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.

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