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Challenging the Corporate Veil Doctrine: A Critical Examination of Limited Liability and Separate Corporate Personality in UK Corporate Law

Introduction

Since the dawn of the twentieth century and development in corporate law, the doctrine of corporate veil and the associated principles of limited liability and separate corporate personality has been a highly studied and debated subject in UK. The doctrine of corporate veil has been facing a recurrent challenge in its quest to enhance its predictability. Recent cases in the Supreme Court have exposed the flaws in the doctrine, where the judges have shown divergence of opinion on the nature and scope of the doctrine.

The application of this principle by itself, has been always open-ended and fact specific. Since discourse of justice in diverse social setting seeks flexible indices, that also provision some space for the balancing of policy and equity consideration, a certain level of open-endedness is possibly inherent in the corporate veil doctrine. Due to this open-endedness, this doctrine has always been an issue which requires more elaboration. The aim of this essay is to explain what is meant by corporate veil. This essay has critically discussed the circumstances and the relevant law under which the separate corporate personality can be disregarded.

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Concept of Corporate Veil

The concept of corporate veil is a famous legal notion that separates the personality of a corporation from its shareholder, thus protecting the shareholders from personal liability against the obligations and debts of that company. However, this protection to shareholders via corporate veil is not impenetrable or ironclad. Where, it is determined by the courts, that the business of a company is not carried out in conformity with the corporate standards or

  1. Prest v Petrodel Resources Limited, [2013] 1 BCLC 30, where the judges were divided as to the nature of doctrine of corporate veil, with one judge saying that it was not a doctrine in the real sense of the term.
  2. D French, C Ryan & S Mayson, Mayson, French & Ryan on Company Law (Oxford: Oxford University Press 2016) 133.
  3. Karen Vandekerckhove, ‘Piercing the corporate veil’, (2007) 4(5) European Company Law 191.

legislation, courts may uphold the personal liability of shareholders for the obligations of company under the legal notion of piercing the veil of incorporation.

The doctrine of corporate veil has been developed in various legal jurisdictions, mainly by the courts that began to look for a formula to face the instrumentation of limited liability companies. In case of abuse of legal personality, the method "to lift the veil" is intended by English jurisprudence to avoid the abuse, by not nullifying the company itself, but by issuing a just judgment, by dismissing or disregarding the legal personality, whether in case of fraud to the law or abuse of the right to avoid harmful consequences to third parties.

The history of the English corporate veil principle can be divided roughly into three segments. By 1897, the first phase lasted, when certain principles were laid down in the ruling of Salomon v. Salomon. This historical phase in the evolution of corporate veil doctrine period can be named as the period of early experimentation, during which courts in UK tried various methods for the development or elaboration of this doctrine.

After the World War, the second phase began and sustained till the landmark judgment of court in Woolfson v. Strathclyde during 1978. This phase can be called as the prime era of corporate veil principle. During this phase, substantial vitality of the principle of corporate veil can be credited to Lord Denning, who was among the initial few legal scholars and jurists that dared to pierce this sacred veil of incorporation. The third phase in the evolution of corporate veil doctrine is ongoing, and this period is called as the era of uncertainty.

  1. Smadar Ottolenghi, ‘From peeping behind the Corporate Veil, to ignoring it completely’, (1990) 53 (3) The Modern Law Review 338.
  2. Brenda Hannigan, ‘Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company’, (2013) 50 Irish Jurist 11.
  3. Salomon v Salomon & Co Ltd [1897] AC 22
  4. Marc T Moore, ‘A temple built on faulty foundations: piercing the corporate veil and the legacy of Salomon v Salomon’, (2006) Journal of Business Law 180.
  5. Woolfson v Strathclyde Regional Council [1978] UKHL 5.
  6. Brenda Hannigan, ‘Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company’, (2013) 50 Irish Jurist 11.

The concept of corporate veil in relation to "lifting the veil" can be defined as the fact under review, which should reveal some abuse of company’s legal personality in the situation in question, or the need to limit it to do justice. English jurisprudence and doctrine have established that this deception exists to carry out a fraud when a shareholder has used, abused or manipulated the corporate figure to the detriment of a third party. This typically occurs when a shareholder or director of a corporation "drains" funds from it, resulting in the company being unable to pay its creditors.

Separate Corporate Personality

Varieties of corporate veil cases are presented to courts in the UK. The classic corporate veil case is one wherein the issue of disregarding separate corporate personality and the shareholders is held responsible for the debts of corporation. In these classical type of cases, both the rule of limited liability and separate corporate personality, which provide that responsibility of a shareholder for a liability of corporation is limited to his equity investment the value, are superseded.

These classical kinds of cases are also known in the UK as cases of shareholder liability because piercing of veil leads to liability of shareholder for the debts of the corporate. Some other categories of the case of corporate veil cases are those in which separate corporate personality is disregarded without the imposition of liability of shareholder. For instance, a business subsidiary can be overlooked as an isolated legal entity to enable a courts to exercising their jurisdiction over the principle corporate parent or to induce the procurement of documents from a business subsidiary, as is seen in the case of Lube v Cape Industries Plc, where the

  1. Paddy Ireland, ‘Limited liability, shareholder rights and the problem of corporate irresponsibility’, (2010) 34 (5) Cambridge Journal of Economics 837.
  2. Marc T Moore, ‘A temple built on faulty foundations: piercing the corporate veil and the legacy of Salomon v Salomon’, (2006) Journal of Business Law 180.
  3. [2000] UKHL 41.

courts allowed the British parent company of a South African subsidiary, to be sued by the employees of the South African company by applying the piercing doctrine.

Separate corporate personality can lead to recovery of proceeds from deception or business fraud. The corporate entities of the business subsidiary and the parent can be collapsed as well to determine the scope of the responsibilities of a managing director. This type of case are also regarded as “peeping behind the veil”. An example of this is seen in the case of MCA Records Inc v Charly Records Ltd (No 5), where the court declared the director to be the joint tort-feasor in a tort committed by the company. Similar reasoning was made in Koninklijke Philips Electronics NV v Princo Digital Disc GmbH. Then again in Contex Drouzhba Ltd v. Wiseman, the court fixed the liability of the director for the act done in the name of the company.

The abovementioned plea was rejected by the House of Lords as it pointed that the Solomon Co Ltd (as a company) was a separate and different lawful entity, from the individual (Solomon). Consequently, no personal liability or obligation was owed by Solomon for the

The principle of the separation of the legal personality of the company of those of its members is based on the decision Salomon v Salomon Co Ltd. Mr Solomon has long operated as a leather merchant when he decided to create a company. The capital of this company was 40 000l and was divided into 40 000 shares each of 1l. 20,001 shares were owned by Solomon and 6 to his wife and family. When eventually the company was dissolved, the liquidator wanted to engage Solomon's responsibility to indemnify the company for its loss as the principal for the benefit of the company’s unsecured creditors.

  1. A Dignam and J Lowry, Company Law (Oxford: Oxford University Press 2014) 45.
  2. Marc T Moore, ‘A temple built on faulty foundations: piercing the corporate veil and the legacy of Salomon v Salomon’, (2006) Journal of Business Law 180.
  3. [2003] 1 BCLC 93.
  4. [2004] 2 BCLC 50.
  5. [2007] EWCA Civ 1201.
  6. \ Salomon's Case, 1897 A.C. 22 (1897).

company’s debts. And to the settlement of the obligations of company’s creditors, Solomon personal wealth was not available.

Generally in the UK, this Salomon principle is consistently applied; decisions in Ord v Belhaven Pubs Ltd demonstrate court’s approach and its regards to the concept of corporate veil as it was refused by the Court of Appeal to hold a parent company accountable for its subsidiary’s debts. The House of Lords in Williams v Natural Life Health Foods Ltd also give similar regard to corporate veil.

Though, the principle has also been criticized, many critics of Salomon v Salomon & Co Ltd considers this decision disastrous. The critics argue that connotation to the principle of separate corporate personality led to an insupportable condition in which no measure is left for the protection of creditors and other third parties. The principle of separation of legal personality from its members can also be ignored. Lord Wilberforce stated in the decision Re Westbourne Galleries Ltd: “a limited liability company is more than a legal entity with its own personality ... there instead in corporate law for the recognition that behind it or from it, there are individuals with rights, expectations and obligations as such are not necessarily overwhelmed by the corporate structure.”

In Littlewoods Mail Order Store Ltd v IRC, it was also stressed by Lord Denning that the judge’s conviction to overlook legal personality of an individual in a company is fundamentally shaped by the principle of corporate veil. Although the limits of legal personality is recognised by English judges, the concept of abuse of legal personality is rarely used. The doctrine only

  1. Marc T Moore, ‘A temple built on faulty foundations: piercing the corporate veil and the legacy of Salomon v Salomon’, (2006) Journal of Business Law 180.
  2. Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447
  3. Williams v Natural Life Health Foods Ltd [1998] UKHL 17
  4. Paddy Ireland, ‘Limited liability, shareholder rights and the problem of corporate irresponsibility’, (2010) 34 (5) Cambridge Journal of Economics 837.
  5. Littlewoods Mail Order Stores v IRC [1969] 1 WLR 1241

occasionally denounces the abuse of legal personality. A use of a concept covering all illegitimate uses of legal personality, the English authors prefer to consider all the circumstances in which the veil of legal personality is to be ended. In practice, the most commonly used term is "lifting the veil".

Piercing the veil of legal personality is an expression that denotes the treatment of rights or obligations or activities of a company, as the rights or obligations or activities of its members. Sunrise or look behind the veil of legal personality by cons should be the consideration of the associated legal purposes. Despite the difficulties encountered in the various attempts to define separate personality and clarifying its implications, the UK case law history reveals a periodic standard in court’s judgements.

There also appears to be a legislative intention of maintaining proximity to corporate veil doctrine. Court refused to pierce the veil of incorporation in Salomon case because to do so would be to go beyond what was implied in the notion of corporate veil and reflected in the legislation.

The concept of abuse of legal personality covers diversity of acts. The study of court decisions shows that specific characteristics generally attracts the interest of the court to the individual who commits the abuse. The principle of limited liability is of special interest to the extent that it has direct financial consequences. It is the attribute of the legal personality of the most commonly subject to abuse societies. However, the legal personality of the company out of financial autonomy may also attract the interest of people with any purpose other than the operation of a case.

      Brenda Hannigan, ‘Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company’, (2013) 50 Irish Jurist 11.
      Daniel D Prentice,’Some Aspects of the Law Relating to Corporate Groups in the United Kingdom’, (1998) 13 Conn. J. Int'l L. 305.

In England, the principle established by the judgment of Solomon appears to exclude any similar reasoning, as noted in the judgment of Re Darby case; “Solomon case decided that a company can legitimately be formed under the Company Act by one or two people, the remainder being a separate person, and there is currently no method to reach there end, if not liquidation.

The company founded by Solomon had all the characteristics that can lead the judges to think that only the master of the case was a true partner. Before the creation of the company Salomon Co Ltd, it was a sole proprietorship; on formation into a company, the members were Salomon and his family members, holding the majority of the capital.

Despite these characteristics, the House of Lords declined to hold the company as an agent of Solomon as the company was perfectly legitimate and not contrary to the intent and meaning of the Companies Act 1862. The main consequence of this approach was to weaken the practical scope of the requirement by English law of a minimum number of members, since mere agents can be used to reach this number. One way to artificially achieve the minimum number of members required by law is the use of the legal personality of companies that are not used to operating a business. English law also has shown great tolerance to dormant companies or the "shelf-companies", often created by banks, specialised lawyers or agencies.

The principle in English law is that of indifference to the purpose for which the company was established. Dormant companies can therefore thrive. The legal personality of a dead company economically can be used to reach this number. However, the consequences of too

      Re Darby, ex parte Brougham [1911] 1 KB 95
      Ross Grantham, ‘The Corporate Veil: An Ingenious Device’, (2013) 32 U. Queensland LJ 311.
      David Parker, ‘The Company in the 21 st Century: Piercing the veil: reconceptualising the company under law’, (2015) 10 (2) Journal of Business Systems, Governance & Ethics.
      Lorraine Talbot, ‘Trying to save the world with company law? Some problems’, (2016) Legal Studies 513.

rigid an application of the principle arising from the judgment of Solomon, were mitigated over time by the use of the term theory.

In some cases, judges have found that they denote an agency agreement between the company and a member who has an unusually prominent place in company. This consequently became responsible for all the acts signed by the company. This was reasoning of Lord Denning in Waller Steiner v Moir.

The use of the limitation of liability

English law punishes the misuse of the principle of limited liability by the members for their personal purposes. Such a company is denounced as a pure sham and a facade. In Snook v. London, Lord Diplock defined the notion of sham. He said that the acts and documents are a sham if all the parties to the documents or acts have the similar purpose that the documents or acts in question do not create obligations and rights that they seem to create.

So it would be a notion close to the simulation.

The study of some other jurisprudence reveals something else to UK’s context in relation to corporate veil application. In re Carl Hirth, exp. p Trustee, a businessman named Hirth, whose personal bankruptcy was declared, transferred, before the measures relating to his bankruptcy was taken, its property to a limited liability company. For Lindley MR, this company was a sham and Hirth himself was the company.

The judge also considered that the judgment Solomon did not prevent him from making such a decision because it does not answer the question "whether the creditors of a businessman who had turned into company and had transferred all his property to the company could not

  1. Marc T Moore, ‘A temple built on faulty foundations: piercing the corporate veil and the legacy of Salomon v Salomon’, (2006) Journal of Business Law 180.
  2. Wallersteiner v Moir [1974] 1 WLR 991
  3. Snook v. London and West Riding Investments Ltd, 1967 Q.B.2 786.
  4. Re Carl Hirth Ex parte the trustee [1899] 1 QB 612.

oppose the transaction, either as a fraud on the basis of law or as an act of bankruptcy on the basis of Companies Act 2006.” The opposition of creditors to the transfer of property was therefore granted. Similar reasoning was then followed in many other decisions such as Virdi v Abbey.

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Conclusion

The doctrine of corporate veil is one of prime contours of Company Law in the UK, which fundamentally shapes the legal perspective of companies and courts in the UK to determine the liability of firm to various stakeholders. The doctrine of corporate veil matters for the financing of companies because the lifting of the veil, tending to repair the absolute outsourcing of risk, serves to protect traffic and third parties who have certain expectations relating to a limited liability company. Traffic requires protection against abuse, regardless of the organisational form of a legal person employed for purposes not approved by law.

  1. Ibid.
  2. Virdi v Abbey Leisure Ltd. [1990] BCC 60.

References

  • Dignam A and Lowry J, Company Law (Oxford: Oxford University Press 2014)
  • French D, Ryan C and Mayson S, Mayson, French & Ryan on Company Law (Oxford: Oxford University Press 2016)
  • Grantham R, ‘The Corporate Veil: An Ingenious Device’, (2013) 32 U. Queensland LJ 311
  • Hannigan B, ‘Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company’, (2013) 50 Irish Jurist 11
  • Ireland P, ‘Limited liability, shareholder rights and the problem of corporate irresponsibility’, (2010) 34 (5) Cambridge Journal of Economics 837
  • Moore MT, ‘A temple built on faulty foundations: piercing the corporate veil and the legacy of Salomon v Salomon’ (2006) Journal of Business Law 180
  • Ottolenghi S, ‘From peeping behind the Corporate Veil, to ignoring it completely’, (1990) 53 (3) The Modern Law Review 338.
  • Parker D, ‘The Company in the 21st Century: Piercing the veil: reconceptualising the company under law’, (2015) 10 (2) Journal of Business Systems, Governance & Ethics
  • Prentice DD, ‘Some Aspects of the Law Relating to Corporate Groups in the United Kingdom’ (1998) 13 Conn. J. Int'l L 305.
  • Talbot L, ‘Trying to save the world with company law? Some problems’, (2016) Legal Studies 513
  • Vandekerckhove K, ‘Piercing the corporate veil’, (2007) 4 (5) European Company Law 191

Case Law

  • Contex Drouzhba Ltd v. Wiseman, [2007] EWCA Civ 1201
  • Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
  • Koninklijke Philips Electronics NV v Princo Digital Disc GmbH, [2004] 2 BCLC 50
  • Littlewoods Mail Order Stores v IRC [1969] 1 WLR 1241
  • Lube v Cape Industries Plc, [2000] UKHL 41
  • MCA Records Inc v Charly Records Ltd (No 5), [2003] 1 BCLC 93.
  • Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447
  • Prest v Petrodel Resources Limited, [2013] 1 BCLC 30.
  • Re Carl Hirth Ex parte the trustee [1899] 1 QB 612
  • Re Darby, ex parte Brougham [1911] 1 KB 95
  • Salomon v Salomon & Co Ltd [1897] AC 22
  • Snook v. London and West Riding Investments Ltd, 1967 Q.B.2 786, 1967 All E.R.1 518 [1967].
  • Virdi v Abbey Leisure Ltd. [1990] BCC 60
  • Wallersteiner v Moir [1974] 1 WLR 991
  • Williams v Natural Life Health Foods Ltd [1998] UKHL 17
  • Woolfson v Strathclyde Regional Council [1978] UKHL 5

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