#16729 - Piercing The Veil

Apparent asymmetry of risk – when a company does well, shareholders receive the benefits of its success through dividends but losses are limited to the value of their investment if it collapses – S74(2)(d) Insolvency Act 1986.

So why have limited liability?

Main (1800s) policy argument was that limited liability would allow for raising of capital from members of the public who did not know about running companies – if their liability was not limited, they would be less willing to invest.
Halpern, Tebilcock and Turnbull (1980): limited liability facilitates the function of a public securities market because it relieves the investor of the need to be concerned with the wealth of other investors (IA 1986 S74(1) – default rule is that all shareholders would be jointly and severally liable if not for limited liability)
Limited liability encourages equity investment by those of modest means by facilitating diversification of investment across a number of companies in different sectors, reducing company and country-specific risks.

The first two reasons only really apply to publically listed companies – but what of Salomon type cases?

Alternatives to current approach of limited liability:

Hicks, Drury & Smallcombe (1995): simpler, unlimited liability structure for small businesses; keep limited liability for those willing to comply with the rigours of company law and possibly increase the minimum capital requirements.
- Company Law Review rejected a separate vehicle for small businesses as this would be a barrier to expansion; instead proposed deregulation wrt small businesses.
- Note that the G has provided an alternative in the form of the LLP
More ex post protection
Note debate on whether limited liability should apply to a company or to a corporate group wrt holding companies etc but there is a clear argument for asset partitioning and its ability to simplify matters for would-be creditors
Note that limited liability is not always the case – small businesses and personal guarantees over houses or guarantees from parent company
Incentivising risk may encourage entrepreneurial activity which adds social value

Opportunistic conduct induced by this doctrine may be instigated by shareholders or, more commonly, by directors. In tackling this, the law tends to mitigate against the effects of limited liability by imposing directors duties.

The law has also responded by making information available eg use of suffix Ltd, publishing of accounts, membership and constitution. However, beyond this, incorporation often acts as a veil except eg in the case of inspectors who have access to confidential company documents. When the veil is removed altogether to make shareholders liable, this is either a question of explicit legislative policy or judicial creativity. Judicial creativity limited by Salomon; tends to be sporadic. Legislative policy became more relevant after 1980s insolvency reforms – Cork Committee (1982). Reforms increased grounds for disqualification as director of a company and preventing improper removal of assets from a company prior to winding up.

Statue – very rare – not only must court decide that separate legal personality should be disregarded, but, in consequence of that, shareholders should be made personally liable for the company’s debts or other obligations.

More often, as a result of ignoring the separate legal personality of a company, some other result will follow (not the undoing of limited liability) – eg

US films and incorporation of a UK shell company to claim that a film was ‘British-produced’ – FG (Films) Ltd, Re [1953] – meant that the subsidiary could not claim a subsidy due to British-produced films.
SCA 1981 S51(3); CPR 48.2(1) – non-party costs order for situations where the controllers of a company use it as a litigation vehicle

Under such specific statutory situations, the approach of the court would depend on the purpose of the Act and the specific context.

However, the courts are very reluctant to ignore separate legal personality unless the statute says they have no choice. However, note the vigorous defence of the right of workers not to have their employment compulsorily transferred: Nokes v Doncaster Amalgamated Collieries [1940] – transfer of employment under what is now S900 CA (note modern position has changed – employment law gives employees the option to transfer instead). [I don’t understand this illustration?]

Another example of a refusal to lift the veil, to the benefit of a shareholder or employee is in Lee v Lee’s Air Farming Ltd [1961] – Lee incorporated a company to carry out his business of aerial top-dressing. He was sole shareholder and employee; killed in a flying accident – held his widow was entitled to workmen’s compensation – because of separate legal personality, he could be employer and employee at the same time.

General arguments of sham, façade, single economic unit etc tend not to attract judicial sympathy.

Leading case: Adams v Cape Industries Plc [1990] – parent liable for tort claims against subsidiary – internal group liability and involuntary creditors – in such cases, limited liability is most questionable. Here, the arguments of sham/façade, single economic unit, agency, interests of justice and impropriety were considered.

Why pierce:

‘Single economic unit’: note that normal rule is that each company within a corporate group is a separate legal entity with different rights and liabilities – The Albazero. C tried to argue that exceptions existed and that the single economic unit approach should be applied when the corporate group functions as a single entity but the court distinguished the cases cited as relating to narrow statutory provisions only. However, in Cape, the court nevertheless sympathetically said that the ‘distinction…may seem a slender one’.
Façade or Sham: ‘one well-recognised exception to the rule prohibiting the piercing of the corporate veil’ – where the incorporation is a ‘mere façade concealing the true facts’ – but what is a mere façade? Cape’s Liechtenstein subsidiary considered a façade in the relevant sense – incorporated so that Cape asbestos could continue being sold in the US without Cape being implicated. Beyond the fact that AMC was the wholly-owned subsidiary of Cape, AMC was merely the corporate name that Cape and its subsidiaries used on invoices (motives for setting up a company therefore relevant – if dishonest, court more likely to conclude it is a façade/sham – Kensington International Ltd v Republic of Congo [2006]). However, this did not help the claimants, who needed to show that Cape was present in the US at the relevant time.
Agency: A subsidiary may be the agent of a parent company – the parent will be bound by the subsidiary as long as acting within actual or apparent authority – Southern v Watson [1940]. However, it is very hard to establish agency without an express agreement.
The interests of justice: Such a vague policy argument cut no ice and was treated as shorthand for all the other arguments
Impropriety: Some recent cases – courts have considered lifting veil when incorporation was taken place to carry out some unlawful activity or to avoid the impact of some court order. However, these do not challenge the concept of limited liability most of the time but instead make the company liable for the shareholder (not shareholder liable for the company) –
- Re H [1996] – restraint orders under the Criminal Justice Act 1988 were made in respect of assets held by companies completely owned and controlled by individual defendants who had been convicted of excise duty fraud – but this case is not fully relevant as lifting the veil may have been necessary due to the statutory wording.
- Other cases – company is used to avoid a court order – eg Gilford Motor Co Ltd v Horn [1933] – director trying to circumvent gardening leave obligations – but this depended on the precise agreement entered into by the director. See also Jones v Lipman [1962]
- Use of corporate façade to evade rights of relief a claimant already possesses – pierce veil – Trustor AB v Smallbone [2001] – but there is the alternative solution of unravelling the relevant transactions/transfers.
- However, in Cape, the court was of the view that the use of such corporate structures was a legitimate means of managing liability as the company was aware that there were potential negligence liability issues inherent to their business.

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#16729 - Piercing The Veil - Company Law

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