Introduction

A corporation is an artificial legal person that exists independently of its individual

members. The law speaks of a corporation as a legal person, capable of entering
into contracts and suing and being sued in its own name separate and distinct from
its shareholders. A primary advantage of the corporate form of organization is to
achieve the doctrine of limited liability, which serves as the shield to its members,
due to separate legal entity characteristic of a corporation. Without such limited
liability, a corporation cannot raise large amount of capital by investors and get
enhanced capacity for borrowing to secure financing in order to obtain more
efficient operation. Yet there are times where the limited liability of companies can
cause hardship on creditors. Consequently the judiciary may be prepared to relax
the doctrine of SLP in certain circumstances and render shareholder personally
liable. This relaxation is more commonly known as lifting or piercing the veil.
According to the Chan & Koh on Malaysian Company Law and Practice, 2006 journal,
The rationale behind this is probably that the law will not allow the corporate form
to be misused or for the purpose which is set out in the statute.
The Principle in Solomon v Solomon
Over a century ago, this fundamental principle of separate legal personality
has been established in the leading case of Salomon v Salomon and well accepted
as part of UK and Malaysian company law as well. It was decided that debts of the
corporation were not debts of Mr Salomon since they were two distinct legal
entities. As Lord Mac Naghten stated this point: The company is at law a different
person altogether from the subscribers to the memorandum. Through the years,
Salomon principle has taken rapid evolvement and it has been highly used. This
principle subsequently has expanded to multinational company to absorb risky
ventures. In the event subsidiary fails, the parent company may shy away from
liability. President Butler of Columbia University has described limited liability as the
greatest discovery of modern times. In a more recent case of Macaura v Northern
Assurance Co, the precedent of Salomon has been confirmed. As all principles have
both advantages and disadvantages the same happens with Salomon principle and
the doctrine of limited liability which can turn out as a double edge sword. Hence in
the quest of finding fair solutions to such problems, several exceptions to this
principle have evolved under the legal concept of "piercing the corporate veil".
Exceptions - Statutory
The Companies Act has a number of general provisions which affect the
separate legal personality of the company. Section 213 Insolvency Act 1986 states
that if, while winding up a company, the company's business is carried on with
intent to defraud the company's creditors, a court may order any person knowingly
carrying on the business to contribute to the company's assets. The main difficulty
was that there was the possibility of a criminal charge also arising and the standard
to prove is beyond reasonable doubt. As the court explained in Re Patrick and Lyon
ltd, this involved proving actual dishonesty'. It is difficult to achieve this standard
and finally a new provision was introduced in s214 of the Insolvency Act 1986 to
deal with what is known as wrongful trading. Section 214 Insolvency Act 1986
states that if, while winding up a company, a director ought to have seen that there

was no reasonable prospect of avoiding insolvency but continued to carry on

business, then a court may hold them liable. The case of Re Produce Marketing
Consortium Ltd (No 2) (1989) is a good example of the way the section operates.
However, this only applies to 'directors' and not shareholders.
Even so, the Companies Act 2006 states that a 'director' includes a 'shadow
director', Therefore, in a limited way, this restricts the Salomon principle where
there is wrongdoing involving the company.
Exceptions Common Law
On the other pole, the courts have been more than prepared to pierce the
corporate veil when it fells that fraud is or could be perpetrated behind the veil.
The two classic cases of the fraud exception are Gilford motor company ltd v. Horne
and Jones v. Lipman. In the first case, The Court of appeal was of the view that "the
company was formed as a device, in order to mask the effective carrying on of
business of Mr. Horne" Judge Russel, in the case of Jones that shares similar facts,
specifically referred to the judgments in Gilford and held that the company here was
"a mask which (Mr. Lipman) holds before his face in an attempt to avoid recognition
by the eye of equity".
Similar analogy can be drawn in a Malaysian case Aspatra Sdn Bhd &21 Ors v. Bank
Bumiputra Malaysia Bhd & Anor, where the judge was ready to lift the corporate veil
where fraudulent activity was present.
Courts may also ignore the corporate veil during wartime. In Daimler Co Ltd v
Continental Tyre and Rubber Co (Great Britain) Ltd a company was incorporated in
England but the vast majority of its members were German. The House of Lords
stated that whether a company was an enemy in wartime depended upon those
who were in control of the company. Courts have also ignored the veil where they
have found an agency relationship existed. In Re FG Films Ltd a company sought a
declaration that it had made a British film for financial reasons. The court held that
in fact the UK Company was only the agent for an American company which owned
the vast majority of its shares. The court, therefore, lifted the veil. However,
commentators such as Sealy and Worthington has criticized that, a court could infer
an agency relationship merely from the act of being a shareholder.
Courts have also ignored the corporate veil where they have found a trust
relationship exists. In Trebanog Working Men's Club and Institutive Ltd v MacDonald
an incorporated club was charged with selling liquor without a licence. The court
held that as the members owned the liquor between themselves, there was no
actual 'sale', and the club was simply a trustee of the liquor for its members.
However, this contradicts an earlier case where the opposite decision was reached
(Wurzel v Houghton Main Home Delivery Service Ltd) and commentators note that
this argument is 'at best tenuous'. Therefore, this probably does not undermine
Salomon.
Case law is more contradictory as to whether groups of companies will be
treated as another exception to Salomon. In DHN Food Distributors Ltd v Tower
Hamlets LBC, Denning MR in the Court of Appeal held that a parent company and its
subsidiaries were a 'single economic entity'. This undermines the Salomon principle.
However in Woolfson v Strathclyde Regional Council the House of Lords disapproved

of Denning's comments and said that the corporate veil would be upheld unless the
company was a faade. The DHN case approach has become less popular since
then. On one hand Denning MR refers to the subsidiaries as being 'bound hand and
foot' to the parent company, which implies the parent has control, but he also says
they are 'partners', which implies they have equal power. At such in my opinion the
DHN case is self-contradictory. Therefore, it seems unlikely that DHN will be followed
in future, especially given the Court of Appeal's later decision in Adams v Cape
Industries plc.
In Adams v Cape an English company was sued for the actions of one of its
subsidiaries abroad.
The Court of Appeal held that the parent company was not liable as the subsidiary
was not a faade or sham as the group had been structured that way only to
minimize future liabilities. The court as well held that there was no general principle
that all the companies in a group should always be treated as a single economic
entity. This reaffirms the Salomon principle in line with writer Dignam quotes: 'Gone
are the wild and crazy days when the Court of Appeal would lift the veil to achieve
justice irrespective of the legal efficacy of the corporate structure.
This is supported by the recent Supreme Court decision in Prest v Petrodel
Resources Ltd, where a divorced wife requested the court to lift the corporate veil
and treat her ex-husband and the companies as being effectively the same.
However, the court held that the veil could not be lifted because the setting up of
the companies had nothing to do with the marriage breakdown.
Another exception to Salomon involves tortious liability. In Chandler v Cape
the claimant had also contracted an asbestos-related disease while working for a
subsidiary of the parent company. This time the Court of Appeal held the parent
liable in the tort of negligence. This undermines the Salomon principle. However,
critics note that Cape is unusual on its circumstances as supported by J Fulbrook,
This suggests that the Court of Appeal is now more willing to lift the veil where there
is a group of companies and it is in the interests of justice.
In following Lubbe, the court in Chandler v Cape achieved justice, as the
victims would otherwise have been denied a remedy. This is important where the
subsidiary no longer exists or has any assets or with asbestos claims where the
disease may not show up for many years (Anon, 'Case Comment: Chandler v Cape
Plc: is there a chink in the corporate veil?'(2012)).The Supreme Court in Prest was
also concerned with achieving justice for the claimant and in the VTB case Lord
Neuberger said: 'it may be right for the law to permit the veil to be pierced in
certain circumstances in order to defeat injustice. This seems fair; as limited liability
encourages subsidiary companies to take risks, knowing that the shareholders of
the parent company in effect get double protection from creditors should anything
go wrong.
In the recent case of Caterpillar Financial Services (UK) Limited v Saenz
Corporation Ltd (2012), A summary judgment was given in respect of a declaration
that a company was an alter ego corporate vehicle of the defendant. This allowed a

judgment obtained against the defendant to be enforced against certain of the

companys assets. This case shows that the corporate veil exists to distinguish a
company as a legal person separate from its shareholders. However, where the
relevant test has been satisfied, the courts have shown a willingness to pierce the
veil.
Conclusion
The principle of separate corporate personality and the corporate veil
recognized in Salomon v Salomon remains central to corporate law despite several
challenges. However, there are certain exceptions when the veil will be lifted. Most
notably these include under statute, during wartime, and where the company is a
sham. It is less likely to be lifted where it is argued that an agency or trust
relationship existed between the company and its controller. Where groups are
involved, Salomon remains the starting point. However, courts have been more
willing to lift the veil recently, especially where personal injury is involved or justice
demands it, even if they do not say so explicitly. This seems fair, as otherwise
shareholders enjoy double protection.