Describe about Critically assess the tests that must be met before the corporate veil will be pierced?
There are several occasions when a court has to deal with the issue if a particular corporation can be considered as separate legal entity. This issue generally arises in cases where the claimant wants to recover from a company and it is found that the company does not own any assets of its own and it is a part of it larger group that owns all the assets.
It was provided for the first time in Saloman v A Saloman & Co Ltd that had incorporated company has to be considered as having a separate legal identity that is different from the directors or the shareholders of the company. Since then, this has remained a basic principle of company law in the UK. The result of this principle is that due to the reason that a corporation is considered as a distinct legal entity, the contract that has been created by the company is generally not enforceable against the controlling parties, like the directors or the shareholders. In the same way, the liability that has been incurred by any of the controlling parties in their individual capacity is not enforceable against the corporation. However, there have been several occasions when the courts have felt the need to penetrate the veil and as a result, have stated that these controlling parties can be considered as liable.
According to the general rule, the courts follow the strict legal principle of the separate legal entity of a company that was provided in Salomon’s case and as a result, the courts consider the corporation as having a distinct identity and therefore, generally the courts are not ready to penetrate the corporate veil. However in the case titled as Caterpillar Financial Services (UK) Limited v Saenz Corp Limited, Mr Karavias, Egerton Corp & Others (2012) is an exception to the general rule because in this case, the court decided to use its jurisdiction and pierce the corporate veil. In this case, a successful application was made by Caterpillar regarding summary judgment seeking a declaration that the defendant was using the Corporation as a corporate vehicle. As a result of this, a judgment should be issued that was also enforceable against some of the assets of the company. In this way, this decision shows that although it is very exceptional but in some cases, the courts will be ready to exercise their jurisdiction for the purpose of penetrating the veil.
Courts generally not ready to penetrate the corporate veil
Despite the fact that the historical position has been that the courts have always considered in corporate companies as enjoying a separate legal identity but at the same time, it has also been recognized since along that in case the directors of the company were involved in the fraud, even when the money was borrowed by the corporate identity, the directors of the company can be held liable under the tort of deceit (Cain, 1990). In the same way, it has also been recognized that in case a director of the company is personally involved in converting an estate of the company, for example selling the asset, it can result in the personal liability of the director due to the reason that the director was acting as the agent of the corporation and an agent is considered as personally liable for the conversion (Cooper and Robertson, 1990).
It has been mentioned by the courts on several occasions that the discretion to penetrate will not be exercised even if any wrongdoing has been established, if the wrong was not associated with the use of the corporate structure for the purpose of avoiding liability and in the same way, the courts will also not penetrate the corporate veil only due to the reason that justice requires so (Cain, 1985). For example, the above-mentioned principles have been reaffirmed in Adams v Cape Industries (1990).
At the same time, there are certain cases where the companies offer group will not be considered as separate entities, even if it is against the general principle. For example, recently in the decision given in Chandler v Cape Plc (2012), where the subsidy company was not in existence anymore and as a result, the duty of care was imposed by the court on the parent company regarding the responsibility to ensure the welfare of the employees who were working for the subsidiary. In this way, although it is not very common for the courts to penetrate the veil, there have been certain attempts by the litigants where the courts have been asked to do so. For example, in a case recently decided by the Court of Appeal, US $225 million were provided by the claimant bank in accordance with the facility agreement. The money was utilized by the Russian borrower which was a corporation, for the purpose of facilitating the acquisition from the first defendant, a company located in British Virgin Islands and was controlled from Russia. Subsequently, the borrower made a default in repaying the debt. Claimant did not recover the loan through the security that was provided in this case and it was purported that the deceitful misrepresentation made by the first defendant had persuaded the claimant for the facility agreement and it also alleged that rest of the defendants were also liable jointly. After having the information to serve out of jurisdiction, a worldwide freezing order was granted against the fourth defendant, as it was claimed by the claimant that it controlled the first and the second defendants. At the same time, an application was also made by the claimant to amend the particulars of claim and to incorporate a contractual claim (VTB Capital Plc v Nutritek International Corp., 2012). It was also argued that in this case, the veil should be penetrated by the court and the respondents should be considered jointly and severally liable along with the debtor on the ground that they had control over the actions of the borrower and were using the borrower only as a device to conceal their impropriety. It was decided by the Court of Appeal that it will be against the principal and authority and as a result, it will not be appropriate to pierce the corporate veil for the purpose of giving effect to a contractual claim made by the claimant against those who were claimed to be in control over the defendant corporations, particularly when they were not a part of the above-mentioned contract.
Fraud and personal involvement of directors leading to liability
In Caterpillar Financial Services v Saenz Corp. Ltd, Caterpillar had advance loans to the 1st and the 2nd defendant corporations. The reason of these loans was to build two yachts. However the 1st and the 2nd defendant had evaded the repayment of loan. The result was that the claimant, Caterpillar Financial Services made the months from the 1st and 2nd defendants and it also dominated the loan contracts. At the same time, demands were also made on each guarantor of the loans, comprising the third to the ninth defendant. In this case, the defendants were connected with the 1st and the 2nd defendant and also with the third defendant who was described as the governing mind of the defendant corporations and was also among the guarantors.
In this case, the 4th defendant corporation had provided guarantee and indemnity that was exhibited in favor of the agreement regarding the loans advanced by the claimant. In the same way, the fifth, six as well as the seventh defendant corporations have also provided guarantees or security regarding the loan advanced by the claimant. The 8th and the 9th defendants were the persons who had given guarantees regarding the loan that was given to the second defendant. At the same time, it was alleged that the defendant number 10 to 16 were the alter ego corporate vehicles that were used by the third defendant as it had control over the actions of these companies. Under these circumstances, the claimant was successful in achieving a judgment from the court against a third defendant under the impression that the judgment was enforceable against the property that was stated by the guarantor as belonging to him, before the loan was given by the claimant. On the other hand, it was claimed by the guarantor in these proceedings that the residential property mentioned above was in fact owned by the 14th defendant or the Company and therefore, the fourth defendant does not have any beneficial interest in the property. On the other hand, in an application made by the claimant, it was stated that if these facts would have been mentioned by the fourth defendant earlier, the claimant would not have considered the advancement of these loans without the presence of a sufficient security given by the company as a result of which, the claimant could have pursued against the company and ultimately, it would have enforced a judgment against the security provided by the company in case of a default (Grantham, 2001). Therefore, an application for summary judgment was made by the claimant for declaring that the Company was only a corporate vehicle that was used by the guarantor and therefore the court should penetrate the veil and the judgment should be allowed to be enforced against the assets that belong to the Company.
Discretion to penetrate not exercised if wrongdoing not related to avoiding liability
For the purpose of penetrating the veil, the relevant tests that were described by the court in this case needs to be discussed. There are certain tests that have to be fulfilled before the court can yes the corporate veil (Hayshem v Shayif & Anor., 2008). The Court has applied these tests in VTB Capital Plc v Nutritek International Corp (2012) and also in Caterpillar. These tests can be described in the following words. According to this test, only the ownership and control over the company cannot be considered a sufficient for the court to penetrate the veil. The corporate veil cannot be penetrated by the court in case there is no unrelated third party and only on the grounds that piercing the corporate there is required in the interests of justice. On the other hand, impropriety should also be established by the party who wants the court to pierce the corporate veil but at the same time, impropriety alone is not considered as sufficient for the court to pierce the veil. In this regard it is also required to be established that such impropriety is also associated with the concealment or the avoidance of a liability by using the corporate structure (Egert, 1986). For the purpose of penetrating the veil by the court, the intentions of the wrongdoer have to be considered but at the same time, it also needs to be established that the wrongdoer had control over the company and it was being used as a facade for the purpose of concealing the wrongdoings (Gallimore, 1994). While deciding the question if the company was incorporated with the deceptive intention, the court is required to consider if the company was only a facade at the relevant time which is the time of the transactions in question. Similarly the remedy will be provided by the court only regarding the particular wrongdoing and has been committed in a case (Machen, 1910). For the purpose of establishing that the corporate structure was being used as a device for conceiving and impropriety, first of all the impropriety should be established in the court.
The above-mentioned tests were successfully applied by the court in Caterpillar case. For example, several documents which included the documents that confirm that the bank documents were received by the guarantor on behalf of the Company, established that the actions of the company were being controlled and directed by the guarantor. In this way, the first requirement related control was established. It was also established in this case that the first defendant was living in the residential property mentioned above and the same was also being used by the first defendant as an address for registering and corresponding regarding several other companies. In the same way, the guarantor had also tried to sell the property when the claimant had made an application for a freezing injunction. Therefore the court was of the opinion that although the issues might be right but they do not satisfy the 5th notion.
Parent company's responsibility in subsidiary's welfare
Therefore Eder J said that “the court will only pierce the veil so far as is necessary to provide a remedy for the particular wrong which those controlling the company have done”. On these grounds, it was decided by the court that in this case, a declaration should be made by the court in favor of the Claimant the corporate veil can be pierced regarding the residential property mentioned in the case and in the same way, the judgment delivered by the court against the guarantor was also enforceable against this property.
The most significant factor on the basis of which, Eder J arrived that his conclusion was that according to the evidence presented in this case, it was established that the guarantor was the ultimate owner and had full control over the Company. This conclusion was made on the basis of the papers which comprised a communication that was written by the guarantor before the funds were advanced. In this letter, a net worth statement given by a public accountant mentioned that the assets of the guarantor included “a residence in Fulham” that was worth 3US$3,500,000. In the same way, in another net worth statement that was also provided by the same accountant after 16 months, it was mentioned that the assets of the guarantor included a residence in Fulham that was worth US$3.2 million. Therefore the court held that the mention of residence in Fulham was related with the residential property regarding which it has been claimed by the guarantor that it was not owned by him during the hearing for the summary judgment. In view of this documentary evidence, it was stated by the court that the assertions made by the guarantor cannot be considered as credible.
In this case, it was also stated by the court that this was an exceptional case in which no contemporaneous documents were present that can support the possessions that were made by the guarantor while the papers that emanated from the guarantor were totally contrary to the assertions made by the guarantor.
Cain T, (1985) ‘Ultra Vires in 1984’ 1 Qld Institute of Technology Law Journal 31
Cain T, (1990) ‘The Rule in Royal British Bank v Turquand in 1990’ 2 Bond Law Review 152
Cooper GD and DB Robertson, (1990) ‘Subsidiary Companies’ Guarantees – Their Continued Existence’ 1 Journal of Banking and Finance Law and Practice 284
Egert G, (1986) ‘The Doctrine of Ultra Vires – Recent Developments’ 2 Queensland University of Technology Law Journal 73
Gallimore J, (1994) ‘The Authority of Companies to Enter into Transactions – a New Twist’ 14 (8) Proctor 10
Grantham R, (1996) ‘Corporate Knowledge: Identification or Attribution?’ 56 Modern Law Review 732
Grantham R, (1999) ‘Illegal Transactions and the Power of Company Directors’ 115 Law Quarterly Review 296
Grantham R, (2001) ‘Attributing Responsibility to Corporate Entities: A Doctrinal Approach’ 19 Company and Securities Law Journal 168
Adams v Cape Industries plc  Ch 433
Chandler v Cape plc  EWCA Civ 525
Hashem v Shayif & Anor  EWHC 2380
VTB Capital plc v Nutritek International Corp  UKSC 5
To export a reference to this article please select a referencing stye below:
My Assignment Help. (2017). Critically Assess The Tests That Must Be Met Before The Corporate Veil Will Be Pierced. Retrieved from https://myassignmenthelp.com/free-samples/ultra-vires-in-1984-corporate-veil.
"Critically Assess The Tests That Must Be Met Before The Corporate Veil Will Be Pierced." My Assignment Help, 2017, https://myassignmenthelp.com/free-samples/ultra-vires-in-1984-corporate-veil.
My Assignment Help (2017) Critically Assess The Tests That Must Be Met Before The Corporate Veil Will Be Pierced [Online]. Available from: https://myassignmenthelp.com/free-samples/ultra-vires-in-1984-corporate-veil
[Accessed 03 March 2024].
My Assignment Help. 'Critically Assess The Tests That Must Be Met Before The Corporate Veil Will Be Pierced' (My Assignment Help, 2017) <https://myassignmenthelp.com/free-samples/ultra-vires-in-1984-corporate-veil> accessed 03 March 2024.
My Assignment Help. Critically Assess The Tests That Must Be Met Before The Corporate Veil Will Be Pierced [Internet]. My Assignment Help. 2017 [cited 03 March 2024]. Available from: https://myassignmenthelp.com/free-samples/ultra-vires-in-1984-corporate-veil.