Piercing of Corporate Veil

By Samridhi Arora, Amity University

Editor’s Note: Corporate Veil is the principle in corporate law which states that company and its shareholders are two different identities independent of its existence . Piercing of corporate veil  is a legal method of trying to go behind this veil. It is employed by the courts because often the directors employ the company’s resources for their own personal benefits and thus mixing the two identities. However there are many such situations and this paper has highlighted few of them.

INTRODUCTION

Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually, a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may “pierce” or “lift” the corporate veil.

There are five categories of cases:

1). Questions that cannot be answered by Incorporation

There are several cases which at first glance appear to be cases that ignore the separate legal personality of the companies by focusing on the nationality of the shareholders rather than of the company. A company may assume an enemy character when persons in de facto control of its affairs are residents in an enemy country. In such a case, the Court may examine the character of persons in real control of the company, and declare the company to be an enemy company.

In Daimler Co. Ltd V. Continental Tyre And Rubber Co. Ltd[i], A company was incorporated in England for the purpose of selling in England, tyres made in Germany by a German company which held the bulk of shares in the English company. The holders of the remaining shares, except one, and all the directors were Germans, residing in Germany. During the First World War, the English company commenced action for recovery of a trade debt. Held, the company was an alien company and the payment of debt to it would amount to trading with the enemy, and therefore, the company was not allowed to proceed with the action.

In re FG (films) Ltd[ii], FG films wanted Monsoon registered as a British film. The film was made in India. It was held that the film could not be considered British made, even though the company owning the rights was a UK company.

2). Evading Existing Obligations

There are certain cases which involve attempts to use the corporate form to avoid existing legal obligations to which the defendants were subject. In Gilford Motor Co. Ltd. V. Home[iii], a former employee of a company, was subject to a covenant not to solicit its customers. He formed a company to carry on a business which, if he had done so personally, would have been a breach of the covenant. An injunction was granted both against him and the company to restrain them from carrying on the business. The company was described in this judgment as “a device, a stratagem”, and as “a mere cloak or sham for the purpose of enabling the defendant to commit a breach of his covenant against solicitation.

Jones v. Lipman and Another[iv], L Agreed to sell certain land to J. He subsequently changed his mind and to avoid the specific performance against L and the company. The court looked to the reality of the situation ignored the transfer, and ordered that the company should convey the land to J.

3). Single Economic Unit

The activities of subsidiary companies are an integral part of the activities of the group of companies to which they belong. Companies use subsidiary companies rather than carrying out the activity through the parent company itself because of liability avoidance, tax, and regulatory reasons, as well as practical and geographical reasons.

In the case of D.H.N. Food Products Ltd. V. Tower Hamlets[v], it has been said that the Courts may disregard Salomon’s case whenever it is just and equitable to do so. In the above-mentioned case, the Court of appeal thought that the present case was one which was suitable for lifting the corporate veil. Here the three subsidiary companies were treated as a part of the same economic entity or group and were entitled to compensation.

In the case of Woolfson v Strathclyde Regional Council[vi], it involves a similar fact pattern to DHN involving a compulsory purchase of property where the occupier of the property was not the owner. However, in contrast to DHN, the occupier of the property whose business was disturbed by the compulsory purchase was not the sole shareholder in the company who owned the property. In this case, the owner of the property was also the majority shareholder in the occupier and it was held that the facts of this case do not fall within the ‘façade exception’; but it provides no guidance which needs to determine.

In Adam v Cape Industries Plc[vii], the ‘single economic unit’ argument, there is no general principle that all companies in a group of companies are to be regarded as one. On the contrary, the fundamental principle is that each company in a group of companies is a separate legal entity possessed of separate legal rights and liabilities.

4). The façade Concealing the true facts

Woolfson v Strathclyde Regional Council[viii] that the House of Lords considered that there is one circumstance in which the corporate veil can pierce, namely when there is one circumstance in which the corporate veil can be pierced, namely when there are special circumstances indicating a façade concealing the true facts. However, the House of Lords did not elaborate on the nature of such special circumstances or the meaning of ‘façade’.  Following Adams v Cape Industries Plc, further extracts from which are set out, it is below, it is clear that the ‘façade concealing the true facts’ test has become the primary reference point for any lawyer investigating whether it is possible to pierce the corporate veil and even the same judgment was held in the case of Ord & Another v Belhaven Pubs Ltd[ix].

In the recent case Prest v Petrodel Resources Ltd[x], it was held that evasion is piercing. Even Evasion can be considered as Façade only.

5). Agency

The House of Lords made it very clear in Salomon v Salomon, that the company is not the shareholders’ agent by reason of the fact of incorporation. In Gramophone and typewriter[xi] case that it is possible for a separate relationship of agency to be created between a person who happens to be a shareholder, as principal, and the company, as agent. Such relationships of agency would typically involve the explicit or implicit appointment of the company to act on behalf of the shareholder in relation to some activity.

CONCLUSION

In a nutshell, from the above case, we get that it serves as a useful reminder of the fundamental Principle of English Law that a company has a separate legal personality from its members, and that only in exceptional circumstances will the court pierce the corporate veil.

Formatted on 28th February 2019.

BIBLIOGRAPHY

[i] Daimler Company, Limited Appellants v Continental Tyre and Rubber Company (Great Britain) HL [1916] 2 AC 307

 [ii] In re FG (films) Ltd, [1953] 1 WLR 483

[iii] Gilford Motor Co. Ltd. V. Home, (1933) Ch. 935 C.A. Horne

[iv] Jones v. Lipman and Another (1962) 1 WLR 832 L.

[v] D.H.N.food products Ltd. V. Tower Hamlets, LBC [1976] 1 WLR 852

[vi] Woolfson v Strathclyde Regional Council, [1978] SC (HL) 90

[vii] Adam v Cape Industries Plc, [1990] Ch 433

[viii] Woolfson v Strathclyde Regional Council, [1978] SC (HL) 90

[ix] Ord & Another v Belhaven Pubs Ltd, [1998] 2 BCLC 447

[x] Prest v Petrodel Resources Ltd and Others, [2013] UKSC 34

[xi]Gramophone and typewriter, Ltd v Stanley, [1908] 2 KB 89

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