements between a director and his company cannot be the foundation of a director's personal liability in tort. The enquiry must be whether the director, or anybody on his behalf, conveyed directly or indirectly to the prospective franchisees that the director assumed personal responsibility towards the prospective franchisees. An example of such a case being established is Fairline Shipping Corp v Adamson [1975] QB 180. The plaintiffs sued the defendant, a director of a warehousing company, for the negligent storage of perishable goods. The contract was between the plaintiff and the company. But Kerr J (later Kerr LJ) held that the director was personally liable. That conclusion was possible because the director wrote to the customer, and rendered an invoice, creating the clear impression that he was personally answerable for the services. If he had chosen to write on company notepaper, and rendered an invoice on behalf of the company, the necessary factual foundation for finding an assumption of risk would have been absent. A case on the other side of the line is Trevor Ivory Ltd v Anderson. This case concerned negligent advice given by a one-man company to a commercial fruit grower. Despite proper application of the spray it killed the grower's fruit crop. The company was found liable in contract and tort. The question was whether the beneficial owner and director of the company was personally liable. The plaintiff had undoubtedly relied on the expertise of the director in contracting with the company. The New Zealand Court of Appeal unanimously concluded that the defendant was not personally liable. McGechan J., who analysed the evidence in detail, said, at p. 532, that there was merely "routine involvement" by a director for and through his company. He said that there "was no singular feature which would justify belief that Mr. Ivory was accepting a personal commitment, as opposed to the known company obligation." That was the basis of the decision of the Court of Appeal. In his 1997 Hamlyn Lecture Lord Cooke of Thorndon commented that if the plaintiff in Trevor Ivory Ltd v Anderson "had reasonably thought that it was dealing with an individual, the result might have been different:" see Taking Salomon Further, Turning Points of the Common Law, p 18, note 50. Such a finding would have required evidence of statements or conduct crossing the line which conveyed to the plaintiff that the defendant was assuming personal liability.
That brings me to reliance by the plaintiff upon the assumption of personal responsibility. If reliance is not proved, it is not established that the assumption of personal responsibility had causative effect. In his Hamlyn Lecture Lord Cooke of Thorndon referred to two judgments of La Forest J in the Canadian Supreme Court on the element of reliance. In London Drugs Ltd v Kuehne & Nagel International Ltd 97 DLR (4th) 261, La Forest J emphasised in the context of an issue of personal liability of a company's employee the distinction between "mere reliance in fact and reasonable reliance on the employee's pocket-book." The second case is Edgeworth Construction Ltd v MD Lea & Associates Ltd [1993] 3 SCR 206. The plaintiff company had made a successful bid for a road building contract with a province. The plaintiffs allegedly lost money as a result of errors in the specifications and drawings prepared for the province by an engineering company. The Supreme Court held that the plaintiffs had a prima facie cause of action against the engineering company for negligent misrepresentation. I do not pause to consider that part of the decision. But the Supreme Court unanimously held that by affixing their seals to the drawing the individual engineers did not assume personal responsibility to the plaintiffs. La Forest J said, at p 212:
"The situation of the individual engineers is quite different. While they may, in one sense, have expected that persons in the position of the appellant would rely on their work, they would expect that the appellant would place reliance on their firm's pocketbook and not theirs for indemnification; see London Drugs, supra, at pp. 386-87. Looked at the other way, the appellant could not reasonably rely for indemnification on the individual engineers. It would have to show that it was relying on the particular expertise of an individual engineer without regard to the corporate character of the engineering firm. It would seem quite unrealistic, as my colleague observes, to hold that the mere presence of an individual engineer's seal was sufficient indication of personal reliance (or for that matter voluntary assumption of risk)."
This reasoning is instructive. The test is not simply reliance in fact. The test is whether the plaintiff could reasonably rely on an assumption of personal responsibility by the individual who performed the services on behalf of the company. To that extent I regard what La Forest J said in Edgeworth as consistent with English law.
Academic criticism of the principle of assumption of risk
Distinguished academic writers have criticised the principle of assumption of responsibility as often resting on a fiction used to justify a conclusion that a duty of care exists: see Barker, 'Unreliable Assumptions in the Modern Law of Negligence' [1993] 109 LQR 461; Hepple, 'The Search for Coherence' (1997) Current Legal Problems, Vol 50, 67, at 88; Cane, Tort Law and Economic Interests 2nd ed., 177 and 200. For this criticism two cases which were decided on special facts are cited: Smith v Eric S Bush [1990] 1 AC 831; White v Jones [1995] 2 AC 207. In my view the general criticism is overstated. Coherence must sometimes yield to practical justice. In any event, the restricted conception of contract in English law, resulting from the combined effect of the principles of consideration and privity of contract, was the backcloth against which Hedley Byrne was decided and the principle developed in Henderson. In The Pioneer Container [1994] 2 AC 324, 335, Lord Goff of Chieveley (giving the judgment of the Privy Council in a Hong Kong appeal) said that it was open to question how long the principles of consideration and privity of contract will continue to be maintained. It may become necessary for the House of Lords to re-examine the principles of consideration and privity of contract. But while the present structure of English contract law remains intact the law of tort, as the general law, has to fulfil an essential gap-filling role. In these circumstances there was, and is, no better rationalisation for the relevant head of tort liability than assumption of responsibility. Returning to the particular question before the House it is important to make clear that a director of a contracting company may only be held liable where it is established by evidence that he assumed personal liability and that there was the necessary reliance. There is nothing fictional about this species of liability in tort.
Applying the principle to the facts
Mr Mistlin owned and controlled the company. The company held itself out as having the expertise to provide reliable advice to franchisees. The brochure made clear that this expertise derived from Mr Mistlin's experience in the operation of the Salisbury shop. In my view these circumstances were insufficient to make Mr. Mistlin personally liable to the respondents. Stripped to essentials the reasons of Langley J, the reasons of the majority in the Court of Appeal and the arguments of counsel for the respondents can be considered under two headings. First, it is said that the terms of the brochure, and in particular its description of the role of Mr. Mistlin, are sufficient to amount to an assumption of responsibility by Mr Mistlin. In his dissenting judgment Sir Patrick Russell rightly pointed out that in a small one-man company "the managing director will almost inevitably be the one possessed of qualities essential to the functioning of the company": 156(a). By itself this factor does not convey that the managing director is willing to be personally answerable to the customers of the company. Secondly, great emphasis was placed on the fact that it was made clear to the franchisees that Mr Mislin's expertise derived from his experience in running the Salisbury shop for his own account. Hirst LJ summarised the point by saying that "the relevant knowledge and experience was entirely his qua Mr Mistlin, and not his qua director:" 153(h). The point will simply not bear the weight put on it. Postulate a food expert who over ten years gains experience in advising customers on his own account. Then he incorporates his business as a company and he so advises his customers. Surely, it cannot be right to say that in the new situation his earlier experience on his own account is indicative of an assumption of personal responsibility towards his customers. In the present case there were no personal dealings between Mr. Mistlin and the respondents. There were no exchanges or conduct crossing the line which could have conveyed to the respondents that Mr Mistlin was willing to assume personal responsibility to them. Contrary to the submissions of counsel for the respondents, I am also satisfied that there was not even evidence that the respondents believed that Mr Mistlin was undertaking personal responsibility to them. Certainly, there was nothing in the circumstances to show that the respondents could reasonably have looked to Mr Mistlin for indemnification of any loss. For these reasons I would reject the principal argument of counsel for the respondents.
The joint tortfeasor point
Counsel for the respondents tried to support the judgment of the Court of Appeal on the alternative ground that Mr. Mistlin had played a prominent part in the production of the negligent projections and had directed that the projections be supplied to the respondents. Accordingly, he submitted, Mr. Mistlin was a joint tortfeasor with the company, the latter being liable to the respondents on the extended Hedley Byrne principle.
I am satisfied that this case was never pleaded as an independent cause of action. Like Hirst LJ in the Court of Appeal (with whom Waite LJ agreed) I am satisfied reading Langley J's judgment as a whole (and see in particular at p. 303(c)) that he never intended to find that Mr. Mistlin was liable to the respondents as a joint tortfeasor. The possibility of such a cause of action was raised in the Court of Appeal but expressly abandoned. And it was not included in the Agreed Statement of Facts and Issues before the Appellate Committee. In these circumstances the point is not open to the respondents. In any event, the argument is unsustainable. A moment's reflection will show that, if the argument were to be accepted in the present case, it would expose directors, officers and employees of companies carrying on business as providers of services to a plethora of new tort claims. The fallacy in the argument is clear. In the present case liability of the company is dependent on a special relationship with the respondents giving raise to an assumption of responsibility. Mr. Mistlin was a stranger to that particular relationship. He cannot therefore be liable as a joint tortfeasor with the company. If he is to be held liable to the respondents, it could only be on the basis of a special relationship between himself and the respondents. There was none. I would therefore reject this alternative argument.
Anglo German Breweries Ltd (in liquidation) v Chelsea Corp Inc [2012] EWHC 1481 (Ch)
Summary
It was appropriate to pierce the corporate veil and to require the transfer of a property held by a company where the true owner of the property had transferred it to the company to conceal his fraudulent activities.
Facts
The liquidator for the claimant company (C) claimed for the transfer of a property from the first defendant company (D) to it.
The property had been bought by a de facto director (T) of C, who had then transferred it to D.
The liquidator, supported by the seventh defendant Revenue and Customs, submitted that T had set up D in order to conceal his assets and prevent their seizure for his involvement in tax evasion, and accordingly that D had no genuine corporate existence. On that basis, they argued that the liquidator was entitled to pierce the corporate veil and to require a transfer of the property from D to C.
Held
In order to pierce the corporate veil, C was required to show that T had control of D and that D had been used as a device or facade to facilitate or conceal T’s wrongdoing, Trustor AB v Smallbone (No.2) [2001] 1 W.L.R. 1177 applied. Those conditions were satisfied. D was clearly owned and controlled by T, and the purpose of transferring the property was to conceal T’s ownership of it until his liabilities arising out of his fraudulent activities were resolved. Accordingly, T was the true owner of the property and a declaration was granted to that effect (see paras 22-24 of judgment).
Judgment for claimant
Gramsci Shipping Corp v Lembergs [2013] EWCA Civ 730
On 19 June 2013, the Court of Appeal handed down judgment in Antonio Gramsci Shipping Corporation v Lembergs [2013] EWCA Civ 730, upholding the judgment of Teare J that the English Court had no jurisdiction over the Defendant.
On behalf of the Defendant, Anthony de Garr Robinson QC and Laurence Emmett of One Essex Court successfully argued that, where a company had entered into a jurisdiction agreement, it was not open to the Court to establish jurisdiction over an individual standing behind the company by “piercing the corporate veil” and treating the individual as if he were a party to the jurisdiction agreement.
The argument by the Claimants was that the jurisprudence of the ECJ (now the CJEU) permitted the Court to treat a company’s consent to jurisdiction as the consent of the person controlling the company for the purposes of Art. 23 of the Judgments Regulation. They contended that the decided cases establish free-standing European principles of “good faith” and “deemed consent” which allowed jurisdiction to be established under Art. 23 where the company has been used as a vehicle of fraud. Beatson LJ (with whom Lloyd and Ryder LJJ agreed) rejected these arguments.
The case makes clear what is meant by “agreement” in the context of Art. 23 of the Judgments Regulation. For this purpose, it emphasises that the essential inquiry in any case is whether the defendant has actually consented to the Court’s jurisdiction. It also reinforces the limits of the English law principle of “piercing the corporate veil”, as laid down by the Supreme Court in VTB Capital plc v Nutritek Ltd [2013] UKSC 5; and Prest v Petrodel Resources Ltd [2013] UKSC 34.
VTB Capital plc v Nutritek International Corp [2013] UKSC 5
VTB Capital plc v Nutritek International Corp [2013] UKSC 5, [2013] 2 AC 337 is an English company law case, concerning piercing the corporate veil for fraud.
Together with the subsequent decision of the Supreme Court later the same year in Prest v Petrodel Resources Ltd [2013] UKSC 34 the Supreme Court substantially restated the English company law position in relation to piercing of the corporate veil.
Facts
VTB Capital plc claimed that Nutritek, its parent and a director called Konstantin Malofeev, fraudulently misrepresented the value of dairy companies that Nutritek was selling to Russagroprom LLC. VTB was giving a $225m loan to Russagroprom to buy the dairy companies. VTB claimed that it was deceived into thinking that Russagroprom was not already under common control with Nutritek. It additionally sought to hold the owner of Nutritek, Marshall Capital Holdings, Marshall Capital LLC and the alleged controller, Konstantin Malofeev all jointly liable because of their control of Nutritek. VTB Capital was a subsidiary of the Russian state owned bank called JSC VTB Bank, but the loan facility agreement was expressed to be governed by English law. Russagroprom defaulted on the loan, and only $40m was recovered. VTB sought to amend to add claims that the court should pierce the veil of Russagroprom to make the defendants liable under the facility agreement.
Judgment
High Court
Arnold J refused permission to amend and serve the proceedings out of the jurisdiction, because England was not demonstrated to be the appropriate forum. It discharged the freezing injunction that was obtained against Malofeev.[1]
Court of Appeal
The Court of Appeal dismissed the appeal. Lloyd LJ gave the judgment. Rimer LJ and Aikens LJ concurred.[2]
Supreme Court
The Supreme Court dismissed the appeal, Lord Mance giving the leading judgment, and holding that England was not the appropriate forum. Although the High Court had erred in interpreting Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460, this did not effect its ultimate conclusion because its error favoured VTB. The High Court wrongly concluded that Russian law governed the alleged torts, but it had considered the position if English law had been applicable and found this not to be favourable. The Court of Appeal also erred in finding Russian law applicable for the torts and did not recognise the significance of the governing law, but this would not have changed the conclusion. The High Court’s exercise of discretion could not be faulted or set aside. It was unnecessary to resolve whether the court could not pierce the veil but this could not succeed in any case. The allegation would be an extension of existing law, so that there could be piercing if someone controlled a company, as if they had been a co-contracting partner. A strong justification would be required, and there was an overwhelming case against extension because the law provided redress against the controller in a misrepresentation action. It would be wrong to treat another defendant as party to the contract where none of the actual parties had intended this. The facts did not involve Russagroprom being used as a facade to conceal true facts. The worldwide freezing injunction would be discharged, and it was unsatisfactory given the length of litigation.
Lord Neuberger gave a concurring judgment. While not technically necessary, he said the following on piercing the corporate veil.
120. We were referred to a number of cases where courts have either granted relief on the basis of piercing the corporate veil, or where courts have proceeded on the assumption, or concluded, that there is power to do so. The only case in that connection in the House of Lords, or Supreme Court, to which we were referred, was Woolfson v Strathclyde Regional Council 1978 SLT 159, a case where, on the facts, the House of Lords had no difficulty in rejecting an argument that the corporate veil could be pierced. At 1978 SLT 159, 161, Lord Keith suggested that the court could only take such a course "where special circumstances exist indicating that [the involvement of the company] is a mere façade concealing the true facts".
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122. The starting point for the argument that the principle does not exist is the well known decision in Salomon v A Salomon & Co Ltd [1897] AC 22. There is great force in the argument that that case represented an early attempt to pierce the veil of incorporation, and it failed, pursuant to a unanimous decision of the House of Lords, not on the facts, but as a matter of principle. Thus, at 30-31, Lord Halsbury LC said that a "legally incorporated" company "must be treated like any other independent person with its rights and liabilities appropriate to itself …, whatever may have been the ideas or schemes of those who brought it into existence". He added that it was "impossible to say at the same time that there is a company and there is not."
123. The notion that there is no principled basis upon which it can be said that one can pierce the veil of incorporation receives some support from the fact that the precise nature, basis and meaning of the principle are all somewhat obscure, as are the precise nature of circumstances in which the principle can apply. Clarke J in The Tjaskemolen [1997] 2 Lloyd's Rep 465, 471 rightly said that "[t]he cases have not worked out what is meant by 'piercing the corporate veil'. It may not always mean the same thing" (and to the same effect, see Palmer's Company Law, para 2.1533). Munby J in Ben Hashem seems to have seen the principle as a remedial one, whereas Sir Andrew Morritt V-C in Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177 appears to have treated the principle as triggered by the finding of a "façade".
124. The "façade" mentioned by Lord Keith is often regarded as something of a touchstone in the cases – e.g. per Munby J in Ben Hashem, para 164, and per Sir Andrew Morritt V-C in Trustor, para 23. Words such as "façade", and other expressions found in the cases, such as "the true facts", "sham", "mask", "cloak", "device", or "puppet" may be useful metaphors. However, such pejorative expressions are often dangerous, as they risk assisting moral indignation to triumph over legal principle, and, while they may enable the court to arrive at a result which seems fair in the case in question, they can also risk causing confusion and uncertainty in the law. The difficulty which Diplock LJ expressed in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802, as to the precise meaning of "sham" in connection with contracts, may be equally applicable to an expression such as "façade".
125. Mr Lazarus argued that in all, or at least almost all, the cases where the principle was actually applied, it was either common ground that the principle existed (Gilford Motor Co Ltd v Horne [1933] Ch 935, Re H (restraint order: realisable property) [1996] 2 BCLC 500, and Trustor) and/or the result achieved by piercing the veil of incorporation could have been achieved by a less controversial route - for instance, through the law of agency (In re Darby, Ex p Brougham [1911] 1 KB 95, Gilford, and Jones v Lipman [1962] 1 WLR 832), through statutory interpretation (Daimler Company Ltd v Continental Tyre and Rubber Company (Great Britain) Ltd [1916] 2 AC 307, Merchandise Transport Ltd v British Transport Commission [1962] 2 QB 173, Wood Preservation Ltd v Prior [1969] 1 WLR 1077, and Re A Company [1985] BCLC 333), or on the basis that, as stated by Lord Goff in Goss v Chilcott [1996] AC 788, 798, money due to an individual which he directs to his company is treated as received by him (Gencor ACP Ltd v Dalby [2000] 2 BCLC 734, and Trustor).
126. In summary, therefore, the case for Mr Malofeev is that piercing the corporate veil is contrary to high authority, inconsistent with principle, and unnecessary to achieve justice.
127. I see the force of this argument, but there are points the other way. I am not convinced that all the cases where the court has pierced the veil can be explained on the basis advanced by Mr Lazarus. Further, as Mr Howard QC said, the fact is that those cases were decided on the basis of piercing the veil. More generally, it may be right for the law to permit the veil to be pierced in certain circumstances in order to defeat injustice. In addition, there are other cases, notably Adams v Cape Industries plc [1990] Ch 433, where the principle was held to exist (albeit that they include obiter observations and are anyway not binding in this court). It is also difficult to explain the first instance decision in Kensington International Ltd v Republic of the Congo [2005] EWHC 2684 (Comm), [2006] 2 BCLC 296 on any basis other than the principle (but I am not at all sure that the case was rightly decided – see Continental Transfert Technique Ltd v Federal Government of Nigeria [2009] EWHC 2898 (Comm), paras 27-29). Further, the existence of the principle is accepted by all the leading textbooks – see Palmer op. cit, Gore-Browne on Companies at paras 7[3] to 7[6], Gower and Davies on Principles of Modern Company Law (8th ed) at paras 8-5 to 8-14, and Farrar's Company Law (4th ed), pp 69-78.
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129. In its recent decision in La Générale des Carrières et des Mines v F G Hemisphere Associates LLC [2012] UKPC 27, para 24, the Judicial Committee of the Privy Council, in a judgment given by Lord Mance, was prepared to assume that the appellant was right in contending that it was open to a court in this jurisdiction to pierce the corporate veil, but it is to be noted that this was not challenged by the respondent. In para 27, reference was made to Case concerning Barcelona Traction, Light, and Power Company, Ltd [1970] ICJ 3, in which, it was said,
"[T]he International Court of Justice referred (para 56) to municipal law practice to lift the corporate veil … 'for instance, to prevent the misuse of the privileges of legal personality, as in certain cases of fraud or malfeasance, to protect third persons such as a creditor or purchaser, or to prevent the evasion of legal requirements or of obligations'".
However, at para 27, Lord Mance pointed out that Barcelona Traction concerned "international legal considerations, indicating that there may not always be a precise equation between factors relevant to the lifting of the corporate veil under domestic and international law."
130. In my view, it is unnecessary and inappropriate to resolve the issue of whether we should decide that, unless any statute relied on in the particular case expressly or impliedly provides otherwise, the court cannot pierce the veil of incorporation. It is unnecessary, because the second argument raised on behalf of Mr Malofeev, to which I shall shortly turn, persuades me that VTB cannot succeed on this issue. It is inappropriate because this is an interlocutory appeal, and it would therefore be wrong (absent special circumstances) to decide an issue of such general importance if it is unnecessary to do so.
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132. In so far as VTB invokes the principle of piercing the veil of incorporation, its case involves what, at best for its point of view, may be characterised as an extension to the circumstances where it has traditionally been held that the corporate veil can be pierced. It is an extension because it would lead to the person controlling the company being held liable as if he had been a co-contracting party with the company concerned to a contract where the company was a party and he was not. In other words, unlike virtually all the cases where the court has pierced the corporate veil, VTB is claiming that Mr Malofeev should be treated as if he were, or had been, a co-contracting party with RAP under the two agreements, even though neither Mr Malofeev nor any of the contracting parties (including VTB) intended Mr Malofeev to be a party.
133. The notion that the principle can be extended to such a case receives no support from any case save for a very recent decision of Burton J, Antonio Gramsci Shipping Corporation v Stepanovs [2011] EWHC 333 (Comm), [2011] 1 Lloyd's Rep 647 (which he followed in his later decision in Alliance Bank JSC v Aquanta Corporation [2011] EWHC 3281 (Comm) [2012] 1 Lloyd's Rep 181, which was considered by the Court of Appeal at [2012] EWCA Civ 1588). None of the other decisions relied on by VTB in this connection is, on analysis, of assistance to its case.
134. In Gilford, Mr Horne had undertaken not to compete with his former employer, and a company, in which only he and his wife were shareholders, and which he formed after leaving his employment, was enjoined from competing. He effectively broke his undertaking by trading through the company, in the same way as if it had been carrying on the competing business through his wife – as indeed had happened in Smith v Hancock [1894] 2 Ch 377, 385, a case relied on by the Court of Appeal in Gilford. Thus, the decision in Gilford had nothing to do with the fact that a company was involved, and therefore, as a matter of logic, the decision cannot have been based on piercing the corporate veil – a point made by Toulson J in Yukong Line at 308, and rightly accepted by Arnold J and the Court of Appeal in this case.
135. The same point (as was said in Yukong Line) applies to Jones v Lipman, which I do not find an entirely easy case. After agreeing to sell a property to a purchaser, the vendor sold the same property to a company owned by him and his wife, and the purchaser obtained an order for specific performance against the company. On the judge's reasoning, it would have equally been entitled to do so if, instead of the company, the property had been transferred to the vendor's wife. Another view of Jones is that the sale by the vendor to the company was treated as a sham transaction.
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137. The fact that there has been no case (until Gramsci) where the power to pierce the corporate veil has been extended in the way for which VTB contends in these proceedings does not necessarily mean that VTB's case, in so far as it is based on piercing the veil, must fail. However, given that the principle is subject to the criticisms discussed above, it seems to me that strong justification would be required before the court would be prepared to extend it. Once one subjects the proposed extension to analysis, I consider that it is plain that it cannot be sustained: far from there being a strong case for the proposed extension, there is an overwhelming case against it.
138. First, it is not suggested by VTB that any of the other contracting parties under the two agreements is not liable. Indeed, as mentioned above, VTB's proposed pleaded case is that Mr Malofeev is "jointly and severally liable with RAP". Even accepting that the court can pierce the corporate veil in some circumstances, the notion of such joint and several liability is inconsistent with the reasoning and decision in Salomon. A company should be treated as being a person by the law in the same way as a human being. The fact that a company can only act or think through humans does not call that point into question: it just means that the law of agency will always potentially be in play, but, it will, at least normally, be the company which is the principal, not an agent. On VTB's case, if the agency analogy is relevant, the company, as the contracting party, is the quasi-agent, not the quasi-principal.
139. Subject to some other rule (such as that of undisclosed principal), where B and C are the contracting parties and A is not, there is simply no justification for holding A responsible for B's contractual liabilities to C simply because A controls B and has made misrepresentations about B to induce C to enter into the contract. This could not be said to result in unfairness to C: the law provides redress for C against A, in the form of a cause of action in negligent or fraudulent misrepresentation.
140. In any event, it would be wrong to hold that Mr Malofeev should be treated as if he was a party to an agreement, in circumstances where (i) at the time the agreement was entered into, none of the actual parties to the agreement intended to contract with him, and he did not intend to contract with them, and (ii) thereafter, Mr Malofeev never conducted himself as if, or led any other party to believe, he was liable under the agreement. That that is the right approach seems to me to follow from one of the most fundamental principles on which contractual liabilities and rights are based, namely what an objective reasonable observer would believe was the effect of what the parties to the contract, or alleged contract, communicated to each other by words and actions, as assessed in their context – see e.g. Smith v Hughes (1871) LR 6 QB 597, 607.
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142. Quite apart from this, it seems to me that the facts relied on by VTB to justify piercing the veil of incorporation in this case do not involve RAP being used as "a façade concealing the true facts". In my view, if the corporate veil is to be pierced, "the true facts" must mean that, in reality, it is the person behind the company, rather than the company, which is the relevant actor or recipient (as the case may be). Here, on VTB's case, "the true facts" relate to the control, trading performance, and value of the Dairy Companies (if one considers the specific allegations against Mr Malofeev), or to the genuineness of the nature of the underlying arrangement (which involves a transfer of assets between companies in common ownership). Neither of these features can be said to involve RAP being used as a "façade to conceal the true facts".
143. It was suggested, however, by Mr Howard QC that the case against Mr Malofeev involves him "abusing the corporate structure", and that that is sufficient to justify piercing the corporate veil. However, in my view, abuse of the corporate structure (whatever that expression means) adds nothing to the debate, at least in this case. It may be another way of describing use of the company as a façade to conceal the true facts (in which case it adds nothing to Lord Keith's characterisation in Woolfson), or it may be an additional requirement before the corporate veil will be pierced: otherwise, it seems to me that it would be an illegitimate extension of the circumstances in which the veil can be pierced.
144. It is true that in many civil law systems, abuse of rights is a well recognised concept, and it may be appropriate for a domestic court to apply such a principle in relation to some areas of EU law. However, it was not suggested to us that it should be applied as a new or separate ground in domestic law for treating Mr Malofeev as contractually liable to VTB, or that it would assist VTB in this case.
145. Accordingly, in agreement with the Court of Appeal and for substantially the same reasons, I consider that VTB's contention represents an extension to the circumstances in which the court will pierce the corporate veil, and on analysis it is an extension which is contrary to authority and contrary to principle.
Lord Wilson concurred with Lord Mance and Lord Neuberger. He said the following on the corporate veil point.
In that this court welcomes blue sky thinking, I do not criticise Mr Lazarus for his over-arching attempt to persuade it that English law recognises no principle that the corporate veil may ever be lifted. In my view, however, and notwithstanding the difficulty of being able to define within one sentence the circumstances in which the law will – perhaps – lift the corporate veil, such was a highly ambitious submission. But this is not the place at which to embark on an attempted subjection of it to critical examination.
Lord Clarke gave a judgment, dissenting on the question of forum, while reserving any comments on the corporate veil for a future case.
Lord Reed dissented regarding forum, and agreed with Lord Neuberger there were strong reasons against piercing the veil.
Petrodel Resources Ltd v Prest [2013] UKSC 34
Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 is a leading UK company law decision of the UK Supreme Court concerning the nature of the doctrine of piercing the corporate veil, resulting trusts and equitable proprietary remedies in the context of English family law.[1]
Facts
Ms Yasmin Prest claimed under Matrimonial Causes Act 1973 sections 23 and 24 for ancillary relief against the offshore companies solely owned by Mr Michael Prest. Mrs Prest said they held legal title to properties that he beneficially owned, including a £4m house at 16 Warwick Avenue, London. They had married in 1993 and divorced in 2008. He did not comply with orders for full and frank disclosure of his financial position, and the companies did not file a defence. The Matrimonial Causes Act 1973 section 24 required that for a court to be able to order a transfer a property, Mr Prest had to be ‘entitled’ to the properties held by his companies.[2] Mr Prest contended that he was not entitled to the properties.[3]
Judgment
High Court
Moylan J, in the Family Division of the High Court, held that Mr Prest had the ability to transfer the properties in practice, so he was “entitled” to them under MCA 1973 s 24(1)(a). The court therefore had jurisdiction to make a transfer order. He ordered Mr Prest to transfer to the wife six properties and an interest in a seventh which were held in the name of two of the husband’s companies. He rejected the husband had done anything improper relating to the companies to allow piercing the corporate veil. But under MCA 1973 s 24(1)(a) ancillary relief was wider. Because Mr Prest’s properties were worth £37.5 million, Mrs Prest’s fair award was valued at £17.5m.[4] In reviewing the law as it relates to piercing the corporate veil, he noted the following principles:[5]
Ownership and control were not in themselves sufficient to pierce the corporate veil.
Even where there was no unconnected third party interest the veil could not be pierced only because it is necessary in the interests of justice.
The veil can only be pierced if there is impropriety.
The impropriety must be linked to the use of the company structure to avoid or conceal liability.
In order to pierce the veil, both control by the wrongdoer and impropriety must be demonstrated.
A company may be a façade even though originally incorporated without deceptive intent.
In that regard, he found that piercing was justified, not under the general principles,[6] but by virtue of the Act.[7] The husband’s properties were worth approximately £37.5 million, and therefore the wife’s fair award was valued at £17.5 million.[8]
Court of Appeal
The Court of Appeal, with Rimer LJ and Patten LJ in the majority, allowed an appeal by the companies. The Family Division’s practice of treating the assets of companies substantially owned by one party to the marriage as available for distribution under MCA 1973 section 24(1)(a) was beyond the jurisdiction of the court unless the corporate personality of the company was being abused. The corporate form needed to be used for an improper purpose, or it had to be shown that the companies held the properties on trust for Mr Prest. Because Munby J had rejected these possibilities in Ben Hashem v Al Shayif[9] his order must have been incorrect. In the majority’s view, this conflicted with Salomon v A Salomon & Co Ltd, as affirmed in Woolfson v Strathclyde Regional Council and Adams v Cape Industries plc.[10] Patten LJ commented on other Family Division cases leading to similar results.
161. [...] They have led judges of the Family Division to adopt and develop an approach to company owned assets in ancillary relief applications which amounts almost to a separate system of legal rules unaffected by the relevant principles of English property and company law. That must now cease.
Thorpe LJ (a former judge of the Family Division) dissented, and said the following.
64. In this case the reality is plain. So long as the marriage lasted, the husband's companies were milked to provide him and his family with an extravagant lifestyle. That was only possible because the companies were wholly owned and controlled by the husband and there were no third party interests. Of course in so operating them husband ignored all company law requirements and checks. 65. Once the marriage broke down, the husband resorted to an array of strategies, of varying degrees of ingenuity and dishonesty, in order to deprive his wife of her accustomed affluence. Amongst them is his invocation of company law measures in an endeavour to achieve his irresponsible and selfish ends. If the law permits him so to do it defeats the Family Division judge's overriding duty to achieve a fair result.
Supreme Court
The Supreme Court unanimously overturned the Court of Appeal and held that Mr Prest beneficially owned the assets of the Petrodel Resources Ltd companies 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. However, because Mr Prest had been “entitled” to the assets of his companies under a resulting trust, under the Matrimonial Causes Act 1973 section 24 the court had jurisdiction to transfer half the value of the properties to Mrs Prest.
Lord Sumption gave the first judgment. He said there was only a limited power to pierce the corporate veil, namely when people were under an existing legal obligation which is deliberately evaded. Fraud cuts through everything. A veil could be pierced only for the purpose of depriving the company or its controller of the advantage they would otherwise obtain from the company’s separate legal personality. There had been no evidence that Mr Prest had set up the companies to avoid any obligations in these divorce proceedings, so there was no ground for piercing the corporate veil.[11] The same was true under the MCA 1973 s 24. This did invoke property concepts with established meanings, and did not mean something different in matrimonial proceedings. If someone did try to frustrate a claim, the MCA 1973 section 37 made provision for setting aside certain dispositions. The jurisdiction that Munby J purported to recognise would, however, cut across the statutory schemes of company and insolvency law that protected people dealing with a company. So, MCA 1973 section 24 did not give judges power to order Mr Prest to transfer property that he was not entitled to in law. However, on the facts, the Petrodel Resources Ltd companies could be ordered to transfer the properties under MCA 1973 section 24 because they belonged to him beneficially: under a resulting trust. The evidence was obscure, but this was because of Mr Prest’s obstruction and mendacity.[12] He said the following.
Chandler v Cape plc [2012] EWCA Civ 525
Chandler v Cape plc [2012] EWCA Civ 525 is a decision of the Court of Appeal which addresses the availability of damages for a tort victim from a parent company, in circumstances where the victim suffered industrial injury during employment by a subsidiary company.[1]
Facts
David Chandler had been employed by a wholly owned subsidiary company of Cape plc for just over 18 months, between 1959 and 1962. In 2007, Chandler discovered that as a result of exposure to asbestos during that period of employment, he had developed asbestosis. The subsidiary no longer existed and had no policy of insurance covering claims for damages for asbestosis. Chandler brought a claim against Cape plc, alleging it had owed (and breached) a duty of care to him. Cape plc denied that it owed a duty of care to the employees of its subsidiary company.
Judgment
High Court
At first instance, Wyn Williams J held that Cape plc owed Mr Chandler a duty of care, applying the threefold test (foreseeability, proximity and fairness) laid down in Caparo Industries Plc v Dickman.[2] Cape plc had had actual knowledge of the subsidiary employees’ working conditions, and the asbestos risk was obvious. It had employed a scientific and medical officer to be responsible for health and safety issues and had, in the circumstances, retained responsibility for ensuring that its own employees, and those of its subsidiaries, were not harmed.
48 In the light of the contemporaneous and later documents discussed above there can be little doubt that the Defendant exercised control over some of the activities of Cape Products from the time that it came into existence and through the period during which the Claimant was one of its employees. With his usual realism, Mr Feeny does not seek to argue to the contrary. He submits, however, that although the Defendant was obviously entitled to exercise control over Cape Products and from time to time it did so, that does not mean that the Defendant controlled all its important activities. I accept that submission. A glance at the minutes of the meetings of the directors of Cape Products in the period 1956 to 1962 shows that many decisions about its activities, some of them important, were taken without reference to the Defendant. 49 It does not seem to me, however, that the Claimant's case stands or falls simply upon whether he can establish that the Defendant controlled all the activities of Cape Products. It is enough, in my judgment, if he can establish that the Defendant either controlled or took overall responsibility for the measures adopted by Cape Products to protect its employees against harm from asbestos exposure. [...] 66. ... it is necessary to dispel certain possible misunderstandings which might arise in cases of this type or upon a cursory reading of this judgment. First, the fact that the Claimant was owed a duty of care by Cape Products does not prevent such a duty arising between the Claimant and other parties. No doubt, the fact that a duty situation exists between the Claimant and his employer is a factor to be taken into account when deciding whether another party owes the Claimant such a duty. But, to repeat, the existence of the duty between the Claimant and his employer cannot preclude another person being fixed with a duty of care. Second, the fact that Cape Products was a subsidiary of the Defendant or part of a group of companies of which the Defendant was the parent cannot mean by itself that the Defendant owes a duty to the employees of Cape Products. So much is clear from Adams v Cape Industries plc [1991] 1 AER 929. Equally, the fact that Cape Products was a separate legal entity from the Defendant cannot preclude the duty arising. Third, this case has not been presented on the basis that Cape Products was a sham – nothing more than a veil for the activities of the Defendant. Accordingly, this is not a case in which it would be appropriate to “pierce the corporate veil.” 71 It is true that generally the law imposes no duty upon a party to prevent a third party from causing damage to another. That emerges clearly from Smith v Littlewoods Organisation Ltd [1987] A.C. 241 . However, that same case makes it clear that there are exceptions to the general rule. In his speech Lord Goff identified the circumstances in which a duty might arise. They were a) where there was a special relationship between the Defendant and Claimant based on an assumption of responsibility by the Defendant; b) where there is a special relationship between the Defendant and the third party based on control by the Defendant; c) where the Defendant is responsible for a state of danger which may be exploited by a third party; and d) where the Defendant is responsible for property which may be used by a third party to cause damage. Mr Weir QC submits that if it is necessary to show that special or exceptional circumstances exist in the instant case that can be done. He submits that there was a special relationship between the Defendant and the Claimant based upon the Defendant's assumption of responsibility for safeguarding the Claimant against illness from exposure to asbestos; alternatively, the Defendant had the ultimate control of those measures which were taken to protect the Claimant from the risk of exposure to asbestos. 72 I end my discussion of the parties' submissions upon the law where I began. I must apply the three-stage test in Caparo.... 75 The Defendant employed a scientific officer and a medical officer who were responsible, between them, for health and safety issues relating to all the employees within the group of companies of which the Defendant was parent. On the basis of the evidence as a whole it was the Defendant, not the individual subsidiary companies, which dictated policy in relation to health and safety issues insofar as the Defendant's core business impacted upon health and safety. The Defendant retained responsibility for ensuring that its own employees and those of its subsidiaries were not exposed to the risk of harm through exposure to asbestos. In reaching that conclusion I do not intend to imply that the subsidiaries, themselves, had no part to play – certainly in the implementation of relevant policy. However, the evidence persuades me that the Defendant retained overall responsibility. At any stage it could have intervened and Cape Products would have bowed to its intervention. On that basis, in my judgment, the Claimant has established a sufficient degree of proximity between the Defendant and himself. At paragraph 27 of the skeleton argument submitted on behalf of the Claimant the suggestion is made that in this case the degree of proximity between the Defendant and Claimant is central to the analysis of whether, on the facts, a duty of care was owed. I agree. The facts I have found proved in this case persuade me that proximity is established. 76 No argument was advanced to me by Mr Feeny that if foreseeability and proximity were established nonetheless it was not fair, just and reasonable for a duty to exist. Had such an argument been advanced I would have rejected it. By the late 1950s it was clear to the Defendant that exposure to asbestos brought with it very significant risk of very damaging and life threatening illness. I can think of no basis upon which it would be proper to conclude in those circumstances that it would not be just or reasonable to impose a duty of care upon an organisation like the Defendant. 77 In my judgment the three-stage test for the imposition of a duty of care is satisfied in this case. Accordingly, the Claimant succeeds in his claim.
Court of Appeal
Cape plc appealed to the Court of Appeal, but its appeal was dismissed. Arden LJ (with whom the other judges agreed) concluded that Cape plc had assumed responsibility to Mr Chandler and was answerable for the injury which he had suffered.
1. ... On 14 April 2011, Wyn Williams J held that Cape was liable to Mr Chandler on the basis not of any form of vicarious liability or agency or enterprise liability, but on the basis of the common law concept of assumption of responsibility. Cape appeals against that decision.
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8. Cape acquired at least a majority of the share capital of Cape Products in 1945, and the outstanding shares in about 1953. Cape installed the necessary plant into the empty factory. A manager was appointed "to manage this plant as a branch of Cape" (see The Cape Asbestos Story produced by Cape Asbestos, 1953, page 71). Production of Asbestolux, a new form of non-combustible asbestos board, started. "In a short time, [Cape Products] was an invaluable feature in Cape's economy" (op. cit. page 72). However, it is noteworthy that at no relevant point in time did Cape cease to be an operating company itself or merely hold the shares in its subsidiaries as if it were an investment holding company.
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40. Although it appears that there is no reported case of a direct duty of care on the part of a parent company, Mr Weir cites the passage from the speech of Lord Bingham in Lubbe v Cape Plc [2000] 1 WLR 1545. That case concerned the question whether proceedings, which had been brought by former employees of a former South African subsidiary of Cape in England and Wales, should be stayed on the grounds that the proper forum was South Africa. The House did not therefore have to consider the basis of which such an action might succeed. However, at page 1555 Lord Bingham expressly contemplated that it might involve as in this case a detailed examination of the relationship between the parties based on the surviving documentary material....
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62. The basis on which the judge found there was a duty of care on the part of Cape is on the basis of an assumption of responsibility. This falls within the second and third parts of the three-part Caparo test for determining whether there is a duty of care, namely proximity and the further requirement that it be fair, just and reasonable to impose liability. These two requirements are directed to the essentially same question. As Lord Oliver pointed out in Caparo:
"'Proximity' is, no doubt a convenient expression so long as it is realised that it is no more than a label which embraces not a definable concept but merely a description of circumstances in which, pragmatically, the courts conclude that a duty of care exists." (page 633)
63. The development of the law of negligence has to be incremental and the judge was in my judgment correct to hold that the analogous line of cases in negligence to the instant case is the line of authority on the duty of a person to intervene to prevent damage to another. As Lord Goff pointed out in Smith v Littlewoods Ltd [1987] AC 241 at 270, there is in general no duty to prevent third parties causing damage to another. But Lord Goff recognised that there were exceptions to this principle, for example where there was "a relationship between the parties which gives rise to an imposition or assumption of responsibility" on the part of the defendant (page 272D).
64. Lord Goff speaks of the imposition or assumption of responsibility. Whether a party has assumed responsibility is a question of law. The court does not have to find that the relevant party has voluntarily assumed responsibility (see also on this point Customs and Excise Commissioners v Barclays Bank [2007] 1 AC 181, cited by Mr Weir). The word "assumption" is therefore something of a misnomer. The phrase "attachment" of responsibility might be more accurate.
65. Responsibility was imposed in Dorset Yacht Co Ltd v Home Office [1970] AC 1004, where the Home Office was held liable for damage done by escaping Borstal boys over whom the Home Office had had control. Its control over them gave rise to a special relationship in law between the plaintiffs and the Home Office. An assumption of a duty of care has also been found to exist as between an independent contractor and employees of the employer: see, for example, Gray v Fire Alarm Fabrication Services Ltd [2007] ICR 247; Clay v AJ Crump Ltd [1964] 1 QB 533.
66. Likewise, it has been held on two occasions that it is arguable that a parent company may owe a duty of care to employees of subsidiaries: see Connelly v Rio Tino Zinc Corporation and Ngcobo v Thor Chemicals Holdings Ltd, January 1996, per Maurice Kay J, unreported. There is nothing in either judgment or the general law to support the submission advanced by Mr Stuart-Smith that the duty of care can only exist in these cases if the parent company has absolute control of the subsidiary. Moreover, if a parent company has responsibility towards the employees of a subsidiary there may not be an exact correlation between the responsibilities of the two companies. The parent company is not likely to accept responsibility towards its subsidiary's employees in all respects but only for example in relation to what might be called high level advice or strategy.
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69. I would emphatically reject any suggestion that this court is in any way concerned with what is usually referred to as piercing the corporate veil. A subsidiary and its company are separate entities. There is no imposition or assumption of responsibility by reason only that a company is the parent company of another company.
70. The question is simply whether what the parent company did amounted to taking on a direct duty to the subsidiary's employees.
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78. Given Cape's state of knowledge about the Cowley Works, and its superior knowledge about the nature and management of asbestos risks, I have no doubt that in this case it is appropriate to find that Cape assumed a duty of care either to advise Cape Products on what steps it had to take in the light of knowledge then available to provide those employees with a safe system of work or to ensure that those steps were taken. The scope of the duty can be defined in either way. Whichever way it is formulated, the injury to Mr Chandler was the result. As the judge held, working on past performance and viewing the matter realistically, Cape could, and did on other matters, give Cape Products instructions as to how it was to operate with which, so far as we know, it duly complied.
79. In these circumstances, there was, in my judgment, a direct duty of care owed by Cape to the employees of Cape Products. There was an omission to advise on precautionary measures even though it was doing research and that research had not established (nor could it establish) that the asbestosis and related diseases were not caused by asbestos dust. Moreover, while I have reached my conclusion in my own words and following my own route, it turns out that, in all essential respects, my reasoning follows the analysis of the judge in paragraphs 61 and 72 to 75 of his judgment.
80. In summary, this case demonstrates that in appropriate circumstances the law may impose on a parent company responsibility for the health and safety of its subsidiary's employees. Those circumstances include a situation where, as in the present case, (1) the businesses of the parent and subsidiary are in a relevant respect the same; (2) the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry; (3) the subsidiary's system of work is unsafe as the parent company knew, or ought to have known; and (4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees' protection. For the purposes of (4) it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. The court may find that element (4) is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues.
Significance
The decision is significant because it represents the first time that an injured employee of a subsidiary company has established that his employer’s parent company owed him a duty of care. Arden LJ dismissed any suggestion that the case involved piercing the corporate veil, but the outcome has an equivalent effect in that (through the application of tortious principles) it imposes liability upon a parent company despite the fact that the parent company is a legal entity separate from that of its subsidiary.
The reasoning contained in the judgement is consistent with the common law delictual principles that have application in South Africa and likely in other common law jurisdictions. While no similar ruling has yet been made in a South African court, the decision will be relied upon by the plaintiffs in a class action brought on behalf of several tens of thousands of former Southern African gold mine workers, who have contracted silicosis as a result of work in the mines, against South African gold mine owners and their parent companies.(Bongani Nkala and others v Harmony Gold Mining Company and Others, Case No 48226/12, South Gauteng High Court)
The most significant parent company defendant is Anglo American South Africa Limited, which has now divested itself of all its gold mining assets but, for several decades, owned and controlled gold mine owning subsidiaries responsible for about 40% of South Africa’s gold production. As most of its former gold mine owning subsidiaries have been wound up and deregistered, the decision in Chandler v Cape plc offers avenue for recovery to thousands of former mine workers who might otherwise have no realistic prospect of recovering compensation for their losses.
Thompson v Renwick Group Ltd [2014] EWCA Civ 635
Thompson v Renwick Group plc [2014] EWCA Civ 635
Company Law, Parent company, Court of Appeal, liability
Thompson v Renwick Group plc [2014] concerns the parent company’s liability for breaches allegedly committed by the subsidiary.
Keywords:
Company law – Negligence – Personal injury – Asbestos – Duty of care – Lack of evidence – Parent company – Subsidiary company – Health and safety at work – Court of Appeal – Appeal allowed
Facts:
In the case of Thompson v Renwick Group plc [2014], the appellant company appealed against the decision holding that it owed a duty of care to the respondent, Mr Thompson. In particular, Mr Thompson was employed by the subsidiary of the appellant company Renwick Group plc. Mr Thompson’s work involved handling raw asbestos. He developed pleural thickening as a result of his exposure to asbestos dust. He therefore brought proceedings against the appellant company (the subsidiary’s parent company).
The trial judge found that that the parent company, Renwick Group plc, had assumed a direct duty of care to the claimant, Mr Thompson. As a result, the appellant company appealed.
Issues:
In Thompson v Renwick Group plc [2014], there were two issues in the appeal proceedings:
(a) Whether the appellant company, Renwick Group plc, owed a direct duty of care to the employees of the subsidiary company?
(b) Whether the evidence was sufficient to impose a duty of care on the parent company?
Held:
The Court of Appeal allowed the appeal and found in favour of the appellant company.
(a) As to the first issue, the Court of Appeal concluded that a parent company did not assume a duty of care to the employees of its subsidiary. Although the parent company appointed a new director of its subsidiary company, the fact alone was not enough to impose responsibility for health and safety matters at work.
(b) As to the second issue, the Court of Appeal determined that a duty of care will be imposed only if the threefold test in Caparo v Dickman [1990] 2 AC 605 is satisfied – (a) foreseeability of damage, (b) proximity, and (c) imposing a duty is fair, just and reasonable. A relevant recent example where that threefold test was satisfied was Chandler v Cape plc [2012] 1 WLR 3111.
Therefore, the evidence fell short of what was necessary to impose a duty of care on the appellant company.
Okpabi v Royal Dutch Shell plc [2018] EWCA Civ 191
No parent company duty of care for Niger Delta claims
The Court of Appeal has ruled that the English courts do not have jurisdiction over claims by victims of oil leaks from pipelines in the Niger Delta. The judgment comes after the Lungowe & ors v Vedanta Resources Plc [2017] EWCA Civ 1528 decision by the Court of Appeal delivered last year, in which it was held that similar environmental tort claims could proceed in the English courts on the basis that it was sufficiently arguable that the UK parent company owed a duty of care to the overseas claimant. The Okpabi decision offers insights into what evidence might be necessary to establish parent company liability for acts of a foreign subsidiary: Okpabi & ors v Royal Dutch Shell Plc & anr [2018] EWCA Civ 191, 14 February 2018
The claimants sought damages in the English court as a result of serious, and ongoing, pollution and environmental damage caused by leaks of oil from pipelines and associated infrastructure in and around the Niger Delta in part caused by sabotage and illegal bunkering.
The claimants are members of the Bille and Ogale communities where the oil leaks occurred. They contended that the defendants, UK company Royal Dutch Shell Plc (RDS), and its Nigerian subsidiary, the Shell Petroleum Development Company of Nigeria Ltd (SPDC), were responsible for damage to their lands based on the tort of negligence under the common law of Nigeria (which, the court accepted, was to be regarded as the same as the law of England and Wales).
In particular, they claimed that RDS, the UK parent company, owed a duty of care to the claimants either because RDS controlled the operation of pipelines and infrastructure in Nigeria from which the leaks occurred, or because it had assumed a direct responsibility to protect the claimants from environmental damage caused by the leaks. In establishing whether there was “a real issue to be tried between the claimants and RDS” and a “necessary or proper party” jurisdiction gateway against SPDC, it was necessary for the English courts to rule on its own jurisdiction, the threshold for which is establishing whether the claims against RDS had a “real prospect of success”. At first instance Fraser J held that there was no arguable case that RDS owed the claimants a duty of care. This decision was upheld on appeal by a majority (Sir Geoffrey Vos and Lord Justice Simon), with Lord Justice Sales dissenting.
The test for parent company liability
The court adopted the same test for establishing parent company liability as was adopted by the Court of Appeal in Vedanta:
– The starting point is the three-part test for duty of care of: (a) foreseeability; (b) proximity; and (c) reasonableness, as set out in Caparo Industries v Dickman [1990] 2 AC 605.
– A duty of care may arise where the parent company: (a) has taken direct responsibility for devising a material health and safety policy (the adequacy of which is the subject of the claim); or (b) controls the operations which give rise to the claim.
– Examples of circumstances where the three-part test might be satisfied are found in the decision of Chandler v. Cape Plc [2012] EWCA Civ 525. These examples include instances where the parent company is well placed, because of its knowledge and expertise, to protect the employees of the subsidiary (or, by analogy, where the parent company affects the operations of the company).
Proximity test fails – insufficient control of subsidiary
Although the foreseeability test was satisfied, there was insufficient proximity. The claimants had tried to show proximity by demonstrating RDS’s control of SPDC’s operations including:
– the issue of mandatory policies, standards and manuals which applied to SPDC;
– the imposition of mandatory design and engineering practices;
– a system of supervision and oversight in implementing RDS’s standards;
– financial control over SPDC; and
– a high level of centralised direction and oversight of SPDC’s operations in relation to security.
The majority concluded that none of these factors demonstrated a sufficient degree of control of SPDC’s operations in Nigeria by RDS.
Mandatory policies applied to all subsidiaries
Shell’s mandatory policies (on which the claimants relied heavily) contained high-level guidance, which is then made available to its subsidiaries to implement. Taking its HSSE & SP Control Framework as an example, this indicated how the effectiveness of HSSE compliance would be reviewed at Group level, but not the existence of any degree of control.
The court found that the imposition of these policies (to all subsidiaries) could not mean that the parent company assumed a duty of care to anyone affected by the policies. Sir Geoffrey Vos commented that the policies applied to all subsidiaries and had not been tailored for SPDC, and that “there needs to be something more specific for the necessary proximity to exist”.
A dissenting voice
In the view of Lord Justice Sales, however, the claimants had shown that they had a good, arguable case, namely, that RDS owed them a duty of care at the material times, and that RDS had breached that duty of care. He considered that there was a “more than merely speculative” claim based on the evidence produced, including the fact that the existence of global standards was capable of providing a mechanism for the projection of real practical executive control by RDS over the affairs of SPDC.
Comment
This decision demonstrates that there is a difference, as far as the law is concerned, between a parent company which takes steps to ensure that there are proper control mechanisms in place over all subsidiaries (for example, by establishing standard global mandatory policies and processes) and a parent company which seeks to exercise control over a subsidiary. It is in the latter case, suggests this decision, that a duty of care may arise.
That said, it is unlikely that this will deter future similar claims against multi-nationals. Mindful of that fact, it is likely that such companies will wish to assess the risk of parent company liability being established. Factors that may point away from parent company liability, as in this case, include standard policies which apply across the board to operating subsidiaries (not tailored to a particular subsidiary’s business) and a responsibility for implementing and overseeing any such policies – whether those be environmental and/or human rights focused – being firmly seated at subsidiary level. This, in turn, should help to promote better compliance and awareness of environmental and human rights issues by foreign subsidiaries.
Finally, it is likely that parent company liability for environmental and human rights claims is an area of law that will see further developments in the near future.
