The Corporate Veil: Lifting of the Veil and Issues of Liability

Table of CasesAdams v Cape Industries Plc (1990)Attorney-Generals Reference (no 2 of 1982) [1984] QB 624Broderip v Salomon [1895] 2 Ch 323Bugle Press Ltd [1961] Ch 270Cape PLC v Chandler [2012] EWCA Civ 525Chandler v Cape PLC [2011] EWHC 951 (QB)DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852Diamler Co Ltd v Continental Tyre and Rubber Co (Great Britain) [1916] 2 AC 307HL Bolton (Engineering) Ltd v TJ Graham and Sons Ltd [1987] 1 QB 159Jones v Lipman [1962] 1 WLR 832Lee v Lees Air Farming Ltd [1961] AC 12,Littlewoods Mail Order Stores v IRC (1969) Macaura v Northern Assurance Co Ltd [1925] A.C. 619Nicholas v Nicholas [1984] FLR 285Petrodel Resources Limited & Ors v Prest & Ors [2012] EWCA Civ 1395Re A Company [1985] BCLC 333Re Southard Ltd [1979] 1 WLR 1198 at 1208R v Kite and OLL Ltd [1996] 2 Cr App Rep (s) 295R v P&O Ferries (Dover) Ltd [1991] 93 CR App Rep 72Salomon v Salomon & Co Ltd( 1897) AC 22Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116Templeman LJ in Re Southard Ltd [1979] 1 WLR 1198 at 1208Williams v Natural Life Health Food Ltd [1998] 1 WLR 830Winkworth v Edward Baron Development Co Ltd [1987] 1 All ER 114Woolfson v Strathclyde Regional Council (1978)Yukong Line Ltd of Korea v Rendsburg Investments Corpn of Liberia (No 2) [1998] 1 WLR 294

Table of Statutes

Companies Act 1844Companies Act 1862Companies Act 1985Companies Act 2006Corporate Manslaughter and Corporate Homicide Act 2007Insolvency Act 1996Joint Stock companies Act 1856Liability Act 1855Matrimonial Causes Act 1973Workers Compensation Act 1922

Abstract

A company or corporation can be operated through many different type of business models, the common being either a company or a corporation. An incorporated company follows certain formalities, mostly for legal purpose, and upon completion of these formalities enjoys many advantages as a result of corporation, which makes them fundamentally different to those companies that are unincorporated although they appear to be dealing in the same kind of trading. Examples of unincorporated company are joint ventures, partnership or sole trader. Perhaps the most important advantage enjoyed by the incorporated company is the separate legal personality and limited liability feature which can make the enterprise t more attractive to the business environment and potential investors. This feature of separate legal personality implies that a company, for the purpose of law, is an artificial legal person who possesses the legal rights rather different from those of the physical person who created the company or its stake-holders at any point in time. That is, the responsibilities and legal rights of the stake-holder are not one and the same as of those of the company. Another characteristic enjoyed by an incorporated company is limited liability, which means that since the company is a legal person in its own right, its liability cannot extent to its shareholders and directors who control it and its liability is limited only up to the paid value of the share the shareholders hold. Importantly, such limited liability means that only the company can be sued without extending any liability to its shareholder. Thus, if the company is unable to pay its debts the creditors will not be able to recover those debts from the personal property of the companys shareholders and the latter are not legally obliged to make a personal contribution to the debt of the company. This feature of limited liability, referred to as the Veil of Corporation acts as a barrier between the shareholders and the company, effectively protecting them from the investigation and appraisal by external parties, particularly creditors. In recent years there has been much debate on the justification of the veil of corporation and the protection offered to companies, largely due to the perceived abuse by some and some business owners and the assumption that a business enterprise may be started and purely as a means of providing a veil to the conduct of unlawful practice under the umbrella of corporate veil. Although the courts strictly apply the approach of the veil of separate personality, in the event that they are satisfied that there might be some unlawful practice, the court will disregard the corporate veil in order that they can see more transparency of the enterprises operations and structure to allow any owners, directors or stakeholders who are perceived to be abusing the veil of corporation personally liable for any wrongful practice or activities they may have committed. In English law the principle of disregarding the veil of corporation is known as lifting the veil.This paper has been compiled by using legislative analysis, journal articles, books and critical appraisal of those cases which have made the most significant impact in this area of law. The author feels that the outcome of the research demonstrates that there are a range of circumstances when the court is prepared to lift the veil, particularly to serve justice if the transparency provided relates to or impacts on a homicide case, but also shows that the judiciary is allowed to use its discretion in deciding where or not to apply the doctrine of lifting the veil. In addition, the paper has affirmed the authors initial expectation that the corporate veil is prone to abuse, particularly to avoid liability and to make evidence of the conduct of unlawful practice.

1.INTRODUCTION

The research topic selected for the purpose of this report is:An analysis of the corporate entity and the issues surrounding the use of the corporate veil.

This report is an analysis of the corporate entity and the concept of separate legal personalities in the United Kingdom. The paper has been structure to provide an analysis and discussion of the concept of limited liability and the issue of the corporate veil. It also discusses how the court deals with property held in a companys name in relation to its liabilities. The analysis is supported by the inclusion of cases and statutes which illustrate the authors main points of argument and a comparison of the conflicting interpretations and decision given by the court on lifting the veil on corporation and the application of separate legal personality together with commentary on the approach adopted by the courts in terms of lifting the corporate veil and key exceptions.The research question is focussed on:1. What is meant by separate legal personality and its key cases2. What is mean by the term limited liability3. What is the concept of Corporate personality4. What is meant by the term lifting of the veil of corporation5. What are the exception of veil lifting6. Current Affairs7. Recommendations and suggestion.The report has been split into four key sections, specifically: The development or corporate identity with a focus on tackling the issue of corporate personality and limited liability including an analysis of the cases that clarify the nature of corporate personality and how a company acquires the status of separate personality and limited liability. This section also includes a detailed evaluation of the Case of Salomon v Salomon which is the main backbone of the concept of separate legal personality

The corporate veil looking at the processes and approach employed by the courts in lifting the corporate veil including consideration of the exceptions that a court needs to consider in order to determine whether or not to lift the veil.

Inconsistencies in judicial reasoning of limited liability and corporate personality

The structure of the analysis and critical appraisal has been designed to demonstrate the authors findings and observation that the application of the legal framework in this area of corporate law is and has been inconsistent with evidence of the need to rely on the judiciary and for the court interpretation of the law in order to run their business whilst acknowledging that there is no certainty in the outcome of any cases at any given time. The author has attempted to argue that the courts make it clear that they will not lift the corporate veil for the sake of justice and that they are less willing to lift the veil unless they are certain that fraud or sham motive has taken place. The author acknowledges that in recent developments the courts do appear to have no hesitation in lifting the veil if the case involves corporate homicide although some academic suggest that in such circumstances the courts are merely reacting to public pressure as has been seen from the introduction of Corporate Manslaughter and Corporate Homicide Act[footnoteRef:1] and the Insolvency Act[footnoteRef:2] [1: 2007] [2: 1986]

2LITERATURE REVIEW

2.1Background

The research question of assessing the issues surrounding the corporate veil, the exploration of the current state of the subject and the judicial and business environments attitudes and aspirations, prompted a literature review into the subject and the factors which could influence the subject of the corporate veil.

The nature of the research question represented a particular challenge, largely due to the large quantity of material available for review and the need to disseminate only that data of specific relevance to the project

2.2The Critiquing Framework

The nature of the literature review and the development of the research project would mean the original scope and structure of the project is likely to change as new information is collated and additional insight into the project is acquired.

The evolutionary approach to the project development is acknowledged by Hart (1988)[footnoteRef:3], particularly in terms of the recognition of the identification of new and diverse variables which influence the ultimate direction of the project and the need to be focussed in terms of the selection of the content of most relevance and, in consequence, the arguments and theories which should be subject to review and discussion. [3: C. Hart, Doing a Literature Review (London:Sage, 1988)]

The value and importance of the literature review is reaffirmed by Afolabi (1992) [footnoteRef:4]and the recognition that an incomplete review represents the failure of the author to provide evidence of completion of comprehensive body of research. [4: M.Afolabi, The review of related literature in research, International Journal of Information and Library Research, Vol 4, no. 1992, pp. 59-66]

2.3The Principal Problems Encountered

A fundamental challenge in the completion of the literature review for this research project has been the time constraints associated with the data gathering, analysis and appraisal. However, the author feels the commitment demonstrated, particularly in terms of the extensive sources of data identified and the consequential need to revise the scope and objectives of the research project as a consequence of the increased level of subject knowledge, has been invaluable in the preparation of the sequence of arguments adopted as part of the final report. Indeed, the evolutionary approach of the literature review and the revisions to the scope and content of the report is consistent with the recognition that the completion of a research report is not a single exercise, rather an iterative process reflecting any additional, relevant information identified (Masden 1992)[footnoteRef:5]. [5: D. Madsen, Successful dissertations and theses: A guide to graduate students research from proposal to completion (San Francisco, Jossey-Bass, 1992)]

2.4The Theory of Separate Legal IdentityThe theory of separate legal personality of a company and limited liability has attracted a lot of attention over the years because of conflicting decisions reached by the courts and the state of inconsistency in the law. Mohan S. and Bhandary V. suggested that the global meltdown created scope for state intervention in favour of the company. It was then further stated that while the judicial freedom in this area is indispensable, more statutory provisions should be brought into place to reduce the risk of ambiguity in regulatory law. This argument was supported by Lee R. Elkin J in her article which suggested that the corporate veil should be pierced in order to hold a shareholder liable for the obligations of the corporation and further still, applying the theory of alter ego to treat separate but related corporations as a single entity liable for the same debt. In contrast, Professor Gower argued that although creditors are afforded an option to enter into contracts on unlimited liability grounds, even thou it is a difficult task, it demonstrate that somehow the principal of limited liability and separate legal personality that has so far shaped the company law is somehow not untouchable. This area of law is extensive and in consequence the author has focussed attention only on those aspects of research of the topic which are most recurring, dominate the debate and which have attracted the most criticism in the judicial, academic and business arena.

3.METHODOLOGY

Due to the nature of the subject the author has adopted a qualitative approach to the project reflecting the high level of focus on literature and library based research[footnoteRef:6]. [6: C. Hart, Doing a Literature Review (London:Sage, 1988).]

The specific methodology used is black letter research comprising three stages of

Stage One The Descriptive Stage: including the definition and description of the concept of legal personality, limited liability and veil of corporation and an examination of the origin and back ground of the concepts by analysing the key case of Salomon v Salomon. Stage Two The Explanatory Stage: dealing with the explanation and discussion of the process of lifting the veil of corporation and the approach adopted by the courts together with an appraisal of how the courts make use of exceptions when lifting the veil. Stage Three The Identification Stage: involving the identification of the problems that arise as a result of the concepts discussed in stage one with specific focus on the problem faced by the court when dealing with personal property held in company names and the concept of single economic entity and the different and conflicting interpretations provided by the courts when dealing with the issue of limited liability.The author has made extensive use of books, journal articles, cases and legislation in order to give answers to the research question and provide a sound foundation of academic knowledge[footnoteRef:7]. [7: D. Madsen, Successful dissertations and theses: A guide to graduate students research from proposal to completion (San Francisco, Jossey-Bass, 1992).]

4DEVELOPMENT OF THE CORPORATE PERSONALITY4.1Corporate Personality

Before any attempt to go through the concept of corporate legal personality, it is important to briefly look at how a company can first come into existence, referred to as Incorporation. According to Professor Sealy, a company can be defined as a legal entity that is created by registration contained in the companies Act[footnoteRef:8] and its predecessor[footnoteRef:9]. The first incorporation of a company was first regulated by the Joint Stock Companies Act 1844[footnoteRef:10] which was later revised by the Joint Stock companies Act 1856[footnoteRef:11] followed by the Companies Act 1985 and the latest and currently in force is Companies Act 2006[footnoteRef:12]. [8: companies Act 2006] [9: L Sealy, S Worthington Cases and Materials in Company Law (8th edn OUP, Oxford 2008)] [10: Companies Act 1844] [11: Joint Stock companies Act 1856] [12: Companies Act 2006]

There are two different types of companies that can be created under the provision of the Companies Act 1985, specifically a private company and a public company. The issuing of the Incorporation certificate provides proof that the formality and requirement of the Act [footnoteRef:13] is satisfied and the company is now regarded as PLC or Ltd enterprise and, as such, is able to enjoy the benefits of incorporation. The information of the company is filed with Companies House, the United Kingdom Registrar of Companies and an Executive Agency of the Government under the remit of the Department for Business, Innovation and Skills (BIS), and is publically available for inspection by anyone who may wish to deal with that specific company. The Company House keep all the record of registered companies in the UK. [13: Companies Act 1985 s13]

The concept of separate legal personality is an important principle of English company law afforded by the act of incorporation. After a company is incorporated it acquires an artificial legal personality which is distinct from the rights and responsibilities of its members. A principal which was established in the case of Salomon v Salomon[footnoteRef:14]. [14: Salomon v Salomon & Co Ltd( 1897)]

The distinct features of incorporated company are that its rights and responsibilities are not one and the same with of those who brought the company into existence. These features can be reflected in the fact that although the people managing the company are forever changing, their movement or shift in the running of the company does not affect the legal structure of a company and that the company does not change or cease to exist because the creator has lost an interest in the company or diversified the original investment to a different company[footnoteRef:15]. Further to the element of corporate legal personality, the company which is dully registered under the Act and has the ability to enter into contracts and agreements[footnoteRef:16], thus the company is also capable of suing or be sued and any claim of a creditors is against the company and not the member [footnoteRef:17], it can own property in its own name[footnoteRef:18] and enjoy the benefit of perpetual succession. The shareholders of the company as a result of incorporation can delegate management duties to directors. [15: P Davies, S Worthington, E Micheler Principal of Modern Company Law ( 8th edn Sweet & Maxwell Ltd, London, 2008)] [16: Lee v Lees Air Farming Ltd [1961] AC 12,] [17: R Kraakman, H Hansmann the assential Role of Organizational Law (Yale 2000)] [18: By law the property of the company belong to the company and the shareholder are not the owners as per the world of L.J in the case of Short v Treasury Commissioners [1948]1K.B. 11,122,CA (affd [1948] A.C. 534 HL]

The Salomon case established the fundamental principle of separate legal personally and is regarded as the backbone of company law. Professor Sealy[footnoteRef:19] described it as the cornerstone of company law as is that specific feature that defines company law. Corporate personality is a powerful instrument that empowers companies to mitigate commercial risk although it can be subjected to some abuse. It is important that this principle is guarded and preserved in all possible manner and be allowed to serve its purpose when considering issues and evidence of abuse. Professor Janet Dine[footnoteRef:20] argued that the court does not appear to have any respect for this principle as being sacrosanct but rather are only concerned with the purpose of the provision of the Act. They ignore legal personality at will. [19: L Sealy Cases and Material in company Law ( 8th edn O U P 2006)] [20: J dine Company Law (5th edn Palgrave Macmillan Law Masters Series 2005)]

However, the doctrine as established by Salomon case with its main element that all the provision under the Act be observed by those wishing to form a company is still the current approach and should be guarded and preserved as company law continues to develop. 4.2Limited Liability

The concept of limited liability comes into being under the Liability Act 1855[footnoteRef:21]. The main aim of the act being to help companies raise funds by issuing shares without subjecting the shareholder to the risk of liability should a company fail to prosper. [21: Liability Act 1855]

The doctrine of limited liability protects the members from being liable for the companys liabilities if the company goes into administration or if the company become insolvent under the Companies Act [footnoteRef:22] and The Insolvency Act [footnoteRef:23]. In essence, the members of the company are only liable for the debt of the company up to the value of their unpaid shares and, as such, the debt of the company cannot affect the individual assets of the members. [22: Companies Act 2006] [23: Insolvency Act 1986]

One of the most important criticisms of limited liability is offered by Professor Gower[footnoteRef:24] who argues that there is no balance in the allocation of risk when observing the limited liability rule, particularly since shareholders receive their unlimited dividends as the company prospers but suddenly, once the company is faced with financial crisis, their liabilities are limited to the disadvantage of the companys creditors. [24: Gower and Davies, Principles of Morden company law (8th edn Sweet & Maxwell Ltd 2008) p194]

There is widespread academic debate, for example Gower and Davies[footnoteRef:25] and Professor Janet Dine[footnoteRef:26] on the issue of liability and establishing the grounds on which limited liability should be available to companies. However it is important to note that the concept of limited liability will not protect the assets of the company from its creditors until all its assets are exhausted. [25: P Davies, S Worthington, E Micheler Principal of Modern Company Law ( 8th edn Sweet & Maxwell Ltd, London, 2008)] [26: J dine, Company Law (5th edn Palgrave Macmillan Law Masters Series 2005)]

The doctrine of limited liability is regarded as a well preserved concept since the judgement of Salomon v Salomon which was described as calamitous by Otto Kahm Freud[footnoteRef:27], the House of Lord stressed that the motive behind the creation of a company is not important provided that all the requirement under the Act have been met and the company was not created with the intention of conducting unlawful activities. [27: (1897) 7 M.L.R. 54]

Whilst the company enjoys the benefits of limited liability the company is run and the decision are made by their directors in exercising the powers granted to them by the Memorandum of Association, Articles of Association and the board of directors which means that if they acted outside of those power invested in them by the company constitution they will be held personally liable for their action. Further to the concept of limited liability is the question of whether limited liability should be applied when dealing with a group of companies and subsidiaries or should it be applied as one single entity. It is in fact applied to group of companies rather than one single entity unless there are circumstances, including abuse, which would prove otherwise. This rationale, is referred to by academics like H.Hansmann and R.kraakman as asset partitioning[footnoteRef:28]. [28: R Kraakman, H Hansmann The essential Role of Organizational Law (Yale 2000)]

Although it seems unfair to the creditors that the shareholder liabilities are limited this approach is not compulsory. According to Gower and Davies[footnoteRef:29] those who wish to form a company can choose not to limit their liability and form an unlimited liability company. It can be argued that this is in conflict with the asset partitioning rationale. Indeed, not only that the incorporators can opt out of limited liability concept by forming a unlimited company but the creditors also have the choice of including in their agreement the extent of the liability at the contract stage. However, Professor Gower further argues that it is not an easy task for every creditor to find their way around as to adjust their contractual relations with the company as to reflect the riskiness of their situation[footnoteRef:30] It was further suggested that involuntary creditors should not be subjected to limited liability concept[footnoteRef:31]. This leaves the reader to wonder about whether the limited liability and corporate personality is untouchable after all since the power of its sustainability is placed in the hand of those dealing with the company[footnoteRef:32] whose aim is to protect their investment[footnoteRef:33]. [29: P Davies ,S Worthington, E Micheler, Principal of Modern Company Law ( 8th edn Sweet & Maxwell Ltd, London, 2008)] [30: P Davies, S Worthington ,E Micheler, Principal of Modern Company Law ( 8th edn Sweet & Maxwell Ltd, London, 2008) page 197] [31: R.Kraakman & H.Hansmann Toward Unlimited Shareholder Liability for Corporate Tort 1991] [32: Kleinworst Benson Ltd v Malaysia Mining Corp Bhd [ 1989] 1 W.L.R. 379 CA ( Comfort Letter was not mean to be legal binding] [33: P Davies, S Worthington, E Micheler Principal of Modern Company Law ( 8th edn Sweet & Maxwell Ltd, London, 2008) p197]

It can be seen that the group that most benefits from the concept of limited liability are the shareholders, although from a different perspective, perhaps they too have a price to pay. One of these prices is a disclosure obligation, s448[footnoteRef:34], which exempts the unlimited company from filing its account with the registrar. In contrast, the limited liability company is required by the statute to file their account with the registrar annually, so it is perhaps this obligation that justifies the connection between limited liability and publicity. It can be argued that, while the creditor are not allowed to go after the shareholders assets to recover what is owed to them by the company it is clearly important for the legislature to put regulations in place to monitor the improper movement of property from companies to individuals or other companies in attempt to avoid being attached by creditor. [34: Company Act 2006 s448]

4.3Salomon v Salomon

Although Salomon is not the only English case that depended on the concept of limited liability and the separate legal personality, it is by far the most discussed in terms of the concept of limited liability and corporate legal personality. The facts of the case being:Mr Salomon was a sole trader who carried on a business of manufacturing leather shoes. He was trading in his own capacity as a sole trader under the business name A Salomon & Co. Salomon lived in the neighbourhood for many years, where he built a big warehouse from where he operated his business of shoe making Salomon established himself well in term of his business. He earned himself a reputation in the shoe making industry and built up a good credit record. He had a large family comprised of a wife, four sons and a daughter. Salomon worked alongside his four sons, however they were not partners in the business, merely his employees. It is only natural that the sons will one day want to own part of their fathers business therefore they keep asking their father to give them shares in the business they troubled me , all the While[footnoteRef:35] . Ultimately, Mr Salomon sold his business to an incorporated company that was known as Salomon & Co Ltd. Solomon said the reason he had to sell his business was to expand his business and include his family who depended on him financially. [35: Mr Salomon said in the case Broderip v Salomon [1895] 2 Ch 323 this was the first decision in the case of Salomon v Salomon before it was upheld by the House of Lord.]

Salomon begin the process of incorporation, he complied with all the formalities and requirement required under the Company Act [footnoteRef:36]at a time Mr Salmon also had the contract with the trustees in place. The Memorandum of Association was signed and registered in the correct manner. The memorandum stated that the company was created to carry that contract in affect. Salomon had invested 40,000 into the business to the value of 1 per share. The Articles of Association were also in place detailing the way in which the affairs of the business should be conducted. The directors were to be nominated by the subscriber to the Articles of Association. In the memorandum there was an express power to borrow on a debenture the amount not more than 10,000 otherwise a general meeting should be called. All the formality was met and the company was formed. Salomon was a director alongside his two elder sons who were shareholders at the same time and the other shareholders were his daughter, his youngest son and his wife. All members of his family owned one share each and therefore Mr Salomon was the majority shareholder owning the rest of the remaining shares in the company. [36: companies Act 1862]

Soon after Salomon had sold his business to a limited company, there was a deep recession and the market for his business declined thus leaving him out of business and without income. Salmon had tried everything he could to save the business but he could not prevent the company from becoming insolvent. The creditors of A Salomon & Co Ltd submitted that Mr Salmon should be held liable for the debt of the company and reimburses the creditors. They claimed that the company was a sham[footnoteRef:37] created by Mr Salomon to avoid liability. [37: The creditors submitted to the court that Salomon created a company to avoid liability]

In the court of appeal Vaughan William J agreed with the creditor and up held their argument stating that:I am perfectly certain that each one of the shareholders in this company was perfectly well aware of all that was done with regard to the purchase by the company of Mr Salomon's business. The shareholders were all of full age, and the number of shareholders, as it existed at first, continued throughout the life of the company down to the liquidation. There never was any intention of offering the shares in the company to the public. It was what the late Master of the Rolls in In re British Seamless Paper Box Co. 1 called a private company; but, on the other hand, I am perfectly convinced that the shareholders, who were all members of the family of Mr Salomon, were nominees of Mr Salomon, and that no real interest was ever given to them in the company, and I do not believe that it was ever intended to give them any real interest whatsoever in the company.[footnoteRef:38] [38: This was a statement delivered by Vaughan William J in the case of Boredrip v Salomon [1895] ch .D. 467 in agreement with the creditors that Mr Salomon should assume liability.]

Vaughan William J went further to say that the subscriber to the Memorandum of Association where mere Damies[footnoteRef:39] and stated that the company was Mr Salmon with a different face. H said Mr Salomon was using the nominees as his aid and the company as his device to perpetuate fraud and avoid liability. Furthermore, that Mr Salomons motive to form a company was to collect all the profit without taking responsibility for the creditors therefore his company was his agent[footnoteRef:40] .. [39: This where the world used by Vaugan William J to describe the state of Salomon connection to his company] [40: Vaughan William J]

Vaughan William J in his argument states that there was an agency relationship between Salomon and the company and that Salomon should be held responsible for the company debt, stating: ...that this business was Mr Salomon's business and no one else's; that he chose to employ as agent a limited company; that he is bound to indemnify that agent, the company; and that his agent....[footnoteRef:41] In the judgement Salomon was then ordered by the court of appeal to assume responsibility of the debt to the creditors. [41: Vaughan William J in Boredrip v Salomon[ 1895]ch.D . 467]

However this Judgement was reversed by the House of Lords which disagreed with the approach used by Vaughan William J. The Lords view was that Mr Salomon has met all the requirements prescribed under the Act[footnoteRef:42] and the Act demand for at least seven people to be signatory to the Memorandum of Association and that Mr Salomon had satisfied all the conditions. They stated that it was irrelevant whether the members were family or strangers, as long as all the condition had been met there should be no issue and the concept of legal personality should prevail. The House of Lords pointed out that the business had been running perfectly well prior to incorporation, that Mr Salomon had invested heavily in the business and the business was in a sound position and fully solvent at the time of incorporation, as such Mr Salomons intention to incorporate the business was not different from those permitted by the Act[footnoteRef:43]. In his argument Lord Halsbury L. stated that: [42: companies Act 1862] [43: Companies Act 1985]

... Statute enacts nothing as to the extent or degree of interest which may be held by each of the seven, or as to the proportion of interest or influence possessed by one or the majority of the share-holders over the others. One share is enough[footnoteRef:44] . [44: Lord Halsbury L supporting Mr Salomons argument and rejecting Vaughan William J approach]

It can be noted that Halsburys view is simply saying that the court should interpret the Act as it is. In its plain meaning that is to say the Act is silent or further to say it did not specify the precise interest to be held by the member as long as they have the interest that should be enough to satisfy the conditions under the Act and for the purpose of the company as duly formed they should be regarded as shareholders.Lord Morris, in supporting the appeal, pointed out that whether Mr Salomon was the majority shareholder did not matter, he went on to mention that the so called one man company had been around for quite sometimes now but when considering the legal issue of the company that does not matter as long as all the requirements are met. His arguments were not different from Lord Halsburys. In his argument accepting the appeals he states that : It has become the fashion to call companies of this class one man companies. That is a taking nickname, but it does not help one much in the way of argument. If it is intended to convey the meaning that a company which is under the absolute control of one person is not a company legally incorporated, although the requirements of the Act of 1862 may have been complied with, it is inaccurate and misleading[footnoteRef:45] [45: [1897] 53 A.C. 22]

The House of Lords upheld the Court of Appeal Judgment. It held that the company was a separate legal person in its own right and Mr Salomon was not liable for the debt of the company. It also held that the company can be in control of one person but still be regarded as a company. It further confirmed that the interest in the company does not matter, one share is enough and the member of the company need not to be stranger for the company to legally exist.The decision of Salomon therefore established that trading in the name of a company as a separate entity is legally permissible by law provided that all the requirement of the Companies Act have been met and that the company was not formed to undertake unlawful activities, that the company is a separate legal entity, separate from its member regardless of the extent of the interest and relation of the members and it does not matter whether the company is controlled by one member. It further established that it is the purpose of the Act that by forming a limited company with all the conditions under the Act met that shareholder can legally avoid liabilities.[footnoteRef:46] [46: William 1977:78]

4.4 Post Salomon

It has been long established by the Salomon case that a company is a separate entity different from its members and that the companys liabilities are separate from its shareholders. The companys properties belong to the company and not to its shareholders. After Salomons decision the courts have often been called upon to apply and defend the Salomons principle. In some cases they applied it and in some cases they did not.[footnoteRef:47] [47: A Dignam,J Lowry, N Padfield, Company Law (4th edn OUP 2006)p33]

The Salomon principle was reaffirmed by the case of Macaura v Northern Insurance Limited[footnoteRef:48] Mr Macaura owned a Timber estate business and consequently sold it for fully paid up shares. Mr Macaura had insured the Timber in his name prior to the sale of the business, however he did not transfer the insurance policy into the company name when he sold the business. Mr Macaura owned all the shares in the company and he was the only shareholder. The timber was destroyed by fire and Mr Macaura sued the insurance provider Northern Insurance Limited for compensation. Northern Insurance refused to pay claiming that the timber belonged to the company and not to Mr Macaura. The matter was referred to arbitrator which held that Mr Macaura had no insurable interest in the timber. However it then went to the Court of Appeal. The issue before the court was whether Mr Macaura had any insurable interest in the property and whether he had no such interest in the manner in which it was raised in the course of these proceedings.[footnoteRef:49] Lord Buckmaster in his statement rejecting the appeal stated that the fact that Mr Macaura owned the entire share in the company and happened to be the only creditor did not guarantee him interest in the companys property. A company is a separate legal entity apart from its member as established by Salomons case[footnoteRef:50], he related his decision by stating the judgment in the case of Moran, Galloway & Co. v Uzielli where a creditor for ships' necessaries was held entitled to insure the ship, the decision rested upon the fact that the creditor had a right in rem against the vessel, and the learned judge in that case said that[footnoteRef:51] [48: Macaura v Northern Assurance Co Ltd [1925] A.C. 619] [49: LORD BUCKMASTER hearing the appeal] [50: Salomon v Salomon & Co Ltd( 1897) AC 22] [51: Lord Walton in Moran, Galloway & Co. v Uzielli ]

"in so far as the plaintiffs' claim depends upon the fact that they were ordinary unsecured creditors of the shipowners for an ordinary unsecured debt, I am satisfied that it must fail. The probability that if the debtor's ship should be lost he would be less able to pay his debts does not, in my judgment, give to the creditor any interest, legal or equitable, which is dependent upon the safe arrival of the ship."[footnoteRef:52] [52: Lord Walton J delivering the judgment in the case of Moran, Galloway & Co. v Uzielli ]

Lord Buckmaster stated that this is the correct interpretation of the law and Mr Macaura cannot possibly establish this in his claim as a creditor[footnoteRef:53]. On the issues of Mr Macaura being the only shareholder in the company his Lordship stated that his position should not in any way be influenced by the extent of the shares he held in the company. He argued that if the shares in the company where held by different shareholders they would not have any interest in the company apart from receiving their dividends and that applies to Mr Macaura too. He stated that: [53: Lord Buckmaster in Macaura case]

Nor can his claim to insure be supported on the ground that he was a bailee of the timber, for in fact he owed no duty whatever to the company in respect of the safe custody of the goods; he had merely permitted their remaining upon his land.[footnoteRef:54] [54: Lord Buckmaster delivering his statement in Macauras case emphasising that member have no interest in the companys property. ]

Lord Summer in rejecting the appeal stated that it is evident that Mr Macaura had no insurable interest in the timber. The timber belonged to the company not to him. He owned the shares and it was not the shares that were destroyed by fire. As a consequence the appeal failed and Lord Wrenbury said My Lords, this appeal may be disposed of by saying that the corporator even if he holds all the shares is not the corporation, and that neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.[footnoteRef:55] [55: Lord Wrenbury said at page 633]

The decision in Macaura was regarded by commentators such as S Kunalen as a harsh and narrow application of the doctrine of Salomon[footnoteRef:56]. It can be argued that a loss of a timber that belongs to the company could be regarded as suffered by Mr Macaura since he was the only shareholder and the only creditor of company. However the court narrowly established that the extent of the shares in the company does not give any shareholder interest in the companys property. Gower and Davies argue that any change in a membership of the company leaves the property of the company untouched as it is only the shares that are dislocated, the property stays the same.[footnoteRef:57] Therefore it can be said that the decision in Macaura allows the property of the company to be clearly distinguished from the personal property of the member.[footnoteRef:58] [56: S Kunalen, S Mckenzie, Company Law (2nd OUP 2001)] [57: Gower and Davies, Principles of Morden company law (8th edn Sweet & Maxwell Ltd 2008)p40] [58: R Kraakman, H Hansmann, The essential Role of Organizational Law (Yale 2000)]

A company which is duly formed under the Act[footnoteRef:59] with all the requirements met can enter into effective agreement and form a contract with its members. The principle of legal personality established by Salomon makes it possible for the members in control of the company to be the same time a director and employee of the company[footnoteRef:60]. Lee v Lees are farming [footnoteRef:61] is the leading case that dealt with the employment status of a shareholder who owned all the shares in the company and at the same time was a director of that company. Mr Lee lost his life while flying a plane for the company of which he owned all shares and was a director. Mr Lee entered into valid employment contract with the company where he owned shares. His wife brought a claim against the company for compensation under Lees employment contract. The question before the court was whether Mr Lee who owned all the shares in the company and was a director could be regarded as an employee for the purpose of compensation under the Workers Compensation Act [footnoteRef:62]. The court held that the fact that Lee was in full control of the company did not render his employment contract invalid for the purpose of compensation. The court stressed that this was the purpose and consequences of the principle, that a person can have a multiple role in the company as established by Salomon[footnoteRef:63]. It is submitted that going against Salomons doctrine will destroy the fundamental basis of company law. [59: Companies Act 2006] [60: F Tolmie Can controlling shareholders be employees as well? L.Q.R. 1997, 113(10), 536-540] [61: Lee v Lees air Farming Ltd [ 1961] AC 12] [62: Workers Compensation Act 1922] [63: C Howell Salomon Under Attack Comp. Law. 2000, 21(10), 312-314]

Although Lees decision is preserved as a correct interpretation of company law[footnoteRef:64], in particular to the fact that one person can have multiple roles in the company and that the company can enter into a legal agreement with its members, the question of whether a person who controls the company and holds all the shares in the company could be referred to as an employee may not always be easy to establish[footnoteRef:65]. For example in a situation that deals with redundancy compensation the court may rule that such persons may not have the right to claim unfair or wrongful dismissal[footnoteRef:66] [64: L Sealy Cases and Material in company Law ( 8th edn O U P 2006) p41] [65: L Sealy Cases and Material in company Law ( 8th edn O U P 2006) ] [66: Buchan v Secretary of State for trade and Industry [ 1997] IRLR 80 he decision in this case denied the separate legal status of the company that had been established in the Salomon case and put into effect in Lee's Air Farming.]

As demonstrated by the cases of Macaura and Lee it can be said that the courts after Salomon Judgment have shown that they are eager to strictly defend and apply the Salomon principle.

5THE CORPORATE VEIL5.1Lifting the Corporate Veil

In the period since the Salomon verdict the application of the principle of separate legal personality has been the subject of much discussion and judicial challenge which, as a result of the apparent inconsistencies in the application of the principle in different court cases has resulted in a number of attempts by the judiciary and legal experts to give clarity to the principle and provide direction on the circumstances in which the courts are likely to lift the veil of incorporation.[footnoteRef:67] [67: L.S.Sealy and R.J.A. Hooley, Commercial Law: Text, Cases and Materials (OUP Oxford, 4 Ed., 2008)]

The nature of this clarity is itself ambiguous, for example the classification of veil lifting into distinct categories covering specific circumstances such as occasions of fraud, tax considerations, employment problems within a group of companies operating structure and situations where a company is an agent of another. In contrast, alternative clarification is provided by means of categorisation of the manner in which the judiciary has been perceived as lifting the corporate veil, including the separate circumstances of the courts lifting the veil simply to obtain member details and information, the courts disregarding the veil and finding members liable, the courts not recognising the separate entities of companies within a group structure but rather identifying them as a single entity and simply not recognising the existence of a company as an entity at all[footnoteRef:68]. [68: L. Linklater, Piercing the Corporate Veil The Never Ending Story? Comp. Law., 27(3): 65, 2006]

Such variation in approach by the judiciary presents a challenge to the legal and business environment leading to uncertainty and confusion over the likely interpretation of liability by the courts in individual cases and a perceived inability to presume the likely verdict of the courts in any judicial case.

It is worth noting that such uncertainty has been variable in the period since the Salomon verdict. Indeed the time passed since Salomon can be separated into three distinct phases with the period from 1897 to 1966 where the Salomon verdict was strictly applied to subsequent cases and challenge to the interpretation of the Salomon verdict was impaired by the constitutional constraints on the House of Lords and its inability to overrule its earlier judgements. However, in the mid 1960s, under the direction of Lord Denning, the House of Lords undertook changes to its rules of operation and constitutional framework which allowed earlier decisions to be overruled and thereby offered the courts the opportunity to challenge the legislative expectation and problems of being bound to and by historic precedence which was being perceived unjust and unfair.

Dennings initiatives and reforms represented an important milestone in the issue of corporate identity, liability and the lifting of the veil as demonstrated by his observation in the Littlewoods Mail Order Stores v IRC case of 1969[footnoteRef:69]: [69: Littlewoods Mail Order Stores v IRC (1969) ]

the doctrine laid down in Salomons case has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can, and often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way with group accounts and the rest. And the courts should follow suit.[footnoteRef:70] [70: Littlewoods Mail Order Stores v IRC (1969) ]

However, although such reform represented an important opportunity for clarity it also offered increased potential for alternative interpretation and uncertainty of the definition of corporate personality and limited liability. Such observation was reinforced by Lowry (1993)[footnoteRef:71]: [71: Lowry (1993) ]

the problem that can naturally arise .. is the uncertainty which it casts over the safety of incorporation. The use of the policy to erode established legal principle is not necessarily welcomed[footnoteRef:72]: [72: Lowry (1993) ]

In recognition of the risk of ambiguity, in recent years there has been a growing move toward improving the level of understanding and application of the veil of incorporation, particularly in terms of lifting the veil and the circumstances in which such transparency should be allowed. Perhaps the most significant example of this reassessment is offered by the case of Adams v Cape Industries Plc (1990) [footnoteRef:73]: [73: Adams v Cape Industries Plc (1990) ]

Central to the understanding of the application of veil of incorporation and justification of the lifting of the veil is a sequential and systematic approach to the assessment of the case, specifically initially examining the issue of being a single entity, issue of the corporate veil and faade, consideration of the issue of agency[footnoteRef:74]. [74: L.S.Sealy and R.J.A. Hooley, Commercial Law: Text, Cases and Materials (OUP Oxford, 4 Ed., 2008)]

In terms of the issue of single entity the Court of Appeal in the Cape group case gave clear affirmation of the separation of subsidiaries in a group structure as individual legal entities with all the rights and liabilities which are applicable to separate interests rather than the parent companies possessing the rights and liabilities.

The consideration of the lifting of the veil and determination of faade is supported by assumption of Lord Keith in Woolfson v Strathclyde Regional Council (1978)[footnoteRef:75] and the premise that the veil should only be lifted in cases of exceptional or special circumstances and where the corporate veil is being used as a faade to hide important facts and issues. The scope and consideration of the issues of fraud, sham and faade is covered in more detail in section 5.2 below. [75: Woolfson v Strathclyde Regional Council (1978)]

From the agency perspective it could be assumed that the application of the concept of the agency principle is an easy task for the courts[footnoteRef:76]. The basis of this premise being the simple absence of any agency agreement between a subsidiary and a parent company represents evidence of the independence of the subsidiary from the parent. [76: K.V. Krishnaprasad, Agency, Limited Liability and The Corporate Veil. Comp. Law., 32(6): 163, 2011]

In consequence the Court of Appeal in the Adams case [footnoteRef:77] effectively clarified the three circumstances in which the veil can be lifted and is founded on the courts interpretation of a statute or document and the absence of clarity in either which would allow the courts to treat a group of companies as a single legal entity rather than separate subsidiaries, the determination of special circumstances in which the veil should be lifted, particularly where it is deemed to be a faade and a means of concealing facts and issues, and the subject of agency. [77: Adams v Cape Industries Plc (1990) ]

5.2Fraud, Sham and Faade

The importance of the Adams v Cape case cannot be underestimated. In essence it affords recognition by the courts that the principle of the Salomon case[footnoteRef:78] has effectively been enshrined in the UK legal framework and is the default position to be adopted by the courts except in specific circumstances. Perhaps the most important departure from the principle is those cases where it is argued that the company as an entity is considered to be a faade and exits solely for the purpose of securing the rights and liabilities offered by the concept of the corporate veil as a mask to hide fraud or avoid current or potential liabilities. [78: Salomon v Salomon & Co Ltd( 1897) AC 22]

The determination of a company being a fraud, sham or faade represents a challenge for the courts and central to the resolution of this challenge is the ability to identify those aspects of a companys existence, purpose and structure which could justify the corporate veil being lifted[footnoteRef:79] Such clarity is afforded by the case of Broderip v Salomon (1895) [footnoteRef:80] where Lord Justice Lopes stated: [79: M. Rudorfer, Piercing the Corporate Veil: A Sound Concept (GRIN Verlag Ohg, 2009)] [80: Broderip v Salomon [1895] 2 Ch 323]

it never was intended that the company to be constituted should consist of one substantial person and six mere dummies, the nominees of that person, without any real interest in the company. To legalise such a transaction would be a scandal.[footnoteRef:81]: [81: Broderip v Salomon [1895] 2 Ch 323]

Attempts by an enterprise or organisation to avoid existing contractual liabilities through the creation of separate companies have been recognised by the courts as examples of faade with the specific purpose of avoiding one or more elements of company law. For example Jones v Lipman [1962] 1 WLR 832[footnoteRef:82] involving the creation of a company to which property was transferred with the principal objective of avoiding performance of a contract for sale of a piece of land and resulting in only nominal damages being offered for the breach of the original sale contract. Additionally the case of Bugle Press Ltd [1961] Ch 270[footnoteRef:83] where 90 per cent of the shared in the company were held by two members who wanted to remove the third, 10 per cent, minority shareholder. The latter refused to sell to the two majority stakeholder who proceeded to establish a separate company which made a takeover bid to the three separate shareholders. The bid was accepted by the two majority stakeholder and the company then attempted to secure the third members share by means of compulsory acquisition under the terms of the Companies Act 1948, s. 209 (CA 2006, s.979) [footnoteRef:84]. Such an attempt was recognised by the courts as a means of evading the requirements of company law and the expropriation of minority interests. [82: Jones v Lipman [1962] 1 WLR 832] [83: Bugle Press Ltd [1961] Ch 270] [84: Companies Act 1948, s. 209 (CA 2006, s.979)]

5.3National Security

It could be perceived that the issue of national security in the context of the corporate veil is a feature of the current global environment and the high awareness of the global nature of business operations and interest and the inherent risks associated with a company carrying out its activities in areas with different cultural, political, social and legislative frameworks and faced with the increasingly cross border threat of terrorism from extremist groups and organisations[footnoteRef:85]. However, it is worth noting that the issue of national security in terms of veil lifting is actually nothing new, for example the case of Diamler Co Ltd v Continental Tyre and Rubber Co (Great Britain) [1916] 2 AC 307 [footnoteRef:86] where the courts sanctioned the lifting of the corporate veil of the UK registered company to determine the nationality of the business in the time of war. [85: L.S.Sealy and R.J.A. Hooley, Commercial Law: Text, Cases and Materials (OUP Oxford, 4 Ed., 2008)] [86: Diamler Co Ltd v Continental Tyre and Rubber Co (Great Britain) [1916] 2 AC 307]

Central to the analysis of the issue of national security and the corporate veil is the recognition of the correlation between corporate, economic and national security, particularly since the economic stability of a nation is at the heart of a stable social and political order and, since economic stability is supported by successful, transparent and legal business activities the corporate structures and operation of the enterprises in a lawful manner is a fundamental point for review.

The national security itself can be classified as threatened by any incidence of unlawful economic activity since such activity represents a threat to the stability of the social and political order. The principal examples of such unlawful activity include tax avoidance, illicit commerce, misrepresentation of facts and information.

5.4Agency

The issue of agency in terms of justification and basis for lifting the corporate veil is most important where the justification for lifting due to the issue of faade or sham has failed or is difficult to prove[footnoteRef:87]. Based on the Salomon case[footnoteRef:88] the default assumption is that a company is not an agent of its shareholders. Although the issue of agency could arise in many arguments for the lifting of the corporate veil it is most likely to become an issue in the context of associated or group companies and determination of the existence of agency is supported by both statute and case law. [87: K.V. Krishnaprasad, Agency, Limited Liability and The Corporate Veil. Comp. Law., 32(6): 163, 2011] [88: Salomon v Salomon & Co Ltd( 1897) AC 22]

In terms of statute, the Companies Act 1985 ss. 227-331 (and CA 2006 s.399 et seq)[footnoteRef:89]stipulated the requirement for the compilation of group accounts including a consolidated balance sheet and profit and loss account for groups of companies covering both the parent company and any subsidiary companies. The principal purpose of this element of the legislation is to facilitate transparency of the accounts, the units of the group of companies and their contribution to the group undertaking. The very nature of this statutory requirement is evidence of the lifting of the corporate veil by reason of the need to allow clear and separate identification of the different subsidiaries and units in the group. [89: Companies Act 1985 ss. 227-331 (and CA 2006 s.399 et seq)]

In contrast to the clear definition and expectation of agency in the context of statute, in case law there is evidence of ambiguity and an absence of any clear rules of application. However, in spite of this, there are example of rulings which do offer some degree of clarity and a reference point for assessment, for example Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116[footnoteRef:90] which identified a number of questions for consideration in determining the existence of agency between subsidiaries and the parent in a group structure. These questions include determining if the individuals conducting the business of the subsidiary had been appointed by the parent, if the parent controlled and governed the subsidiary and if the financial profits secured by the subsidiary were made under the direction of the parent company. [90: Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116]

6INCONSISTENCY IN JUDICIAL REASONING OF LIMITED LIABILITY AND CORPORATE PERSONALITY6.1The Establishment of The Principle and Inconsistency of Application

Salomon v Salomon [footnoteRef:91] is central to the establishment of the principle that a company exists as a separate legal entity to its shareholders and as such allows the latter to continue trading activities without the risk of liability for creditors and the potential personal insolvency if the business or enterprise failed. The application of the principle to a group of companies is the same as that for members of an enterprise that is, each company with a group are recognised as separate legal entities with no liability on each other if one or more companies in the group fails or becomes insolvent. Support of this premise is provided by Templeman LJ in Re Southard Ltd [1979] 1 WLR 1198 at 1208[footnoteRef:92] : [91: Salomon v Salomon & Co Ltd( 1897) AC 22] [92: Templeman LJ in Re Southard Ltd [1979] 1 WLR 1198 at 1208]

"A parent company may spawn a number of subsidiary companies, all controlled directly or indirectly 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 proper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary.[footnoteRef:93]: [93: Re Southard Ltd [1979] 1 WLR 1198 at 1208]

However, such an approach has not been consistently applied in the UK courts and, as such, the judiciary has offered a number of opportunities in which the corporate veil of group enterprises has been lifted in order to provide transparency of actions and the relationship between and activities any directors and shareholders. Perhaps the most important example of the dismissal of the corporate veil and the application of corporate personality and liability is offered by the case of DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852[footnoteRef:94] and the Court of Appeals decision to treat the three companies under the veil of DHN Food Distributors as a single economic entity. Reference has already been made to the ambiguity of the interpretation of the concept of the corporate veil and the DHN Food case generated much discussion and arguments in the judiciary, academia and the business environment and demands for clarity and definition of the principles under which the veil of incorporation may be lifted and which could assist litigants in predicting, or at least anticipating, if the judiciary was likely to lift or refuse to lift the corporate veil in their own cases[footnoteRef:95]. [94: DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852] [95: L.S.Sealy and R.J.A. Hooley, Commercial Law: Text, Cases and Materials (OUP Oxford, 4 Ed., 2008)]

6.2Variability in Judgements

Indeed, the scope and variation in the judicial judgement of the courts on the issue of corporate personality and limited liability has been both surprising and extreme, not least in terms of the time gap between conflicting judgements and interpretation of the principle[footnoteRef:96]. For example Adams v Cape Industries Plc (1990) [footnoteRef:97] where Slade LJ stated: [96: A. Dignam and J. Lowry, Company Law (Core Text Series) (OUP Oxford, 7th Ed., 2012)] [97: Adams v Cape Industries Plc (1990) ]

"Neither in this class of case nor in any other class of case is it open to this court to disregard the principle of Salomon v A Salomon & Co Ltd merely because it considers it just to do so.[footnoteRef:98]: [98: Adams v Cape Industries Plc (1990)]

Such an observation is in direct contrast to the judgement of Re A Company [1985] BCLC 333[footnoteRef:99] just five years earlier where the Court of Appeal stated: [99: Re A Company [1985] BCLC 333]

"In our view. The cases show that the court will use its power to pierce the corporate veil if it is necessary to achieve justice..[footnoteRef:100]: [100: Re A Company [1985] BCLC 333]

6.3The Importance of Wider Statute Assessment in The Application of the Veil

This conflict of interpretation and apparent inconsistencies in the judicial reasoning of limited liability and corporate personality and the outcome of the Adams v Cape Industries Plc (1990) [footnoteRef:101] judgement of limiting exception to the corporate veil depending on the interpretation of statutes, contracts and other documents, assessment of the issue of faade and the agency argument has meant that further statutory analysis of the exceptions to the veil of incorporation through other relevant statutes must also be considered[footnoteRef:102]. [101: Adams v Cape Industries Plc (1990) ] [102: L. Linklater, Piercing the Corporate Veil The Never Ending Story? Comp. Law., 27(3): 65, 2006]

In this context, the IA 1986 statue must be considered to determine if further clarification is possible, for example s.212 of the act which makes provision for the possibility of legal remedy against delinquent directors under which circumstances if the directors were found to be guilty of any breach of duty in relation to the company then the courts have the ability to require the offending directors to pay compensation to the companys assets[footnoteRef:103]. [103: C. Taylor, Law Express: Company Law (Pearson, 2nd Ed., 2012)]

Additionally, fraudulent trading activity, particularly in circumstances where the company is experiencing difficulty and faces the risk of insolvency, is covered under s.213 as a means of protecting the companys creditors from deception arising from their continued business relationship and operations with the company in the face of the potential winding up of the enterprise[footnoteRef:104]. Again, in such circumstances the statute provides the courts with the opportunity to order the directors to make a compensatory contribution to the companys assets[footnoteRef:105]. Such protection of the creditors is founded on the principle that when a company faces insolvency or has become insolvent then the directors have a duty to both the creditors and the company to ensure that the companys assets and property is not exploited for the benefits of the directors at the expense of the creditors, for example Winkworth v Edward Baron Development Co Ltd [1987] 1 All ER 114[footnoteRef:106] [104: B. Hannigan, Company Law (OUP Oxford, 3rd Ed., 2012)] [105: B. Hannigan, Company Law (OUP Oxford, 3rd Ed., 2012)] [106: Winkworth v Edward Baron Development Co Ltd [1987] 1 All ER 114]

6.4The Lack of Understanding of the Choice of Corporate Status

Much reference has been made to the issue of limited liability and the challenges surrounding the corporate veil but consideration should also be given to the challenges faced by companies and the judiciary in terms of the corporate structure which an enterprise or members of an enterprise may choose to adopt for the purpose of carrying out their business[footnoteRef:107]. [107: Salomon v Salomon & Co Ltd( 1897) AC 22]

Indeed, although the decision to operate as a company limited by shares offers a valuable opportunity for operation in terms of the personal protection against liability afforded by the rule in Salomon [footnoteRef:108] particularly in the event of the companys decline into insolvency, the actual benefits of limited liability may be weakened by the scope and extent of the companys activities. [108: Salomon v Salomon & Co Ltd( 1897) AC 22]

Of particular importance and clear contributing factor to the ambiguity and inconsistencies of application of the concept of the corporate veil and ability to pre-empt its relevance and applicability to individual cases, is the lack of understanding often held by owners and shareholders of companies, particularly small sized and family dominated enterprises, of the legal consequences and impact of incorporation[footnoteRef:109]. For example, the ability be form a limited company with no minimal capital requirement which could lead to a company being formed with only nominal capital provision and an inadequate capital structure which, due to the absence of any security and capital asset base, would prevent the directors of the business from being able to borrow money and secure creditors goods and services. Such inability represents an important challenge to the potential for effective operation of the enterprise and the lack of security poses a significant risk to any creditors the company is able to secure, challenges which all require consideration by the judiciary in the event of a case being presented before the courts. [109: M. Lower, Whats on Offer? A Consideration of the Legal Forms Available for Use by Small and Medium Sized Enterprises in the United Kingdom. Comp. law., 24(6): 166, 2003]

This lack of legal awareness and knowledge represents an important risk to the members of the company in that although they are protected in the form of limited liability, in the event it is difficult for the company to secure credit from banks or creditors without some support it is likely that the security for any secured credit will come in the form of protection through a third party guarantee or guarantor and, in the example of a family business, it is likely that the credit facilities will be secured against the family home and assets[footnoteRef:110]. A particularly good example of the lack of legal awareness is offered by the case of Macaura v Northern Assurance Company [1925] AC 619[footnoteRef:111] where Macaura transferred property from himself to a limited company of which he was the primary shareholder without appreciating he had relinquishing his title to the property. [110: J.S. Slorach and J. G. Ellis, Business Law 2009-2010 (Oxford: Blackstone Legal Practice Course Guide Series, 2009)] [111: Macaura v Northern Assurance Company [1925] AC 619]

An additional issue for consideration in the context of liability and separate legal personalities which represents an issue for the courts in the context of lifting the corporate veil are circumstances where shareholder or directors of a company, particularly small sized, family run enterprises do not recognise or understand that the limited business a separate legal entity to themselves and who utilise the companys assets and finances as extensions to their own personal assets[footnoteRef:112]. In such circumstances the courts are faced with the problem of balancing the recognition of limited legal awareness, poor business acumen and deliberate intention to defraud or steal. In this context, the Attorney-Generals Reference (no 2 of 1982) [1984] QB 624[footnoteRef:113] is directly relevant in the establishment that a shareholder of a company could be found guilty of stealing from the company on the grounds that the shareholder and directors are effectively the directing minds of the enterprise and any offence is committed with implied consent. [112: Attorney-Generals Reference (no 2 of 1982) [1984] QB 624] [113: C. Taylor, Law Express: Company Law (Pearson, 2nd Ed., 2012)]

Consistent with the ambiguity surrounding the corporate veil and the issue of liability of large corporate structures and organisations, there is evidence of ambiguity when the courts are required to apply the rule of law to smaller sized enterprises, particularly in the context of negligent advice and misstatements. However, in common with the Adams v Cape Industries Plc (1990) [footnoteRef:114] judgement, the courts are able to apply tests to determine complicity and guilt of directors and shareholders in such small sized enterprises. For example, the House of Lords ruling in the case of Williams v Natural Life Health Food Ltd [1998] 1 WLR 830[footnoteRef:115] and the judgement that liability depending on a test of if: [114: Adams v Cape Industries Plc (1990) ] [115: Williams v Natural Life Health Food Ltd [1998] 1 WLR 830]

"the director, or anybody on his behalf, conveyed directly or indirectly that the director assumed personal responsibility.[footnoteRef:116]: [116: Williams v Natural Life Health Food Ltd [1998] 1 WLR 830]

The consequence of the ruling being that directors and shareholders would not be personally liable for negligent advice or misstatements unless they acted in such a manner as to support the assumption that they had accepted personal responsibility for the advice or misstatements.

In view of the above, although protection is and can be afforded by the principle of the separate legal personality of the company there is a potential risk of unwanted and unexpected complications and issues arise which could result in limited liability and the corporate veil not affording the expected protection from personal liability.

Despite the inherent weaknesses and ambiguity in the application of the principle of the corporate veil, the doctrine which was established under the ruling of Salomon v Salomon [footnoteRef:117] does still represent a fundamental feature of UK company law. There is no doubt that the development of the principle, not least the variability in the judgements and rulings by the courts in the period since the case, can be a cause for concern but it is still important to note that although the courts do often lack the initiative and enthusiasm to lift eh corporate veil to allow creditors, third parties and others to obtain transparency of a companys structure and operations, the central objective of avoiding injustices and fraud remains. [117: Salomon v Salomon & Co Ltd( 1897) AC 22]

Although heavy criticism could be made of the judiciaries inability to compile and apply a simple, structured framework for assessment of cases and application of the principle, particularly due to the time frame which has elapsed since the Salomon case and the number of cases which have been brought before the courts in the period since Salomon, often resulting in the perception that the courts possess extensive discretionary licence, the fact the courts are willing to pierce the corporate veil for the protection and benefit of creditors should be seen as recognition of the difficulties of applying a standard rule and methodology to the complex arena of company law. This problem is compounded in the current operating environment of companies where there are global interests increasingly complex connections and relationships in a companys group structure and organisation.

7Lifting the Veil in the Interest of Justice

Much discussion regarding the issue of lifting the corporate veil is focussed on the dismissal of the limited liability enjoyed by companies under the concept of the corporate veil for the purpose of transferring liability to directors and shareholders. However, such a basis argument appears to ignore the inherent objective of the concept, that is to support the understanding, identification and assessment of the circumstances in which the separate legal personality of a company can be ignored[footnoteRef:118]. [118: J. Bass, Two Important Legal Doctrines Every CEO Should Know: Piercing the Corporate Veil and Contract Formation (Exec Sense, 2013)]

The application of the concept has been the subject of much debate largely due to the ambiguity and apparent inconsistency in judicial commentary, compounded by the evolution of the concept and the judicial, business and academic influences at different times since Salomon v Salomon[footnoteRef:119]. In addition, the confusion and reconciliation required in the interpretation and application of the overlapping issues of faade and concealing the true facts compared with the evasion of legal obligations only compounds the difficulties encountered in any attempt to lift corporate veil. [119: Salomon v Salomon & Co Ltd( 1897) AC 22]

In this respect there appears to be a clear argument for the development of some consistent methodology and approach within the framework of the doctrine which would support more informed and consistent judgement on business purpose and behaviour and which would support or negate the lifting of the veil in the interest of justice on a more common basis rather than the apparent erratic case by case system which has been endemic of the legal process to date.

Justification of the development, adoption and application of such a defined framework should support the achievement of what can be perceived to be the three core objectives of the corporate veil concept. Specifically, to justify the removal of the veil as a means of allowing creditors, shareholders and others with a demand on the company to have transparency of structure and operation, to remove the protection of limited liability where it has been used as a screen for illegal or unethical business practice and to give clarity on what circumstances define the presence of a separate legal entity[footnoteRef:120] . [120: L.S.Sealy and R.J.A. Hooley, Commercial Law: Text, Cases and Materials (OUP Oxford, 4 Ed., 2008)]

Reference has already been made to the case of Adams v Cape Industries Plc (1990) [footnoteRef:121] in terms of attempts at lifting of the corporate veil however the importance of this case cannot be underestimated. Central to the case is the claim by employees of an American subsidiary of Cape Industries for damages arising from the exposure of the claimants to asbestos. The claim against Cape Industries was founded on the three fold assessment and justification for lifting the corporate veil and the protection of limited liability afforded to the subsidiaries of the parent, specifically an attempt to demonstrate that the subsidiaries and the parent were actually a single economic entity and not separate businesses within a group structure, that the attempt to present as separate entities represented evidence of faade and in addition that the subsidiary was effectively the agent of the parent. [121: Adams v Cape Industries Plc (1990) ]

The Court of Appeal rejected the submission of all three arguments under the ruling of Slade LJ who commented that:"Neither in this class of case nor in any other class of case is it open to this court to disregard the principle of Salomon v A Salomon & Co Ltd merely because it considers it just to do so.[footnoteRef:122]: [122: Adams v Cape Industries Plc (1990)]

The observation subsequently conformed in the case of Yukong Line Ltd of Korea v Rendsburg Investments Corpn of Liberia (No 2) [1998] 1 WLR 294.[footnoteRef:123] [123: Yukong Line Ltd of Korea v Rendsburg Investments Corpn of Liberia (No 2) [1998] 1 WLR 294]

However, following the Court of Appeals 1990 ruling on Cape Industries, a claim was brought against Cape Products by Chandler, Chandler v Cape PLC [2011] EWHC 951 (QB)[footnoteRef:124] an ex-employee of a Capote Products subsidiary of Cape Building Products Limited in the 1950ss and early 1960s who, as a consequence of exposure to asbestos fibres was diagnosed with asbestosis in 2007. Although Cape Products itself had been dissolved in the post the Adams case and before Chandlers claim and the original insurance policy held by Cape Products was comprehensive in the exclusion of claims akin to Chandler, alternative proceedings were made against the parent company of Cape Products, Cape PLC. [124: Chandler v Cape PLC [2011] EWHC 951 (QB)]

Although the Court of Appeal had already rejected claims for the lifting of the corporate veil, the ruling of the Chandler claim effectively overturned the original Appeal result. Central to the decision in the Chandler case and the acceptance that the parent company Cape Plc was liable was the judgement by the courts that although the parent was not liable for the activities and practices of its subsidiaries, effectively reinforcing the 1990 Court of Appeal judgment, it was deemed to be liable for a duty of care to Chandler and the courts deemed that such a duty had been breached.

Such an apparent reversal of earlier judgement, representing demonstrable evidence of the apparent inconsistencies in the judicial approach to the case concerning the need or justification for piercing the corporate, represented an important milestone in the legal approach to and issue of the corporate veil and the concept of limited liability afforded to companies; both parents and subsidiaries within a group structure.

At the heart of understanding the judgement is the need to consider the key factors considered by the courts and the subsequent appeal ruling by Arden J in Cape PLC v Chandler [2012] EWCA Civ 525[footnoteRef:125]. In essence there were four principal issues for consideration in the determination of the judgement, specifically are the parent and subsidiary companys business activities the same, does the parent company have knowledge on some relevant aspect of health and safety in the industry in which it operates, does the parent company know of any unsafe systems of work or practices employed by the subsidiary companies and does the parent know, or should it have been aware, that any subsidiary of the parent or employees within the group, expected the parent company to be aware of operational activities and possessed responsibility for the protection of employees. [125: Cape PLC v Chandler [2012] EWCA Civ 525]

It is important to note that the ruling does not require any demonstrable evidence that a parent company was intervening in the health and safety practices and procedures of the subsidiary against which the initial claim in likely to have been levied, but rather that there is evidence of the parent company interfering or controlling the trading activities of the subsidiary, for example, being a major funding source of the subsidiaries operational activities and influencing the direction of its business. However, in case of the Chandler proceeding the Court of Appeal did find that there was demonstrable evidence of a group relationship in the arena of health and safety and, as such, judgement was made that although the parent, Cape PLC, did not control the activities of the subsidiary, Cape Products, it did take overall responsibility for the measures adopted by subsidiaries within the group structure in terms of the protection being afforded to employees and the processes in place to protect them from harmful exposure to asbestos in their employment.

Indeed in his approved judgement, Williams J stated:

"The Defendant employed a scientific officer and a medical officer who were responsible, between them, for health and safety issues relating to all the employees within the group of companies of which the Defendant was parent. On the basis of the evidence as a whole it was the Defendant, not the individual subsidiary companies, which dictated policy in relation to health and safety issues insofar as the Defendants core business impacted upon health and safety. The Defendant retained responsibility for ensuring that its own employees and those of its subsidiaries were not exposed to the risk of harm through exposure to asbestos. In reaching that conclusion I do not intend to imply that the subsidiaries, themselves, had no part to play certainly in the implementation of relevant policy. However, the evidence persuades me that the Defendant retained overall responsibility. At any stage it could have intervened and Cape Products would have bowed to its intervention. [footnoteRef:126] [126: Chandler v Cape PLC [2011] EWHC 951 (QB)]

The implication of the Chandler case are wide and represent an important challenge for both the courts and corporate structures comprising both parent and subsidiary companies, in terms of the application of the concept of limited liability. Indeed, the case imposes an urgent need on the business environment to undertake a comprehensive review of any procedures which are in place, particularly in the context of health and safety, employment and environment policies and practices, with a view to determining the potential risk to the parent company of any group structure to future liabilities for past, current and future operational activities. At the core of such an assessment is the need to undertake a detailed appraisal of the roles and responsibilities of directors and managers, particularly due to the opportunity afforded to claimants in terms of corporate manslaughter and corporate homicide, the membership composition and relationship of the parent and subsidiary companys group boards and the lines of reporting and management accountability. In addition, consideration would also need to be given to the issue of training, the channels of communication, again in the context of health and safety, environmental and employment issues, between the parent and any subsidiaries and the scope and content of any external communications which could be used in the future to demonstrate evidence of the parent and subsidiary relationship and thereby offer potential opportunities for litigation being taken against the parent and the loss of limited liability.

Subsequent to the Williams judgement, Cape PLC appealed on the basis that it did not owe a duty of care to the employees of its subsidiary and was not liable for ensuring a safe system of work. However, the appeal was rejected in the judgement of Lady Justice Arden[footnoteRef:127] whilst emphasising that the judgement did not constitute the establishment of a general principle that a parent company is always liable for actions or negligence on the part of their subsidiaries, specifically: [127: Cape PLC v Chandler [2012] EWCA Civ 525]

A subsidiary and its company are separate entities. There is no imposition or assumption of responsibility by reason only that a company is the parent of another. [footnoteRef:128] [128: Cape PLC v Chandler [2012] EWCA Civ 525]

The importance of this clarification cannot be underestimated, particularly in consideration of the post judgement arguments and debate that the affirmation of the Williams judgement by Arden represented evidence of the corporate veil being pierced and consequently posed significant ramifications associated with liability and limited liability of parents and subsidiaries.

The Chandler v Cape PLC[footnoteRef:129] case represents evidence of the first time a direct duty of care has been established as owed by a parent company to an employee of one of its subsidiaries and presents two potential effects on future cases or potential claims. Firstly, any claimants presented with an insolvent employing company or a company without insurance to cover the claim would in the future have the opportunity to determine, examine and present evidence of the existence of a relationship between the company with its parent to support the establishment of a direct duty of care being owed by the parent to the employees of the subsidiary. Secondly, defendants will be required to consider if they themselves have a claim against their parent company in the context of the same relationship test. Although the likely occurrence of such cases and claims will be uncommon it is important that the Arden judgement has offered the potential opportunity for legal redress by disaffected parties. [129: Cape PLC v Chandler [2012] EWCA Civ 525]

There can be no doubt that the implications of the successful upholding of the Chandler verdict and the failure of Cape PLC to overturn the ruling are likely to be wide reaching. Although the issue of the lifting of the corporate veil has been emphatically rejected by the Court of Appeal, the success of the case demonstrates that the Courts, however ambiguous and inconsistent in their judgement on and application of the veil and the associated issues of limited liability and corporate personality, do appear to be aware and considerate of the implications, particularly in the context of duty of care, and as such appear to be demonstrating and understanding and appreciation of the unique and complex issues which need to be addressed when dealing with claims and cases involving parent and subsidiary companies within corporate structure; especially in the current global environment.

8Matrimonial Cases

Perhaps one of the most important observations arising from the completion of the research and the literature review has been the interpretation of the courts in terms of lifting the corporate veil and the concept of separate legal personality in relation to matrimonial cases.Of particular relevance to this aspect of the discussion the case of Petrodel Resources Limited & Ors v Prest & Ors [2012] EWCA Civ 1395[footnoteRef:130] which has given clarification to the basis on which courts and proceedings in matrimonial cases are able to pierce the coporate veil in order to determine separate legal personality of companies. Central to the judgement by the Court of Appeal is the emphasis on company law and the judgement that, in the future, the courts should only treat a companys assets as though they are assets of a spouse involved in matrimonial cases in exceptional circumstances. [130: Petrodel Resources Limited & Ors v Prest & Ors [2012] EWCA Civ 1395]

At the core of the judgement is the rejection of the provisions of Section 24(1)(a) of the Matrimonial Causes Act 1973 which provides that assets of a company can be made the subject of order in the course of divorce proceedings in those circumstances where a party of the marriage maybe legally entitled to the assets. Instead, in determining the appropriateness of entitlement, the trial judges in the Court of Appeal case, brought by the companies in response to an earlier judgement which found in favour of Mrs Prest, rejected the provisions of the Matrimonial Causes Act and undertook an assessment of the corporate structure of the business entity and inconsideration of the principles and pro