Separate Corporate Personality and Veil Lifting

Question 1

Broderip v Salomon [1895] 2 Ch 323 (Chancery Division and Court of Appeal)

Answer 1

(Overruled in House of Lords)
Vaughan Williams J:
- A relationship of principal and agent existed between Mr Salomon and the company so he was bound to indemnify the company for the debts that had been made by his agent
Lindley LJ:
- Argued that the company was incorporated for an illegitimate purpose
- Vaughan Williams J’s thesis does not work in this case, although a company can be an agent for a person, in this case the company was a trustee for Mr Salomon
- “A trustee improperly brought into existence by him to enable him to do what the statute prohibits”
- It was important that the shareholders had nothing to do with the company and were merely used to create a loophole around the law
- The shareholding amount was not relevant, he could have done this and set up the corporation for a legitimate purpose
Lopes LJ:
- Allowing Mr Salomon to continue with this scheme would be “a perversion of the Joint Stock Companies Acts”
- The Act was

Question 2

Salomon v Salomon & Co [1897] AC 22 (House of Lords)

Answer 2

Facts:
- Mr Salomon set up the company following all the formalities and requirements in the CA 1862
- Intended and continued to be a private company
- The companies hit hard times and the debentures could not be covered when the company went into liquidation
Lord MacNaghten:
- Previous decisions where a misconception of the scope and effect of the CA 1862
- The conditions of the Act have properly been complied with then there is no reason to make it invalid; it does not make sense to invalidate incorporation due to the bulk of capital being issued to one person
- Having the agent rules would mean that no partnership could incorporate with unlimited liability
- The unsecured creditors only have themselves to blame for their misfortunes
- It is not against public policy or detrimental to the interests of creditors to have on predominant partner
Lord Halsbury:
- The statute has been complied with and does not specify anything to do with the extent or degree of interest
- The court should only recognise the artificial existence of the company not the motives or intentions of individual corporators

Question 3

Macaura v Northern Assurance [1925] AC 619 (House of Lords)

Answer 3

Facts:
- Timber owned by the corporation, dominant shareholder insured the timber in his own legal capacity (as apposed to as the company)
Lord Sumner:
- Though the timber lay on his land by permission, he had no responsibility to its owner for its safety
- Had no property or equitable interest in the timber
- Neither as a creditor or shareholder could he insure the company’s assets
Notes:
- In JJ Harrison v Harrison (2001) the court state that there is no rule of company law which constitutes a company the trustee of its property and its members or shareholders beneficiaries of that trust

Question 4

Lee v Lee’s Air Farming Ltd [1961] AC 12 (Privy Council)

Answer 4

Facts:
- Mr Lee was both the sole director, majority shareholder (2,999:1) and employee of the company
- He died, and his wife sought to claim compensation under the Workers’ Compensation Act 1992 which required the deceased to be an employee of the company
- Argued that he could not be both an employee and a sole director
Judgment:
- “The deceased as one legal person was willing to work for and to make a contract with the company which was another legal entity” - overrules the previous court’s idea that he could not be both a governing director and an employee
- The company was not a sham, and even if the company was is contract as an employee would not be impugned
- As Salomon shows: one person can function in dual capacities so there is no reason “to deny the possibility of contractual relationship being created as between the deceased and the company”

Question 5

Antonio Gramsci Shipping Corporation v Stepanovs [2011] EWHC 333 (Comm)

Answer 5

Burton J thinks the veil should be pierced to allow the claimants to enforce the sham charterparties as against the “directing mind and will” (despite there being no authority) so they should be entitled to enforce a contract entered into by a puppet against both the puppet company and the puppeteer
In VTB Lord Neuburger expressly disproves, but Lord Clarke felt it should be deferred to an appropriate case

Question 6

Costello & Anor v MacDonald & Ors [2011] EWCA Civ 930

Answer 6

(Diagram in notes)
The defendant company failed to meet liabilities
Could not sue the directors and shareholders (via piercing the corporate veil) for unjust enrichment, as although the parties had been enriched, it was not unjust as it was the result of a perfectly proper contractual agreement between the claimant and the company… holding otherwise would undermine the law of contract

Question 7

Chandler v Cape plc [2012] EWCA Civ 525

Answer 7

Facts:
- The claimant, Mr Chandler, was employed by a subsidiary of Cape plc and during the course of his employment was exposed to asbestos fibres causing asbestosis:by this time the subsidiary entity had been dissolved
- His estate bought a claim alleging Cape plc had owed (and breached) a duty of care to Mr Chandler
Key points:
- Cape plc assumed responsibility and owed a direct duty of care to Mr Chandler which it breached
- The CA were careful to stress that the duty of care of a parent company to subsidiary employees was not automatic and only arose in particular circumstances; it is therefore not piercing the corporate veil
- The parallel duties of care between the parent/subsidiary arose because (i) the parent company and subsidiary had relatively similar businesses; (ii) the parent company knew (or ought to have known) that the subsidiary’s system of work was unsafe; and (iii) the parent company knew (or ought to have foreseen) that the subsidiary or its employees would rely on its using that superior knowledge for employee protection
- It is likely that courts will approach group structures holistically; unlikely to make a difference if plc parent is UK
Further Notes:
- Same affect as veil lifting but a tort action

Question 8

Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447

Answer 8

Facts:
- Ord where in a dispute with Belhaven, but due to restructuring it had no assets
- Ord therefore wanted to change the recipient of the claim to Ascott Holdings Ltd (another part of the group)
Judgment:
- The reorganisation was a legitimate one, and not done to avoid an existing obligaiton
- Hobhouse J argued that the reorganisation was done as part of a response to the group’s financial crisis and there was no ulterior motive
- Specifically overruled the earlier case of Creasey v Breachwood Motors Ltd

Question 9

Newton-Sealey v Armorgroup Services Ltd & Ors [2008] EWHC 233

Answer 9

The court held that an employee’s contract was with only one company in a corporate group, but that day-to-day dealings with other companies in the group gave rise to a duty of care, allowing the employee to sue in the tort of negligence

Question 10

Woolfson v Strathclyde Regional Council [1978] SLT 159

Answer 10

Facts:
- The claimants claimed that the facts where analogous to those in DHN and should therefore be allowed compensation following the compulsory purchase of the premises
Distinct from DHN:
- Woolfson did not own all the shares in the compulsorily purchased property
- Campbell Ltd (Who Mr Woolfson virtually controlled) had no control over the land
Lord Keith:
- The only exceptions to SCP is where the company is a mere facade concealing the true facts
- Although cannot explicitly overrule DHN in this case as facts too different, in obiter expresses that DHN is wrongly decided… CA in DHN wrongly interpreted what is meant by a mere facade (doubted CA’s application of SCP)
Notes:
- General approach adopted in Adams v Cape; possibly overturning DHN although not distinctly

Question 11

DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 3 All ER 462

Answer 11

Facts:
- The council compulsorily acquired the premises, causing DHN to shut down
- There was subsantial compensation available for disturbance, which had already been given to Bronze
- DHN also wanted compensation as parent company of Bronze
- DHN’s only assets where Bronze’s profits… could only claim for loss of profit if holding a business and loss of property for holding an asset..
- The CA held that the company should be viewed as a single economic entity and that consequential compensation should be paid… this is as DHN where virtually Bronze with the same directors, shareholders and common interest in maintaining the property
Notes:
- Lord Denning thinks this sharply contrasts with the case law
- There are statutory exceptions to group companies being treated as separate economic entities so it seems illogical to create a new common law doctrine that isn’t covered in legilsation

Question 12

Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116

Answer 12

• When the courts recognize an agency relationship: a subsidiary may be acting as an agent for its holding company, so may be bound by the same liabilities
• No court has yet found subsidiary companies liable for their holding company’s debts
  Facts:
• The court held that a subsidiary company were an agent and the holding where allowed compensation for a compulsory purchase order
• I think this agency argument was rejected in Adams? ish

Question 13

Gilford Motor Co v Horne [1933] Ch 935

Answer 13

Facts:
- When D left P they covenanted in a written agreement not to solicit customers of the company after leavings its employment
- D formed a company to solicit customers (where he and his wife where sole legal owners)
Judgment:
- P was granted an injunction against both D and the company
Lord Hanworth MR:
- He agreed with Farwell J that D obviously carried out the business (his wife was no part, D was always the boss)
- “The company was formed as a device, a stratagem, in order to mask the effective carrying on of a business of Mr Horne”
- In both this and Jones v Lipman the company had been deliberately set up in an attempt to evade an existing obligation, this was emphasized in Adams v Cape industries
Further Notes:
- Injunction enforced against both Horne and the company and was described as a “sham” set up for illegitimate reasons

Question 14

Jones v Lipman [1962] 1 WLR 832

Answer 14

Facts:
- L set up a company to purchase his home so he could avoid selling it
Judgment:
- The company was a device and a sham to avoid his obligation

Question 15

CA 2006, s.399

Answer 15

Parent companies have a duty to produce group accounts (stops some tax evasion)

Question 16

ERA 1996

Answer 16

Employees are protected when moving from one company to the next - treated as a continuous employment

Question 17

IA 1986, s.213-15

Answer 17

Protects against fraud
The bar for intent is set high (Re Patrick and Lyan Ltd) so ‘wrongful trading’ introduced
Liability of members may be indirectly effected if they are also directors

Question 18

Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307

Answer 18

Exceptional circumstances to lift the corporate veil: to determine if an enemy at war

Question 19

Re Bugle Press Ltd; ChD 1961 - [1961] Ch 270

Answer 19

Exceptional circumstances where the company is set up as a facade for compulsory purchase of shares

Question 20

Trustor AB v Smallbone (No 2) [2001] EWHC 703

Answer 20

(Adams is the greater authority)

• The corporation must be a “device” through which the impropriety is conducted, impropriety alone will not suffice
• Png (1999) does it apply only to construction or also when the company becomes a facade?

Question 21

Prest v Petrodel Resources [2013] 3 WLR 1

Answer 21

Facts:
- When the couple divorced there were disputes about the division of assets under the Matrimonial Causes Act 1973
- It was held that while the veil could not be pierced (as there were no legitimate grounds) to transfer the property to the wife, it was held that the properties were being held on resulting trust by the company for the husband (there was no reliable evidence to rebut this inference)
Judgment:
- “Subject to very limited exceptions, most of which are statutory, a company is a legal entity distinct from its shareholders”
- There are situations where the law attributes the acts or property of a company to those who control it, without disregarding its SLP: the controller may be personally liable as an agent to the company; the controller may have a beneficial interest in property (law of trusts); provision of the CA governing group accounts; rules governing infringements of competition law; equitable remedies such as injunctions or specific performance may be available
- Reluctance to write the principle of piercing the corporate veil out of existence
Further Reading Notes:
- Piercing veil is not appropriate and should be limited to evasion of a legal obligation, restriction or liability (deliberate/frustrates enforcement) - Lord S and N
- The CA noted how they did not want one rule for commercial cases and other for family… Salomon still remained strong
- Lord Sumpton “The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a lgal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil”… these relationships include agency (as in Smith, Stone Knight); trust (Prest itself); deciet and conspiracy (VTB v Nutritek); so-calling “knowing receipt” (Trustor AB v Smallbone); tortious liability (Chandler v Cape)
Where does this leave the law?
- Veil piercing can only be used as a last resort, where no other remedy is available, and only in cases involving evasion (rather than concealment)
- Veil lifting is still allowed, but the distinction is far from clear

Question 22

Adams v Cape Industries [1990] Ch 433

Answer 22

Facts:
- Cape headed a group which included many wholly owned subsidiaries
- American appellants attempted to bring their law suit in tort against the defendant’s parent company
Judgment:
- The CA rejected the judgment being enforced against the English parent company, rejecting the following arguments:
(i) that Cape and the relevant subsidiaries should be treated as a single economic unit, following DHN;
(ii) that the subsidiaries should be treated as a ‘facade’ concealing the true facts; and
(iii) that an agency relationship existed between Cape and NAAC.
Slade LJ:
- There is no principle that all companies in a group of companies are to be regarded as one; the court cannot reject the Salomon principle just because justice requires it; the decision in DHN is doubtful due to HL decision in Woolfson; the court must looked at the relationship to determine if the parent company is acting as an agent, however, there is no presumption of agency
- Uncertainty as to whether the corporate veil can be pierced (DHN/Woolfson)
- Suggested that the court will pierce the CV “where the defendant by the device of a corporate structure attempts to evade (i) limitations imposed on his conduct by law; (ii) such rights of relief against him as third parties already possess; and (iii) such rights of relief as third parties may in the future acquire” - the court possibly accepts (i) and (ii) but not (iii) as that is merely the corporate structure of a company… “whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law”
- Even if it was their intention to avoid tortious liability (future) they are allowed to do so
- The agency argument: it is a legal entity separate from Cape, and NAAC’s business was carried out exclusively as its own, not the business of Cape
Notes:
- Following this and other case law e.g. Polly Peck unlikely that the corporate veil can be pierced (Sealy and Worthington)
Further Reading Notes:
- The business reorganisation took place to minimise taxation and other liability issues
- Can only overturn Salomon if a statute, not because justice allows it, that would be too uncertain
- A facade is the main operating exception and express agency (with day to day control, such as Hillam v The Print factory, 2008, does not apply in this case)
- Lubbe similar but an undeveloped legal system to do sufficient justice so allowed claim in English courts

Question 23

Raja v Van Hoogstraten [2005] EWHC 2890

Answer 23

Moves away from ‘narrow’ reading of Adams… may apply to dishonest construction even where liabilities are not envisaged

Question 24

Conelly v RTZ Corp Plc [1997] UKHL 30, [1998] AC 854; [1999] CLC 533

Answer 24

C worked for RTZ’s subsidiary, but sued RTZ
HL:
- Case can be held in London as in Namibia would be too complex and costly
- Lord Hoffman dissents (issues with Salomon, implications for multinational corporations)
HC:
- Parent company have a duty of care
- Time barred
- Lubbe v Cape Industries had the same legal issues but HL thought more appropriate in South Africa, however may be miscarriage of justice so went to HC in London
- Chandler v Cape: HC+CA agree that the parent company assume responsibility for health&safety policy of their subsidiaries, even when almost entirely disconnected… only time this duty seen

Question 25

Creasey v Breachwood Motos Ltd [1993] BCLC 480

Answer 25

(Overruled in Ord v Belhaven Pubs Ltd)
Facts:
- Mr Creasey was dismissed from his employment and he claimed for unfair dismissal, in breach of his employment contract
- Before he could be paid Breachwood Welwyn ceased trading and their assets where moved to Breachwood Motors
Judgment:
- Mr Richard Southwell liften the corporate veil to enforce Mr Creasey’s wrongful dismissal claim, he held that the directors of Breachwood Motors Ltd had deliberatley ignored the separate legal personality of the companies by transferring assets between the companies without regard to their duties as directors and shareholders
- They had disregarded their duties as directors
- Specific legal orders cannot be avoided but general liability for compensation of money can be by transferring assets

Question 26

Hilton v Plustitle Ltd [1989] 1 WLR 149 CA

Answer 26

It was not a facade to create the company to avoid future obligations under the Rent Acts
The agreement reflected the parties intentions
Distinction from Jones v Lipman shows avoidance v evasion

Question 27

Williams v Natural Life Health Foods Ltd [1998] UKHL 17

Answer 27

Facts:
- W started a franchise on the premise of a negligent misstatement of X, given in his capacity as an employee of the franchise company (who was maj shareholder and managing director of franchise company)
- W claims negligent misstatement mean that X had assumed personal responsibility
HL:
- An employee/director must have a special relationship for an assumption of personal responsibility for claims of negligent misstatement (e.g. evidence of personal dealings)
- If the tort is deceit then there may be personal liability (Dido v Rothen)
- Noel v Poland: the director was acting on behalf on the company so was no personal responsibility
- CA criticise this in MCA Records as it would be very rare to get a successful tort claim in these circumstances… thinks it should cover acts where they go beyond constitutional control
- Director liable

Question 28

VTB Capital Plc v Nutritek International Corp [2013] 1 BCLC 179

Answer 28

Facts:
- The Claimants entered into a loan faculty agreement wit RAB to fund the acquisition of Nutritek
- Nutritek was in control of RAB
- RAB defaulted on the loan so VTB sought to have the corporate personalities disregarded to show that Nutritek was in control of RAB and liable for the loan
Lord Neuberger:
- Making Nutritek liable for RAB’s loans would be an extension of the law as it would make the controlling company a co-contracting part in a contract where they were not a party… there is no support for this notion
- They will still be protected by the rules of fraudulent misrepresentation and that is what should be followed
- RAP was not being used as a “facade concealing the true facts”: which in Neuberger’s mind is where in reality the person behind the company (rather than the company) is the relevant actor or recipient
Further Notes:
- Dishonesty is not the same as accrued legal practice

Question 29

The Tjaskemolen [1997] 2 Lloyds Rep 456

Answer 29

Shipping group formed subsidiary to acquire new ship; when subsidiary was sued and ship faced arrest, ownership of ship was transferred to another subsidiary’ plaintiff claimed transfer was a ‘sham or facade’ and still able to arrest ship
Note how this was a specific asset

Question 30

Antonio Graminsci Shipping Corporation v Stepanovs [2012] NCLC 561

Answer 30

(Overruled by VTB)
The High Court decided that the corporate veil should be pierced to allow contractual claims to be brought against non-contracting parties. In situations where the contracting party was merely a ‘puppet’ company, a victim could bring a contractual claim against both the ‘puppet’ company and the non-contracting ‘puppeteer’, who ‘all the time was pulling the strings’

Question 31

Re Augustus Barnett & Sons Ltd [1986] BCLC 170

Answer 31

Directors of AB, subsidiary of Rumasa SA, were advised they risked fraudulent trading unless additional finance was obtained; funds obtained from another subsidiary of Rumasa and Rumasa itself gave assurances of support for AB, widely publicized at press conference; Rumasa later ended its support and AB went into liquidation; proceedings against Rumasa for fraudulent trading.
Hoffmann J held that because this section required a finding of someone carrying on a company “with intent to defraud”, it was only when that requirement was fulfilled that knowing parties could be similarly liable. The state of mind of the outsider was irrelevant. There could be an action in the tort of deceit, but not s.332. Because there was no allegation of fraud on Barnett directors, the parent could be no accessory.

Question 32

Re Augustus Barnett & Sons Ltd [1986] BCLC 170

Answer 32

Directors of AB, subsidiary of Rumasa SA, were advised they risked fraudulent trading unless additional finance was obtained; funds obtained from another subsidiary of Rumasa and Rumasa itself gave assurances of support for AB, widely publicized at press conference; Rumasa later ended its support and AB went into liquidation; proceedings against Rumasa for fraudulent trading.
Hoffmann J held that because this section required a finding of someone carrying on a company “with intent to defraud”, it was only when that requirement was fulfilled that knowing parties could be similarly liable. The state of mind of the outsider was irrelevant. There could be an action in the tort of deceit, but not s.332. Because there was no allegation of fraud on Barnett directors, the parent could be no accessory.

Question 33

Ben Hashem v. Ali Shayif [2008] EWHC 2380

Answer 33

The disputed properties in a divorce case were owned by a company in which the husband held a sizeable equity stake, and had infused most of the capital.
Accordingly, the wife sought to argue that the husband and the company were one entity and that the corporate veil could therefore be pierced.
Justice Munby, in arriving at his six principles, extensively surveyed the authorities, starting from Salomon and ending with Cape Industries (the judgment is lengthy, so interested readers may refer to paras. 144 – 221 for the discussion on piercing the corporate veil). In his lengthy discussion of the authorities, the Justice elucidated the following six principles (available in paras.158 – 164 of the judgment):
1. That ownership and control, even if in totality, cannot of itself be a reason to pierce the corporate veil. In Justice Munby’s words, it is a necessary but not a sufficient condition.
2. Similarly, the ‘interests of justice’ cannot be the reason to pierce the veil. This applies even where there is no third-party interest being prejudiced.
3. Quoting Hobhouse LJ in Cape Industries, Justice Munby states that there must be some ‘impropriety’ as a precondition the veil being pierced.
4. Importantly, the impropriety mentioned above cannot be of a general nature, it must be linked to the use/misuse/abuse of the company structure or separate legal entity status specifically. As exemplified by the Justice, a general impropriety such as failure to pay electricity bills would therefore not warrant the piercing of the veil. Something further, such as using the separate legal entity to avoid a liability, is necessary.
5. In keeping with the above general propositions, Justice Munby concludes that the essential elements to make out a case for piercing the corporate veil are: a) control of the company by the alleged wrongdoer and b) misuse of the corporate structure in perpetrating an ‘impropriety’.
6. The last point the Justice makes is that the veil can be pierced only for a specific purpose, and that the piercing of the veil for that purpose has limited operation, confined to the relevant transaction where it was used as a facade to perpetrate an impropriety. He also states that merely because the company was incorporated as a bona fide entity, this does not operate as a bar to subsequent piercing on account of impropriety.
In Prest:
- Lord Clarke agreed that Munby J in Ben Hashem v Al Shayif was correct that the veil could only be pierced where all other possibilities were exhausted. Also as he said in VTB Capital plc v Nutritek International Corp it is wrong to foreclose all future possibilities of piercing the veil.
Notes:
- Where a company is set up just to hold the assets it may be considered impropriety worthy of a claim… but a company having a general purpose and the assets being moved there not… possibly… but Prest still limits so far they will first exercise all other possibilities
- The twin features of control and impropriety are akin to the evasion of existing liabilities in Gilford and Jones… also described as evasion in Prest

Question 34

Re FG Films Ltd [1953] 1 WLR 483

Answer 34

There were tax advantages offered to film companies operating in Britain, the film “Monsoon” was declared British despite being mainly from the US…
The Court were happy to pierce the corporate veil in finding this not a British film
In this case they where an AGENT of the company

Question 35

Kensington International v Congo [2003] EWHC 2331 (Comm)

Answer 35

The defendants appealed against orders requiring them to disclose documents in an action regarding the payment of bribes, saying that the requirement effectively required them to incriminate themselves.
Held: The appeal failed. The public interest required that those alleged to be in the possession of property belonging to a third party should be allowed to be obliged to divulge their whereabouts. The removal of the privilege against self incrimination could be ‘largely, if not entirely, balanced’ by the disclosed material being made inadmissible in criminal proceedings.
Moore-Bick LJ said that conduct involving dishonest abuse of a position (in which a person is expected to safeguard the financial interests of another person) with a view to gain for himself or another, or causing loss or risk of loss to another, could be described as deception of a kind, ‘since the wrongdoer deliberately deceives the person whose interests he is bound to safeguard by allowing him to believe in his trustworthiness while actively falsifying that belief’.
The courts reiterated the difference between evasion and avoidance.

Question 36

Re Southard & Co Ltd. [1979] 3 All E R.

Answer 36

Templeman LJ “English company law possesses some curious features, which may generate curious results. A parent company may spawn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the parent company. If one of the subsidiary companies turns out to be the runt of the litter and declines into insolvency to the dismay of its creditors, the parent company and other subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary.”