Corporate Law and Governance

Lecture Three – Lifting the Corporate Veil

- Companies are separate legal entities, as stated in the Solomon case, the HoL told us
we have to pay regard to this and cannot ignore this fact, we couldn’t identify the
company with those behind it.
- Limited Liability is pretty robust under the English Company Law, the legal fiction
under the corporate veil, the company has a legal personality separate identity and
separate from the shareholder. Any rights, obligations or liabilities of a company are
separate from those of it’s shareholders, they are only responsible from the extent of
their capital contribution known as limited liabilities.
- This corporate fiction was devised to enable groups of individuals to pursue an
economic purpose as a single unit without exposure to rates or liabilities in ones own
personal capacity.
- A company can own it’s own properties, contracts, investments and assume other
rights and obligations independent of it’s members. The most striking consequences
of separate legal personality is that a company survives and dies because of it’s
members.
“Applications” of Salomon
• Macaura v. Northern Assurance Company [1925] AC 619 (HL)
• Lee v. Lee's Air Farming Ltd [1961] AC 12 (PC)
• Tunstall v Steigmann [1962] 2 QB 593 (CA)
(‘reversed’ by Landlord & Tenant Act 1954, s.30(3))
• [Revenue & Customs Commissioner v Holland [2010] UKSC 51
• VTB Capital Plc v Nutritek Intern.Corp [2013] UKSC 5
• *Prest v Petrodel Resources Ltd [2013] UKSC 34

The corporate group context

In many instances a parent company may hand off some of it’s business into one subsidiary
or may take over a companies business incorporated as a company by all the shares in it,
then it becomes a subsidiary of the parent or holding companies, common scenario of where
limited liability is operating.
(a) ‘subsidiary company’ (& ‘wholly-owned subsidiary’) and ‘holding company’ in
Companies Act 2006, ss.1159-1160 & Sch.6
(b) for general purposes of that Act only (eg. s.251(3))
(c)‘subsidiary undertaking’ (& ‘fellow subsidiary undertaking’) and ‘parent undertaking’ in
Companies Act 2006, ss.1161-1162 & Sch.7
Gramophone & Typewriter Ltd. v. Stanley (CA) [1908] 2 KB 89
- subsidiary means a company in which the parent has a degree of control and defined
in various ways, although they have parents subsidiary are also separate legal entity
and treated as such.
- In a group context, subsidiary is treat as a separate legal entity separate from it’s
parent company.
- Gramophone – (CoA IMPORTANT HERE) in this case you have a parent company
which was English that owned all the shares of a German company which was one
it’s subsidiary, which made a lot of profits, there directors decided to send dividends
to parent as shareholder.
 - So now parent company declared dividend for corporate tax purposes but in the land
revenue said, as they own all the shares in the subsidiary that they wanted to tax
them all the profits that subsidiary made, not just the dividend they sent, as you are
doing business as this subsidiary.
- The CoA disagreed, as stated the German companies are their own separate legal
entities and carrying on their own business, it’s decided to send dividend to
shareholders (parent company) and that’s the only income that the parents are
entitled.
- This is right legally as the shareholders aren’t entitled to all profits made, but
dividends directors have declared. This isn’t a limited liability case but shows how
robust the separate legal entity concept is.
- Limited liability works in group context, and controversial

“Lifting” or “Piercing” the Veil

- Challenging here the separate legal identity of the company
• It refers to the situations where the judiciary or the legislature have decided that the
separation of the personality of the company and the members is not to be maintained
(the veil of corporation is said to be lifted)
Ø To challenge the separate legal personality of a company
Ø To attach liability to shareholders or directors
• It is about the applicability of the doctrine of the separate legal personality of the
company rather than that of limited liability.
Ø Per Lord Sumption SCJ: “Piercing the corporate veil” is an expression rather
indiscriminately used to describe a number of different things. Properly speaking,
it means disregarding the separate personality of the company.

(Historic) confusion of terminology

Prest v Petrodel Resources Ltd [2013] UKSC 34,
- Leading case in this area in terms under the common law or case law in what
circumstances will the veil of the company be lifted by the courts.
Per Lord Sumption JSC paras.16 and 19
“’Piercing the corporate veil’ is an expression rather indiscriminately used to describe a
number of different things” case law is “characterised by incautious dicta and inadequate
reasoning”

The Facts of Prest

• Matrimonial Causes Act, section 23
• the husband was the sole shareholder in numerous offshore companies, and those
companies have significant assets. And then there was a divorce, and his ex-wife claimed
some of those assets, so she was going the pot and was entitled to some of them.
- The issue in Prest, was whether the husband was entitled was entitled to the assets
for the purposes of civilisation under section 23
- In this case the husband is the sole shareholder of the companies, so does this mean
he owns all the assets?

The issue
How to ensure that, company law could not be used as a tool to conceal assets or avoid
liability in relation to those assets, whilst maintaining the integrity of the Salomon principle?
- If we stick to Solomon principle, we can see that the husband handed off his assets to
his ex-wife, so the law doesn’t allow this to happen, as he cannot hand of his assets
using the corporate as a sham to hid his personal assets

The decision
• The Supreme Court unanimously overturned the Court of Appeal’s decision
• Lord Sumption: the doctrine of veil piercing required some dishonesty on the part of the
company member and was not simply a device that could be employed to ensure justice
in a particular case
- If we are going to use the doctrine of veil piercing it requires some dishonesty on
behalf of the company member.
• In Trustor AB v Smallbone (No 2): the dishonesty must involve company law being used
as a sham or façade to disguise the true ownership of property.
- In both cases the HoL has said, if we are going to use the doctrine of piercing the
corporate veil, the dishonesty must be used as a sham to disguise the true ownership
of the property.

General Principles
(a) Meaning of “piercing corporate veil”
Per Sumption JSC in Prest v Petrodel at para.16
“Disregarding the separate personality of the company’”(emph.added)”where a person who
owns and controls a company is said to be identified with it in law by virtue of that
ownership and control”
- Lord Sumption was condemning of previous terminology, and he said that piercing
the corporate veil, should only be used when you are meaningless.
- So if we pierce the corporate veil we are identifying that person with the company
and disregarding the separate legal entity that the company, challenging this fact.
- The separate legal entity is not disregarded of the company, but under this
circumstances at this time your are personally liable for (fact/debt) raised by the
company.

(b) “concealment principle”

Per Sumption JSC Prest v Petrodel at para.28
“look[ing] behind [the company] to discover the facts which the corporate structure is
concealing”
- You can see the company are separate legal entity, but you can see that they are
concealing certain things, so you look at surrounding circumstances and reach legal
conclusion, this is the concealment.
- Not denying that the company is a separate legal entity, it is, but on the fact certain
thing follow and that are around.

(c) When will the court actually “pierce the veil” ’?:
the “evasion principle”
 - This principle comes into play when the individual behind the company use it’s
separateness to escape legal liability, by shielding themselves behind the company
and using it separateness to escape legal liability.
- Shareholders shield themselves behind the company’s corporate structure and
companies separate legal personality, to escape their own responsibility, hence the
court decided to lift or pierce the corporate veil in this circumstance
Sumption JSC: “there is a limited principle of English law which applies when a person is
under an existing legal obligation or liability or subject to an existing legal restriction which
he deliberately evades or whose enforcement he deliberately frustrates by interposing a
company under his control. The court may then pierce the corporate veil for the purpose,
and only for the purpose, of depriving the company or its controller of the advantage that
they would otherwise have been obtained by the company's separate legal personality.”
(Emphasis added)
- For evasion principle to come into play, the companies controller must use the
companies separate legal character of the company to escape the personal
obligations, this is important for when the companies veil will be lifted by the court.
- If the question states: describe under what circumstances will the separate legal be
disregarded or when will the veil of the company be lifted by the court?
- You answer: first under the statute there are four circumstances and list these
situations and legislation and plus in the second part you will say, under the common
law there are two principles that helps the judge to decide when the veil will be lifted
by the court, one is the concealment principle and the other is the evasion principle,
and say the fact of the Prest case.

“Lifting the corporate veil”

vs
“Piercing the corporate veil”

Atlas Maritime Co. SA v Avalon Maritime Ltd (No. 1)

• Lord Staughton :“lifting or peeping behind the corporate veil” means “having regard to
the shareholding in a company for some legal purpose".
• Lifting the veil can be merely described as “least offensive to separate entity theory”’ and
as an “act of curiosity”. Therefore, “lifting of the corporate veil” cannot in any way
override the principles laid down in “Salomon v Salomon”.
- Instead piercing the corporate veil describes a situation when the courts completely
ignoring the companies separateness and consider the rights and liabilities of the
company as they are that of the shareholders, which means the separate legal
personality principle is overlooked.

• The “corporate veil” has been lifted under the following labels: (1) “Single economic
unit”, (2) “Agency”, (3) “Justice”, (4) “Fraud”, (5) “State of National Emergency”, (6)
“Saving legal costs” and (7) “Statute”.
But!
• ambiguous and unclear. (margins)
• hard to be categorised under one label. – case law has shown judicial decisions hard to
be categorised under one label, decided on case by case basis, but generally use
 concealment or evasion principle to decide whether the separate legal personality would
be disregarded

• Currently, the most relevant case on “lifting the corporate veil” :

• Adams v Cape Industries Plc
• Lord Slade: when the “corporate structure” is used as a “facade” to obscure true facts
the “corporate veil” should be pierced.
• The word facade has been synonymously used with “puppet”, “device”, “sham”, “mask”,
“stratagem” and “cloak” to emphasize that the company has been misused by a member
for his own means, which involves “abuse of the corporate form”
- In order for the exception to the applicable there must be some misconduct or
irregularity on behalf of the doer.

The “phoenix fraud”

What is a phoenix company?
• A phoenix company is one that literally ‘rises from the ashes’ of another company, when
existing directors buy the underlying assets.
- Term can be used to describe a new company that emerges during the prepack of
administration that is the procedure that save jobs and prevents other businesses
suffering the ripple effect of the insolvency, once the buyer has been identified unless
a insolvency practioner is appointed, who must be able to prove that the prepack
provides the best return for the creditors and the prepack administration is governed
by strict rules and regulations designed to prevent to avoidance of companies
obligations to it’s creditors called the phoenix company fraud.
- For example, if company A ceases to trade or goes into liquidation, then company A1
continues to trade with the same name, directors and shareholders having been set
up within 12 months of company A, it may be considered a phoenix fraud, and
criminal sanctions could be implied, or fines imposed.
- If company A has creditors who have not been paid and they are only owned money
by the company, so company A as a separate legal entity and their debts are
consolidated within the liquidation of the company, this is not far that shareholders
cannot pay debts and start with a clean sheet with company A1.
- The law doesn’t allow this to happen for directors to avoid responsibilities by
continuing to start new companies in this way, moving on from struggling business
without paying creditors first.
- Section 216 of Insolvency Act 1986 governs circumstances in which a phoenix may or
may not be legal, if found to be illegal then it is an offence in the bound of criminal
courts, with punishments of disqualifications of directors or imprisonments.

There are two ways in which the separate legal personality of the company will be lifted:
limited under the statutes and incapsulated in case law

Veil Lifting by Statutes

Under these four circumstances, the statutes state the separate legal personality between
shareholders and company will be disregarded, and shareholders are personally responsible
for the debt of the company.
• Taxation laws usually provide for the lifting of the veil where a corporate structure (e.g. a
group) is being used deliberately to avoid the payment of taxation
- So if a parent company used separate legal personality to deliberately avoid payment
of taxation, under this circumstance the veil of the company will be lifted.
• Employment Rights Act 1996 protects the statutory rights of employees when they
transfer form one company to another within a group (i.e. treating the group as the one
entity)
- So here the group will be treated as one entity, ignoring the separate legal
personality
• The Companies Act requires that group accounts need to be prepared to provide an
accurate sense of the group’s financial situation
- Good to know, we don’t focus on this in this module
• Insolvency Act 1986 also provides important statutory veil lifting provisions
Fraudulent trading (s.213)
Wrongful trading (s.214)
- When a fraudulent or wrongful trading happens, the separate legal personality
between shareholders and company will be ignored by the courts.
These are the circumstances in which the veil could be lifted by the courts.

Veil Lifting by Courts

• Since the Salomon decision the courts have often been called upon to apply the principle
of separate legal personality in what might be called difficult situations
• Unfortunately, the courts have failed to develop adequate principles to guide as to when
the veil of incorporation would be lifted
• There were many cases where in a similar situation one court would lift the veil whilst
another would not; it was basically a matter of what the judge thought to be just in the
particular case

The Evasion Principle

• If the corporate form had been adopted in order to evade an existing legal obligation,
the separate personality of the company could be ignored based on the evasion
principle.
• Gilford Motor Co Ltd v Horne [1933] Ch 935
Ø The court found that the company was but a front for Mr Horne and issued an
injunction.
Ø The injunction against the company was based on the evasion principle.
• Jones v Lipman [1962] 1 WLR 832
Ø The court found that the company was but a façade used for evading an existing
obligation
Ø The injunction against the company was justified on the evasion principle.
The Concealment Principle
• Gilford Motor Co Ltd v Horne (injunction against Mr Horne)
• Jones v Lipman (court order against Mr Lipman)
• Gencor ACP Ltd v Dalby [2000] 2 BCLC 734
• Trustor AB v Smallbone and others (No.2) [2001] WLR 117
Per Sir Andrew Morritt V-C: “In my judgment the court is entitled to “pierce the corporate
veil” and recognise the receipt of the company as that of the individual(s) in control of it if
the company was used as a device or facade to conceal the true facts thereby avoiding or
concealing any liability of those individual(s).”
v N.B. it is now argued that concealment principle does not involve ignoring the separate
legal personality of the company, the court is only looking behind it to discover the facts
which the corporate structure is concealing.