Company Law Revision Part 2: Model Essays

1. What general principles, if any, can be derived from those cases

where the courts have 'pierced the corporate veil'? Discuss.
Piercing (or lifting) the Corporate Veil
Gilford Motor Co Ltd. v Horne [1933] Ch 935
Jones v Lipman [1962] 1 WLR 832
DHN Food Distributors v Tower Hamlets LBC [1976] 1 WLR 852
Woolfson v Strathclyde Regional Council 1978 SLT 15
Adams v Cape Industries [1990] 2 WLR 657 Creasey v Breachwood Motors Ltd [1993] BCLC 480
Re Polly Peck International [1996] 2 All ER 433
Ord v Belhaven Pubs Ltd. [1998] BCC 607
Connelly v RTZ Corporation Plc [1998] AC 854 [HL]
Lubbe v Cape Industries Plc [2000] 1 WLR1545 [HL]
Williams v. Natural Life Health Foods Ltd [1998] 1 BCLC 689
Standard Chartered Bank v Pakistan National Shipping Corp. [2003] 1 All
ER 173

Company law sometimes effectively ignores or bypasses the separate

legal personality of the company (Salomon doctrine) and attaches
liability directly to individuals within the company. This area has been
mostly developed as judge made law. The courts have laid down
situations in which separate legal personality will be disregarded.
Lifting the veil
Per Adams v Cape (see below): 3 grounds for veil lifting:

(a) Statutory requirements, or contractual documents

Eg. tax legislation; accounting rules
(b) Faade or Sham
Gilford Motor Co Ltd. v Horne [1933] Ch 935

Jones v Lipman [1962] 1 WLR 832

Adams v Cape Industries [1990] 2 WLR 657

Asbestos, subsidiary companies used to shield liability from the
apparent company for the sale of the potentially dangerous asbestos.
Slade L.J. said that a member of the corporate group was perfectly
entitled to use the corporate structure in such a way: as to ensure
that the legal liability (if any) in respect of particular future activities
of the group ... will fall on another member of the group rather than
the defendant company
The distinction between avoiding existing, and future, liabilities
Must the company be formed to evade the liability, or is it enough that it
is subsequently used for such?
Raja v Van Hoogstraten [2006] EWHC 2564 (Ch)
(c).

Agency

Express Agency:

Implied Agency
Re FG (Films) [1953] 1 WLR 583
Smith, Stone and Knight v Birmingham Corporation [1939] 4 All ER 116

(d)

Single economic entities: the problem of corporate groups

Lonrho v Shell Petroleum [1980] QB 358; [1980] 1 WLR 627 HL

DHN Food Distributors v Tower Hamlets LBC [1976] 1 WLR 852
The SINGLE ECONOMIC UNIT exception was first expounded in
DHN
Woolfson v Strathclyde Regional Council 1978 SLT 15
Adams v Cape Industries [1990] 2 WLR 657
Creasey v Breachwood Motors Ltd [1993] BCLC 480
Re Polly Peck International [1996] 2 All ER 433
Ord v Belhaven Pubs Ltd. [1998] BCC 607
EC Draft 9th. Directive on Conduct of Groups of Companies

(e) The corporate veil and tortious claims:

Why claims in tort are problematic.
Connelly v RTZ Corporation Plc [1998] AC 854 [HL]

Lubbe v Cape Industries Plc [2000] 1 WLR1545 [HL]

But compare:
Williams v. Natural Life Health Foods Ltd [1998] 1 BCLC 689
Standard Chartered Bank v Pakistan National Shipping Corp. [2003] 1 All
ER 173
(f) criminal law
eg. health and safety at work provisions
eg. environmental regulations
(g) statutory creditor protection
Insolvency Act 1986:
s.213: fraudulent trading
any person who is knowingly party to carrying on the business of
the company with intent to defraud creditors can be made liable
to contribute towards the assets of the company
s.214: wrongful trading
if a director fails to take all reasonable steps to protect the
companys creditors once he knows, or ought to know, that
insolvency is inevitable, he can be made liable to contribute
towards the assets of the company.

(h) Contractual liability

Intro:

Since Salomon1 in which the dual doctrines of;

o i) separate legal personality of the company and
o ii) limited liability of shareholders of companies,
this has been an issue in English company law.
Greater so, now that many companies are part of larger
corporate groups, there is a greater risk that companies
will shield themselves from any potential liability by
masking the activities of subsidiaries and parents
through this structure. The onus has been on balancing
the competing concerns of precedent and producing an
outcome that is just
o At times though the Salomon doctrine will be
sidestepped by a statute anyway, as shown by
taxation legislation; s.399 CA 2006 provides that
the parent companies are under a duty to produce

group accounts..
Thus, there is sometimes a need to disregard Salomon

doctrine and pierce the corporate veil.

The arguments against are threefold: single economic

entity, facade and agency;

However, this has generally been limited to only the
most extreme cases, in which it has been demonstrated

that the corporate group is a mere faade.

However, the current approach has been described as
inadequate, and commentators such as Marc Moore
have propounded alternatives, more onerous on
incorporators which also have a strong basis in the

1 Salomon v. Salomon & Co [1897] AC 22

existing case law the genuine ultimate purpose or

GUP test
Slade LJ recognised three exceptions in Adams v. Cape
which I shall discuss below:

Para 1 Single Economic Entity:

This is an argument in favour for piercing the veil in certain

conditions.
The example provided:
o Company A has subsidiary B
o Company B runs farming business
o Company A owns land on which business is run
o Government makes a compulsory purchase of land;
compensation by statute only provided for in respect of
disturbance to business, which is disturbed.
o This provides a difficulty; as in reality they are one
business (parent + subsidiary) de facto single economic

unit; but de jure they may not be recognised as such.

This exception was first expounded in the DHN case.
o The DHN case

Para 2 Agency:

Smith Stone & knight v. Birmingham Corp.

o The autonomous identity of the company will be
disregarded on the basis of the agency exception, only
where the subsidiary is completely and utterly under the
control of its parent to the extent that the subsidiary
cannot be said to be carrying on its own business in
distinction from its parent.
o This has been recognised to be a very narrow exception;
single economic unit not enough.
o In the Birmingham Corp case, the parent purchased a
subsidiary; which had initially been an unincorporated

company; it was then registered and subsequently

treated as merely a department of the parent company.
The parent had full and exclusive access to the

subsidiarys books.
The subsidiary was allowed to occupy the parents

premises for no consideration

The subsidiary employed no other staff than a

manager
The only evidence that the subsidiary was distinct
was the separate name on the stationary and

premises
o As this case has a very strange and particular set of
facts, it isnt the most satisfactory precedent as it is
unforeseeable that many cases will arise in the future
with this sort of situation.
Para 3: Faade:
This will arise in cases were an existing incorporated or
unincorporated trader uses a company as nothing more than an
artificial device for the purpose of shielding themselves from preexisting statutory, contractual or tortious liabilities.

The typical sets of circumstances that will trigger this sham

exception to Salomon are exemplified in two well-known 20th

century cases:
Gilford Motor Co v. Horne:
o The defendant in this had a contract with his previous
employer that prevented him from engaging with former
clients for business
o He created a new company, for the mere purpose of
engaging with his previous customers and competed
with his former employers.
o The CA discarded the corporate veil, which had the
effect of allowing the plaintiff to pursue injunctive relief
against both the defendant and the company through
which he had been trading in breach of his contractual
undertaking.

o Of note, because 3 members of the bench agreed that

the company was a mere cloak or sham its only
purpose being to shield the defendant from any
potential liability that would arise from his breach of

contract.
This case was followed at first instance by Jones v. Lipman
o Essentially similar set of characteristics to Gilford
o The D entered into a contract with the plaintiff to
transfer land to him, D then changed his mind. Created
a new company, to transfer the land to and put it
beyond the reach of an action for specific performance.
o Russell J refused to recognise the existence of the
corporate veil under these circumstances and instead
made an order for specific performance against both the

Defendant and the company

Slade LJ in Adams insisted that sham or faade be the only
general basis for piercing the corporate veil.
o Moore argues that Slades view is understandable from
a practical perspective
Clearly defines and therefore minimises the range
of possible cases in which the court may pierce
the corporate veil; this presents a situation where
the integrity and autonomy of the corporate form
gains the paramountcy; whilst not neutering the
Courts potential responses to the most morally
reprehensible and economically harmful abuses of

the corporate form by traders.

By focusing on concrete doctrinal principles over
potentially subversive considerations of fairness or
policy he guarded against the likely floodgates
problem consequent upon the moralisation of the

issue of piercing the corporate veil.

Certainty though, Moore argues, comes at the cost
of the development of a more advanced set of
legal principles to deal with the on-going problem
of the corporate veil.

The test that remains means that a wronged

plaintiffs outcome in a case will hinge upon an
arbitrary, mechanical and morally dubious test as
to whether Ds actions can be defined as malicious
and dishonest evasion of liabilities via a sham
company (Gilford and Jones) or else as shrewd and
opportunistic avoidance of potential liabilities via
ade facto rea company as in Adams.

Conclusion

Despite difficulties, where it is sometimes hard to penetrate a

corporate group in which there are numerous subsidiary
companies; it is recognised that at times the Salomon doctrine

does not provide a just result in cases.

There have been many attempts at finding a conclusive
exception to the Salomon doctrine, such as the now defunct
interests of justice test employed in the Creasey v.

Breachwood Motors case.

This case also has difficulties Slade LJ seemed to favour the sham test, but as mentioned

above; it is not complete.

The Moore alternative of the GUP would be better, but would it
be possible to implement?

This question requires students to consider the nature of and

grounds for piercing the corporate veil. It has both a descriptive part
where it is necessary to explain clearly what the current law says in
relation to piercing the veil and a prescriptive/normative part (i.e.
the latter is the critical analysis bit). It is important to examine both
parts of the question.

Adams v Cape needs to be discussed along with the other

significant decisions. Agency, single economic entity,
facade/sham argument need to be made.

2. Articles of association rights given to a member in his capacity

as a director are enforceable. Discuss
Company Constitution and Articles of Association

This question requires having awareness of the nature of articles

and constitution. Whether a shareholder who is a director can invoke
the application of the articles in a dispute arising out of directors
rights? Relevant case law (e.g. Beattie v Beattie, Ely v Positive
Government Security Life Assurance Co Ltd., etc) need to be
discussed.

Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286

Wood v Odessa Waterworks Co. (1889) 42 Ch D 636
Hickman v Kent and Romney Marsh Sheep-Breeders Association
[1915] Ch 881
Beattie v E & F Beattie Ltd [1938] Ch 708

Eley v Positive Government Security Life Assurance Co Ltd (1876) 1

Ex D 88
The Constitution of a Company
The Articles and Altering the Articles
The Contractual Nature of the Articles
The Effect of Shareholder Agreements
The Object Clause and the Ultra Vires Rule

We shall be discussing the nature of the constitution of a company

and the significance of shareholder agreements.
Articles of association ss. 17 and 29 CA 2006
Key constitutional document.
Supplemented by resolutions and shareholder agreements,
together creating a Constitution of a company.
Companies Objects S. 31(1) CA 2006
CA 2006 removed the requirement to have an objects clause.
Unlimited capacity
Alteration of the Constitution
Alteration of articles
s. 21(1) CA 2006
Articles as evidence of term of extraneous contract with
third party:
s. 33 CA 2006 (re-enacts its predecessor CA 1985 s. 14)
Re New British Iron Co ex parte Beckwith (1898) 1 Ch 324

Ss 21-27 CA 2006 Alteration of Articles of Association

A company may amend its articles by special resolution.
Allen v Gold Reefs of West Africa Ltd [1901] 1 Ch 656
But the alteration must actually have a discriminatory effect and be
shown to be in bad faith
Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286
Russell v Northern Bank Development Corporation Ltd [1992] 1 WLR
588
s. 21-27 CA 2006
Entrenched provisions of the articles s. 22 CA 2006
See Draft Model Articles for Private Companies Limited by Share,
especially article 3
Shareholder Agreements, their use and effect & Members
personal rights under the Constitution
S. 18 - Legal effect of Articles of association
The articles of association have replaced the memorandum of
association as the key document in the companys constitution.
See also s. 20 CA 2006
See also s. 33 CA 2006 Effect of Companys Constitution
Shareholders may enforce the articles as a contract against the
company and as against each other:

Wood v Odessa Waterworks Co. (1889) 42 Ch D 636

Hickman v Kent and Romney Marsh Sheep-Breeders Association
[1915] Ch 881
However there is some controversy as to what types of right the
Courts will enforce and some commentators argue that the
shareholder must be suing as a member to enforce a right of
membership rather than as an outsider in some other capacity to
enforce a non-membership right. e.g. Beattie v E & F Beattie Ltd
[ 1938] Ch 708 Eley v Positive Government Security Life Assurance
Co Ltd (1876) 1 Ex D 88
The line between shareholders rights and outsiders rights remains,
despite the Salmon v Quin & Axtens Ltd [1909] AC 442 HL decision

3. A non-executive is considered independent when the board

determines that the director is independent in character and
judgment and there are no relationships or circumstances which
could affect, or appear to affect, the directors judgement.
Discuss.
Shadow Directors/Directors Duties & Regulating Directors

The question requires students to look at the nature of executive

and non-executive directors and their independence. What are the
responsibilities and liabilities of non-executive directors? Are they
independent? Unfettered discretion argument should also be made.

4. Directors owe trustee-like duties and unless expressly allowed,

they must not profit from their position. Discuss.

Directors Duties + Directors Profiting

Fiduciary Duty of the Director.
This question requires students firstly to consider the nature of
directors duties. In this perspective they need to discuss the
historical background. Here it may be good to argue briefly that
directors were in the early 19th century trustees. Secondly, it is
important to look at, very generally, the types of duties and finally
discussion of no profit rule and no conflict rule.

Intro
Two strings:

There are different types of duty which the director owes

o Common law duties (care and skill
o Fiduciary duties (trustee-like)
o Housed ss. 171-177 CA 2006
Should Directors profit?
The question highlights the duality of the role of the director;
on the one hand they are the trustee of the company,
protecting the assets of the beneficiaries. Whilst on the other
as Lowry and Reisberg term it, they are expected to be the

dynamic entrepreneur who turns the shareholders

investments into greater rewards.

History
Types of Duties
No Profit Rule/No Conflict
The rule in Foss v. Harbottle (Unfair Prejudice)

History of the Role

This bifurcated nature of the role and its history goes

someway to explaining why there is not a satisfactory and

wholly accepted legal answer to the regulation of directors.

The Courts originally developed the directors duties; before

they were codified in the CA 2006.

The

General Duties

S.170 CA 2006 sets out the Scope and Nature of the general
duties
o S.170(1) The general duties specified in ss.171-177 are
owed by a director of a company to the company
o S.170(3) The general duties are based on certain
common law rules and equitable principles as they
apply in relation to directors and have effect in place of
those rules and principles as regards the duties owed to
a company by a director.
o The general duties shall be interpreted and applied in
the same way as common law rules or equitable
principles, and regard shall be had to the corresponding

common law rules and equitable principles in

interpreting and applying the general duties.