Piercing the Corporate Veil

The principles of separate legal personality and limited liability are well-established in common law.[1] Under those principles, an incorporated company is treated as legally distinct from its members, a legal person with its own legal rights and obligations.[2] The House of Lords, in the landmark case of Salomon v A Salomon & Co[3] gave a unanimous judgment that the shareholder was not personally liable for the company’s debts. Its significance lying on the extension of the principle of separate legal personality to one-manned companies, provided that the companies are incorporated in accordance with the Companies Act, which has given rise to what is called the corporate veil.

‘Piercing the corporate veil’ describes cases where the courts disregard the principle extracted from Salomon and instead look behind the corporation, to its real controllers, to impose liability to them.[4]  It does not affect the company’s separate personality but disregards it within a particular context. The recent ruling of theSupreme Court in Prest-v-Petrodel Resources-Ltd [5] being crucial in determining the current state of the law. The principle of sole legal personality stems from statute, the Companies Act 2006. Hence, in accordance with Salomon, separate legal personality does not arise unless the formal requirements are complied with. The judgment of Salomon and its austere application in Macaura v Northern Assurance-Co,[6] where the company’s owner was found not to have even an insurable interest in the company’s property, demonstrate that the courts are generally unwilling to ‘pierce the corporate veil’.  And for good reason, as those principles protect entrepreneurs from assuming liability for corporate debts and those trading with the companies as their claims will not be affected by the creditworthiness of the shareholders.[7]

Nevertheless, there are several legal principles that can be used to attribute one person’s property, rights or liabilities to another person.[8]  First-of-all, one can always contract out of the resulting benefits from the company’s separate personality. Furthermore, Parliament has introduced numerous provisions that can ‘pierce the corporate veil’. Though, per Lord Diplock[9] any such intention should be expressed in clear unequivocal language. For instance, the Insolvency Act 1986 imposes personal liability on a person who conducts business under a fraudulent purpose.[10]  However, it appears that such provisions exist mainly as safeguards to prevent the abuse of company law and not as evidence of some Parliamentary intent to disregard the Salomon principle.

Case law also shows several instances where the Salomon principle can be disregarded. Per Lord Denning, “the courts can and often do draw aside that veil.”[11] If a legal relationship of agency exists between two persons, a principal and an agent, then the principal is liable for the agent’s conduct.[12]  In Smith, Stone and Knight Ltd v Birmingham Corporation,[13] Atkinson J found that the claimant could gain damages from a parent company that operated as the principle of a subsidiary company. However, this ground has only been applied sporadically within the common law,[14] mainly because of its difficulty in finding an agent-principal relationship without an express agreement. The area of tort is also relevant. The House of Lords has identified that a director can be personally liable for both a negligent statement,[15] and a misrepresentation[16] made by a company. Though, the area has been criticised for its lack of clarity. Per Clarke-J in Visvliet,[17] “the cases have not worked out what is meant by corporate veil.” Similarly, Professor Farrar has described the Commonwealth authority as incoherent and unprincipled.[18]

The family courts developed a broad interpretation of their powers under the Matrimonial Causes Act, in particular s.24(1)(a) regarding the transfer of corporate assets in financial remedy cases. In Nicholas v Nicholas,[19] the Court of Appeal established that the transfer of corporate assets can be ordered in cases where the spouse has a beneficial interest in a company. Hashem v Shayif[20] established a set of principles. For the viel to be pierced, ownership is not sufficient and the court cannot do so merely in the interest of justice, but only if there is an impropriety which as highlighted by the Chancery division in Trustor AB v Smallbone[21]is linked to the abuse of the company structure, to avoid or conceal liability.[22]

On the other hand, the Court of Appeal in Prest-v-Prest,[23] concluded that Nicholas was incorrect. The case concerned proceedings for ancillary financial relief. In particular, the position of assets owned by the Petrodel group, which was beneficially owned by the husband. In Petrodel, three grounds were identified that could allow the transfer of the properties. [24] Firstly, whether the doctrine of piercing the corporate veil applied, secondly the family court approach, under s.24(1)(a), and thirdly, whether the property was held on a resulting trust. Lord Sumption held that there is nothing in the Matrimonial Causes Act 1973 to indicate Parliamentary intent to authorise the transfer in such cases,[25] and if the court did so, it would be ignoring the corporate veil.[26] Furthermore, it agreed that the corporate veil could not be pierced here to transfer the corporate assets but on the facts, the properties were vested in the companies on a resulting trust for Mr Prest, thus constituting another exception to Salomon.

Rogers AJA in Brigs-v-James Hardie[27] stated that there is no common unifying principle that underlies the piercing of the veil.[28]  Lord Sumption in his dicta expressed the view that there is a limited principle to pierce the corporate veil in carefully defined circumstances, which apply when a person is under an existing obligation or liability that he deliberately evades.[29]  An issue being, per Lady Hale, whether the cases are merely examples of the principle that the use of corporate schemes should not be abused to obtain an unconscionable advantage with those trading with it. A variety of cases were assessed in Petrodel. In Gencor-ACP v Dalby,[30] a company whose function was to make payments, through which the owner profited, was found his alter ego, which justified piercing the veil. Furthermore, in Trustor, the court held that piercing of the veil should only occur when the company was a façade or sham and that it involved some sort of impropriety, in order to avoid or conceal liability.

Moreover, the ‘façade’ exception has been recognised by the House of Lords in Woolfson-v-Strathclyde Regional Council.[31] The existence of a doctrine was assumed and it was held obiter dicta that the piercing of the veil should only occur where special circumstances exist that indicate it is a mere façade concealing the true facts. The principle was endorsed by the Court of Appeal in Adams v Cape[32]  where it was held that, save for cases that turn on the wording of particular statutes or contracts, the courts are not free to disregard the Salomon principle merely because they believe that justice so requires.[33] Case examples demonstrating the ‘sham’ exception are Gilford Motor Co Ltd v Horne[34] and Jones v Lipman.[35] The facts in those cases echo Trustor insofar as there was an attempt to avoid a legal obligation. An individual was bound by a non-solicitation clause and pursued competitive business through a limited company when his contract expired. It was held that the company formed a ‘device’, a ‘stratagem’ or ‘mask’ which carried on business only to enable the individual to commit the breach.[36] Therefore, the individual was found in breach of covenant. Guilford was followed in Jones, wherean individual transferred land to a company in an attempt to avoid his liability. Russel-J held that the company was a creature of the defendant, a sham, a mask to avoid recognition by the eye of equity.[37] The judgments demonstrate that courts could only pierce the corporate veil where the company was a ‘mere cloak or sham’, concealing the real facts[38] and would not do so simply because justice so required.[39]

The decision of VTB Capital Plc-v-Nutritek, although not a direct authority on the question of piercing the veil[40] offered some useful conclusions. The Supreme Court found that piercing the corporate veil should only occur when all other means are exhausted and the relevant impropriety should involve fraudulent or dishonest misuse of the corporate personality. Additionally, it established that ownership and control of the company is not sufficient in itself, which was upheld in Petrodel.[41] Lord Sumption found the references to a ‘façade’ or ‘sham’, as recognised by previous cases unsatisfactory,[42] and in order to better clarify the state of the law introduced two categories, the concealment principle and the evasion principle.[43]

The concealment principle refers to the use of a company in order to conceal the identity of the real actors will not deter the courts from identifying them, if their identity is legally relevant. A principle he described as legally banal, as it does not involve piercing the veil but rather ‘lifting it’, to discover the facts concealed by the corporate structure.  Previous case-law supports this position. In Atlas Maritime Co SA v Avalon Maritime-No(1)[44]it was recognisedthat to ‘lift the corporate veil’ means to have regard to the shareholding in a company for some legal purpose. Both Gencor and Trustor were found examples of this principle. The reasoning being, that there was no piercing of the veil but instead, the courts refused to be deterred by the legal personality of the company in identifying the true facts of its legal relationship with the individuals involved. The result being the same had the companies been natural persons.[45] The Australian Courts also distinguish between piercing and lifting the corporate veil.[46] Though, there have been instances where the two were confused.[47]

Under the evasion principle, the courts may pierce the veil if there is a legal right against the company’s controllers, which exists independently of the company’s involvement and the company’s separate legal personality is intended to defeat the right or frustrate its enforcement.[48] Lord Sumption noted that many cases will fall in both categories but underlined that the difference between them may be critical.[49] In light of this principle, Gilford was found an example as the sole legal personality of the company was intended to be used for the evasion of a right granted to the purchaser of his company, not to compete with it, where the injunction granted amounted to piercing the veil. Equally, in Jones specific performance was ordered against Mr.Lipman under the concealment principle and the company under the evasion principle.

Nevertheless, Lord Sumption stated that in almost every case, piercing of the veil would not be necessary as the facts would disclose some other legal relationship between the company and its controller.[50] For instance, the conduct in Gilford could be found tortious, which would justify an injunction. Additionally, Lord Walker expressed doubts over the existence of a doctrine, both facts that illustrate that the doctrine only represents a practical solution.[51]

The issue then arises, as identified in the statement, whether it is possible to classify all cases that disregard the Salomon principle within those two categories.  It appears that Lady Hale wished to allow for further development of the law by allowing for more potential categories, in accordance with Lord Mance and Clarke.[52] The cases of Atlas and Pioner evidence that the groundwork for such an approach has already been set. Conversely, a potential exception was recognised by both Lady Hale and Lord Walker.[53]  The case being Stone & Rolls v Moore Stephens,[54] where the court disregarded the personal veil in order to “get at” the owner of a company[55] and attribute his knowledge to it. Hence, issues of attribution can be seen as independent of Lord Sumption’s rule, where Lady Hale seems correct in suggesting that the concepts of agency or of the directing mind would be more relevant.

Post-Petrodel cases illustrate its importance. The Criminal case of R v Sale [56] confirmed that the principles derived are of general application, as it found the Supreme Court was addressing the issue across the law generally and intended to do so.[57] Furthermore, that ownership and control are not sufficient to pierce the veil was also evidenced by the recent case of Hyde v The Queen,[58] where there was no basis to pierce the corporate veil, solely because the individual owned 62 percent of the company.[59] Lord Sumption’s principle was also applied in Pennyfeathers Ltd v Pennyfeathers Property[60] where the Court held that there was no evidence of the individual in question seeking to avoid any obligation, and in Antonio Gramsci Shipping Corp v Recoletos[61]where it was identified as the current state of the law.

In conclusion, it appears that the corporate veil can only be pierced if the company is being used either to evade liability or to frustrate enforcement, assuming that the impropriety is relevant to the courts and all other remedies have been exhausted. It can be argued that Lord Sumption drew a distinction between the terms ‘lifting’ and ‘piercing’ the vail in accordance with the judgment in Atlas, in a practical decision to avoid the disadvantages of an inconsistent and disordered body of law. Yet, its actual limits remain unclear as there is no consensus on whether all cases fit within the concealment and evasion principles, with the possibility for more categories to be created. Nevertheless, the doctrine of piercing the corporate veil is rarely exercised, the majority of cases dealing with the issue in obiter than applying it.           

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[1] T Cheng-Han, “Veil piercing – a fresh start”, J.B.L. (2015) 

[2] The importance of limited liability has been identified early in the debates for the Limited Liability Act 1855 by Mr.John Macgregor, who attributed the United States’ industrial strength to its existence.
HC Deb 26 col 1378-97 July 1855 vol 139 

[3][1897] A.C. 22

[4] See n.1

[5] See n.5

[6] Macaura v Northern Assurance Co [1925] A.C. 619

[7] PW Lee,“The Enigma of Veil-Piercing” I.C.C.L.R. 2015, 26(1), 28-34

[8] Mayson p.127

[9] Dimbleby & Sons v National Union of Journalists [1984] 1 W.L.R. 427

[10] s.213 Insolvency Act 1986

[11] Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners [1969] 1 WLR 1241 as approved by the Nova Scotia Court of Appeal in 2005 NSCA 167

[12] P.130, D French, S Mayson, C Ryan, Mayson French & Ryan on Company Law, 31st edition, (Oxford: OUP, 2014)

[13] [1939] 4 All E.R. 116

[14] A Hargovan, J Harris, “Piercing the Corporate Veil in Canada: A comparative analysis,” Company Lawyer, Vol. 28, No. 2, p. 58, 2007.

[15] Williams v Natural Life [1998] 1 W.L.R. 830, although the action failed here due to the lack of a special relationship

[16] Standard Chartered Bank v Pakistan National Shipping Corporation (No.2) [2002] UKHL 43

[17] [1997] C.L.C. 521

[18]  J Farrar, ‘Fraud, Fairness and Piercing the Corporate Veil’ (1990) 16 Canadian Business Law

Journal 474, 478

[19] (1984) FLR 285

[20] Hashem v Shayif and Another [2008] EWHC 2380 (Fam)

[21] [2001] 1 W.L.R. 1177

[22] ibid. paras 159-164

[23] [2012] EWCA Civ 1395

[24] See n.5 at para. [9]

[25] ibid. paras [37]-[40]

[26] ibid. para. [42]

[27] Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549, 558 (Rogers AJA)

[28] ibid. at [567]

[29] See n.5 at para [35]

[30] [2000] 2 B.C.L.C. 734

[31] [1978] UKHL 5

[32] [1990] Ch. 433

[33] ibid. “the court is not free to disregard the principle of Salomon v. A. Salomon & Co. Ltd. [1897] A.C. 22 merely because it considers that justice so requires.”

[34] [1933] Ch. 935

[35][1962] 1 W.L.R. 832

[36]ibid. Per Romer LJ at p.956

[37]ibid. at p.836

[38] See n.33

[39] See Hashem v Shayif, Adams v Cape and Petrodel

[40]See n.5 at [27]

[41]ibid. at [124]

[42] ibid. at [28]

[43] ibid.

[44] [1990] 2 Lloyd’s Rep. 258

[45] See n.5 at [31]

[46] Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254

[47] For instance, the Australian case of Commissioner of Land Tax v Theosophical Foundation Pty Ltd (1966) 67 SR  (NSW) 70 (NSWCA, Herron CJ, Sugerman and McLelland JJA).

[48] See 49

[49] See n.5 at [29]

[50] See n.5 at [31]

[51] ibid. at [80]

[52] ibid. at [100]-[103], per Lord Clarke  “I agree with Lord Mance JSC that it is often dangerous to seek to foreclose all possible future situations which may arise”

[53] ibid. at [28] -[34]

[54] [2009] UKHL 39

[55] See n.5 at [95]

[56] [2013] EWCA Crim 1306

[57] ibid. at [20]

[58] [2014] EWCA Crim 713

[59] ibid. at para [46]-[47]

[60] [2013] EWHC 3530 (Ch);

[61] [2014] Bus. L.R. 239