#5306 - Lifting The Veil - Company Law

Lifting the veil

Occasionally the courts will compromise the principle in Salomon and allow remedies against the shareholders in respect of company liability or against the company for shareholder liability.

Manager liability, where the directors are personally liable, is not lifting the veil. Lifting the veil is where members are liable for the company or the company is liable for the members.

Statutory lifting the veil

Senior Courts Act 1981 s.51 enables a court to make a costs order against those who sit behind the company where they have used the company as a vehicle for legislation without considering whether the company had an independent interest in the legislation and knowing it would be unable to meet the costs of failure. (Very limited circumstances)

Most of the law on lifting the veil has been created by the courts:

Adams v. Cape Industries

1. A claim by tort creditors, this is the leading case on lifting the veil.

2. Court of Appeals said that can lift the veil for a sham/facade company or if there is and agency relationship. But the corporate veil cannot be lifted on the basis of a single economic unit argument or in the interests of justice.

a. Sham / facade

Woolfson v. Strathclyde

• House of Lords Lord Keith said that it is appropriate to pierce the corporate veil only when special circumstances exist indicating that a company is a facade to conceal the true facts. On this basis Lord Keith said that he doubted the Country Appeal decision in DHN.

Gilford Motor Co

• The company was held to be shown when it was used to try and dodge existing obligations. The corporate veil could be lifted.

Jones v. Lipman

• The company was held to be a sham when it was used to try and avoid existing restrictive covenants. The veil could be lifted.

Adams v. Cape Industries

1. A claim by tort creditors against several companies in the cape group.

2. Held that for one of the companies the veil could be lifted and for another it could not.

3. Where the court did lift the veil, the company was found to be a sham because it had no business of its own, it was just a name on the invoice, the company was merely a break between Cape and different parts of its operations.

4. Where the court refused to lift the veil, the Court of Appeal said that although the company had clearly been set up to reduce future liability exposure, the fact that this arrangement was not moral did not matter. The veil cannot be lifted if the arrangement has been done to ensure that future liability will fall on another member of the group. This is fine. But the arrangement cannot defend already existing claims.

In Adams v. Cape Industries the Court of Appeal did not specify what would be required to constitute a sham, but it seems that if the motive behind the company is improper then it is more than likely to be a sham.

The more recent cases seem to focus on impropriety.

Gencor v. Dalby

• A director was diverting money to a company which he owned; on the basis this meant he had not personally received the money.

• Held that the company was a sham. It had no life of its own, no employees and was a vehicle for the directors’ impropriety.

Trustor v. Smallbone

• Entitled to pierce the corporate veil and recognise a receipt as that of the individuals in control if the company was a facade to conceal the true facts thereby avoiding or cancelling any liability of the individuals.

Anglo German Breweries

• Consistent with Trustor v. Smallbone

Kensington International v. Republic of Congo

1. A company set up to carry out a series of fictitious transactions to try and protect the government of the Republic of Congo

2. Held that there was such dishonesty that there could be no problem finding it to be a sham.

But the veil exception seems to be narrow.

VTB Capital v. Nutritek

• The principle is a limited one which has been developed pragmatically to enable a practical solution in particular factual circumstances.

Belhaven Pubs

1. A husband and wife took out a loan based on a misrepresentation. They wanted to substitute Belhaven Pubs for the lead company as Belhaven Pubs was no longer in possession of any assets after a restructuring.

2. Held, although the restructuring did mean the claim was worthless, it was not done for the purpose of avoiding liability. Instead it was a response to a financial crisis. Because it was done in good faith, and not to avoid liability, not able to lift the veil.

Agency

It is possible to lift the veil if there is a relationship of agency. This will require an agreement (either explicit or implicit) that the parties act for each other. Then, provided they have remained within the boundaries of the agency, the principle is bound by the acts of the agent.

Not actually lifting the veil, not saying that we are entity merely saying that one entity is bound by the actions of the other.

Adams v. Cape Industries

• An agency claim failed because there was not an agency agreement which the court could find.

After Adams v. Cape Industries it seemed that there will need to be an express agency agreement for such a relationship to be found.

Re FG (Films)

1. FG (Films) wanted to register its firms as British. The company was 90% owned by US citizens, no employees or officers in the UK, money was merely channelled through FG (films)

2. Held FG (Films) was merely acting as an agent and so could lift the veil.

Smith Stone & Knight v. Birmingham

1. Land was owned by a subsidiary and then made subject to CPO. The local authority said there was no need to pay compensation as did not lose. The parent company used the land and so would lose profit.

2. Held that there was an agency relationship as the subsidiary was completely controlled by the parent.

3. Particular to the facts perhaps? The company was actually arguing itself that the veil should be lifted as it wanted to claim for lost profits in the parent company.

The Single Economic Unit

Initially this was accepted in DHN, but Adams v. Cape industries has now made clear that it is not correct. Even in the same circumstances as DHN would probably not have the same result now, in Woolfson the Court said that it doubted the correctness of the decision in DHN (per Lord Keith in House of Lords)

DHN v. Tower Hanlets

• Allowed the veil to be lifted on the basis that there was a single economic unit.

• Lord Denning wanted a wide exception to the Salomon principle to enable the veil to be lifted in all circumstances where there was 100% ownership and the operations are indivisible.

• Lord Justice Goff wanted it to be much more restricted and in his judgment tried to avoid setting a precedent.

Woolfson

• Two companies not in a parent/subsidiary relationship but both owned by the same person.

• House of Lords rejected the agency argument and Lord Keith also said that he doubted the correctness of DHN v. Tower Hanlets

Adams v. Cape Industries

Court said that the single economic unit argument was wrong.

The interests of justice

Initially it seemed that this was a reason to lift the veil, but since Adams v. Cape Industries it is clear that this is wrong.

In Re a Company it was suggested that this reason existed. However Adams v. Cape Industries subsequently countered this by saying no lying in the interests of justice.

Creasey v. Breachwood Motors

• An employee wanted to bring a claim for unfair dismissal but due to a restructuring, there was no money in the company against which there was a claim.

• Held that the veil could be lifted in the interests of justice to allow a claim against the parent company.

Belhaven Pubs

• Held that a restructuring is not a cause to allow lifting of the veil, even if it has the effect of avoiding liability, if the avoidance of liabilities was not the purpose of the restructuring.

• Did not follow Creasey v. Breahwood Motors and reiterated that the courts cannot lift the veil in the interests of justice.

Summery

Adams v. Cape Industries

• Only able to lift the veil for a sham / facade or for agency.

• Not able...