Separate Corporate Responsibility and Lifting the Corporate Veil

Question: “In company law, separate corporate personality ensures that the corporate veil is lifted in very exceptional cases.” Do you agree? Use relevant case law to justify your answer.

In any business, the risk of loss and failure is inherent. Loses can be brought about by various circumstances such as, recession, poor business management, government policies, among many other factors.[1] The fear of losing it all, historically led to increasing reluctancies from businessman in setting up new business ventures, fearing loss of personal property through repossession to pay off debts owed in situations where business endeavours failed.[2] In order to avoid such events faced by business starters a legal principle was enacted, stating that the liability of shareholders and directors be ‘limited’[3], in instances where a company is incorporated under the Companies Act[4]. Furthermore, the latter be legally assessed separate from the company, thus companies being animatedly existent with a separate legal personality.[5]  Moreover, the essence of limited liability by nature limits the creditor solely to the assets of the company, protecting shareholders from loss of personal property when creditors seek to reclaim their funds[6].

Conversely, the approbate of corporate personality with limited liability created a loop hole for many business owners to evade paying back large sums of owed monies[7]. In order to limit the misuse of the rule ‘lifting the corporate veil[8]’ was introduced, which meant, in exceptional circumstances the courts could disregard the notion of corporate personality.

However, the British courts have often expressed disinclination in lifting the corporate veil, maintaining the corporate legal entity stance, even in cases where it would be deemed necessary to uplift the corporate vail to ensure justice[9]. This essay attempts to explain why separate corporate personality ensures that the corporate veil is lifted in exceptional cases, and to what extent it is reasonable for British courts to do so.

Firstly, the courts in Britain have often expressed utter reluctance regarding lifting the corporate veil, the courts often readily protect the limited liability notion. Equally, the number of cases where the corporate veil has been lifted in the UK are scarce, and only occurs in exceptional events[10]. Professor L Sealy suggested that “the courts refused to violate the sacred rule of limited liability[11]”, which illustrates even to this day, the courts will readily evade lifting the veil, which would place debt liability of the company on the shareholders[12]. The doctrine of British company law timeline can be split into two, firstly, the Salomon v Solomon[13] case decision in 1897, to the 1930-40s during the Second World War.

Cheng describes this era as, early trial and error period, whereby English courts tested various approaches to company law. Second stage commencing post WW2 –1978, where the ruling of Woolfson v Strathclyde Regional Council[14] case was concluded by Lord Denning[15]. Moreover, the Solomon principle was re-asserted in the 1989 Adams v Cape industries[16] case. The history of the corporate veil doctrine in Britain transparently lacks in developing a systematic approach regarding the corporate veil problem[17].

Furthermore, most company law cases in Britain consign on the concept of agency, courts lifting the corporate veil only if the agency relationship exists[18]. For example, in the case of Adams v Cape Industries Plc[19], the court did not pierce the veil even though crucial in order to prevent injustice, the judiciary reinforced the notion of maintaining the usage of Solomon v A Solomon & Co Ltd[20]. The refusal of the court to lift the corporate veil in the Adams case, did not consider the implications the ruling was to have on the asbestos victims, the company simply shut down to merely evade liability[21]. Thus, the leeway of company law rules clearly hinders the judicial responsibility to prevent injustices[22]. By the same token, the pretentiousness on the notion of agency by the court, create little room for other categories to be realized, proven in the case of Commissioner of Ireland Revenues v Sansom[23], whereby a charge was made against Sansom for using his company solely for the avoidance of tax liabilities. The court was seen to neglect the taxation policy, only basing the case on the agency concept[24].

Moreover, there is a perception that British courts are keen in lifting the corporate veil in cases where fraud is proved, however, unlike misrepresentation, fraud is not always easy to prove[25]. In cases regarding fraud the accuser must make a great attempt at proving the misrepresentation, as well as intent of the parties involved, which is amongst the most complicated in veil piercing cases, thus, although keen, by no means are the courts willing or flexible to lift the corporate veil[26]. Fraud cases therefore harder to prove, besides, the amount of evidence available in corporate veil cases, is relatively smaller than required to successfully sustain a fraud claim[27].

Despite the consistent reluctancies from the court to uplift the corporate vail, British courts have already demonstrated the ability to use considerable flexibility in ruling if they choose to. For example, Lord Denning made influential decisions relating to piercing the corporate veil, the most significant to the latter being the ruling on Littlewoods Mail Order Stores case[28], where he suggested courts where indeed capable and did lift the veil, encouraging other judges to follow suit. Although, Lord Denning was widely criticised for taking a stance outside the norm regarding piercing the corporate veil, there is no justification, nor logic in retaining the reluctant approach, as it lacks the necessary adjustments as to avoid exploitation and abuse of the limited liability privilege[29].

Also, the notion of corporate legal entity was enacted to support trade and the promotion of economics, not as a shield to evade liability in situation where illegal dealings and defrauding of the system takes place, thus, where it is found that the corporate character is deployed for such purposes, lifting the corporate veil should be mandatory, and the courts should willingly encourage transparency, welcome the notion of piercing the corporate veil in order to provide clarity and justice regarding the parties involved, regardless of the legal sufficiency of the corporate structure[30]. American Judge Sanborn, suggested that, when the notion of legal entity is misused to protect fraud or justify wrong doings, corporation would be regarded as an association of in command[31], this hard-legal stance is essential in modernised economies.

In conclusion, one can not undermine the importance of corporate legal personality as well as limited liability, as it enabled business ventures along with entrepreneurs to venture into business without the constant fear of losing everything, including personal property if business failed. Furthermore, the businesses created as a result, contributes to the good of the country, creating jobs to name one of many benefits, which would otherwise be non-existent as a result of fear, especially in modern era, where it would be near impossible for economics to function at productive pace without the notion of limited liability[32].

Nevertheless, when shareholders exploit the values of limited liability, by bending the rules in order to evade responsibility in instances where it would be morally right  and just to accept such liabilities, but through greed choose not to, it leads to creditors being sceptical towards the promotion and funding of businesses, implications which affect all in society, less jobs amongst many other effects. As previously noted, the fundamental notion of separate legal personality was enacted to promote and influence industrialisation of business economics, not hinder it[33]. However, the elementary interpretation of lifting the corporate, which is currently practised by British courts, is to be re-evaluated and amended accordingly as it may well frustrate the very purpose it seeks to encourage, which is growth in economics[34].

 From the cases evaluated above, it is evident that the British rule regarding corporate legal personality and piercing of the corporate veil is outdated, and in need of modern amendment to better deal with modern corporations. But, the most important aspect regarding providing justice through the courts, is a radical change in attitudes of judges who occupy the Supreme courts, as they are ultimately the ones who can make considerable impact regarding how Britain tackles the notion of lifting the corporate veil, given the autonomy of legal authority which they possess.

 Bibliography

• [1897] AC 22 (HL).
• [1921] 2 KB 492 (CA).
• [1978] SLT 159 (HL).
• [1990] Ch 433 (CA).
• Amaeshi, K., Osuji, O. and Nnodim, P. (2007). Corporate Social Responsibility in Supply Chains of Global Brands: A Boundaryless Responsibility? Clarifications, Exceptions and Implications. Journal of Business Ethics, 81(1), pp.223-234.
• Amin George Forji, ‘The Veil Doctrine in Company Law’ (2007) < http://www.llrx.com/ features/veildoctrine.htm> accessed 8 November 2018
• Amsler, C., Bartlett, R. and Bolton, C. (1981). Thoughts of Some British Economists on Early Limited Liability and Corporate Legislation. History of Political Economy, 13(4), pp.774-793.
• Bartlett D, ‘The Face behind the Veil.’ (1987) 19 B L J 71
• BETZ, K. (2018). PROVING BRIBERY, FRAUD AND MONEY LAUNDERING IN INTERNATIONAL ARBITRATION. [S.l.]: CAMBRIDGE UNIV PRESS.
• Bryer, R. (1997). The Mercantile Laws Commission of 1854 and the Political Economy of Limited Liability. The Economic History Review, 50(1), pp.37-56.
• Biswas, L. (2011). Approach of the UK Court in Piercing Corporate Veil. SSRN Electronic Journal.
• Cathy S Krendl & James R Krendl, ‘Piercing the Corporate Veil: Focusing the Inquiry’(1978) 1(55) Denver Law Journal < http://www.krendl.com/CM/Publications/Piercing-Corporate-Veil.asp> accessed 8 November 2018.
• Cheng, T. (2011). The Lifting of Corporate Veil Doctrine in Hong Kong: An Empirical, Comparative and Development Perspective. Common Law World Review, 40(3), pp.207-234.
• COHN, E. and SIMITIS, C. (1963). ‘LIFTING THE VEIL’ IN THE COMPANY LAWS OF THE EUROPEAN CONTINENT. International and Comparative Law Quarterly, 12(1), pp.189-225.
• Donaldson, T. and Preston, L. (1995). The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications. Academy of Management Review, 20(1), pp.65-91.
• Hornby, J. (1975). An introduction to company law. London: Oxford University Press.
• JB Exports Ltd. v Bses Rajdhani Power Ltd [2006] AIR 317 (DHC).
• Kaden LB, ‘Politics, Money, and State Sovereignty: The Judicial Role.’ (1979) 79(5) Colum L Rev 847
• Kolb, R. (2010). Lessons from the financial crisis. Hoboken, N.J.: Wiley.
• Littlewoods Mail Order Stores v Inland Revenue commissioners [1969] 3 All ER 861 (CA).
• Ottolenghi, S. (1990). From Peeping Behind the Corporate Veil, to Ignoring it Completely. The Modern Law Review, 53(3), pp.338-353.
• Payne, J. (1997). Lifting the Corporate Veil: A Reassessment of the Fraud Exception. The Cambridge Law Journal, 56(02), p.284.
• PETERSEN, M. and RAJAN, R. (1994). The Benefits of Lending Relationships: Evidence from Small Business Data. The Journal of Finance, 49(1), pp.3-37.
• Robert B Thompson, ‘Piercing the Corporate Veil:  an Empirical Study’ (1990-91) 76 CornellLR1036<http://heinonline.org/HOL/Page?handle=hein.journals/clqv76&div=35&g_sent =1&collection =journals > accessed 8 November 2018.
• Stone v. Ritter, 911 A. 2d 362 – Del: Supreme Court 2006
• Thompson RB, ‘Piercing the Veil: Is the Common Law the Problem.’ (2005) 37(3) Conn L Rev 619
• Tiley, J. and Loutzenhiser, G. (2012). Revenue law. Oxford: Hart Publishing.
• US v Milwaukee Refrigerator Transit Co [1905] 142 F 242.

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[1] Kolb, R. (2010). Lessons from the financial crisis. Hoboken, N.J.: Wiley.

[2] PETERSEN, M. and RAJAN, R. (1994). The Benefits of Lending Relationships: Evidence from Small Business Data. The Journal of Finance, 49(1), pp.3-37.

[3] Limited Liability means shareholder or investors are liable for only a portion of the amount, and personally responsible for all debts of the company.

[4] Stone v. Ritter, 911 A. 2d 362 – Del: Supreme Court 2006

[5] Amaeshi, K., Osuji, O. and Nnodim, P. (2007). Corporate Social Responsibility in Supply Chains of Global Brands: A Boundaryless Responsibility? Clarifications, Exceptions and Implications. Journal of Business Ethics, 81(1), pp.223-234.

[6] Amin George Forji, ‘The Veil  Doctrine in  Company  Law’  (2007) < http://www.llrx.com/ features/veildoctrine.htm> accessed 8 November 2018

[7] Amsler, C., Bartlett, R. and Bolton, C. (1981). Thoughts of Some British Economists on Early Limited Liability and Corporate Legislation. History of Political Economy, 13(4), pp.774-793.

[8] COHN, E. and SIMITIS, C. (1963). ‘LIFTING THE VEIL’ IN THE COMPANY LAWS OF THE EUROPEAN CONTINENT. International and Comparative Law Quarterly, 12(1), pp.189-225.

[9] Payne, J. (1997). Lifting the Corporate Veil: A Reassessment of the Fraud Exception. The Cambridge Law Journal, 56(02), p.284.

[10] Biswas, L. (2011). Approach of the UK Court in Piercing Corporate Veil. SSRN Electronic Journal.

[11] Biswas, L. (2011). Approach of the UK Court in Piercing Corporate Veil. SSRN Electronic Journal.

[12] Bartlett D, ‘The Face behind the Veil.’ (1987) 19 B L J 71

[13] [1897] AC 22 (HL).

[14] [1978] SLT 159 (HL).

[15] Lord Denning was a judge of Court of Appeal for 20 years. He was an enthusiastic advocate and practitioner of the doctrine and one of the most influential English jurists.

[16] Cheng (n 23).

[17] Cheng (n 23); Ottolenghi (n 15).

[18] Donaldson, T. and Preston, L. (1995). The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications. Academy of Management Review, 20(1), pp.65-91.

[19] [1990] Ch 433 (CA).

[20] ibid.

[21] Hornby, J. (1975). An introduction to company law. London: Oxford University Press.

[22] Kaden LB, ‘Politics, Money, and State Sovereignty: The Judicial Role.’ (1979) 79(5) Colum L Rev 847

[23] [1921] 2 KB 492 (CA).

[24] Tiley, J. and Loutzenhiser, G. (2012). Revenue law. Oxford: Hart Publishing.

[25] BETZ, K. (2018). PROVING BRIBERY, FRAUD AND MONEY LAUNDERING IN INTERNATIONAL ARBITRATION. [S.l.]: CAMBRIDGE UNIV PRESS.

[26] Robert  B  Thompson, ‘Piercing  the  Corporate Veil:  an Empirical  Study’ (1990-91) 76 Cornell  LR 1036 <  http://heinonline. org/HOL/Page?handle=hein.journals/clqv76&div=35&g_sent =1&collection =journals > accessed 8 November 2018.

[27]Cathy S Krendl & James R Krendl, ‘Piercing the Corporate Veil: Focusing the Inquiry’(1978) 1(55) Denver Law Journal < http://www.krendl.com/CM/Publications/Piercing-Corporate-Veil.asp> accessed 8 November 2018.

[28] Littlewoods Mail Order Stores v Inland Revenue commissioners [1969] 3 All ER 861 (CA).

[29] ibid

[30] Ottolenghi, S. (1990). From Peeping Behind the Corporate Veil, to Ignoring it Completely. The Modern Law Review, 53(3), pp.338-353.

[31] US v Milwaukee Refrigerator Transit Co [1905] 142 F 242.

[32] Bryer, R. (1997). The Mercantile Laws Commission of 1854 and the Political Economy of Limited Liability. The Economic History Review, 50(1), pp.37-56.

[33] ibid

[34] JB Exports Ltd. v Bses Rajdhani Power Ltd [2006] AIR 317 (DHC).