Lifting the corporate veil often presents the judiciary with extremely hard choices as to where the loss as a whole should lie. Moreover, the courts have a hard decision when it comes to treating the company as a separate legal entity on one side of the coin, but maintaining justice and ensuring accountability on the other. In this way, and through the use of case law to strengthen this discussion, over time the judiciary have swung from strictly applying the Salomon principle in these difficult situations, to taking a more interventionist approach to try to achieve justice in a particular situation.
In Gilford Motor Company Ltd a former employee who was bound by a covenant not to solicit customers from his former company to his own, tried to claim that although individually he may be bound by such a covenant, his new company was not. It was held in this case by the courts that the new company was merely a front, and subsequently issued an injunction against him having pierced the corporate veil to account for individual liability.
This was consequently supported in Jones27, where an order for specific performance was issued by the courts in the interests of overall justice for the claimant who had a reliance on the activities of the defendant. Thus, he, or rather the corporation as a whole, were held to perform regarding the remedy, and the courts were adamant that no individual should be allowed to hide behind the veil to escape detection for their behaviour therein28.
By the 1960s the increasingly sophisticated use of group structures was beginning to cause the courts some difficulty with the strict application of the Salomon doctrine. At this point, the courts began to give varying opinions which meant the theory of the corporate veil became perplexed some what. The rules in company law meant that it was uncertain as to whether the courts would hold subsidiary companies as separate legal entities, such as stated in Salomon, or whether they should be classed as a single economic unit.
In DHN Ltd29 it was argued that a group of companies was in reality a single economic entity and should be treated as one. Yet two years later however, the House of Lords in Woolfson30 specifically disapproved the former regarding views on group structures, in finding that the veil of incorporation would be upheld unless it was a fai?? ade, further confusing the application of the principle. The case of Adams31 represents a significant move by the judiciary towards introducing more legal certainty into the interpretation of Salomon and subsequently the corporate veil32.
Generally the court found that in cases where groups had been treated as a single economic unit, the judges were involved in the interpretation of statute. Therefore this exception to maintaining corporate personality is qualified by the fact that there has to first be some lack of clarity about a statute which would allow the court to treat a group as a single entity. “… save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v. A. Salomon & Co. Ltd.
A. C. 22 merely because it considers that justice so requires. ” Adams therefore narrowed the situations where the veil of incorporation is lifted to effectively three situations. Through the interpretation of statute, where the company is a mere fade, and finally where a subsidiary is an agent of the company. Moreover, while there have also been some notable departures35 from the Court of Appeal’s interpretation in Adams of when the veil may be lifted, this highly influential case has dominated judicial thinking since.
As can be seen through the discussion above, the courts went through an uncertain time regarding whether they should lift the corporate veil to account for an individuals (or company’s) actions or not. Companies and company law as a whole would be at a considerable disadvantage if the principles set out in Salomon were not adhered to, especially as many new, small businesses rely heavily that their members may not be liable for debts early on. Having said this however, it is an essential purpose for the courts to at least be seen to be upholding the law, and following procedures in the interests of justice.
As suggested certain unlawful business activities should not be allowed to exist, and so subsequently the courts must take a substantial stand in order to protect justice on the whole. It is useful to note at this point, that in some jurisdictions, corporate directors can be held directly liable, alongside the corporation itself, for certain statutory offences37, such a stance showing that companies and their individuals are not exempt from all liabilities as first thought.
Following Adams and Trustor AB, we can see that the courts are only willing to lift the veil in particular or special circumstances, and are usually reluctant to do so, regardless of the advantage of legal certainty that this would bring. The aforementioned examples may be seen to be significant circumstances for the veil to be lifted by the courts, or alternatively and perhaps more controversially, they may be seen as masking the fundamental justification for denying the preservation of the corporate veil, namely to prevent injustice.
Indeed Lord Denning has stated the tool for lifting the veil should be used by the courts as a discretionary power, as apposed to using it in such defined circumstances as stated above38. Regardless of the specific rules set in Adams, the disadvantage of the courts taking the “interests of justice” approach, is that it is dependent upon the individual merits of a case, and its individual circumstances. Therein this surely will encourage a degree of judicial subjectivity which may lead to an uncertainty in the law.
Yet having said this, it is ultimately the role of the courts to uphold justice, especially when it is an individual acting unlawfully and not necessarily the company, as a separate person. In general, the following quote is useful to sum up by; “… the court will use its powers to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration. “
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