Company Will be Regarded as an Autonomous Legal Aerson

“In the more recent authorities on piercing the corporate veil, at least since Woolfson, the English courts have, on the whole, been primarily concerned with policing the boundaries of any established exceptions to the principle in Salomon. As a result, it has been clearly established that only in the limited range of cases in which a trader exploits the corporate form as a mere sham or façade to disguise otherwise unlawful activity will a court feel justified, as a matter of course, in denying a defendant the benefits of incorporation.”

Marc Moore, ‘A temple built on faulty foundations: piercing the corporate veil and the legacy of Salomon v Salomon’ (2006) JBL 180, 185.

Critically evaluate this statement by reference to appropriate case law and analysis of the recent academic debates)

The general rule in companies acts since 1844 is that company will be regarded as an autonomous legal person in its own right and exists independently, distinct both from its original incorporators …

The court may pierce the “veil” that law uses to divide the corporation and its liabilities and assets from the people behind the corporation, when the corporation engages in fraud or in wrongful acts or in sole interest of directors and the share holders the court may ignore the corporate existence and defined statutory policy. The veil creates a separate, legally recognised corporate entity and shields the people behind the corporation from personal liability.

One of the most uncertain and disputed issues in English Company law is lifting of corporate veil. As a general rule the English courts have persistently refused to affirm the validity of any alleged exceptions to the principle established in Salomon case and adopted a laissez faire approach towards determining the legality of attempts by traders to exploit the legal machinery of separate corporate personality in order to mitigate their personal limited liability.

The rule in Salomon’s case is still the principle and the courts have forged a limited range of exceptions to the principle in Salomon to curb extreme cases of abuse. The courts have shown themselves willing to “lift the veil” where the device of incorporation is

A façade or sham and no unconnected third party is involved.

Used as a device to evade a contractual or other legal obligation.

Used as a device to abuse the corporate form and unjust advantages.

“…the corporate veil has been pierced on the basis that the company was a façade or sham, or was the agent of its controllers, turn out on examination to have been concerned with the evasion of statutory provision or a contractual obligation, or some similar issue, and not with imposing personal liability on the directors or shareholders for the company’s debts.” quotation by Professor Sealy (1994).

The modern personification of the English approach towards determining the legality of opportunist uses of the corporate form is the leading judgment of Slade L.J. in Adams v Cape Industries. In this case, the Court of Appeal refused to lift the corporate veil so as to expose the identity of the defendant as the controlling mind behind a complex arrangement through which potentially harmful products were marketed overseas by capitalised subsidiary companies. It was held that a member of a 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” and described the right as an “inherent in our corporate law”. Despite the apparent universality of the principle in Salomon, the courts have, throughout the course of the 20th century, attempted to draft a number of exceptions to the general rule.

These developments include

“Agency” exception to Salomon by Atkinson J. in the 1939 case of Smith, Stone & Knight v Birmingham Corp

The “single economic unit” exception by the Court of Appeal in DHN Food Distributors v Tower Hamlets LBC,

Defunct “interests of justice” test deployed by Mr. Richard Southwell Q.C. in the 1993 case of Creasey v Breachwood Motors.

The general reasoning of the courts in this area has been confusing and contradictory. The most comprehensive and authoritative statement upon which a court will be justified in disregarding a company’s autonomous existence was provided by Slade L.J. in Adams. His Lordship identified two grounds upon which a court is permitted to “pierce the corporate veil”.

The first and most significant of these is known as the “sham” or “façade” ground, where a trader uses a company as an artificial device for the purpose of “shielding” themselves from their pre-existing liabilities under contract, tort or statute.

The second basis for piercing the corporate veil is the “agency” ground, where a subsidiary is under total 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.

The circumstances that triggered the “sham” exception to Salomon are two well-known 20th century cases:

Gilford Motor Co v Horne and

Jones v Lipman

In Gilford Motor Co v Horne, the defendant, in an attempt to get round the effect of a restrictive covenant preventing him from soliciting customers from his former employers, established a company through which he set up business in competition with them. The Court of Appeal felt justified in discarding the corporate veil, thereby allowing the plaintiff an injunction effective against both the defendant and the company through which he had been trading in breach of his contractual undertaking.

While in Jones v Lipman, the defendant changed his mind after entering a contract with the plaintiff to transfer land to him, and latter in an attempt to put the land beyond the reach of an action for specific performance, set up a company to which he transferred ownership of the property. Russell J. refused to recognise the existence of the corporate veil.

An example of exceptions in which a court did regard a subsidiary as the de facto agent of its parent is the 1939 case of Smith, Stone and Knight v Birmingham Corp. In this case, a parent purchased a subsidiary initially as an unincorporated business and following its registration carried on the subsidiary as if it was nothing more than an internal department of the parent’s business. The Court of Appeal recognised that the subsidiary was carrying on the business of its parent and on this basis, the court allowed the parent company to claim compensation on account of the compulsory acquisition of the subsidiary’s premises.

The courts support to maintain respect for the integrity and autonomy of the corporate form as established in Salomon, without completely depriving future capacity to curb the most economically harmful or morally reprehensible abuses of the corporate form by traders. This certainty have been won at the expense of failing to develop a more sophisticated system of norms to govern this grey area that might have better succeeded in reflecting socially accepted standards of commercial morality. Indeed, the reasoning of Slade L.J. in Adams would seem to suggest that the outcome of any case involving abuse of the corporate veil is very much a “zero sum game”, with the success or failure of a wronged plaintiff hinging upon the arbitrary, mechanical and morally dubious test as to whether the defendant’s conduct can be characterised 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 a de facto “real” company (Adams ). One commentator has argued that, “as far as the common law is concerned, the principles upon which the court will ignore corporate personality and lift the veil of incorporation are almost completely inelastic”.

In Woolfson v Strathclyde Regional Council his Lordship rejected an argument tendered by the appellants in this case, based on the decision of the Court of Appeal in DHN Food Distributors v Tower Hamlets LBC, to the effect that a court will be justified in piercing the corporate veil where such a course of action is necessary to give legal effect to the “realities” of the business situation.

Although the Woolfson case did not involve any allegations to the effect that a company had been used either fraudulently or as a sham, Lord Keith’s authoritative opinion that “any departure from a strict observation of the principles laid down in Salomon has been made to deal with special circumstances when a limited company might well be a façade concealing the true facts” has been affirmed in a number of more modern cases, the facts of which have specifically concerned alleged fraudulent or sham uses of the corporate veil by traders. These include the much cited dictum of Slade L.J. in Adams v Cape and, more recently, the judgment of Hobhouse L.J. in the 1998 case of Ord v Belhaven Pubs, on the basis of which the Court of Appeal overruled the rather eclectic opinion tendered at first instance in the 1993 case of Creasey v Breachwood Motors, to the effect that a court will be justified in disregarding the corporate veil “so as to achieve justice between the parties”.

In the more recent authorities on piercing the corporate veil the English courts have been primarily concerned with policing the boundaries of established exceptions to the principle in Salomon. Therefore except in a limited range of cases in which a trader exploits the corporate form as a mere sham or façade to disguise otherwise unlawful activity will a court feel justified, as a matter of course, in denying a defendant the benefits of incorporation.

The methodical approach that the modern courts have adopted towards this issue is satirically grey area in cases where the corporate machinery had been exploited by traders for a fraudulent or sham purpose. In particular, to Apthorpe v Peter Schoenhofen Brewing Company and Gilford Motor Co v Horne, this considered to be the grounding authorities on the “sham” exception to Salomon. The English courts might better equip the doctrine for processing “hard” cases such as Creasey v Breachwood Motors, where the conduct complained of, whilst not amounting to use of the corporate form either fraudulently or as a mere sham, certainly served to deprive a plaintiff of what were his legitimate expectations based on contractual entitlement.

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BIBLIOGRAPHY

Books

Palmers Company Law from Sweet and Maxwell, “Part 2 – Formation of Companies, D. – Incorporation and Commencement of Business, Corporate Existence, Looking behind the company’s legal persona. Lifting the veil.”

Articles

By Marc Moore, “”A temple built on faulty foundations”: piercing the corporate veil and the legacy of Salomon v Salomon”, J.B.L. 2006, Mar, 180-203