Company - Veil Lifting - Notes (1)
I. Lift the Veil of Incorporation
Corporate Personality
Salomon v A. Salomon 1897
- A company has a separate legal personality from that of its members. On formation of the company a veil of incorporation is drawn over the company separating it from its members, director & creditors.
- Occasionally the court wil lift the veil of incorporation and disregard the corporate personality. Two such occasions include where fraud is present or the company is being used as an agent by the incorporator
Macaura v Northern Assurance 1925
- An unsecured creditor who is also a principal shareholder has no insurable interest in the company’s property
- No shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.
Corporate Regulation
If the law is to regulate corporations, then it has a basic choice between
(a) liability of the company itself: The law can stick with the basic idea that the company is a ‘personality’ in its own right, and therefore it is responsible for its actions. Thus, the company alone is responsible for the debts it incurs, for the contracts into which it enters, and for the torts and the crimes it commits; and
(b) ‘personal liability’ of corporate ‘insiders’ (e.g. directors or shareholders): Alternatively, the law can attach personal liability directly to particular human beings within the company. Individual directors might, in some circumstances, be held liable, then, for the crimes or the torts they commit in their running of the company, or even for company debts. It’s sometimes said that when the law does this, it is ‘Lifting the corporate veil’ which, usually ‘hides’ those individuals who stand behind the company.
Lifting the Veil
1. Judicial veil lifting:
(a) General:
Gilford Motor v Horne 1933
- An equitable remedy is rightly to be granted directly against the company which is a creature of the defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity
Smith, Stone & Knight v Birmingham Corp 1939
- Lifting the corporate veil between a group of companies
- Whether an agency relationship exists between one company and another, or between an incorporator and his company, is a question of fact. This decision (that the subsidiary company was operating as an agent on behalf of the parent company, and therefore the parent company could claim the compensation) is much criticized and the case law since then illustrates that establishing the fact of agency in such circumstances is both difficult and rare.
(b) Problem of corporate groups:
Lonrho v Shell Petroleum 1980 (?)
DHN Food Distributors v Tower Hamlets LBC 1976
- A group of companies was treated as one single economic unit
- This case was doubted by HL but was not overruled
- This case is considered to represent the high watermark of judicial lifting of the veil, while recent case law marked a return to the strict application of the Salomon principle
Woolfson v Strathclyde Regional Council 1978 (?)
Adams v Cape Industries 1990
- A parent company in the UK was not present in the United States simply because it had subsidiaries there: no veil lifting
- 5 points can be extracted:
(i) Save in cases that turn on the wording of particular statutes or contracts, there is no justification for lifting the veil in the interests of justice
(ii) There is no general principle that all companies in a group will be treated as one. Indeed the contrary is true
(iii) There is no presumption of an agency relationship between a parent and subsidiary company. Whether or not there is an agency relationship is a question of fact, and in the absence of an express agreement it will be very difficult to establish such a relationship
(iv) A company is entitled to organize the affairs of its group in such a way that the business carried on in a particular foreign country belongs to its subsidiary and not itself. In this way a company can ensure that any future legal liability falls on another member of the group rather than on itself. Regardless of its desirability, this is an inherent feature in English company law
(v) It is appropriate to pierce the veil where special circumstances exist indicating that there is a façade concealing the true facts and, in deciding this, the motive of the perpetrator may be highly material.
Ord v Belhaven Pubs 1998
- The court refused to lift the veil following the restructuring of a corporate group: No fraud was alleged and the defendant company was not a mere façade for the holding company. The true facts had not been concealed nor was there any sham. All the restructuring transactions that took place were overt transactions
- Overturned Creasey which can no longer be regarded as good authority
Barings v Coopers & Lybrand 2002
- A loss suffered by a parent company as a result of a loss at its subsidiary was not actionable by the parent – the subsidiary was the proper plaintiff
(c) Veil lifting through actions in tort
Williams v Natural Life Health Foods 1998
- A director was not personally liable for a tort committed by his company: The terms of the brochure were insufficient to amount to an assumption of personal liability by claimant for the company’s negligence
- As long as a director’s involvement is only ‘routine involvement for and through his company’, he will not be found to have assumed personal responsibility for the torts of his company
MCA Records v Charly Records 2003
- In order to hold a director liable as a joint tortfeasor, it was necessary and sufficient to find that he procured or induced those acts to be done by the company, or he and the company joined together in concerted action to secure that those acts were done
- When considering the liability of a director as a join tortfeasor:
(i) If all that a director is doing is carrying out the duties entrusted to him as such by the company under its constitution, the circumstances in which it would be right to hold him liable as a joint tortfeasor with the company would be rare
(ii) If, in relation to the wrongful acts which are the subject of complaint, the liability of the individual as a joint tortfeasor with the company arises from his participation or involvement in ways which go beyond the exercise of constitutional control, then there is no reason why the individual should escape liability
(iii) Liability as a joint tortfeasor may arise where, the individual ‘intends and procures and shares a common design that the infringement takes place
Koninklijke Philips Electronics NV v Princo Digital Disc GMBH 2003
- A company director was held personally liable for the company’s wrongful act
2. Statutory creditor protection
Insolvency Act 1986: s213 Fraudulent Trading
s214 Wrongful Trading
Re Produce Marketing Consortium 1989
- Two directors were found to have traded wrongfully and were ordered to make a contribution
(i) Only a liquidator can commence wrongful trading provisions. Given that the liquidators are paid out of the company’s assets, they are only likely to invoke the provisions in clear and straight-forward cases. Even if the court makes a wrongful trading order against the director, it has no power to direct which creditor should benefit from the contribution. The money will go into the general pot available to the creditors who will be paid according to the distribution rules on involvency
(ii) s214 is more like a threat to directors which a liquidator may use in order to seek a voluntary contribution from them. If a wrongful trading contribution is ordered by the court, it can at the same time make a disqualification order for up to 15 years against the director by virtue of s10 CDDA 1986
Re Oasis Merchandising Services, Ward v Aitken 1997 (?)
IA 1986 s214(7) – including shadow director
IA 1986 s251
Morphitis v Bernasconi 2003
- Not every fraud or fraudulent misrepresentation perpetrated by a company amounted to fraudulent trading under s213
- When a fraud on a creditor was perpetrated in the course of carrying on a business, it did not necessarily follow that the business was being carried on with the intent to defraud
- Court did not have a power to include a punitive element in the amount of any contribution to be made. Any punitive action would fall under CA 1985 s458
3. Crontractual Liability
4. Pre-incorporation contracts
Company Act 1985 s36C Personally liable
Phonogram v Lane 1982
- A music promoter was personally liable on a pre-incorporation contract under equivalent of s36C(1) CA 1985 to repay the money
- Under 36C(1) common law intention of parties to the contract has been replaced by a presumption that the individual contracting party will be personally liable on the contract, unless there is an agreement (express) to the contrary
Braymist v Wise Finance 2002
- An individual can enforce a pre-incorporation contract under s36C(1) CA 1985 as well as being personally liable on it
- If the identity of the contracting party is of crucial importance, or there has been a misrepresentation, then there is no question of the contract being enforceable on ordinary common law principles
Corporate Personality
Salomon v A. Salomon 1897
- A company has a separate legal personality from that of its members. On formation of the company a veil of incorporation is drawn over the company separating it from its members, director & creditors.
- Occasionally the court wil lift the veil of incorporation and disregard the corporate personality. Two such occasions include where fraud is present or the company is being used as an agent by the incorporator
Macaura v Northern Assurance 1925
- An unsecured creditor who is also a principal shareholder has no insurable interest in the company’s property
- No shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.
Corporate Regulation
If the law is to regulate corporations, then it has a basic choice between
(a) liability of the company itself: The law can stick with the basic idea that the company is a ‘personality’ in its own right, and therefore it is responsible for its actions. Thus, the company alone is responsible for the debts it incurs, for the contracts into which it enters, and for the torts and the crimes it commits; and
(b) ‘personal liability’ of corporate ‘insiders’ (e.g. directors or shareholders): Alternatively, the law can attach personal liability directly to particular human beings within the company. Individual directors might, in some circumstances, be held liable, then, for the crimes or the torts they commit in their running of the company, or even for company debts. It’s sometimes said that when the law does this, it is ‘Lifting the corporate veil’ which, usually ‘hides’ those individuals who stand behind the company.
Lifting the Veil
1. Judicial veil lifting:
(a) General:
Gilford Motor v Horne 1933
- An equitable remedy is rightly to be granted directly against the company which is a creature of the defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity
Smith, Stone & Knight v Birmingham Corp 1939
- Lifting the corporate veil between a group of companies
- Whether an agency relationship exists between one company and another, or between an incorporator and his company, is a question of fact. This decision (that the subsidiary company was operating as an agent on behalf of the parent company, and therefore the parent company could claim the compensation) is much criticized and the case law since then illustrates that establishing the fact of agency in such circumstances is both difficult and rare.
(b) Problem of corporate groups:
Lonrho v Shell Petroleum 1980 (?)
DHN Food Distributors v Tower Hamlets LBC 1976
- A group of companies was treated as one single economic unit
- This case was doubted by HL but was not overruled
- This case is considered to represent the high watermark of judicial lifting of the veil, while recent case law marked a return to the strict application of the Salomon principle
Woolfson v Strathclyde Regional Council 1978 (?)
Adams v Cape Industries 1990
- A parent company in the UK was not present in the United States simply because it had subsidiaries there: no veil lifting
- 5 points can be extracted:
(i) Save in cases that turn on the wording of particular statutes or contracts, there is no justification for lifting the veil in the interests of justice
(ii) There is no general principle that all companies in a group will be treated as one. Indeed the contrary is true
(iii) There is no presumption of an agency relationship between a parent and subsidiary company. Whether or not there is an agency relationship is a question of fact, and in the absence of an express agreement it will be very difficult to establish such a relationship
(iv) A company is entitled to organize the affairs of its group in such a way that the business carried on in a particular foreign country belongs to its subsidiary and not itself. In this way a company can ensure that any future legal liability falls on another member of the group rather than on itself. Regardless of its desirability, this is an inherent feature in English company law
(v) It is appropriate to pierce the veil where special circumstances exist indicating that there is a façade concealing the true facts and, in deciding this, the motive of the perpetrator may be highly material.
Ord v Belhaven Pubs 1998
- The court refused to lift the veil following the restructuring of a corporate group: No fraud was alleged and the defendant company was not a mere façade for the holding company. The true facts had not been concealed nor was there any sham. All the restructuring transactions that took place were overt transactions
- Overturned Creasey which can no longer be regarded as good authority
Barings v Coopers & Lybrand 2002
- A loss suffered by a parent company as a result of a loss at its subsidiary was not actionable by the parent – the subsidiary was the proper plaintiff
(c) Veil lifting through actions in tort
Williams v Natural Life Health Foods 1998
- A director was not personally liable for a tort committed by his company: The terms of the brochure were insufficient to amount to an assumption of personal liability by claimant for the company’s negligence
- As long as a director’s involvement is only ‘routine involvement for and through his company’, he will not be found to have assumed personal responsibility for the torts of his company
MCA Records v Charly Records 2003
- In order to hold a director liable as a joint tortfeasor, it was necessary and sufficient to find that he procured or induced those acts to be done by the company, or he and the company joined together in concerted action to secure that those acts were done
- When considering the liability of a director as a join tortfeasor:
(i) If all that a director is doing is carrying out the duties entrusted to him as such by the company under its constitution, the circumstances in which it would be right to hold him liable as a joint tortfeasor with the company would be rare
(ii) If, in relation to the wrongful acts which are the subject of complaint, the liability of the individual as a joint tortfeasor with the company arises from his participation or involvement in ways which go beyond the exercise of constitutional control, then there is no reason why the individual should escape liability
(iii) Liability as a joint tortfeasor may arise where, the individual ‘intends and procures and shares a common design that the infringement takes place
Koninklijke Philips Electronics NV v Princo Digital Disc GMBH 2003
- A company director was held personally liable for the company’s wrongful act
2. Statutory creditor protection
Insolvency Act 1986: s213 Fraudulent Trading
s214 Wrongful Trading
Re Produce Marketing Consortium 1989
- Two directors were found to have traded wrongfully and were ordered to make a contribution
(i) Only a liquidator can commence wrongful trading provisions. Given that the liquidators are paid out of the company’s assets, they are only likely to invoke the provisions in clear and straight-forward cases. Even if the court makes a wrongful trading order against the director, it has no power to direct which creditor should benefit from the contribution. The money will go into the general pot available to the creditors who will be paid according to the distribution rules on involvency
(ii) s214 is more like a threat to directors which a liquidator may use in order to seek a voluntary contribution from them. If a wrongful trading contribution is ordered by the court, it can at the same time make a disqualification order for up to 15 years against the director by virtue of s10 CDDA 1986
Re Oasis Merchandising Services, Ward v Aitken 1997 (?)
IA 1986 s214(7) – including shadow director
IA 1986 s251
Morphitis v Bernasconi 2003
- Not every fraud or fraudulent misrepresentation perpetrated by a company amounted to fraudulent trading under s213
- When a fraud on a creditor was perpetrated in the course of carrying on a business, it did not necessarily follow that the business was being carried on with the intent to defraud
- Court did not have a power to include a punitive element in the amount of any contribution to be made. Any punitive action would fall under CA 1985 s458
3. Crontractual Liability
4. Pre-incorporation contracts
Company Act 1985 s36C Personally liable
Phonogram v Lane 1982
- A music promoter was personally liable on a pre-incorporation contract under equivalent of s36C(1) CA 1985 to repay the money
- Under 36C(1) common law intention of parties to the contract has been replaced by a presumption that the individual contracting party will be personally liable on the contract, unless there is an agreement (express) to the contrary
Braymist v Wise Finance 2002
- An individual can enforce a pre-incorporation contract under s36C(1) CA 1985 as well as being personally liable on it
- If the identity of the contracting party is of crucial importance, or there has been a misrepresentation, then there is no question of the contract being enforceable on ordinary common law principles
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