Lifting Corporate Veil

Question 1

What case first established the principle of corporate personality and limited liability within companies?

Answer 1

Salomon v Salomon [1897]
-> company is a separate legal entity from shareholders, directors, employees
-> Possessing shares in a company ≠ ownership rights (Bligh v Brent (1837), per Parke B: ‘the company are as much distinct from the proprietors of shares as one man is from another)

Question 2

When do courts pierce the corporate veil?

Answer 2

• If they believe principle of separate legal personality has been abused
• 3 Main Grounds (Adams v Cape Industries [1990])

1) ‘Single economic unit’

2) Agency argument

3) Façade
- One ‘true’ veil lifting ground (suggested in Prest v Petrodel [2013])

Question 3

What is the (1) ‘single economic unit’ argument?

Answer 3

• Where different companies in a corporate group function together ‘economically and operationally’ to form integrated business empire where it would be unjust to allow parent company to benefit from profits of subsidiary while avoiding liability

e.g. DHN Food Distributors v Tower Hamlets [1976] - Denning: group of companies are a single economic unit
-> especially where ‘parent company owns all shares of subsidiaries and subsidiaries are bound hand and foot to the parent company and must do just what the parent company says’
-> BUT, disapproved in Woolfson v Strathclyde [1978] -> suggest this case was fact specific, not general principle -> veil of incorporation upheld unless façade
-> Also BUT, The Albazero [1977] -> ‘there is no general principle that a;; companies in a group are to be regarded as one, with each a separate legal entity’

e.g. Re a Company [1985] - ‘single economic unit’ may be used if there is an unjust principle behind it -> the court will use its power to ‘achieve justice irrespective of the legal efficacy of the corporate structure under consideration’
-> BUT, directly refuted in Adams [1990] by Slade LJ: ‘court is not free to disregard the principle of Salomon … merely because it considers that justice so requires’

Question 4

How do companies abuse the group structure system?

Answer 4

• ‘Parent company can create multiple subsidiaries, directly or indirectly controlled by parent company’s shareholders. If one subsidiary becomes insolvent, the others can continue to thrive, shielded from liability for the insolvent subsidiary’s debts’. - Templeman LJ - Re Southard [1979]
  –> is this fair?? -> leads to creditors, employees, etc. unable to recover losses
• Parent company can protect themselves with group structure even when they have effectively caused or contributed to subsidiary’s financial failure
  e.g. parent company moves money/assets out of struggling subsidiary, leaving it unable to pay its debts -> this seen as ‘legitimate response to financial pressures’ in Ord v Belhaven Pubs Ltd [1998]
• Group structures used to avoid tax e.g. Starbucks -> House of Commons Public Accounts Committee (2012) found they operate through Netherlands and Swiss subsidiaries to avoid tax
  -> tax gap 2012 = £32.2 billion (25% of which = large businesses)

Question 5

What is the (2) agency argument?

Answer 5

• Subsidiary is considered an agent to parent company -> parent company exercises significant control over subsidiary’s operations but there must have been an express agreement outlining the agency relationship (Adams [1990])
• BUT, unlikely companies have blatant agreement like this + presumed there is no agency relationship (Salomon v Salomon [1897]) ∴ rare
• Also, BUT, arguably not even a veil lift -> when court finds parent company liable for subsidiary’s actions, it acknowledges the legal personalities of both entities but recognises that one is contractually acting on behalf of the other

Question 6

What is the (3) façade argument?

Answer 6

• Where a company is used as a sham to commit fraud or evade legal responsibilities

e.g. Gilford Motor Company v Horne [1933] -> company set up as ‘cloak/sham’ t allow D to ‘commit the breach of covenant that he entered into’
-> D set up façade company to circumvent a non-compete clause in his employment contract and evade contractual obligations

e.g. Jones v Lipman [1962] -> sham where D transferred land to his own company to avoid selling to C

• BUT, limits:
• Must have been set up as a sham for illegitimate purpose of evading existing obligations/liabilities
  e.g. Kensington v Congo [2005] -> existing liabilities so corporate veil could be lifted
  -> nothing wrong with limiting future liability (Adams [1990])
  –> Slade LJ acknowledged this may not be fair, but to use group structures in this way is ‘inherent in corporate law’
• Still reluctance to lift corporate veil, even on façade ground / difficulty to establish:

e.g. Dadourian Group v Simms [2006] - no evidence company structure had been used to evade existing legal obligation -> must be improper behaviour attached directly to misuse of corporate form

e.g. Millam v The Print Factory [2007] - company’s controlling parties were not held liable for C’s debtss -> no evidence company was established/operated as a sham
-> a deliberate intention to misuse the company must be proven

e.g. Ben Hashem [2008] -> C sought to include assets held by companies controlled by husband in financial settlement -> but court would not lift corporate veil –> no impropriety/misuse of corporate structure to evade existing legal obligations

Question 7

Where have courts used other methods to circumvent veil lifting?

Answer 7

(1) Tortious Liability

e.g. Lubbe v Cape Industries [2000] - tortious liability used to determine Cape Industries owed a duty of care to workers, impliedly holding the parent company responsible for its subsidiary’s actions
-> Cape claimed South Africa better place to sue, but rejected (HoL) -> lack of representation + expert evidence required in SA would amount to denial of justice
∴ Cape settled out of court (£21m)
–> victims received justice in a case where a multinational corporation abused the group structure by using subsidiaries in jurisdictions with weaker legal systems

e.g. Chandler v Cape plc [2012] - C forced to sue parent company as subsidiary closed
-> court held parent liable because it owed a direct duty of care to Mr Chandler
-> Lady Arden stated this was NOT a veil lift
-> Dignam and Lowry: ‘the connection with the employee is through its control over the subsidiary … but to pretend that somehow this attribution of liability is not a lifting/piercing action is erroneous and unhelpful’

(2) Trust

e.g. Prest v Petrodel [2013] - C claimed for husband’s properties in divorce settlement, but owned by company
-> SC ruled companies were held on a resulting trust for husband, and he is beneficial owner, so could be included in divorce settlement
–> Here, SC also established that piercing the veil was only possible in very limited circumstances, specifically under the evasion principle and not simply to address unfairness
(evasion principle where company used as a façade or sham to evade existing obligations)
—> supported in VTB Capital [2013]