Separate Corporate Personality and Veil Lifting Flashcards
(36 cards)
Broderip v Salomon [1895] 2 Ch 323 (Chancery Division and Court of Appeal)
(Overruled in House of Lords)
Vaughan Williams J:
- A relationship of principal and agent existed between Mr Salomon and the company so he was bound to indemnify the company for the debts that had been made by his agent
Lindley LJ:
- Argued that the company was incorporated for an illegitimate purpose
- Vaughan Williams J’s thesis does not work in this case, although a company can be an agent for a person, in this case the company was a trustee for Mr Salomon
- “A trustee improperly brought into existence by him to enable him to do what the statute prohibits”
- It was important that the shareholders had nothing to do with the company and were merely used to create a loophole around the law
- The shareholding amount was not relevant, he could have done this and set up the corporation for a legitimate purpose
Lopes LJ:
- Allowing Mr Salomon to continue with this scheme would be “a perversion of the Joint Stock Companies Acts”
- The Act was
Salomon v Salomon & Co [1897] AC 22 (House of Lords)
Facts:
- Mr Salomon set up the company following all the formalities and requirements in the CA 1862
- Intended and continued to be a private company
- The companies hit hard times and the debentures could not be covered when the company went into liquidation
Lord MacNaghten:
- Previous decisions where a misconception of the scope and effect of the CA 1862
- The conditions of the Act have properly been complied with then there is no reason to make it invalid; it does not make sense to invalidate incorporation due to the bulk of capital being issued to one person
- Having the agent rules would mean that no partnership could incorporate with unlimited liability
- The unsecured creditors only have themselves to blame for their misfortunes
- It is not against public policy or detrimental to the interests of creditors to have on predominant partner
Lord Halsbury:
- The statute has been complied with and does not specify anything to do with the extent or degree of interest
- The court should only recognise the artificial existence of the company not the motives or intentions of individual corporators
Macaura v Northern Assurance [1925] AC 619 (House of Lords)
Facts:
- Timber owned by the corporation, dominant shareholder insured the timber in his own legal capacity (as apposed to as the company)
Lord Sumner:
- Though the timber lay on his land by permission, he had no responsibility to its owner for its safety
- Had no property or equitable interest in the timber
- Neither as a creditor or shareholder could he insure the company’s assets
Notes:
- In JJ Harrison v Harrison (2001) the court state that there is no rule of company law which constitutes a company the trustee of its property and its members or shareholders beneficiaries of that trust
Lee v Lee’s Air Farming Ltd [1961] AC 12 (Privy Council)
Facts:
- Mr Lee was both the sole director, majority shareholder (2,999:1) and employee of the company
- He died, and his wife sought to claim compensation under the Workers’ Compensation Act 1992 which required the deceased to be an employee of the company
- Argued that he could not be both an employee and a sole director
Judgment:
- “The deceased as one legal person was willing to work for and to make a contract with the company which was another legal entity” - overrules the previous court’s idea that he could not be both a governing director and an employee
- The company was not a sham, and even if the company was is contract as an employee would not be impugned
- As Salomon shows: one person can function in dual capacities so there is no reason “to deny the possibility of contractual relationship being created as between the deceased and the company”
Antonio Gramsci Shipping Corporation v Stepanovs [2011] EWHC 333 (Comm)
Burton J thinks the veil should be pierced to allow the claimants to enforce the sham charterparties as against the “directing mind and will” (despite there being no authority) so they should be entitled to enforce a contract entered into by a puppet against both the puppet company and the puppeteer
In VTB Lord Neuburger expressly disproves, but Lord Clarke felt it should be deferred to an appropriate case
Costello & Anor v MacDonald & Ors [2011] EWCA Civ 930
(Diagram in notes)
The defendant company failed to meet liabilities
Could not sue the directors and shareholders (via piercing the corporate veil) for unjust enrichment, as although the parties had been enriched, it was not unjust as it was the result of a perfectly proper contractual agreement between the claimant and the company… holding otherwise would undermine the law of contract
Chandler v Cape plc [2012] EWCA Civ 525
Facts:
- The claimant, Mr Chandler, was employed by a subsidiary of Cape plc and during the course of his employment was exposed to asbestos fibres causing asbestosis:by this time the subsidiary entity had been dissolved
- His estate bought a claim alleging Cape plc had owed (and breached) a duty of care to Mr Chandler
Key points:
- Cape plc assumed responsibility and owed a direct duty of care to Mr Chandler which it breached
- The CA were careful to stress that the duty of care of a parent company to subsidiary employees was not automatic and only arose in particular circumstances; it is therefore not piercing the corporate veil
- The parallel duties of care between the parent/subsidiary arose because (i) the parent company and subsidiary had relatively similar businesses; (ii) the parent company knew (or ought to have known) that the subsidiary’s system of work was unsafe; and (iii) the parent company knew (or ought to have foreseen) that the subsidiary or its employees would rely on its using that superior knowledge for employee protection
- It is likely that courts will approach group structures holistically; unlikely to make a difference if plc parent is UK
Further Notes:
- Same affect as veil lifting but a tort action
Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447
Facts:
- Ord where in a dispute with Belhaven, but due to restructuring it had no assets
- Ord therefore wanted to change the recipient of the claim to Ascott Holdings Ltd (another part of the group)
Judgment:
- The reorganisation was a legitimate one, and not done to avoid an existing obligaiton
- Hobhouse J argued that the reorganisation was done as part of a response to the group’s financial crisis and there was no ulterior motive
- Specifically overruled the earlier case of Creasey v Breachwood Motors Ltd
Newton-Sealey v Armorgroup Services Ltd & Ors [2008] EWHC 233
The court held that an employee’s contract was with only one company in a corporate group, but that day-to-day dealings with other companies in the group gave rise to a duty of care, allowing the employee to sue in the tort of negligence
Woolfson v Strathclyde Regional Council [1978] SLT 159
Facts:
- The claimants claimed that the facts where analogous to those in DHN and should therefore be allowed compensation following the compulsory purchase of the premises
Distinct from DHN:
- Woolfson did not own all the shares in the compulsorily purchased property
- Campbell Ltd (Who Mr Woolfson virtually controlled) had no control over the land
Lord Keith:
- The only exceptions to SCP is where the company is a mere facade concealing the true facts
- Although cannot explicitly overrule DHN in this case as facts too different, in obiter expresses that DHN is wrongly decided… CA in DHN wrongly interpreted what is meant by a mere facade (doubted CA’s application of SCP)
Notes:
- General approach adopted in Adams v Cape; possibly overturning DHN although not distinctly
DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 3 All ER 462
Facts:
- The council compulsorily acquired the premises, causing DHN to shut down
- There was subsantial compensation available for disturbance, which had already been given to Bronze
- DHN also wanted compensation as parent company of Bronze
- DHN’s only assets where Bronze’s profits… could only claim for loss of profit if holding a business and loss of property for holding an asset..
- The CA held that the company should be viewed as a single economic entity and that consequential compensation should be paid… this is as DHN where virtually Bronze with the same directors, shareholders and common interest in maintaining the property
Notes:
- Lord Denning thinks this sharply contrasts with the case law
- There are statutory exceptions to group companies being treated as separate economic entities so it seems illogical to create a new common law doctrine that isn’t covered in legilsation
Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116
- When the courts recognize an agency relationship: a subsidiary may be acting as an agent for its holding company, so may be bound by the same liabilities
- No court has yet found subsidiary companies liable for their holding company’s debts
Facts: - The court held that a subsidiary company were an agent and the holding where allowed compensation for a compulsory purchase order
- I think this agency argument was rejected in Adams? ish
Gilford Motor Co v Horne [1933] Ch 935
Facts:
- When D left P they covenanted in a written agreement not to solicit customers of the company after leavings its employment
- D formed a company to solicit customers (where he and his wife where sole legal owners)
Judgment:
- P was granted an injunction against both D and the company
Lord Hanworth MR:
- He agreed with Farwell J that D obviously carried out the business (his wife was no part, D was always the boss)
- “The company was formed as a device, a stratagem, in order to mask the effective carrying on of a business of Mr Horne”
- In both this and Jones v Lipman the company had been deliberately set up in an attempt to evade an existing obligation, this was emphasized in Adams v Cape industries
Further Notes:
- Injunction enforced against both Horne and the company and was described as a “sham” set up for illegitimate reasons
Jones v Lipman [1962] 1 WLR 832
Facts:
- L set up a company to purchase his home so he could avoid selling it
Judgment:
- The company was a device and a sham to avoid his obligation
CA 2006, s.399
Parent companies have a duty to produce group accounts (stops some tax evasion)
ERA 1996
Employees are protected when moving from one company to the next - treated as a continuous employment
IA 1986, s.213-15
Protects against fraud
The bar for intent is set high (Re Patrick and Lyan Ltd) so ‘wrongful trading’ introduced
Liability of members may be indirectly effected if they are also directors
Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307
Exceptional circumstances to lift the corporate veil: to determine if an enemy at war
Re Bugle Press Ltd; ChD 1961 - [1961] Ch 270
Exceptional circumstances where the company is set up as a facade for compulsory purchase of shares
Trustor AB v Smallbone (No 2) [2001] EWHC 703
(Adams is the greater authority)
- The corporation must be a “device” through which the impropriety is conducted, impropriety alone will not suffice
- Png (1999) does it apply only to construction or also when the company becomes a facade?
Prest v Petrodel Resources [2013] 3 WLR 1
Facts:
- When the couple divorced there were disputes about the division of assets under the Matrimonial Causes Act 1973
- It was held that while the veil could not be pierced (as there were no legitimate grounds) to transfer the property to the wife, it was held that the properties were being held on resulting trust by the company for the husband (there was no reliable evidence to rebut this inference)
Judgment:
- “Subject to very limited exceptions, most of which are statutory, a company is a legal entity distinct from its shareholders”
- There are situations where the law attributes the acts or property of a company to those who control it, without disregarding its SLP: the controller may be personally liable as an agent to the company; the controller may have a beneficial interest in property (law of trusts); provision of the CA governing group accounts; rules governing infringements of competition law; equitable remedies such as injunctions or specific performance may be available
- Reluctance to write the principle of piercing the corporate veil out of existence
Further Reading Notes:
- Piercing veil is not appropriate and should be limited to evasion of a legal obligation, restriction or liability (deliberate/frustrates enforcement) - Lord S and N
- The CA noted how they did not want one rule for commercial cases and other for family… Salomon still remained strong
- Lord Sumpton “The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a lgal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil”… these relationships include agency (as in Smith, Stone Knight); trust (Prest itself); deciet and conspiracy (VTB v Nutritek); so-calling “knowing receipt” (Trustor AB v Smallbone); tortious liability (Chandler v Cape)
Where does this leave the law?
- Veil piercing can only be used as a last resort, where no other remedy is available, and only in cases involving evasion (rather than concealment)
- Veil lifting is still allowed, but the distinction is far from clear
Adams v Cape Industries [1990] Ch 433
Facts:
- Cape headed a group which included many wholly owned subsidiaries
- American appellants attempted to bring their law suit in tort against the defendant’s parent company
Judgment:
- The CA rejected the judgment being enforced against the English parent company, rejecting the following arguments:
(i) that Cape and the relevant subsidiaries should be treated as a single economic unit, following DHN;
(ii) that the subsidiaries should be treated as a ‘facade’ concealing the true facts; and
(iii) that an agency relationship existed between Cape and NAAC.
Slade LJ:
- There is no principle that all companies in a group of companies are to be regarded as one; the court cannot reject the Salomon principle just because justice requires it; the decision in DHN is doubtful due to HL decision in Woolfson; the court must looked at the relationship to determine if the parent company is acting as an agent, however, there is no presumption of agency
- Uncertainty as to whether the corporate veil can be pierced (DHN/Woolfson)
- Suggested that the court will pierce the CV “where the defendant by the device of a corporate structure attempts to evade (i) limitations imposed on his conduct by law; (ii) such rights of relief against him as third parties already possess; and (iii) such rights of relief as third parties may in the future acquire” - the court possibly accepts (i) and (ii) but not (iii) as that is merely the corporate structure of a company… “whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law”
- Even if it was their intention to avoid tortious liability (future) they are allowed to do so
- The agency argument: it is a legal entity separate from Cape, and NAAC’s business was carried out exclusively as its own, not the business of Cape
Notes:
- Following this and other case law e.g. Polly Peck unlikely that the corporate veil can be pierced (Sealy and Worthington)
Further Reading Notes:
- The business reorganisation took place to minimise taxation and other liability issues
- Can only overturn Salomon if a statute, not because justice allows it, that would be too uncertain
- A facade is the main operating exception and express agency (with day to day control, such as Hillam v The Print factory, 2008, does not apply in this case)
- Lubbe similar but an undeveloped legal system to do sufficient justice so allowed claim in English courts
Raja v Van Hoogstraten [2005] EWHC 2890
Moves away from ‘narrow’ reading of Adams… may apply to dishonest construction even where liabilities are not envisaged
Conelly v RTZ Corp Plc [1997] UKHL 30, [1998] AC 854; [1999] CLC 533
C worked for RTZ’s subsidiary, but sued RTZ
HL:
- Case can be held in London as in Namibia would be too complex and costly
- Lord Hoffman dissents (issues with Salomon, implications for multinational corporations)
HC:
- Parent company have a duty of care
- Time barred
- Lubbe v Cape Industries had the same legal issues but HL thought more appropriate in South Africa, however may be miscarriage of justice so went to HC in London
- Chandler v Cape: HC+CA agree that the parent company assume responsibility for health&safety policy of their subsidiaries, even when almost entirely disconnected… only time this duty seen
