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Lecture

Separate Corporate Personality &


Piercing the Corporate Veil
Definition
• A company once registered has its own legal
personality
• Artificial rather than natural person

• Historically recent characteristic recognised in


Salomon v Salomon (1897)AC 22 HL
• Vaughan Williams. Benefit without risk.. An
unfair mechanism to defeat the just claims of
creditors.
• Lindley, LJ Intention of parliament, 7.
• A fraud, a sham, an agent
House of Lords
• Creditors have notice of Limited liability
• Required adherence to statutory requirements
• No fraud

• Company has a distinct legal identity.


Salomon Followed in
• Lee v Lee Air Farming Ltd [1961] AC 12
• Macaura v Northern Assurance Co. [1925] AC619

• One man co. cases

• Salomon principle always followed unless facts fall


under a common law or statutory exception
Common law exceptions
• One single economic unit
• Façade or sham co.
• Agency
• To determine nationality
• Tax evasion
• Alter ego for criminal or tortious liability
• Company guarantee
Single Economic Unit
DHN Food Distributors Ltd v Tower Hamlets LBC
(1976) 1 WLR 852
Firm of grocery and provision merchants. It had a
warehouse, lorries and a cash and carry business.
Three companies-
The business was owned by the parent company,
D.H.N. Food Distributors Ltd.
The land was owned by a subsidiary, Bronze Investment
Ltd
Vehicles were owned by D.H.N. Transport Ltd.
Parent company 100% owned and controlled
Bronze and transport co.
Situation
• Tower Hamlets compulsory purchase of land
• Unable to relocate the 3 companies went into
liquidation
• The three companies sought compensation for
loss of land and business under section 5 & 6 of
the Land Compensation Act
Tower Hamlets Argued
• DHN Transport and DHN Food had business
disturbed
• They had no interest in the land that could be
compensated, licencees only
• Following Salomon the three companies should
be treated as separate entities
Court of Appeal

“This group is virtually the same as partnership in


which all three companies partners. They should not
be treated separately so as to be defeated on a
technical point. They should not be deprived of the
compensation which should be justly payable for
disturbance. The three companies should, for
present purposes, be treated as one.”
GOFF, LJ.

Decision limited to facts of case.


“I would not at this juncture accept that in every
case where one has a group of companies one is
entitled to pierce the veil.”

Pierce if-
1. Wholly owned subsidiaries.
2. No separate business operations.
3. The owners of three businesses have been
disturbed in their possession and enjoyment of it.
Woolfson v Strathclyde RC (1978
S.L.T. 159)
Compulsory purchase order of shop premises in
St Georges street Glasgow by Glasgow Corporation.
Business organised under 3 companies
Numbers 57 and 59-61 (owned by Mr Woolfson).
Numbers 53-55 (owned by Solfred Holdings Ltd):
He held two thirds of the shares wife held one third.

The shop (53-5) was occupied by M & L Campbell


(Glasgow) Ltd. Wedding garments.
Share capital in this company was 1000 shares,
999 were held by Woolfson and 1 by his wife.
Council S.Woolfson
• Campbell had not signed a • Campbell and Solfred should
lease agreement with Solfred be treated as one entity
Holdings embodied in himself

• Campbell not eligible for • He should be compensated for


compensation as had no disturbance of Campbell’s
property interest in shop business
Held
For DHN to apply all three criteria had to apply.
They did not as no 100% owned subsidiary

Campbell had no control over the owners of the land,


Solfred and Woolfson.

Woolfson held only two thirds of the shares in


Solfred and 999 of 1000 in Campbell
Wife not a mere nominee.
Adams v Cape Industries [1990]
Ch.433
• English parent company, South African
subsidiary, Asbestosis victims.
• LORD KEITH.
• economic unit: only applicable in cases “where
legal technicalities would produce injustice in
cases involving members of a group of
companies”
corporate veil.
Court will lift Veil if a defendant utilises the
corporate structure in an attempt to evade
(1) limitations imposed on his conduct by law
(2) such rights or relief against him as third
parties already possess.
But “cannot lift the veil against a defendant company
which is the member of a corporate group merely
because that corporate structure has been utilised
so as to ensure that the legal liability(if any) in
respect of future activities of the group (and
correspondingly the enforcement of that liability)
will fall on another member of the group rather
than the defendant company. Whether it is desirable
or not, the right to use the corporate structure in this
manner is inherent in our corporate law”
Not as plaintiff’s counsel contended, “such rights
of relief as third parties might in the future
acquire”

Veil may be pierced in cases involving the


interpretation of legal documents or statute
such as……….
Revlon Inc v Cripp & Lee Ltd
[1980] FSR 85
• Revlon Suisse was a subsidiary of Revlon Inc
Revlon Suisse held the Revlon trademark

• Question
• Was this an exclusively Revlon Suisse Asset?
• Was it connected in the course of trading with
Revlon Inc?
Buckly LJ
“Since, however, all the relevant companies are
wholly owned subsidiaries of Revlon… the mark is…..
an asset of Revlon…... regard Suisse as
holding the mark at the disposal of Revlon and for
Revlon’s benefit. The mark is an asset of the Revlon
Group of companies regarded as a whole, which all
belong to Revlon.”

This does not constitute piercing the veil but


recognises the legal and factual relationship between
the companies.
Salomon principle will tend to be
upheld in ‘Economic groups’

• Polly Peck International PLC [1996] 2 All ER


433 subsidiary raised funds for parent which
was guaranteed by parent. Subsidiary could
claim as a creditor when parent in liquidation
• Dimbleby & Sons v NUJ [1984]
• Lonhro Ltd v Shell Petroleum Co Ltd [1981] 3
WLR 33
Issues
• Should parent companies owe a duty of care to
those adversely affected by the tortious act of its
subsidiary?
• Groups tend to be MNEs, with subsidiaries
operating in developing countries
• Cape. SA Asbestos
• Thor Chemicals
• Bhopal. Union Carbide. India, UCI Ltd
Liability and Organisational
structure
• Move from a classical model of the MNE as a ‘pyramid’
to ‘a more flexible organisational form where
subsidiaries are given more initiative over major
decisions and to which significant strategic functions
may be devolved’ (Company Lawyer 2002 Muchlinski
p170)
• shift from firms as internalised markets to ‘co-operative
relationships between firms’
• Dunning, ‘Alliance Capitalism and Global Business
(Routledge 1997) where firms behave ‘like a single
integrated business’
• Cape was of the old model but argued from the
new model of subsidiary independence
(‘heterarchical’ model) which may have
influenced judicial thinking.

• Flexible forms more likely in new industries


rather than old established oligopolies
Ngcobo et al Thor Chemicals Holdings
[1995] T.L.R. 579. Lubbe v Cape Plc
[2000] 1 WLR 1545
• Cape and Thor – Issues of alleged breach of the
duty of Care, considered 2 questions
• 1. Does the forum have jurisdiction to bring the
case?
• 2. Is the parent liable for the beach?

• In both cases the answer was yes to one but
settled before getting the answer to 2.
• Both considered the doctrine in the Spillada case (Spillada
Maritime Corp. v Cansulex Ltd [1987] AC 460.
• 1. Taking account of all circumstances particularly the nature
of the subject matter and the convenience of the subject
matter which forum is most appropriate?
• 2. Even if a forum other than England might be more
appropriate will substantive justice be achieved in that
forum?
House of Lords. Lubbe
• succeeded on 2.
• Substantive justice could not be done in South
Africa. Absence of legal aid etc.
• It did it consider the issue of integrated
economic interests and managerial power such
as would make Cape a party to the claim.
The problem with limited liability
in MNEs
• Never intended to disempower involuntary creditors (in MNEs
likely to be poor and powerless in developing countries) such as
victims of tort. Here limited liability ‘shifts the risk of liability
onto them and away from the group’ (Muchlinski p172)
• Designed to protect the outsider investor not the direct involved
investors (parent) who is involved and responsible.
• Insulates succeeding layers of corporate group organisation from
liability not just ultimate shareholders
• In small companies members/managers usually have to
personally guarantee loans.
• Human rights Act- right to fair trial may be denied by
the corporate veil.
• Mass tort cases likely to require the assets of all
members of the group. NB Walkovsky v Carlton (1966)
• Public policy concerned with establishing CSR ie OECD
Guidelines for Multinational Enterprises (2008) suggest
minimum international standards.
Agency: Actual or Ostensible
Authority binds Principal
Smith, Stone and Knight v Birmingham
Corporation [1939] 4 All ER 116
Functional control

Adams v Cape Industries plc [1990]


Express agreement required
Smith, Stone & Knight v Birmingham
Corp [1939] 4 All ER 116
• 1. Who was really carrying out the business?
• 2. Were the profits treated as the profits of the
company?
• 3. Was the company the head and brains of the
trading venture?
• 4. Did the company govern the venture?
• 5. Did the company make the profits by its skill
and direction?
• 6. Was the company in effectual and constant
control? Atkinson j.
Façade: Veil Pierced
FG Films Ltd [1953] 1WLR 483
British subsidiary claimed to be maker of
film- £100 investment, under capitalised.
Gilford Motor Co Ltd v Horne [1933] Ch. 935
Avoidance of covenant
Jones v Lipman [1962] 1 WLR 832
Avoidance of house sale-
remedy: Decree of specific performance binding
on company
To Determine Nationality

• Daimler Co. Ltd v Continental Tyre & Rubber


Co. Ltd [1916] 2 AC 307

• Rare application
Tax Evasion
• Littlewoods Mail Order Stores Ltd v IRC
• [1969]1 WLR

• De Beers Consolidated Mines Ltd v Howe


• [1906]
• De Beers traded diamonds in England but
• registered in South Africa.
• Income tax payable “where it does its
• business” Applicable only for tax purposes
Alter Ego: Co. responsible for acts of
director

• Liability if clear identification of “directing


mind”

• In practice applies mainly to smaller companies


Lennard’s carrying co. Ltd v Asiatic
Petroleum co. Ltd [1915] AC 705
• Fire caused by unseaworthiness results in loss of
cargo
• Co claimed immunity under s. 502 of Shipping
Act as “no actual fault”

• Director had knowledge and fault therefore the


company at fault.
Criminal Activity
• Re H and others (restraint order: realisable
property) [1996] 2 BCLC 500

• Defendants owned 100% of shares in companies


and had committed excise fraud worth £100
million
• Court could treat assets of co. as their realisable
property s.77 CJA 1988. Veil used to conceal
criminal activities
• "Where a defendant has used the corporate
structure as a device or façade to conceal his
criminal activities, the court could lift the
corporate veil and treat the assets as the
realisable property of the defendant under
the 1988 Act [the Criminal Justice Act 1988].
On the facts, there was a prima facie case
that the defendants controlled the two
companies, that the companies had been
used for the fraudulent evasion of excise
duty on a large scale…..appropriate to lift the
corporate veil….”
Remains ruling authority
• Crown Prosecution Service v Compton and
others COURT OF APPEAL (CIVIL
DIVISION) [2002]
• property obtained from drug trafficking,
realisable property.
Contractual Guarantees
• Creditors who hold guarantees from other
members of the group may be able to shift the
liability around the group by enforcing
contractual claims.

• However, a document that may appear to be a


guarantee may fall short of this and may be
termed merely “comfort letters”.
Kleinwort Benson Ltd v Malaysia
Mining Corporation Berhad [1986]
1 WLR 379
Def were a plc in Malaysia that formed a wholly owned
subsidiary in England Exchange. Plaintiffs were
merchant bankers who made a loan to sub (MMC Metal
Ltd) relying on a comfort letter from def
“it is our policy to ensure that the business of the
subsidiary is at all times in a position to meet its
liabilities”
Sub in liquidation.Def refused to pay sums outstanding
letter had not been intended to impose any binding legal
obligation.
On appeal
def statements in letter were “ in terms and context
(def had originally refused joint liability) as well as on
evidence, a statement of present fact and not a
promise as to future conduct: and that no promise
as to future conduct could be implied: and that
accordingly, the terms of the comfort letter had no
contractual effect.”

Moral not legal responsibility.


Statutory Exceptions: s.212
Insolvency Act 1986 (IA 1986)

• Summary remedy against delinquent directors-


• s.212 provides a summary procedure (requires leave of court) to make
directors, (and liquidators, administrators or administrative receivers)
liable to contribute to the company’s assets for misuse of company
assets, breach of fiduciary duty or the duty of care and skill.
• Procedural and does not add to duties

• Applicants: official receiver, liquidator, or any creditor. Acting in own name but on
behalf of the company
• On examination of officer’s conduct the court can order person to repay all or some
of funds.
In Re Continental Assurance Company of
London plc CHANCERY DIVISION
[2001] BPIR 733

• to repay, restore or account for the money or


property or any part of it, with interest at such
rate as the court thinks just, or

• to contribute such sum to the company's assets


by way of compensation in respect of the
misfeasance or breach of fiduciary or other duty
as the court thinks just.
West Mercia Safetywear Ltd (in liq)
v Dodd [1988] BCLC 250

• West Mercia Safetywear Ltd wholly owned


subsidiary of AJ Dodd & Co Ltd.
• Mr Dodd was a director of both companies
• Companies shared bank, Dodd Ltd’s overdraft was
guaranteed by Mr Dodd

• By May 1984 West Mercia owed Dodd Ltd £30,000,


• both companies in financial difficulties
• Accountant advised against using bank accounts
• But Mr Dodd transferred £4000 from Mercia’s
account to Dodd Ltd’s.
• In June both companies went into liquidation.

• Liquidator for West Mercier applied for a declaration that Mr


Dodd was guilty of misfeasance and breach of trust and should
repay £4000 to West Mercier.
• On appeal.

• Held: Once a company was insolvent the interests of the


creditors override the interests of the shareholders. Therefore
transfer was in breach of duty to WM (as assets effectively
belonged to creditors in insolvency), because it was against the
interests of the creditors.
• Mr Dodd ordered to repay £4000 to WM with interest.
Fraudulent Trading -
s.213 IA 1986
• A criminal offence under CA06 s.993
• A civil offence under s 213 -when winding up.
• Applicants: liquidator.

• Same tests for liability


• Requirement: “business of the company has been carried on
with intent to defraud creditors”
• Includes one transaction and one creditor.
Morphitis v Bernasconi and others [2003] 2
BCLC 53
• Although a business may be found to have been
carried on with intent to defraud creditors
notwithstanding that only one creditor was shown
to have been defrauded, and by a single transaction,
it did not necessarily follow that whenever a fraud
on a creditor was perpetrated in the course of
carrying on business that the business was being
carried on with intent to defraud creditors.
• under s 213 declare persons liable to contribute to
the assets of the company in the winding up must be
shown that business was undertaken thus
• Conduct must “involve actual dishonesty,
involving, according to current notions of fair
trading among commercial men, real moral
blame” Patrick Lyon Ltd, Re [1933] Ch.786
• No real prospect of repayment William C Leitch
[1932] 2 Ch 71
• Includes anyone who was party to the fraudulent
transaction. Bank and Credit and Commerce
International SA (no.15), Re [2005] 2 BCLC 53
• Effect: court’s discretion on personal assets.
s.213 IA (cont)
• Re L. Todd (Swanscombe)Ltd (1990) BCC 125.
• Morez was a co. director of a scrap metal business. Principal
customer Mayer Newman, dealt with for many years without
charging VAT and did not pay VAT in respect to these
transactions.
• 1985 coy went into liquidation.
• 1988, Commissioners of customs and Excise of VAT sought
repayment of VAT from Morez under 213IA .

• Held: Personally liable for VAT debts as trading, knowingly and


fraudulently.
Wrongful Trading
section 214 IA 1986
• S.214 application by liquidator upon winding up
directors (including shadow directors) personal
contribution, to the company’s assets
• Appears that trading continued (before winding
up) when the director knew or ought to have
known that there was no reasonable prospect
that the company would avoid liquidation.
Ought’- standard of competency
required

• a) the general knowledge, skill and experience


reasonably expected from somebody carrying
out the same function as a director.

• b) general knowledge and skill that a director


actually has.
• Shadow directors
• Does not include professional advisors
• Or others involved in trading (unless shadow
director)
• Defined in CA s.251 as a person in accordance
with whose directions or instructions the
directors of the company are accustomed to act
• Re Hydrodam (Corby) Ltd, Re [1994] 2 BCLC
180- useful definitions
• Secretary of State for Trade and Industry v
Becker [2003] 1 BCLC 565- bank as S/D
• Defense: Dir had taken every reasonable step to
minimize loss. 214(3)

• Liability: Courts discretion, compensatory not penal.


214(1) Re Produce Marketing [1989] BCLC 133.
• Nb. Liability for fraudulent trading understood as
penal but Morphitis v Bernasconi stated it too was
compensatory
When does wrongful trading begin?

• In Re Continental Assurance Company of


London plc CHANCERY DIVISION [2001]
BPIR 733
'the increase in net deficiency' between a
hypothetical liquidation date and the actual
date of liquidation
• Sherbonne Associates Ltd [1995] BCC 40.
Identify a date directors should have known
• Re, The Rod Gunner Organisation Ltd [2004]
BCLC 110. Not for period when they expected
an investor to solve the problem
• Courts cautious about restricting directors.
s.215 Proceedings under s.213,214
• Allows company to take compensation from
moneys owed by it to director s.215(2) (a)
• Court may direct that director’s creditor status
shall rank in priority after all other creditors
s.215(4)
Director Liability for Phoenix
Companies s.216 and s.217
• To prevent the abuse of limited liability by re-using
the name of an insolvent company.
• Re-use of insolvent company name in contravention
to s.216 IA
• Criminal offence s.216
• Civil liability with new company s.217
• New company need not be insolvent
• Claims brought by individual creditors
• CLR noted that proceedings are rare and more likely
to be pursued under s214 and 213 IA 1986
• Less successful than s.214 and 213 but more
successful in criminal liability
216 Restriction on re-use of company names
216(1) [Application] This section applies to a person where a company
("the liquidating company") has gone into insolvent liquidation on or
after the appointed day and he was a director or shadow director of the
company at any time in the period of 12 months ending with the day
before it went into liquidation.
216(2) [Prohibited name]
(a) it is a name by which the liquidating company was known at
any time in that period of 12 months, or
(b)it is a name which is so similar to a name as to suggest an
association with that company.
216(3) [Restriction] Except with leave of the court , a person to whom
this section applies shall not at any time in the period of 5 years
beginning with the day on which the liquidating company went into
liquidation be a director of any other company that is known by
a prohibited name,
216(4) [Penalty] If a person acts in contravention of this section, he is
liable to imprisonment or a fine, or both.
Personal liability for debts, following
contravention of s. 216
IA 1986, s. 217(1)

217(1) [Personal liability] A person is personally


responsible for all the relevant debts of a company if at any
time–
(a)in a contravention of section 216, he is involved in the
management of the company, or
(b)as a person who is involved in the management of the
company, he acts or is willing to act on instructions given
(without the leave of the court) by a person whom he knows
at that time to be in contravention in relation to the company
of section 216.
217(2) [Joint and several liability]
Thorne v Silverleaf [1994] 1 BCLC 637

Mr Thorne had been the directors of three companies, each of


which had had the name ‘Mike Spence’in its name.

1.Incorporated in 1968, Mike Spence (Reading) LTD.


In 1990 it went into creditors voluntary liquidation.

2. Incorporated in 1986 Mike Spence (Motorsport) LTD.


In 1989, it went into voluntary liquidation.

3. Mike Spence Classic Cars LTD was incorporated in 1990.


Joint venture was formed between the plaintiff, Mr Silverleaf
and Mr Thorne, the defendant, whereby the plaintiff would fund
purchase of stock.
Company owed the plaintiff £135,000 with further debts of
£200,000 for unsecured creditors.

The plaintiff commenced proceedings claiming the money lent


to and used by the company and that def 1 was personally liable
jointly and severally with the company in respect of the sum owed
by the company to the plaintiff..

Held. The name of the company was so similar to that of the


two previous companies as to suggest an association with them.
Accordingly it was a prohibited name under s216(2)
of the ‘86 Act.

The def satisfied the requirements of s217


since he was involved in the management of the company in
contravention of s.216
End of lecture