The Courts Can and Often Do, Draw Aside the Veil

September 10, 2017 Management

Law of Business Associations Assessed Coursework Question 1 (a) Essay “…The courts can and often do, draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way… the courts should follow suit”. [1] When a company is incorporated, it is treated as a separate legal entity, distinct from its promoters, directors, members and employees and hence the concept of the corporate veil, separating those entities from the corporate body has arisen. The nature of corporate personality can be analysed by reference to the celebrated case of Salomon v. A. Salomon & Co.

Ltd. [2] Indeed it has been said that Salomon forms a cornerstone of company law and that the separate legal identity of a company stands as a fundamental principle[3] of our English law. [4] In modern English company law, the principle of the separate legal identity of the company is still firmly adhered to and the principle of Salomon has been upheld over time. However Salomon itself and subsequent judgements have indicated possible exceptions to the separate entity concept. Lord Halsbury recognised the separate entity providing there was: “… no fraud… and no agency and if the company was a real one and not a fiction or a myth”. 5] It is, however, evident that the courts are prepared to abandon the strict view of Salomon[6] and disregard the principle in certain circumstances in order to reveal human culpability. Some researchers argue that the courts have become increasingly willing to lift the veil,[7] while others suggest that it will only be lifted (or extended) in very specific circumstances – in order to restrain the corporate personality by “reaching it through its shareholders”. [8] It has also been suggested that all of the common law exceptions to the principle of separate corporate identity are simply symptomatic of the ourts attempt to ensure that all parties involved are not disadvantaged by the actions of company management and shareholders protected by the status of limited liability. [9] They say that ultimately English law is remedy driven and that without a method of reaching in through the veil of incorporation, they question who will pay the price for a breach of the company’s powers? Furthermore, Gallagher and Ziegler argue that all of the common law exceptions traditionally proposed by the courts and other legal researchers, are in fact subsets of the one category – the prevention of injustice. 10] Ultimately they might be right. It does seem to come down very often, to the view of the judge as to the justice of providing a remedy in the case before him. [11] There are a number of advantages that are linked to the existence of the corporate personality. The main ones to be considered here are (a) the ability to transfer shares and combine capital from different sources in a corporate framework, which, it is said will encourage business ventures and entrepreneurialism, that an unincorporated individual may be unwilling to undertake. b) Perpetual succession and (c) the fact that the liability and assets of the company can be separated from those of its members. [12] It seems that the guiding principle is to say that the doctrine of the separate legal personality of the company, prima facie, will be recognised and acted upon by the courts unless the public interest and/or public policy require that the veil of incorporation be lifted. Alec Samuels concludes that where the veil has been lifted in the past, while the motive of the court in each case is readily apparent, no pattern is discernible.

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Certainly such things as crime and fraud should be suppressed and the intention of Parliament, as expressed in various statutory schemes, such as those relating to taxation, ought to be upheld, and the device of incorporation should not be allowed to frustrate them. [13] “…the fact that two persons are separate in law does not mean that one may not be under the control of the other…”. [14] The fact of the ‘separate legal entity’ has invariably continued to be recognised even in cases where the veil of incorporation has been lifted.

In actual fact, many of the leading cases do not purport to deny the existence of the company, but simply state the circumstances under which that ‘form’ will be deconstructed or penetrated in order to get at the human controllers or ‘alter ego’ of the company. Dankwerts LJ summed up the position by saying that: “…where the character of the company, or the nature of the persons who control it, is a relevant feature, the court will go behind the mere status of the company and consider who are the persons who direct or control [it]…”. 15] It has to be said that it is difficult to ascertain any clear principles of judicial intervention in this area or to be precise about the circumstances. Certainly there are some clear categories (or if you subscribe to the Zeigler and Gallagher theory – sub-categories), that have emerged in varying degrees, over the years. At times the courts will need to ascertain a physical or mental attitude in relation to an issue which means that it is necessary to look at the human management involved in the control of the company.

It may be said that the power to lift the veil is a tactic used by the judiciary in a flexible way to counter inter alia fraud, sharp practice, oppression and illegality. An example of the latter, where the courts invoked the ‘alter ego’ doctrine and founded a case of illegality is that of Daimler v. Continental Tyre Co. [16] It was held by the House of Lords that the court has a jurisdiction to draw aside the corporate veil in some cases to see who the persons in control of the company’s affairs are.

The court’s justification for doing so was to establish whether those in control of the company were enemy aliens and if so, then the company could be so regarded for the purposes of the law relating to trading with the enemy. (Only it appears that at the time, there was no such statutory law! ) In cases like this, the veil is being lifted, to an extent but an attribution of characteristics does not necessarily contradict the Salomon principle.

Some commentators say that it is simply a question of having to consider the reality of the situation. [17] In addition to the ‘alter ego’ doctrine, another major area where the concept of lifting the veil has been discussed is where a holding company and subsidiary relationship is considered. The court has on occasion lifted the veil of incorporation to allow a group of companies to be regarded as one, because in reality they were not independent either in human or commercial terms.

There have been numerous inconsistent judicial attempts and techniques employed to bring the Salomon principle into a modern economic context by establishing inter alia a trust or agency relationship between the entities involved, or in a few cases by referring to them as a single economic entity. On the one hand, the judiciary have considered the agency relationship, for example in Smith, Stone and Knight Ltd v. Birmingham Corp. ,[18] where Atkinson LJ laid down six guidelines as to when the court could treat a holding and subsidiary company as a single legal unit. 19] This is a case that can be seen as attempting to derive an agency relationship from various ‘control’ factors. However this is the first instance[20] point of view that was so heavily criticised by the House of Lords in Salomon. It has been suggested that Vaughn Williams LJ’s misapplication of partnership law is as a result of him ostensibly being a partnership lawyer. However it should be pointed out that the courts have not fought shy of importing partnership principles in other corporate situations where it is felt they can afford an appropriate remedy. [21]

Within the Salomon case the issues of ownership and the organs of control were dealt with in concert, however, this was refuted in J. H. Rayner (Mincing Lane) Ltd. ,[22] where it was held that there was no firm principle that could be derived from Smith, Stone and Knight. In the modern business environment ownership and control may be separated albeit with liability accruing to either, though under differing principles and authorities. Furthermore, the concept of the ‘agency’ argument as a means of disrupting the corporate form has, for many years, infuriated corporate lawyers.

One can almost see the angry, red-faced, bench thumping Lord Sterndale MR as he exclaimed: “…an agent cannot make a loan to a principle out of the principle’s assets; it is not conceivable; it cannot be done”. [23] In Ebbw Vale District Council v. South Wales Traffic Area Licensing Authority,[24] a case that was decided after Smith, Stone and Knight, it was held that an express agency agreement was required before such a relationship could be considered. The House of Lords have subsequently upheld this decision[25] where Lord Templeman reaffirmed the vigour of the Salomon principle by commenting that: …since Salomon’s case, traders and creditors have known that they do business with a corporation at their peril, if they do not require guarantees from members of the corporation or adequate security”. [26] In Adams v. Cape Industries Plc,[27] Slade LJ stated that there is no presumption of an agency relationship between a holding and a subsidiary company and equally nor could there be a presumption that the subsidiary was the parent company’s ‘alter ego’. [28] There has been judicial consideration that a group of companies can form a ‘single economic unit’ and this is supported by dicta in DHN Food Distributors Ltd. , v.

Tower Hamlets LBC. [29] Albeit that the decisions in Wolfson v. Strathclyde Regional Council[30] and Cape were critical of this approach and the courts in these cases reiterated that the rule of general application should continue to be that as laid down in Salomon. There is certainly no general principle that all companies in a group are to be regarded as one[31] and in Cape, Slade LJ went on with regard the concept of this ‘single economic unit’ argument by restating Salomon: “…our law, for better or worse, recognises the creation of subsidiary companies [which] under the general law, fall to be treated as separate legal entities…”. 32] It is clear that the judges in these latest cases of Woolfson, Maclain and Cape, saw themselves as defenders of the ‘corporate faith’ all proffering the certainty of Salomon and a strict adherence to the corporate entity theory. Indeed Lord Keith, in Woolfson, when commenting on the DHN decision, stated: “I have some doubts whether, in this respect, the Court of Appeal properly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist, indicating that it is a mere facade concealing the true facts”. 33] This is a clear reference to Lord Halsbury’s speech stating that the court will lift the corporate veil if there is evidence of fraud. [34] However, in the cases where the veil has been, extended, pierced, lifted or whatever other metaphor is in vogue, it is difficult to say that they ignore the concept of a separate corporate personality – despite various phrases describing the company as a ‘cloak’, ‘sham’, ‘mask’, ‘puppet’ etc.

Rather they accept the separateness but establish that there are cases where it is right for the device to be interrupted. With regard to ‘reality’, mentioned earlier, and notwithstanding these last three cases, there are occasions where the courts will acknowledge the economic realities of the situation, as opposed to legal fiction. Slade LJ commented in Cape that: “…we are left with sparse guidance as to principles which should guide the court in determining whether or not the arrangements of a corporate group involve a facade…”. 35] He then went on to say, however: “…we will not attempt a comprehensive definition of those principles [in this case]”. It seems odd, in an increasingly capitalist society, not to have clear rules laid down in this important area of economic activity. The result being that we are left somewhat twixt and tween the certainty of Salomon, although Kahn-Freund is critical,[36] suggesting that it is this that leads to an invitation to abuse the corporate form[37] and the need to recognise the economic realities and the justice of individual cases.

It is suggested that the ‘single economic unit’, agency, trustee and other tests are merely methods of construction whereby the courts are attempting to unravel who should take the benefit of compensation or bear the burden of liability. There are numerous situations where in one case the veil is lifted yet in another seemingly similar case the court refuses to do so. [38] This leads one to consider the argument put forth in an interesting article by Gallagher and Ziegler, that all of the supposed ‘categories’ which enable the courts to lift the corporate veil, are in fact merely sub-sets of one category; the pursuit of justice.

For example, in Ebrahimi v. Westbourne Galleries,[39] the House of Lords were considering whether it was ‘just and equitable’ to wind up a company. [40] Although it may be that individual right’s and obligations are more suited to a small private company rather than an organisation like Cape Industries, Lord Wilberforce, in considering the phrase ‘just and equitable’ commented that: …a limited company is more than a mere judicial entity… there is room in company law for recognition of the fact that behind it… there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure”. [41] Other commentators have since used the justice argument,[42] at times in answer to criticism that the courts are doing something that they have no authority to do and that their methodology is fundamentally flawed.

The courts argue that lifting the veil is perfectly legitimate where there is some evidence of fraud, illegality or that a company is being run for an improper purpose. Certainly at times the court’s argument is flawed, as with the decision in Gilford Motor Co. Ltd. , v. Horne[43] to grant two injunctions! “Horne and his company are either separate or one” goes the cry. The problem with Jones v. Lipman[44] is that, by the doctrine of precedent, Lipman’s motive’s should not have been considered. [45] And in Wallersteiner v.

Moir,[46] Denning MR seems to be promoting the agency argument that was expressly prohibited in Salomon. It seems that in most of these cases the aims are good but it is the method of achieving them that is flawed and disputed. It is submitted, however, that there is a certain euthanasia effect in operation and that, for many, it is the outcome that is the important aspect. Salomon v. Salomon was decided over a hundred years ago now and as the emergence of rights based thinking lays testimony to, even the law has to move on sometime.

The idea of justice and promoting ‘rights’, is an oft-maligned concept in today’s economically driven world, however, this is not to say that the two concepts cannot lie together. It has been said that there is a great change occurring in company law theory generally and that is the advance from the concept of the company as a formal legal person to that of the enterprise constituting an economic unit. This reflects the transition of the company as an instrument of unfettered capitalism, to a form of business organisation in the social order of the community. 47] Indeed it is clear that as the European Union continues to create ever-closer ties within member states, the doctrine of free movement of goods will have an impact on the separate legal entity of for example multi-national groups of companies. Upon an examination of the case law in this area it appears that when the courts talk of lifting the veil, what is complained about is their methodology. While academics continue to seek to identify set formulae, it is suggested that certainty is exactly what the judiciary does not want to offer. This can be seen, for example, by the ambivalent attitude towards the one-man company. 48] Lord Asquith once actually spoke of: “…the fallacy that the one-man firm is a separate person from the one man who owns and conducts it…”. [49] Yet this came after a statement by Tomlin J where he said: “…it is not possible, even in the case of the so called one man companies, to go behind the legal corporate entity of the company…”. [50] In light of the above discussion, it is difficult to concur with Gunther Teuber’s view that nobody is interested in the essence of the legal person any longer or that it is having to pay the price of its success. Quite the opposite.

Current Cape Industries litigation is attracting widespread media attention and even the ‘man on the Clapham omnibus’ is aware of the separate legal personality concept. Moreover it is clear that the ‘one-man band’ who decides to spend his ? 100 or so on a company off the shelf or rather out of the Exchange and Mart, has little to fear from the overly enthusiastic creditor. This is because the instances where the courts exercise their (some would say dubious) jurisdiction to lift the veil are in fact extremely rare and they do not appear to be gearing themselves up for an onslaught in the near future.

In conclusion, it will be interesting to see how the latest Cape Industries case,[51] the first major ‘lifting the veil’ case involving liability for personal injury together with human rights, will finally be decided or whether it will be dismissed. The claimant’s are shortly to learn whether the House of Lords will hear their appeal, having recently lost in the Court of Appeal. Apparently on grounds that it is ‘against the public interest’ (read fear), to have a potential three thousand asbestosis ridden and presumably wheezing, South African litigant’s wandering unaccompanied up and down the Strand! Books

Davies, P. L. Gower’s Principles of Modern Company Law 6th Ed. Sweet & Maxwell London 1998 Keenan, D. Smith & Keenan’s Company Law 10th Ed. Pitman Publishing London 1996 Morse, G. Charlesworth & Morse Company Law 15th Ed. Sweet & Maxwell London 1995 Articles Editorial Company Cases: ‘Piercing the Veil’ [1987] JBL 249 @ 249 Gallagher, L. & Ziegler, P. ‘Lifting the Corporate Veil in the Pursuit of Justice’ JBL (1990) Kahn-Freund, O. ‘Some Reflections on Company Law Reform’ MLR 7 (1944) Ottolenghi, S. Prof. , ‘From peeping Behind the Corporate Veil, to Ignoring it Completely’ MLR 54 May 1990 Pickering, M. The Company as a Separate Legal Entity’ MLR Vol. 31 September 1968 Samuels, A. ‘Lifting the Veil’ JBL (1964) Schmitthoff, C. M. ‘Salomon in the Shadows’ JBL 305 (1982) Table of Cases Adams v. Cape Industries Plc [1990] Ch 433 British Thomson-Houston Co. Ltd. , v. Sterling Accessories Ltd. , [1924] 2 Ch 22 Broderip v. Salomon and Co. (1895) 2 Ch 323 DHN Food Distributors Ltd. , v. Tower Hamlets LBC [1976] 3 All ER 462 Daimler Co. Ltd. , v. Continental Tyre & Rubber Co. (GB) Ltd. , [1916] AC 307 Ebbw Vale District Council v. South Wales Traffic Area Licensing Authority [1951] 2 KB 366 Ebrahimi v. Westbourne Galleries [1973] AC 360

Gilford Motor Co. Ltd. , v. Horne [1933] Ch 935 IRC v. Sansom [1921] 2 KB 492 J. H. Rayner (Mincing Lane) Ltd. v. DTI [1989] Ch 72 Jones v. Lipman [1962] 1 All ER 442 Littlewoods Mail Order Stores Ltd. , v. IRC [1969] 1 WLR 1241 Maclain Watson Ltd. , v. DTI (1990) BCLC 102 Merchandise transport Ltd. , v. BTC [1961] 3 WLR 1358 Road Haulage Executive v. Elrick [1953] AC 337 @ 346 Salomon v. A. Salomon & Co. Ltd (1897) AC 22 HL Smith, Stone and Knight Ltd v. Birmingham Corp. [1939] 4 All ER 116 The Albazero [1977] AC 774 Wallersteiner v. Moir [1974] 2 All ER 217 Woolfson v. Strathclyde Regional Council [1978] SLT 159

Table of Legislation Insolvency Act 1986 Section 122(1)(g) ———————– [1] Littlewoods Mail Order Stores Ltd. , v. IRC [1969] 1 WLR 1241 per Lord Denning MR @ 1254 [2] Salomon v. A. Salomon & Co. Ltd (1897) AC 22 HL [3] Samuels, A. ‘Lifting the Veil’ JBL (1964) [4] Schmitthoff, C. M. ‘Salomon in the Shadows’ JBL 305 (1982) [5] Salomon v. A. Salomon & Co. Ltd (1897) AC 22 HL per Lord Halsbury @ pp22-23 [6] Schmitthoff, C. M. ‘Salomon in the Shadows’ JBL 305 (1982) [7] Ibid [8] Ignoring the first category ‘peeping behind the veil’ where it is possible to determine who are the shareholders etc.

Ottolenghi, S. Limits it to three circumstances in: Ottolenghi, S. Prof. , ‘From peeping Behind the Corporate Veil, to Ignoring it Completely’ MLR 54 May 1990 [9] Gallagher, L. & Ziegler, P. ‘Lifting the Corporate Veil in the Pursuit of Justice’ JBL (1990) [10] Gallagher, L. & Ziegler, P. ‘Lifting the Corporate Veil in the Pursuit of Justice’ JBL (1990) [11] Editorial Company Cases: ‘Piercing the Veil’ [1987] JBL 249 @ 249 [12] The liabilities of the members essentially being limited to the value of their shareholding [13] Samuels, A. ‘Lifting the Veil’ JBL 1964 14] Merchandise transport Ltd. , v. BTC [1961] 3 WLR 1358 per Devlin LJ [15] Ibid @ 1393 [16] Daimler Co. Ltd. , v. Continental Tyre & Rubber Co. (GB) Ltd. , [1916] AC 307 [17] Schmitthoff, C. M. ‘Salomon in the Shadows’ JBL 305 (1982)@ 306 [18] Smith, Stone and Knight Ltd v. Birmingham Corp. [1939] 4 All ER 116 [19] Ibid @ 121 [20] Broderip v. Salomon and Co. (1895) 2 Ch 323 [21] e. g. Shareholder exit articles for small ‘quasi-partnership’ private limited companies. Similar to those often found in partnership agreements [22] J. H. Rayner (Mincing Lane) Ltd. v. DTI [1989] Ch 72 23] IRC v. Sansom [1921] 2 KB 492Per Lord Sterndale MR @ 505 [24] Ebbw Vale District Council v. South Wales Traffic Area Licensing Authority[1951] 2 KB 366 [25] Maclain Watson Ltd. , v. DTI (1990) BCLC 102 per Lord Templeman [26] Ibid @ p111 [27] Adams v. Cape Industries Plc [1990] Ch 433 [28] Ibid @ 513 per Slade LJ [29] DHN Food Distributors Ltd. , v. Tower Hamlets LBC [1976] 3 All ER 462 [30] Woolfson v. Strathclyde Regional Council [1978] SLT 159 [31] See The Albazero [1977] AC 774 per Roskill [email protected] 807 [32] Adams v. Cape Industries Plc [1990] Ch 433 per Slade LJ @ 513. [33] Woolfson v.

Strathclyde Regional Council [1978] SLT 159 per Lord Keith @ 256 [34] Salomon v. A. Salomon & Co. Ltd (1897) AC 22 per Lord Halsbury @ 32 [35] Adams v. Cape Industries Plc [1990] Ch 433 per Slade LJ @ 519 [36] Kahn-Freund, O. ‘Some Reflections on Company Law Reform’ MLR 7 (1944) [37] i. e. Achieve major privilege with no attendant responsibility [38] See Notes 48 & 49 infra [39] Ebrahimi v. Westbourne Galleries [1973] AC 260 [40] Under Insolvency Act 1986 Section 122(1)(g) [41] Ebrahimi v. Westbourne Galleries Ltd. , [1973] AC 360 per Lord Wilberforce @ 379 [42] e. g. Pickering, M. The Company as a Separate Legal Entity’ MLR Vol. 31 September 1968 [43] Gilford Motor Co. Ltd. , v. Horne [1933] Ch 935 [44] Jones v. Lipman [1962] 1 All ER 442 [45] Motive was expressly ousted in Salomon v. Salomon & Co. Ltd. , (1897) AC 22 HL [46] Wallersteiner v. Moir [1974] 2 All ER 217 [47] Schmitthoff, C. M. ‘Salomon in the Shadows’ JBL 305 (1982) [48] Samuels, A. ‘Lifting the Veil’ JBL (1964) [49] Road Haulage Executive v. Elrick [1953] AC 337 @ 346 per Lord Asquith [50] in British Thomson-Houston Co. Ltd. , v. Sterling Accessories Ltd. , [1924] 2 Ch 22 @ 38, [51] See The Times (Law) 11 January 2000 pp14 – 15

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