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The Company as a Separate Legal Entity

Question:

Discuss about the Corporate Veil.

The company is a separate legal entity; it has the right to sue another person, and the liability to be sued by another person. According to the provisions of law, a person cannot be held liable for the liabilities of another unless he has expressly or impliedly assumed responsibility, indemnified or guaranteed the other person[1]. In the same way, the directors and other shareholder of the company cannot be accounted for the rights and liabilities of the company, as it is a separate legal person. The corporate veil can be lifted by the court if the company had been formed with the intention of fraud. If the court is satisfied that fraud was the main reason for the creation of the company than in the ends of justice, it can “pierce the corporate veil”. The concept of corporate veil can be traced since 1612, in the case of Sutton’s hospital (1612)[2].  In the facts before the court was to determine whether or not the corporate veil can be lifted. In this case, the court provided that the incorporation of the company was valid and the corporate veil cannot be lifted[3].

One of the most significant about case with relation to the lifting of corporate veil is the case of Solomon v Solomon & Co ltd 1986. In this case the defendant had solely owned the shares of a company incorporated by him. The defendant was also the debenture holder of the company. The company suffered losses and was ultimately wound up. The defendant as the debenture holder of the company claimed his debenture amount through the company’s assets at the time of the winding up. There were very little assets left after the denture was claimed for the payment of other creditors who were the plaintiff. The court in this case dismissed the claim made by the plaintiff highlighting the concept of corporate veil between the owner and the company.

The concept of piercing the corporate veil in the united kingdom had been highlighted in united kingdom through various cases such as Macaura v Northern Assurance Co Ltd 1925[4] and  Solomon v Solomon & Co ltd 1896[5] , where the court decided not to life the corporate veil in ends of justice. In the cases of Gilford Mortar Co Ltd v Horne and Tunstall v Steigmann 1962[6] the court lifted the corporate veil as the company for formed for a fraudulent purpose.[7]


Dignam and Lowry have stated that the decisions made by the judges with respect to the cases involving the lifting of corporate veil is not clear and confusing and the judges hide such confusion behind apparent clarity.  In the United Kingdom, the lifting of corporate veil is a very rarely used phenomenon. The doctrine of control for piercing the corporate veil and economic reality theory was tried to be established by the court of appeal in the early 1970s for the purpose of lifting the corporate veil. However, the House of Lords reasserted the orthodox approach to this concept.  In the landmark case of Adam v cape Industries plc, the court provided that the corporate veil of the corporation can only be pierced by the court when the purpose of the formation of the corporation was fraudulent and had been established in order to evade an existing obligation.  There are still various significant statements that are made by the judiciary to support the lifting of corporate veil in a broader aspect with respect to the ends of “justice”.

The Concept of Lifting the Corporate Veil

This concept provided by the judiciary is discussed in details in the landmark case Prest v. Petrodel Resources Ltd 2013[8]. This case discusses the concept of resulting trusts, piercing of corporate veil and equitable proprietary remedies with respect to English Family Law[9].

In this case, Ms Yasim Prest had made a claim under the provisions of section 23 and 24 of the Matrimonial Causes Act 1973 for an ancillary relief against a company that was totally owned by her husband Mr. Michale Prest. According to the claimant, the husband had legal title with respect to the properties beneficially owned by him, which included a house worth 4million. She also claimed that her husband did not abide by the provisions of making a total and correct disclosure with respect to his financial position. According to the provisions section 24 of the Matrimonial Causes Act 1973, the court has the power to make an order for the transfer of property, if the person against whom the claim is made, holds the legal title of the property. It was provided by the defendant that he did not hold the title of the properties which were claimed by the plaintiff.[10]

The high court in this case held that, as the defendant had the powers to transfer the property in practice, it is assumed that he holds the legal title of the property in context with respect to section 24 of the Matrimonial Causes Act 1973. It was held by the high court in this case that control and ownership themselves were not enough for the purpose of piercing the corporate veil. The court also provided that in case where there is no existence of a third party interest, the corporate veil cannot be pierced even for the purpose of serving the ends of justice.  The court provided that only when there is a case of impropriety can the corporate veil is pierced. Such impropriety must have been related to misuse of the corporate veil for the purpose of avoiding an existing liability. In order to pierce the corporate veil the control of the person who has done a wrongful act is also needed along with the concept of impropriety[11].

The high court in this case justified the pairing of the corporate veil; however, such justification was not based on the general principals but on the provisions of the Matrimonial Causes Act 1973.

In the same case, when an appeal was made to the court of appeal, the court provided that the decision made by the high court about distribution of the assets owned by a company according to the provisions of Matrimonial Causes Act 1973, was out of the jurisdiction of the court, unless the court had abused the corporate veil of the company[12].   The court of appeal provided that the decision of the high court was incorrect as for the purpose of piercing the corporate veil the company had to be formed based on a fraudulent purposes and it must have been shown by the court that the properties held by the company were on trust of the defendant. The decision made by the judges of the high court was not consistent with the decisions in major cases like Salomon v Salomon & Co Ltd, Woolfson v Strathclyde Regional Council and Adams v Cape industries plc.

Landmark Cases in the UK

In this case Justice Patten, further provided that this system of family courts with respect to the adoption and development of new approaches towards the assets owned by companies in ancillary relief enforcement is a different system of laws, which has no relevance for the existing laws. These approaches by the lower courts have to be stopped with immediate effect.


There was again a difference of opinion in the same case between the two LJ’s of the court of appeal. Dissenting to concept provided by Patten LJ, Thorpe LJ provided a different concept with respect to the case[13].

He said that the reality in this case was very simple. The defendants used the company to provide for the extravagant lifestyle of himself and his family. This could only have happed if the company was in total control of the defendant and was not liable for any interest with respect to the third parties. As there was a complete control of the defendant over the company, he must have ignored the provisions of the company law towards the operations of the company.  After the marriage had come to an end the defendant used the corporate veil as a defense to deprive his wife of her rights. If the present provisions of laws in this respect allows him to escape with such an act it would end the make the effort of the family court to achieve a fair result irrelevant[14].

The confusing in the approach of lifting the corporate veil by the courts can clearly be identified by the difference in these opinions.

Further, the Supreme Court had overturned the decision of the court of appeal with respect to this case. The Supreme Court held that as the defendant has contributed personally to the purchase price of the property in context, he had a beneficial interest in the property. The court further provided that in this case there was no necessity of lifting the corporate veil, as this concept is applicable in a very limited situations. The court provided that as the defendant had the title with respect to the assets of the companies with respect to a resulting trust so the transfer of rights under section 24 of Matrimonial Causes Act 1973 was valid[15].

The first judgment in this case as given by lord Sumption, he provided that the corporate veil could be pierced in very rare circumstances, when the company had been formed with the fraudulent motive of escaping an existing obligation[16].  The lifting of corporate veil can only be used to dispossess the controllers of the company of the powers, which they have obtained through the concept of corporate veil. In this case, it cannot be proved that the defendant had created the company to escape the obligation arising out of the divorce, thus corporate veil cannot be lifted.  He also provided that the high court had no powers to order the transfer of property under section 24 of the Matrimonial Causes Act 1973. Such powers could only arise if the defendant held beneficial interest in the property, the evidence of which in this case of obscure because of mendacity and obstruction of the defendant[17].

Judiciary Confusion Regarding Lifting of Corporate Veil

The justice in this respect said that there are ways in which, remedies can be provided without lifting the concept of the corporate veil of the companies. he provided examples that an person who is the controller of the company can be held liable as he is the agent of the company, or properties belonging to the companies can be transferred as the controller holds beneficial interest in the property. He provided that there can be many remedies like injunctions, specific performances, provisions of the company act and competition law which been be given without lifting the corporate veil of a company[18]. He added that when the concept of lifting the corporate veil is being talked about, these rules could not be related to it, only in cases, which are truly exempted from the rule of the case Salomon v Salomon & co ltd can be related to the doctrine of piercing the corporate veil[19].

Lord Neuberg in this case provided that lifting of the corporate veil should only be done as a last resort. Lord Wilson in this regard gave another view, he provided that the piercing of corporate veil in all cases cannot be classified into cases of evasion or concealment. Lord Mance gave a view that the future situations in which the veil might have to be lifted should not be foreclosed.  Concurring to this judgment, lord Clarke provided that corporate veil should only be lifted when there is no other option left.  Lord walker in this case gave the view that lifting the corporate veil of a corporation is not at all a doctrine it is only a label. [20]

It can be concluded with the decisions of all the judges in this case that, the concept of piercing the corporate veil was unclear and confusing; this concept was not helpful for most of the judges.

When it comes to piercing the corporate veil, the judges are always engaged in the process of finding the appropriate principles to adequately address and govern this concept. The judges in order to make their decisions with respect to lifting or piercing the corporate veil rely on several factors such as sham or fraud, agency, determination of nationality, tax evasions and single economic entity[21].


The landmark case of Adams V cape Industries 1991[22] the argument based on “a single economic entity” was rejected by the court. In this case, the court denied to disregard the legal form to glance at the economic substances. In the recent case of Hashem v. Shayif, it was held by justice Munby after considering many cases with respect to the lifting of corporate veil that, in order to pierce the corporate veil of a company the defendant should have total control over the company and there should be a presence of some kind of impropriety. [23]

Although the argument of a single economic unit was rejected in the case of Adams V cape Industries, the case provided for an argument based on the rule of agency. The court in this case provided that agency not only mean a contractual relationship, but an agency arising out of facts. On the other hand, in the case of Hashem v. Shayif  it can be concluded that justice Munby did not consider agency as an argument as he insisted on the term of impropriety[24]. In many instances the judges have also based their decisions on the concept of “interest of justice” whereas, justice Munby had rejected this approach.  He provided that after analyzing several cases he found two factors to be present in each case, one was control and the other was impropriety, and the only case in which the court can lift the corporate veil is when there is existence of a façade. The arguments based on agency are not enough to lift the corporate veil because of the presence of impropriety[25].

The Orthodox Approach to Lifting the Corporate Veil

The courts in most of the cases are unclear, when the phrase “lifting the corporate veil “is used by them. Prof. S. Ottolenghi in a seminal article in Modern Law Review (May 1990) divided judicial proceedings with respect to corporate veil into four types[26]:


Peeping:  This concept is used by the court only to determine the control of the defendant over the company.

Penetrating: In this case, penetration is done in the corporate veil of a company to tie up liabilities on shareholders for the actions of the company or for giving the shareholders a direct interest with respect to the company’s assets. This concept does not mean to provide that the company does not exist. It only provides that the shareholders are being directly looked at by the court because of the existence of certain factors.

Extending: This approach is adopted by the courts in both “factual agency” and “single economic unit arguments”. This process involves piercing the corporate veil of one company and again reinforcing it to bring another company into the same veil.

Ignoring: This concept involves eliminating the corporate veil of a company as a sham or a façade.

After going through the decision of various cases, with respect the lifting of corporate veil it can be concluded that, there is an immense uncertainty in this aspect to law. The judges themselves are confused about the use of the doctrine of “piercing the corporate veil”.  All cases provided with a different approach for this purpose and their no certainly and consistency at all between them. The courts, in spite of so many decisions, have not been able to identify a single, simple and clear approach in this field. Courts are making this doctrine more and more complicated by adopting a different approach to it in different cases.

References:

BOOKS

Becker, Riaan. "Disregarding the separate juristic personality of a company: an English case law comparison." (2015).

Chen, Chen. Piercing the Corporate Veil. Erasmus Universiteit, 2014.

Lam, Chun Leung. "Piercing the Corporate Veil." (2015).

Nelson, Josephine Sandler. "Frustration with the Intracorporate Conspiracy Doctrine Distorts Other Areas of Law." Available at SSRN 2581242 (2015).

Sharman, Jason Campbell. "Shell Companies and Asset Recovery: Piercing the Corporate Veil." (2014).

JOURNAL ARTICLES

Anderson, Helen. "Challenging the Limited Liability of Parent Companies: A Reform Agenda for Piercing the Corporate Veil." Australian Accounting Review 22.2 (2012): 129-141.

Booth, Richard A. "Close Encounters with Piercing the Corporate Veil." Vill. L. Rev. 61 (2016): 393.

Booth, Richard A. "Close Encounters with Piercing the Corporate Veil." Vill. L. Rev. 61 (2016): 393.

Butusina, Lorena. "Piercing the corporate veil." Revista Romana de Drept al Afacerilor 8 (2013): 83.

Farrar, John H. "Doctrinal incoherence and complex variables in piercing the corporate veil cases." Australian Journal of Corporate Law 29 (2014): 23-37.

Grantham, Ross. "Corporate Veil: An Ingenious Device, The." U. Queensland LJ 32 (2013): 311.

Hare, Christopher. "Family Division, 0; Chancery Division, 1: Piercing the Corporate Veil in the Supreme Court (Again)." The Cambridge Law Journal72.03 (2013): 511-515.

Ho, May Kim. "Piercing the corporate veil as a last resort: Prest v Petrodel Resources Ltd [2013] UKSC 34;[2013] 2 AC 415;[2013] 3 WLR 1." Singapore Academy of Law Journal 26.1 (2014): 249.

Prest v. Petrodel Resources Ltd 2013: A Landmark Case

Khimji, Mohamed F., and Christopher C. Nicholls. "Piercing the Corporate Veil Reframed as Evasion and Concealment." UBCL Rev. 48 (2015): 401.

Kim, Ho May. "Piercing the Corporate Veil as a Last Resort; Prest v Petrodel Resources Ltd." SAcLJ 26 (2014): 249.

Macey, Jonathan, and Joshua Mitts. "Finding order in the morass: The three real justifications for piercing the corporate veil." Cornell L. Rev. 100 (2014): 99.

Okoli, Chukwuma. "English courts address the potential convergence between the doctrines of piercing the corporate veil, party autonomy in jurisdiction agreements and privity of contract." Journal of Business Law(2014).

Small, Rashied, Lucinda Smidt, and Achmad Joseph. "Piercing the corporate veil-separation of the business from the business owner: industry insights." Professional Accountant 26 (2015): 24-25.

Thompson, Sharon. "Behind the veil: Company or family property on divorce?." Journal of Social Welfare and Family Law 36.2 (2014): 217-219.

Tsang, King Fung. "The Elephant in the Room: An Empirical Study of Piercing the Corporate Veil in the Jurisdictional Context." Hastings Bus. LJ12 (2015): 185.

CASE LAWS

Adams V cape Industries [1991] 1 ALL ER 929

Macaura v Northern Assurance Co Ltd [1925] AC 619

Prest v. Petrodel Resources Ltd [2013] UKSC 34

Solomon v Solomon & Co ltd [1896] UKHL 1

Sutton’s hospital (1612) 77 Eng Rep 960. 

Tunstall v Steigmann [1962] 2 QB 593

[1] Lam, Chun Leung. "Piercing the Corporate Veil." (2015).

[2] Sutton’s hospital (1612) 77 Eng Rep 960. 

[3] Small, Rashied, Lucinda Smidt, and Achmad Joseph. "Piercing the corporate veil-separation of the business from the business owner: industry insights." Professional Accountant 26 (2015): 24-25.

[4] Macaura v Northern Assurance Co Ltd [1925] AC 619

[5] Solomon v Solomon & Co ltd [1896] UKHL 1

[6] Tunstall v Steigmann [1962] 2 QB 593

[7] Macey, Jonathan, and Joshua Mitts. "Finding order in the morass: The three real justifications for piercing the corporate veil." Cornell L. Rev. 100 (2014): 99.

[8] Prest v. Petrodel Resources Ltd [2013] UKSC 34

[9] Ho, May Kim. "Piercing the corporate veil as a last resort: Prest v Petrodel Resources Ltd [2013] UKSC 34;[2013] 2 AC 415;[2013] 3 WLR 1." Singapore Academy of Law Journal 26.1 (2014): 249.

[10] Thompson, Sharon. "Behind the veil: Company or family property on divorce?." Journal of Social Welfare and Family Law 36.2 (2014): 217-219.

[11] Booth, Richard A. "Close Encounters with Piercing the Corporate Veil." Vill. L. Rev. 61 (2016): 393.

[12] Okoli, Chukwuma. "English courts address the potential convergence between the doctrines of piercing the corporate veil, party autonomy in jurisdiction agreements and privity of contract." Journal of Business Law(2014).

[13] Kim, Ho May. "Piercing the Corporate Veil as a Last Resort; Prest v Petrodel Resources Ltd." SAcLJ 26 (2014): 249.

[14] Grantham, Ross. "Corporate Veil: An Ingenious Device, The." U. Queensland LJ 32 (2013): 311.

[15] Becker, Riaan. "Disregarding the separate juristic personality of a company: an English case law comparison." (2015).

[16] Anderson, Helen. "Challenging the Limited Liability of Parent Companies: A Reform Agenda for Piercing the Corporate Veil." Australian Accounting Review 22.2 (2012): 129-141.

[17] Farrar, John H. "Doctrinal incoherence and complex variables in piercing the corporate veil cases." Australian Journal of Corporate Law 29 (2014): 23-37.

[18] Hare, Christopher. "Family Division, 0; Chancery Division, 1: Piercing the Corporate Veil in the Supreme Court (Again)." The Cambridge Law Journal72.03 (2013): 511-515.

[19] Nelson, Josephine Sandler. "Frustration with the Intracorporate Conspiracy Doctrine Distorts Other Areas of Law." Available at SSRN 2581242 (2015).

[20] Butusina, Lorena. "Piercing the corporate veil." Revista Romana de Drept al Afacerilor 8 (2013): 83.

[21] Khimji, Mohamed F., and Christopher C. Nicholls. "Piercing the Corporate Veil Reframed as Evasion and Concealment." UBCL Rev. 48 (2015): 401.

[22] Adams V cape Industries [1991] 1 ALL ER 929

[23] Chen, Chen. Piercing the Corporate Veil. Erasmus Universiteit, 2014.

[24] Lewis, Andrew. "Piercing the corporate veil has been extended: from the courts." Tax Breaks Newsletter 327 (2013): 2-3.

[25] Tsang, King Fung. "The Elephant in the Room: An Empirical Study of Piercing the Corporate Veil in the Jurisdictional Context." Hastings Bus. LJ12 (2015): 185.

[26] Sharman, Jason Campbell. "Shell Companies and Asset Recovery: Piercing the Corporate Veil." (2014).

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