Decoding Veil Lifting: Legal Complexities and Judicial Dilemmas

The general reasoning of the Court in this area of Veil Lifting the Corporate veil has been confusing and, at times, contradictory:

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The question requires an analysis of whether the parent company (A); will be liable for the claims against its subsidiary, (b): in other words, whether the corporate veil can be lifted in this group structure. Both the parent company and its subsidiary are incorporate which have been legally formed. A company once incorporated, is a separate, and distinct legal entirely from the people who set it up: The Veil of incorporation is created by the principle of separate legal personality and that limited liability which are established in Salomon v Salomon & Co Ltd (1897)

A company, once incorporated is a separate and distinct from the people who set it up.

In a company limited by shares, a member’s liability for the company debts is limited to his subscribed shares. The courts are very protective of the Salomon principle and only lift the Veil in a small number of exceptional cases at common law and by statute.

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As there are no clear rules or guidelines for lifting the corporate veil, it is correct argued that this area of law is confusing, contradiction and difficult to rationalize.

Example: in Solomon v Solomon& Co Ltd (1897)

In a company limited by shares, a shareholder is not liable for the company’s debts. As (A) hold shares in (b) , it enjoys the protection of limited liability in respect of debts of (b), if the corporate veil could be lifted and the separate legal personality of (b) be ignored, (a) would be liable for claims against (b).

The court may lift the corporate veil if the corporate group structure is used as the: example in Adam v Cape Industries plc [1990] Cape Industries plc (cape) was an English mining company and its products were marketed through its subsidiary companies in the United State. A number of workers suffered from inhaling asbestos. The question can Cape mother company in England be liable for the subsidiary in the state.

The judgment in Adams v Cape Industries Plc [1990] has significantly narrow the ability of the court to lift the Veil in case, subsidiary companies were incorporated in the United States of that the parent company in the United Kingdom could avoid future asbestosis claims in the United State. The Court of Appeal reviewed this complex area of law and concluded that the Veil could only be lifted in three circumstances.. The only way that the veil of incorporation would be lifted by the Court was only in thee circumstances, (i) view cape group as a single entity, (ii): find the subsidiary as a mere façade, (iii) the subsidiary were agents for cape. The Court exhaustively examine all the three possibility (i): find the subsidiary as a mere façade

First, the veil may be lifted when the corporate structure is a mere sham or façade concealing the true fact. It is difficult to clearly define mere façade or decided whether the arrangements of a corporate group involve a façade. In Adam v Cape the Court of Appeal held that the company structure was a façade when it had been used by a defendant to evade limitations imposed on his conduct by law or when it had been used to evade rights which third parties already possessed against him.

In Gilford Motor Co v Horn [1933]

A former employee who was bound by a covenant not to solicit customer from his former employers set up a company to do so. The defendant formed the company as a device to avoid liabilities in breach of his pre-existing legal duty and the Veil was lifted .

Jones v Lipman [1982]:

The Veil was lifted when the company was set up by the defendant to avoid specific performance in relation to transfer of land. The Court described the company as a device, a sham, a mask which he hold before his face in an attempt to avoid recognition by the eye of equity. The defendant formed the company as device to avoid liabilities in breach of his pre existing legal duty and the Veil was lifted.

The company structure is a façade only when it has used by a defendant to evade limitations imposed on his conduct by law ; Example in Jones v Lipman [1962]; Mr. Lipmann had entered had entered into a contact with Mr. Jones for the sale of land. Mr. Lipman then changed his mind and did not want to complete the sale. He formed a company in order to avoid the transaction and conveyed the land to it instead. He then claimed he no longer owned the land and could not comply with the contract. The judge found the company was but a façade and granted an order for specific performance. But the of Appeal in Adam Court in held that each company was a separate legal entity from its shareholders and the presence of the US subsidiaries did not automatically amount to the presence of the English parent company. (ii): view cape group as an Agency:

Secondly, the Court may lift the veil if a express agency relationship exist between a company and its shareholders, or between a parent and subsidiary company in a group structure. Although a company is a separate legal entity instead an agent of its shareholders, it is possible that there is evidence of day to day control and that an agency relationship can be established on particular facts. It is, however, difficult to prove an agency relationship without express agreement. Somme guidance is provided in: Smith, Stone & Knight Ltd v Birmingham Corp [1939]

In order to maximize the amount of compensation, the parent company argued that the subsidiary carried on the business as its agent. It was held that whether there was an agency relationship was a question of fact in each case, such as who was actually carrying on the business, who received the profit, who was actually conducting the business and who was in effective and constant control of the business. As the subsidiary was operating on behalf of the parent company the court lifted the Veil on the basis of the existence of an agency relationship. It can be argued that third is not a true exception to Salomon principle it is merely an instance where the normal agency principles applies.

In the absent of an express agency agreement or the evidence of day to day control, it is very difficult to establish an agency relationship: In Smith, Stone & Knight v Birmingham Corporation [1939] In Smith, Stone and Knight Ltd v Birmingham Corporation (1939) All ER 116, Atkinson J lifted the veil to enable a subsidiary company operating business on land owned by the holding company to claim compensation on the ground of agency. The parent company held almost all the shares in the subsidiary and profit of the subsidiary were treated as the profits of the parent was in effective con troll of the business and also the personnel who conducted the business and also appointed the personnel who conducted the business.

It was held that whether there was an agency relationship was a question of fact in each case, such as who was really carrying on the business, who received the profit and who was in effective and constant control of the business. The veil was lifted in this case on the ground of any agency relationship. Although (a) hold all the shares in its subsidiary and all the profit flow back to it, there is no evidence of day to day control of an express agency agreement. It is therefore unlikely that the court would consider (b) as the agent of (a): (iii): view cape group as a single entity :( Single economic Unit): Third, in relation to the debate on single economic unit, Lord Denning in: DHN Food Distributors Ltd v Tower Hamlets LBC (1976):

Argued that a group of companies was in reality a single economic entity and should be treaty as one. This view was disapproved by the House of Lords in: Woolfson v Strathclyde Regional Council (1979)

Which held that the Veil would be upheld unless it was a façade, In Adam v Cape held that, whether or not this is desirable, the rights to use a corporate structure in this manner inherent in our corporate law. The fundamental principle is that each company in a group of companies is a separate legal entity possessed of separate legal rights and liabilities. The Court, however, will ignore the distinction of particular statutory or contractual provisions, the meaning of which is disappointingly unclear. There is controversy as whether the Veil can be lift in the interest of justice. This idea of lifting the corporate Veil in pursuit of justice was championed by Lord Denning in: Wallesteiner v Moir [1974]

It is held in Adam v Cape that the Veil cannot be lifted merely in pursuit of justice. Another ground for lifting the Veil is where the Country is at war and it is in the Country’s interest to do so. Daimler v CRT (1916) :

The application of this category is limited and it is more about politics than law. In addition to the examples at common law, the courts may lift the Veil and hold individuals shareholders or directors liable for the company’s liabilities according to statutory provision. Section 761 of the companies Act 2006, for example, reauires that the directors of a public limited company be jointly and severally liable to indemnify the other party in respect of any loss or damage suffered by reason of the company failure to comply with the provision that company should not trade before its registration. According to section 213 of the insolvency Act 1986 on fraudulent trading, the Court may declare that any person, who carries on the business with the intention to defraud the company assets.

Lord Diplock in: Dimbleby v National Union of Journalists [1984]

States that the statutory provision must be in clear and unequivocal language The judicial approach towards lifting the corporate Veil is still unclear and lacks precise guidance despite the judgment in Adam v Cape. The Courts appear to proceed on a case-by-case basis in deciding whether to lift the corporate Veil. The few number of examples at common law and in statute reflects the court reluctance to ignore the Salomon principle which are the foundations of company law and have promoted the economic growth.

This theory was first put forward by Lord Denning in: in the case DHN Food v Distributors’ Ltd v Tower Hamlets (1976); who agreed that a group of companies was in reality a single economic entity, and should be treated as one; the court was entitled to look at the realities of the situation to lift the corporate veil. The Court in Adam rejected the argument by stating that there was no general principle that all companies in a group of companies were to be regard as one.

The fundamental principle is that each company in a group of companies is a separate legal entity with separate legal rights and liabilities. The disapproval of the single economic unit theory was confirmed in the case Ord v Belhaven Pub Ltd (1998): where the Court did not allow a plaintiff with a claimed against one subsidiary company to substitute the parent company as defendant merely because the group might be a single economic units.

Lord Denning in the Court of Appeal examined the major single economic units’ case where group structure were as single entity. It found that the case all involved the interpretation of the statute or a document. The Court reject the argument that cape was the group should be treat as one; and confirm the principle of Salomon.

It can be argued, therefore, that the group structure of (b) and its subsidiaries is legitimate and it is very unlikely that the court will hold the parent liable on the ground of fraud, sham or mere façade.

Conclusions

Given the judicial reluctance to ignore the Salomon principles, it is highly unlikely that the court will hold (a) liable for the claims against (b) on the basis that the group structure is a mere façade, or there is an express agency relationship between them or that they should be treated as one economic unit