Lifting the veil on incorporation

Question 1

When will the veil be lifted?

Answer 1

English courts have been very reluctant to look behind the corporate veil, ignoring the fact that an act has been performed by a company and instead holding that any human being involved should be personally liable.

Question 2

Is it common today?

Answer 2

It is rare to lift the veil today, for example the veil was lifted in the case of Creasey v Breachwood

Question 3

Creasy v Breachwood

Answer 3

• The general manager of the Saab car dealership was dismissed. At the time the dealership had been operated by Welwyn Ltd, but latterly the business was transferred to Motors Ltd.
• The general manager sought to proceed against Motors Ltd on two bases. First that Welwyn Ltd had no assets and second that Motors Ltd was effectively the same company, carrying out the same business and operated by the same individual.
• It was held that this situation merited the lifting of the veil of incorporation so as to ignore the fact there were two different companies.

Question 4

After Creasy

Answer 4

However, this decision was overruled in Ord v Bellhaven

Question 5

Ord v Bellhaven

Answer 5

• Two individuals agreed to take a lease over a pub but alleged that they had been the victims of a misrepresentation as to the pub’s profitability.
• The group of companies that contained the defendant company was reorganised.
• The issue was whether or not the claimants were restricted to proceeding against the company on whose behalf the misrepresentation had been made or whether the veil of incorporation could be lifted so the claimants could proceed against a different company.
• It was held, reasserting the orthodox position, that Creasy had been wrongly decided.
• The claimants had no action because the company had no assets left. The veil of incorporation is only very rarely lifted. The veil cannot be lifted simply to do justice

Question 6

The issue of corporate groups

Answer 6

The issue with corporate groups is whether they are separate entities or a single economic unit.

In the Albazero, it was held that each company in a group of companies is a separate legal entity possessed of separate legal rights and liabilities

However, in DHN Food Distributors v Tower Hamlets, Lord Denning suggested that they should not be treated as separate but as a single economic unit

Question 7

Woolfson

Answer 7

Lord Keith, however did not follow DHN in Woolfson v Strathclyde Regional Council. He found there was no basis upon which the corporate veil could be pierced to the effect of holding the holding company liable for the subsidiary

Question 8

Adams v Cape Industries

Answer 8

Court declined to pierce the veil and treat Cape as a single economic entity, again going against DHN. Slade found that the court is not free to disregard Salomon merely because it considers that justice so requires.

Question 9

Recent case for corporate groups

Answer 9

Lungowe v Vedanta Resources was a recent case involving human rights violations and environmental damage. The parent company could be held liable for its subsidiary.

Question 10

Who spoke in Tate Access Floors v Boswell

Answer 10

Browne-Wilkinson

Question 11

Adams v Cape Industries

Answer 11

• Cape Industries plc was a UK company head of a group of subsidiaries that mined asbestos in South Africa
• Employees of a subsidiary became ill with asbestosis
• the tort victims sought to enforce the judgement in the UK courts, asking for the veil to be lifted and the companies treated as one
• Court of appeal found it could not be a single economic unit
• For this to occur the company must be set up to avoid existing obligations, not future ones

Question 12

When can the veil be lifted (pre-Prest)

Answer 12

Where the company is a mere device or facade

Question 13

What are the circumstances where this has been found to be the case

Answer 13

Enemies at times of war
Fraud
Breach of contract
corporate groups
agency
shareholders limit of liability
trust relationship
controlling the mind and will
where the company has been used to evade rights of relief

Question 14

Enemies at times of war

Answer 14

Daimler v Continental Tyres

Question 15

Daimler v Continental Tyres

Answer 15

• Continental Tyre company was incorporated in England, but all except one of its shares were held by persons resident in Germany and all the directors resided in Germany.
• The secretary who held the remaining share resided in England and was a British subject.
• The issue was whether the company had standing in an English court to sue and recover a debt when a state of war existed between England and Germany
• It was held that the company was capable of acquiring enemy character

Question 16

Fraud

Answer 16

Darby

• Darby and Gyde were undischarged bankrupts with convictions for fraud.
  They registered a company called City of London Investment Corporation in Guernsey.
• They were the only directors and entitled to all profits The company purported to register and float a company in England called Welsh Slate Quarries.
• The prospectus invited the public to take debentures in WSQ. WSQ failed and went into liquidation. - The liquidator claimed Darby’s profit and he objected that it was City of London Investment Corporation and not him.
• However this argument was rejected. City of London Investment Corporation was a mere alias for themselves, they were minded to perpetrate a very great fraud.

Question 17

Breach of contract

Answer 17

Gilford v Horne
Jones v Lipman

Question 18

Gilford v Horne

Answer 18

• Horne was formerly managing director of Gilford Motor Co Ltd
• His employment contract stipulated that he could not set up a competing business to the company were he to leave
• He set up his own business in a company called JM Horne & Co
• His wife and a friend called Howard were the sole shareholders and directors
• It was held that the company was formed to mask the effective carrying on of a business by Mr Horne, the purpose being to enable him to carry on that business in breach of a covenant he had entered into.
• Farwell J found that the business was obviously carried on ‘wholly’ by Mr Horne, that Mrs Horne had taken no part in the business or its management, that Howard was an employee and that those dealing with the company treated Mr Horne as the boss.

Lord Hanword - I am quite satisfied that this company was formed as a device, in order to mask the effect carrying on of a business. The purpose was to enable him, under what is a cloak or sham, to engage in business

Question 19

Jones v Lipman

Answer 19

• Lipman conveyed to a company, land which he had already contracted to sell to the plaintiff
• The purpose of this was to defeat the plaintiff’s claim for specific performance of the sale
• The only directors and shareholders of the company were Lipman and a clerk of his solicitors.
• Russell J described the company as being under the complete control of Lipman
• The acquisition of the company and the transfer to it of the property was carried through “solely for the purpose of defeating the plaintiff’s rights to specific performance”
• Found it was a device and a sham and that the veil could be pierced

Question 20

Agency

Answer 20

Re FG Films

Question 21

Shareholders’ Limit of Liability

Answer 21

Multinational Gas v Multinational G and P

The Liquidator cannot sue the members because they owed no duty to the company as a separate entity and he cannot sue the directors because the decisions which he seeks to impugn were made by, and with the full assent of, the members

Question 22

Controlling the mind and will of the company

Answer 22

This is tort liability:

• Standard Chartered Bank v Pakistan National Shipping it was found that all the ingredients for the tort of deceit were made out. - Therefore, there was no basis upon which Mr Mehra should not be held liable for the loss caused as a result of this deceit.
• His status as a director when he executed the fraud cannot invest him with immunity.
• He could not hide behind the veil of incorporation as director

MCA Records Inc v Charly Records Ltd:
- there is no reason why a person who happens to be a directors or controlling share holder should not be liable with the company as a joint tortfeasor if he is not exercising control through the organs of the company and he would be so liable if he were not a director or controlling shareholder

Question 23

Where the company has been used to evade rights of relief

Answer 23

Grencor
Trustor v Smallbone

• Smallbone had transferred to Intercom substantial sums belonging to the claimant which he had removed in breach of his duty as managing director
• Smallbone was the controller of Intercom, the directors were nominees acting on his instructions, the company had no independent business, third party directors, creditors or shareholders
• Thus, Intercom was simply a vehicle Mr Smallbone used for receiving the money.
• The court pierced the corporate veil and to regard the receipt by Introcom of the monies as receipt by Smallbone.

Question 24

Hashem v Shayif

Answer 24

In this case Munby J set out a detailed overview of the case law in this area and suggested the way in which the corporate veil will be pierced is through wrongdoing + abuse of corporate structure. He broke it down as follows:

1. Ownership and control of a company do not justify piercing. This is the very essence of Salomon.
2. The court cannot pierce the veil merely because it is thought of be necessary in the interests of justice (Yuknong Line)(Trustor)
3. The corporate veil can only be pierced if there is some “impropriety”
4. The impropriety must be linked to the use of the company structure to avoid or conceal liability (Trustor)
5. It is necessary to show both control of the company by the wrongdoer and the impropriety is the use of the company as a device or facade
6. A company can be a facade even though it was not originally incorporated with deceptive intent

Question 25

Otolenghi

Answer 25

Otolenghi sets out there are categories of veil lifting

Peeping - where the veil is lifted to get information

Penetrating - where the veil is disregarded and liability is attributed to members

Extending - where a group of companies is treated as one legal entity

Ignoring - where the company is not recognised at all

Question 26

How do Dignam and Lowry suggest veil lifting has developed

Answer 26

1. 1897-1996 There was autolimitation on the idea of veil lifting by the House of Lord. There were some exceptional cases that referred to classical lifting

In times of war - Diamler v Continental Tyre and Rubber

When companies are set up as facades - Gilford and Jones v Lipman

As time progressed, the courts took a perhaps more interventional approach in cases such as DHN. In this case DHN imported groceries and provision having a grocery business. The premises were owned by its subsidiary Bronze. Bronze’s directors were DHN’s. Bronz had no business and the only asset were the premises of which DHN had a licence. Tower Hamlets London Borough Council compulsorily acquired the premises and as a result DHN had to close down. Compensation was paid to Bronze, however, DHN could get compensation too if it had more than a licence interest. Lord Denning found the two companies to be part of a single economic unit. Found the group is virtually the same as a partnership in which all the three companies are partners. They should not be treated separately.

However, after this case, considered Adams v Cape Industries. This was another group company case. The court found that they could not disregard Salomon merely because it considers justice so requires. Thus a more restrictive approach was again followed, whereby Salomon was being upheld consistently.

Question 27

Next case in 2011

Answer 27

Antonio Gramsci Shipping Co v Stepanvos

Question 27

Antonio Gramsci

Answer 27

• Claimants successfully argued that the corporate veil should be pierced and Stepanvos treated as a party to certain agreements entered into
• Justice Burton held there was a good arguable case that the claimants should be able to enforce a contract against Mr Sepanvos ‘the puppeteer’ despite the contracts being entered into by his ‘puppet’ company
• This was a revolutionary extension of the circumstances in which claimants could recover damages from those hiding behind the veil
• This was heavily criticised in VTB Capital

Question 28

VTB Capital

Answer 28

Confirmed that piercing itself exists.

• Strong justification would be required before the court would be prepared to extend it

Question 29

Key case on piercing

Answer 29

Prest v Petrodel

• Lord Sumption confirmed that piercing/lifting exists and set out two distinct principles, the concealment principle and the evasion principle

Question 30

Prest facts

Answer 30

• In matrimonial proceedings concerning the division of assets said to be worth over £50 million, the appellant wife (W) applies to have certain residential properties transferred to her
• The properties were not owned by her husband, but by the respondent group of companies (x), being companies operated and controlled by H
• The trial judge concluded that H was entitled to possession or reversion of the properties, withing the Matrimonial Causes Act and this statute therefore entitled the court to pierce the corporate veil and order H to transfer them to W
• Court of Appeal reversed the decision holding no legitimate grounds for piercing the veil
• The Supreme Court found unanimously in favour of W on the basis that the most plausible inference was that each of the properties was held on a resulting trust by X for H
• There was no reliable evidence to rebut that inference

Question 31

Lord Sumption’s view

Answer 31

Lord Sumption: Subject to very limited exceptions, most of which are statutory, a company is a legal entity distinct from its shareholders
- It has rights and liabilities of its own which are distinct from those of its shareholders
- Its property is its own and not that of its shareholders.

• Piercing the corporate veil is used to describe a number of things, however, properly speaking it means disregarding the separate personality of the company.
• We are only speaking of the true exceptions to the rule from Salomon i.e. where a person who owns and controls a company is said to be identified with it in law by virtue of that ownership and control
• References to a façade or sham beg too many questions to provide a satisfactory answer.

Question 32

Concealment principle

Answer 32

The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is the interposition of a company/several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming their identity is legally relevant. In these cases the court is not disregarding the façade but looking behind it to discover the facts which the corporate structure is concealing.

Question 33

Evasion principle

Answer 33

• there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.
• The court may pierce the corporate veil for the purpose of depriving the company or its controller of the advantage they would otherwise have obtained by the company’s separate legal personality.

Gilford is an example of evasion.

Piercing the veil as a last resort and remedies in equity and tort could often achieve the appropriate results.

The consequence of piercing is merely to address the particular wrong which merits the court exercising the jurisdiction in the first place. For example, when the court pierces the veil because a company is being used to evade contractual obligations, the consequence is the enforcement of that contractual obligation.

Question 34

Lady Hale in Prest

Answer 34

Whereas, Lady Hale took a different approach. She provided that Individuals who operate limited companies should not be allowed to take unconscionable advantage of the people with whom they do business.

Question 35

Examples of cases for concealement

Answer 35

Gencor and Trustor, lifting the veil allowed for the identification of the companies’ controllers as persons who had secured secret profits/misappropriated funds in breach of their duties as directors of third companies which funds had been received by the companies. Lifting the veil in this context is for identification purposes and as a consequence it is possible to apply ordinary equitable remedies against the company (as a third party involved in a breach of duty and the controller for breach of duty). Lifting is not disregarding the corporate facade but allows the courts to look behind it to discover the facts concealed by it when it is relevant to do so.

Question 36

Example cases for evasion

Answer 36

Gilford and Jones

Question 37

Sum up of previous case law before Prest

Answer 37

Before Prest, the previous principles of piercing the corporate veil may not be clear.

• From Adam v Cape
  Industries plc (Adam), it was held that the principles from Salomon and the separate legal entity - cannot be freely disregarded – the court can only pierce the veil if both control of the company and impropriety are present.
• Only in special circumstances, where it is shown that the company is being used as a façade to conceal true facts (impropriety) can the veil be pierced according to Woolfson v Strathclyde Regional Council.
• In Gencor v Dalby and Trustor AB v Smallbone (No.2) both cases held that the corporate veil was pierced on the basis that the companies were ‘used as a façade to conceal the true facts’

Question 38

Gencor

Answer 38

• The defendant has placed monies derived from his misfeasance as a director in a company called Burnstead.
• Rimer J said: Burnstead was an offshore company which was wholly owned and controlled by Mr Dalby and in which nobody else had any beneficial interest.
• Everything it did was done on his directions alone. It had no sales force, technical team or other employees capable of carrying on any business.
• Its only function was to make and receive payments. In my view this is the type of case in which the court ought to have no hesitation in regarding Burnstead simply as the alter ego through which Mr Dalby enjoyed the profit which he earned in breach of his fiduciary duty to ACP

Question 39

Trustor v Smallbone

Answer 39

• Smallbone had transferred to Intercom substantial sums belonging to the claimant which he had removed in breach of his duty as managing director of the claimant.
• Rimer J found Smallbone was the controller of Intercom and that the directors were nominees acting on his instructions, that the company had no independent business, third party directors, creditors or shareholders, that he was its directing mind and will.
• Intercom was simply a vehicle Mr Smallbone used for receiving money from Trustor.
• The court was entitled to pierce the corporate veil and to regard the receipt by Introcom of the monies as receipt by Smallbone

Question 40

Lord Sumption

Answer 40

Lord Sumption identified two separate principles regarding
‘veil-piercing’ - evasion and concealment. In his opinion, a lot of the previous ‘veil-piercing’ cases were not in fact piercing the veil as those cases were actually invoking the concealment principle - merely looking behind the veil to impose liabilities on the wrong-doer.

On the other hand, veil-piercing can exist only in evasion cases where a person under an existing legal obligation or liability deliberately evades or frustrates said obligation or liability by interposing a company under his control.

This implies that the law on ‘veilpiercing’ has been inconsistent as Lord Sumption rejected prior cases on what qualifies as ‘veil-piercing’

Question 41

Spotomo (principle)

Answer 41

It is undisputed from case law and academic articles that the doctrine of veil piercing is contradictory, confusing and unprincipled. It is difficult to find a coherent approach to the doctrine.

This is because there is an absence of an independent principle underpinning it. One view is that the doctrine is part of a broader principle to prevent companies from taking unconscionable advantage of third parties with whom they deal. For others, the rationale is a policy-based approach to prevent corporate abuses. Lack of an independent principle underlying the doctrine has led to contradiction in judicial reasoning.

Question 42

Spotomo on Prest

Answer 42

Prest was eagerly awaited. However, some might argue it caused more confusion.

Set out two principles, concealment and evasion.

After Prest one could observe applications from counsels to ‘lift the veil’ in terms of concealment and ‘pierce the veil’ in terms of evasion.

Question 43

Wrongly decided piercing cases according to Sumption

Answer 43

Gencor and Trustor v Smallbone

Neither would fall under the evasion principle because Dalby nor Smallbone had a pre-existing liability which arose independently of the company’s involvement. These were within the concealment principle and could be solved by conventional legal remedies.

Question 44

Sealy

Answer 44

The courts have refused to violate the sacred canon of limited liability

Question 45

Cheng

Answer 45

Divided the history of the doctrine into three periods. The first period started from 1897 when Salomon was decided, around the second world word. This is an early experimentation period where the English Courts attempted different approaches to the doctrine.

Second period started from the end of WW2 to 1978, when the doctrine reached its desirable peak because of the rational and liberal judgement of Lord Denning.

The third period started from 1978 when Woolfson v Strathclyde regional council was decided, which characterised the marked decline of the doctrine which culminated in Adams v Cape.

Question 46

Biswas

Answer 46

The English courts have not developed a systematic approach to the cases to resolve the corporate veil issue. The categorisation of cases is based on hodgepodge of criteria.