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Introduction:
Incorporation by registration was introduced in 1844 and the
doctrine of limited liability followed in 1855.Subsequently in
1897 in Solomon v. Solomon & Company the House of Lords effected
these enactments and cemented into English law the twin concepts
of corporate entity and limited liability. In that case the apex
court simply laid down that a company is a distinct legal person
entirely different from the members of that company.
What this means is that the company has life of it's own, can own
property, can sue and be sued in it's own name, has perpetual life
and existence to name a few of the benefits of incorporation. It
is a trite law that a rather hefty veil is drawn between these two
that can be lifted only in a limited number of circumstances that
seem to be fluctuating according to current judicial thinking.
However the courts have not always applied the principal laid down
in Solomon v. Solomon & Co. In a number of circumstances, the
court will pierce the corporate veil or will ignore the corporate
veil to reach the person behind the veil or reveal the true form
and character of the concerned company. The rationale behind this
is probably that the law will not allow the corporate form to be
misused or for the purposes which is set out in the statute. In
those circumstances in which the court feels that the corporate
forms is being misused it will rip through the corporate veil and
expose its true character and nature disregarding the Solomon
principal as laid down by the house of lords.
When the veil is lifted:
1.Fraud
The courts have been more that prepared to pierce the corporate
veil when it fells that fraud is or could be perpetrated behind
the veil. The courts will not allow the Solomon principal to be
used as an engine of fraud. The two classic cases of the fraud
exception are Gilford motor company ltd v. Horne and Jones v.
Lipman .
In the first case, Mr. Horne was an ex-employee of The Gilford
motor company and his employment contract provided that he could
not solicit the customers of the company. In order to defeat this
he incorporated a limited company in his wife's name and solicited
the customers of the company. The company brought an action
against him. The Court of appeal was of the view that "the company
was formed as a device, a stratagem, in order to mask the
effective carrying on of business of Mr. Horne" in this case it
was clear that the main purpose of incorporating the new company
was to perpetrate fraud. Thus the court of appeal regarded it as a
mere sham to cloak his wrongdoings
In the second case of Jones v. Lipman a man contracted to
sell his land and thereafter changed his mind in order to avoid an
order of specific performance he transferred his property to a
company. russel judge specifically referred to the judgments in
Gilford v. Horne and held that the company here was " a mask which
(Mr. Lipman) holds before his face in an attempt to avoid
recognition by the eye of equity" he awarded specific performance
both against Mr.Lipman and the company. Under no circumstances
will the court allow the ant form of abuse of the corporate form
and when such abuse occurs the courts will step in and Jennifer
Payne in her article lists three aspects of fraud, which needs to
be looked at before the corporate veil can be lifted which are
A) What are the motives of the fraudulent
person relevant-
Whether some level of deception is necessary needs to be
determined. In the case of Hilton v.plustile ltd the plaintiff and
the defendant agreed to use a medium of a company in a tenancy
arrangement in order to evade the application of the rent act
1977.The court of Appeal held that the plaintiff was not entitled
to lift the veil since he had full knowledge of the matter at all
times. However another interesting question that arises is what is
the effect of deception on the other party. The issue came up for
discussion in the case of Adams V.Cape industries plc.In
considering whether the corporate form has been used in such a way
as to justify the lifting of the corporate veil, the court stated
that the correct test in relation to groups of companies was
whether the company had been used as a "mere façade concealing the
true facts" applying this test Slade J. said that the "motives of
the perpetrator may be highly material" in both the classic cases
intention to deceive the plaintiff was very much present how ever
it was not so in Adams V.Cape industries. So the point that needs
to be determined is whether motive is necessary for the fraud
exemption to exist. However to get any answer it is also important
to find out the nature of legal right that is being denied to the
plaintiff
b) Is the character of the legal obligation
being evaded relevant?
What the court wants is to prevent limited companies from using
the corporate form to evade a contractual or legal obligation.
However one needs to question whether the nature of this
obligation will affect the ability of the court to lift the
corporate veil. In the classic cases the defendants sought to
avoid the legal obligations that existed prior to their
incorporation, the main motive of incorporation was to avoid the
performance of the legal obligation in Adams v. Cape there was
some discussion about the need to allow the veil to be lifted in
order to prevent Cape avoiding publicity as to its involvement in
the sale of asbestos to America and to prevent cape from having
any practical benefit of the group's asbestos trade in the states
without the attendant risks of tortuous liability. However the
tortuous liability was purely speculative. For the fraud exception
to exist the defendant must deny the plaintiff some preexisting
legal right. In case no legal right is existent the intention on
part of the defendant to deceive the plaintiff must be speculative
and hence less substantial in nature. if the legal right
crystallizes before the incorporation of the company then the
mental element is satisfied if however the reverse then question
arises if whether in such circumstances the mental element can be
satisfied. A suitable answer to this is if the legal right
crystallizes after the incorporation but before the use of the
corporate form to evade the legal right, the fraud exception
should be satisfied
C) Is the timing of the incorporation of the
device company relevant?
In Creasey v. Breachwood Motors Limited, the reason
for the failure of the fraud exception was the timing of
incorporation of the sham company. Here Mr. Creasey brought an
action against wrongful dismissal against his employers BW. BW
served a defence but four months later he was served a notice
saying that the company was insolvent .BM took over all the
business except the plaintiff's claim. The plaintiff obtained an
order for damages and interest however before he received anything
BW went was dissolved without going into liquidation. The
plaintiff sought an order substituting BM for BW on the grounds of
justice. In this case the facts may look similar to
Adams v.
Cape Industries however Richard Southwell sitting as
distinguished Gilford and Horne and Jones v. Lipman on the
basis that in those cases the sham companies are had been formed
with the view to carry out the fraud .in the present case the
device company BM was already in business and caring on it's own
business. This a very controversial case and should have been
decided on the basis of the classic cases as it should not matter
whether device companies were created to avoid the legal
obligation or whether they were in existence. Creasey should have
been otherwise decided maybe on the grounds of justice.
2. Group Enterprises
Sometimes in the case of group of enterprises the Solomon
principal may not be adhered to and the court may lift the veil in
order to look at the economic realities of the group itself. In
the case of D.H.N.food products Ltd. V. Tower Hamlets
it
has been said that the courts may disregard Solomon's case
whenever it is just and equitable to do so. In the above-mentioned
case the court of appeal thought that the present case where it
was one suitable for lifting the corporate veil. Here the three
subsidiary companies were treated as a part of the same economic
entity or group and were entitled to compensation.
Lord Denning has remarked that 'we know that in many respects a
group of companies are treated together for the purpose of
accounts, balance sheet, and profit and loss accounts. Gower too
in his book says, "There is evidence of a general tendency to
ignore the separate legal group" however whether the court will
pierce the corporate veil depends on the facts of the case. The
nature of shareholding and control would be indicators whether the
court would pierce the corporate veil. In the case of Woolfson the
house of lords held that there was "no basis consonant with the
principle upon which on the facts of this case the corporate veil
can be pierced to the effect of holding Woolfson to be the true
owner of Campbell's business or the assets of solfred "the two
subsidiary companies that were jointly claiming compensation for
the value of the land and disturbance of business. The House of
Lords in the above mentioned case had remarked "properly applied
the principle that it is appropriate to pierce the corporate veil
only where special circumstances exist indicating that it is a
mere façade concealing the true facts" In the figurative sense
façade denotes outward appearance especially one that is false or
deceptive and imports pretence and concealment. That the
corporator has complete control of the company is not enough to
constitute the company as a mere façade rather that term suggests
in the context the deliberate concealment of the identity and
activities of the corporator.
The separate legal personality of
the company, although a "technical point" is no matter of form it
is a matter of substance and reality and the corporator ought not,
on every occasion, to be relieved of the disadvantageous
consequences of an arrangement voluntarily entered into by the
corporator for reasons considered by the corporator to be of
advantage to him. In particular "the group enterprise" concept
must obviously be carefully limited so that companies who seek the
advantages of separate corporate personality must generally accept
the corresponding burdens and limitations
In some cases the corporate veil has not been lifted prime
examples of that are Adams V.Cape Industries. This was a case
involving a foreign judgment against a company. the court in this
case held that each company in the group is a separate entity.
However one area where the courts have been particularly reluctant
to recognize the concept of group entity is with relation with
corporate debts. Though it is not possible to in absence of agency
or trust to hold one group liable for the debts of another in
America equitable doctrines are applied and in New Zealand as well
as Ireland there are statutory provisions for pooling of assets.
3. Agency
In the case of Bodrip v. Solomon Justice Vaughan Williams
expressed that the company was nothing but an agent of Solomon "
That this business was Mr. Solomon'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 this agent, the
company has lien on the assets………" however on appeal to the house
of lords it was held that a company did not automatically become
an agent of the shareholder even if it was a one man company and
they other shareholders were dummies.
A company having power to act as an agent may do so as an agent
for its parent company or indeed for all or any of the individual
members if it or they authorize it to do so. If so the parent
company or the members will be bound by the acts of its agent so
long as those acts are within actual or apparent scope of the
authority. But there is no presumption of any such relationship in
the absence of an express agreement between the parties it will be
difficult to establish one. In cape attempt to do so failed.
Incases where the agency agreement holds good and the parties
concerned have expressly agreed to such a agreement them the
corporate veil shall be lifted and the principal shall be liable
for the a acts of the agent.
4. Trust
The courts may pierce the corporate veil to look at the
characteristics of the shareholders. In the case of Abbey and
Planning the court lifted the corporate veil. In this case a
school was run life a company but the shares were held by trustees
on educational charitable trusts. They pierced the veil in order
to look into the terms on which the trustee held the shares.
5. Tort
Usually the English courts have not lifted the veil on the ground
of tort it is a phenomenon not witnessed in most common law
jurisdictions apart from Canada
6. Enemy character-
In times of war the court is prepared to lift the corporate veil
and determine the nature of shareholding as it did in the Daimler
case where germen shareholders held the shares of an English
company during the time of world war 1.
7. Tax-
At times tax legislations warrant the lifting of the corporate
veil. The courts are prepared to disregard the separate legal
personality of companies in case of tax evasions or liberal
schemes of tax avoidance without any necessary legislative
authority.
Statutory support of lifting the veil(
English law)
1) Reduction of number of members
Under section 24 of the companies act if a public company carries
on business for more than six months may become liable jointly and
severally with the company for the payment of debts the right that
this section confers on creditors is limited. it is only that
member who remains after 6 months that can be sued. The anomaly of
this section is that the liability attaches to a member and not a
director unless the director also happens to be a director as
well. This section has very little practical utility because of
the limitation.
2) Fraudulent or wrongful trading: -
a) Criminal liability: -
If any business of a company is carried on with the intend to
defraud creditors of the company or creditors of any other person
or for any fraudulent purpose who was knowingly a party to the
carrying on of the business in that manner is liable to
imprisonment or fine or both
This applies whether or not the company has been or is in the
course of being wound up.
The civil liability for the same offence in now a part of the
Insolvency Act
b) Sections 213-
(1) If in the course of winding up of a company it appears that
any business of the company has been carried on with the intend to
defraud creditors of the company or creditors of any other person
or for any fraudulent purpose...then
(2) The court on application of the liquidator may declare that
person in who were knowingly parties to the carrying on of
business in that manner are liable to make such contributions (if
any) as the court thinks proper.
Wrongful trading is dealt with in section 214 of the insolvency
act and has similar provisions to section 213.however this section
operates only in cases of insolvent liquidation and the
declaration can be made only against a person who at some time
before the commencement of winding up, was a director of the
company and knew or ought to have concluded at that time that
there was no reasonable prospect that the company would avoid
going into liquidation.
No such declaration will take place is the court is satisfied that
the person took all the possible steps to minimize the losses.
These sections have been considered to be opposed to the Solomon
principle: -
3) Abuse of company names or employment of disqualified directors
Section 216 of the Insolvency Act now makes it an offence for
anyone who was a director or a shadow director of the original
company at any time during the 12 months preceding its going into
insolvent liquidation to be in any way concerned (except with
leave of court) during the next five years in the formation,
management, of a company or business with a name by which the
original company was known or one so similar as to suggest an
association with that company.
A person acting in violation of 216 is under 217 personally
liable, jointly and severally with that company and any other
person so liable, for the debts and other liabilities of that
company and any other person so liable, for the debts and
liabilities of that company incurred while he was concerned in its
management n breach of section 216.
d) Misdiscription of the company
Section 349(4) of the companies act provides that if any officer
of the company or other person acting on its behalf
Signs or authorizes to be signed on behalf of the company any bill
of exchange, promissory note, endorsement, cheque or order for
money or goods in which the companies name is not mentioned in
legible letters..He is liable to a fine and he is personally
liable to the holder of such as mentioned above.
e) Premature trading.
Another example of personal liability is section 117 (8). Under
this section a public limited company newly incorporated as such
must not "do business or exercise any borrowing power" until it
has obtained from the registrar of companies a certificate that
has complied with the provisions of the act relating to the
raising of the prescribed share capital or until it has
re-registered as a private company. if it enters into any
transaction contrary to this provision not only are the company
and it's officers in default ,liable to pay fines but it the
company fails to comply with its obligations in that connection
within 21 days of being called upon to do so, the directors of the
company are jointly and severally liable to indemnify the other
party in respect of any loss or damage suffered by reason of the
company's failure.
Conclusion:
The Judgment of the Court Of Appeal in the Adams case is the
current law, which is nothing more than a reiteration of the law
laid down by the House of Lords in Solomon's case. The bottom line
being only the court will lift the veil in the face of grave abuse
of the corporate form not otherwise.
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author can be reached at: anusuya27@hotmail.com /
