Should The Corporate Veil Be More Porous?

Background

Should the corporate veil be more porous? Discuss with particular reference to Adams v Cape Industries plc [1990] Ch 433 and recent English authority?

The purpose of corporate veil is to distinguish a company as a legal person that has a separate identity from its shareholders. In this way, when the relevant test has been satisfied, willingness has been shown by the courts to pierce the corporate veil. On many occasions, the courts have to deal with the question if a company has to be considered as a separate legal entity in cases where the litigants are trying to recover from the opponents and it is found that the other party to the contract is a company that has no assets of its own but at the same time, such company is a part of larger group that has the assets from which the claimant can recover.

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However generally the courts applied the principle of separate legal identity of the companies that has been provided in Salomon v Salomon Co Ltd[1] and as a result, a company is considered as a separate entity from its members and therefore the courts are not willing to pierce the corporate veil.

It needs to be noted in this regard that there are certain case-based exceptions to the general rule provided in Salomon v Salomon. According to the present rule, where the company has been established for commissioning fraud or with a view to avoid any pre-existing obligation, in such a case the doctrine of separate legal identity of the company can be ignored. This rule is based on the decision given by the court in Adams v Cape Industries Plc[2]. In this case, a group of employees contracted asbestos disease after these employees were working for a wholly-owned subsidiary of Cape Industries.

However the Court of Appeal stated that the corporate rate cannot be pierced in this case, as despite the presence of wrongdoing in this case, such wrongdoing was not associated with the use of corporate structure as a tool to conceal or avoid its liability. At the same time, it was also stated by the court is case that the corporate veil cannot be pierced by the courts only on the ground that doing so is required in the interests of justice.  While doing so, the court relied on the reasoning in Jones v Lipman[3].

In this way, the rule provided by the court in Adams v Cape Industries Plc is still followed in England when it comes to general civil liability. In view of the rule provided in this case, the English courts very rarely decide to lift the corporate veil. Therefore, generally in such cases the liability of the company is attributed only to the company itself.

In view of the above discussion, it can be said that the corporate veil needs to be more porous. For example in the recent case of Caterpillar Financial Services (UK) Limited v Saenz Corp Limited, Mr Karavias, Egerton Corp & Others[4], the court gave a judgment against the defendant that can be enforced against some assets of the company. In this way, this decision highlights that although it is very rare but still there are cases where the courts are ready to exercise their jurisdiction and lift the corporate veil.

Adams v Cape Industries Plc [1990] Ch 433

Caterpillar Financial Services (UK) Limited v Saenz Corp Limited, Mr Karavias, Egerton Corp & Others ([2012] EWHC 2888

Jones v Lipman [1962] 1 WLR 832

Salomon v Salomon Co Ltd [1897] A.C. 22

[1] Salomon v Salomon Co Ltd [1897] A.C. 22

[2] Adams v Cape Industries Plc [1990] Ch 433

[3] Jones v Lipman [1962] 1 WLR 832

[4] Caterpillar Financial Services (UK) Limited v Saenz Corp Limited, Mr Karavias, Egerton Corp & Others ([2012] EWHC 2888