Limited Liability – Corporate law revision

  1. “…the most direct response to abuses of limited liability is to remove the veil of incorporation and make the shareholders (or directors) liable for the debts and other obligations of the company where abuse occurs.” (Gower & Davis, Principles of Modern company law, 2008, Thomson/sweet and Maxwell p 1999)

Discuss the circumstances in which the corporate veil may be lifted citing appropriate case law.

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Before lifting the corporate veil, it is important to distinguish between whether the court is applying the terms of a statue or a contract at common law. When dealing with statutory cases, an important factor is to assess cases where courts disregard the separate legal personality of a company. This essentially allows the court to look at the underlying details of a company. The rationale behind this is that the law will not allow the corporate form to be misused or abused. In those circumstances in which the Court feels that the corporate form is being misused it will rip through the corporate veil and expose its true character and nature.

The salmon principle was established by the HOL in Salmon v Salmon 1897. It was states that once a company is incorporated, it becomes a legal entity separate and distinct from its shareholders. What this means that under UK company law, a company is to be treated like any other independent person with rights and liabilities appropriate to itself.

The test applied by the courts to lift the veil is when there is an indication the company is trying to conceal true facts of the business or there are signs it is mere facade. This principle was laid down in Woolfson v Strathclyde Regional Council 1979. In this case, it involved compensation payable due to a compulsory purchase of land by local authorities.  The business was called Campbell ltd which W had 999 shares and his wife 1. He also owned Solfred Ltd. He argues that, W, C and S should be treated as a separate legal entity and that he should be regarded the owner for compensation purposes. He relied on the case of DHN v Tower Hamlets BC stating they were similar situations. However, Lord Keith refused to follow this judgement based on the fact W, did not own all the shares of the business. Woolfson holds two-thirds only of the shares in Solfred and Solfred has no interest in Campbell. In my opinion there is no basis consonant with principle upon which on the facts of this case the corporate veil can be pierced to the effect of holding Woolfson to be the true owner of Campbell’s business or of the assets of Solfred.

Circumstances can arise where the veil is to be pierced. One of them can be when it is discovered that controllers can be “enemy allies”. Illustrated in the Daimler Co Ltd v Rubber 1916 case. In wartime, a company was incorporated in England for the purpose of selling their tires which were manufactured in Germany. Germany and England declared war and the persons in control of its affairs became an enemy aliens and the company filed a suit to recover debt. D claimed the company was owed by German nationals and paying them would be illegal.  The court in this case lifted the veil to discover it indeed was. D was successful in his defence. The courts will lift the veil only when facing grave violation of the corporate form and not otherwise. Lifting the veil is dependent on the facts of each case.

The courts however, are quick to reject lifting the veil on the basis that it is necessary to do so in the interests of justice. It was held the R a Company 1985 case, the courts stated, “In our view the cases before and after Wallersteiner v Moir [1974] show that the court will use its powers to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration.”

 

However, this is in contrast with Adams v Cape Industries plc 1990 case, where the motive of the defendant is a significant element for the court to consider. This case concerned a dispute was over if the company has been present in the US. It was held that the court is not free to disregard the principle of Salomon v. A. Salomon & Co. Ltd. [1897] merely because it considers that justice so requires. Applying the principle of Salomon, the presence of the US subsidiaries did not automatically amount to the presence of the English parent company.

In regards to Re a Company 1985, in this case, it was held the veil would be pierced to enable plaintiffs to pursue their assets if the companies’ structure was used to avoid the consequences of non-performance of an existing obligation.

Statutory provisions represents a significance in road, particularly s.213 of the IA 1986. Wrongful trading, s.213 of Insolvency Act 1986. When a director, ought to have ceased trading but continued to do so, even when there was “no reasonable prospect” of the company avoiding liquidation, then he will be personally liable (asked to contribute to debts of the company).

Strict adherence to Salomon rule in UK company law. This is demonstrated in the extent to which separate legal Identity extends and in the courts reluctance to pierce the corporate veil. However adherence to Salomon remains the basis of UK company law regarding liability