Statutory and Common Law

The expression lifting or piercing the corporate veil refers to a court which look behind the separate legal personality of a company, the court will look behind the corporate entity when assigning a corporate right, privilege, duty or liability to a member of the company where there is a strict application of the separate legal personality doctrine would vest the liabilities or rights solely in the company (Oscar Shub, 2005). The biggest decision in regard to lifting the veil came from The House of Lords in Salomon v Salomon as the courts affirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders (Ramsay, 2001). The court did this in relation to what in this case was a one person company. This essay will look to discuss the certain mechanisms from the various statutory and common laws by which the corporate veil can be lifted.

One of the fundamental principles of company law is that a certain company has its own personality that is distinct from the personality of its shareholders. This rule was put in place by the House of Lords in the case of Salomon v A Salomon & Co [1] ; Mr Salomon was in control of his on business which manufactured boots. His children wanted to become a part of the business as owners, so Mr Salomon sold his business to the new company which he had planned to form for 40000 pounds. He was selling his business as he knew that the company is separate legal entity. Mr Salomon needed 7 shareholders to form the new company, Mr Salomon’s family all became members, his wife and 5 children to make 7 shareholders. He then gave himself 20000 shares, 1 share to each child and 1 share to his wife. Two children were elected to become directors of the company, with this, Mr Salomon become a shareholder. The company still owes Mr Salomon 20000 pounds so the company gave him debentures of 10000 pounds, the rest of the amount was paid in cash. After the first year the company went into liquidation as the liabilities were more than the assets by a certain amount, this meant the creditors needed to pay. The liquidator asked Mr Salomon to pay the creditors since he was the owner of the company, Salomon didn’t agree with this, but trial judge Vaughan Williams agreed with the liquidator, he then asked Salomon to pay on behalf of the company. Salomon appealed to the court of appeal as he didn’t want to have to pay the debts owed to creditors by the company. The court of appeal ruled that Salomon just found 6 people to form the company, the 6 are merely nominees. The court of appeal also asked Mr Salomon to pay. Mr Salomon then appealed to the high court, the House of Lords, who rejected all the judgements made by Judge Vaughan Williams in the court of appeals; they said that there was no fraud in the manner in which Mr Salomon formed the company. So Mr Salomon didn’t have to pay to the company’s creditors since Mr Salomon and the company are were deemed two separate entities. In this case it was established that, actions made by the company are that of the company and not of the shareholders themselves this is now written into the Companies Act 1993. This law separates the company as a different person or entity which will be held responsible for the fortunes and misfortunes of the company; this then separates all blame from directors and shareholders within the company except in situations where the veil is lifted. The ruling from the Salomon case lies at the heart of corporate personality and is in principal, the difference between companies and partnerships. There are some situations where the courts look beyond the personality to members or directions of companies, by doing this the courts are said to life or pierce the corporate veil. There is no single basis in which the veil may be lifted its rather that the cases fall into loose categories which this essay will examine.

Statutory and common law play a vital role within the legal system as they are the main avenues within the system; they determine which cases go to which court house. Common law is the main body of law which has been developed over many yeas an s a result of various judicial decisions of court judges. Statute law meanwhile is a body of law which has been passed by legislature, its also been codified for use. In common law a legal case could establish a value or ruling that courts of different judicial bodies are destined to decide a subsequent case with very similar issues and acts. The courts are bound to follow rules and reasons which have been used in prior decisions when resolving disputes of the same nature. In practise however, the decisions the court makes are binding only in a particular jurisdiction and certain courts have more power than others which means the more powerful court will bind lower courts, decisions of lower courts usually don’t have binding power. Statute law is written laws which are set down by a legislature. Statutes passed by congress and state legislatures are found to be the basis for statutory law. Statutory law also provides a frame work for the society about how to deal with certain matters using the law.

There are some certain statutory exceptions to the rule in the Salomon case which include directors being made liable for certain debts within the company because there has been a breach of the company’s insolvency legislation, there are many examples of this. The first exception is where a company fails in obtaining a trading certification before they begin trading, the directors become liable to other party’s if any transactions are entered into by the company. Another statutory exception would be failure to use the company’s name, if an officer of a company or person acting on behalf of the company signs a bill, cheque or similar instrument on behalf of the company with the company’s name not mentioned, that person would then become liable to the holder of the instrument for the amount due. Disqualified directors from a company are liable for the debts of the company which were incurred when they were acting.

Another statutory exception is the just and equitable winding up, which is apart of the insolvency act 1986. A petition may be presented to conduct a wind up on a company on the grounds that its equitable to do so, this could involve lifting the veil of incorporation to examine the bases on which the company was formed, as in the case of Ebrahimi v Westbourne Galleries Ltd [2] . Fraudulent trading is yet another statutory exception as it appears to the courts that any business that’s been carried out with intent to defraud creditors of the company, the courts will order the person to the carrying of the manner mentioned are then liable to make contributions to the company’s assets. The insolvency act 1986 allows the court to lift the corporate veil in some cases known as Phoenix companies; this is where a new company is created with the same or a similar name to an insolvent company. Its an offence for anyone who was a director of an insolvent company during a 12 month period before liquidation to be associated with another company with the same name used as the insolvent company. If anyone jointly or individually goes against the insolvency act they are liable with the company for all the relevant debts of the company.

Unfair prejudice is another statutory exception whereby the courts’ powers under the 1985 act apply where the company’s dealings are being or have been conducted in a manner which is unfairly prejudicial to its members or part of its members. The conduct of a parent company in control of a subsidiary is relevant where a petition is presented by shareholders of a subsidiary is unsurprising as seen in the Nicholas v Soundcraft [3] case. Unfair prejudice can also be held in a court of appeal as in Citybranch Ltd v Rackind [4] .

One of the most popular statutory exceptions is the third party costs orders where the court has jurisdiction to make a costs order against a party in the proceedings in favour of a member outside of the party. This was recently applied by the court of appeal in the case of Alan Phillips Associates Lyd v Terence Edward Dowling [5] . A contract was accepted by a company on a paper which was almost identical to that of a business run by Mr Phillips. Mr Philips then wrongly issued proceedings in his own name, so the company was substituted as claimant. The company’s claim was dismissed and a third party costs order was then made against Mr Phillips. There are a lot more typical circumstances for third party costs orders, one of which arose in Goodwood Recoveries Ltd v Breen [6] where a non party director could be described as the real party, seeking benefit and control for himself. Even where he had acted in good faith or without impropriety justice might demand that he becomes liable in costs. A similar case can be found in CIBC Mellon Trust Co v Stolzenberg [7] where the court held that there was no real reason why if a shareholder funded, controlled and directed litigation for the company in order to promote his own financial interest, the court shouldn’t make a costs order against him.

Its long been established that courts will not allow the Salomon principle to be used as any sort of engine of fraud or used to avoid pre existing legal obligations. An example of this would be Gilford Motor Company v Horne [8] where the defendant had been the managing director of the claimant company where he had entered a covenant not to solicit customers from his employers when he was no longer employed by them. When he left the company, Horne formed a new company to carry on a competing business where the shares in which were held by his wife, a friend and himself thereby he solicited the claimants customers. The Court of Appeal held that the company was a mere façade to cloak his breach, the courts granted an injunction which enforced the covenant against both Horne and the company. A similar example comes in Jones v Lipman [9] where the defendant entered a contract to sell a properly but then attempted to avoid the sale by transferring the property to a company which he owned in an attempt to avoid a specific performance order. Russell Judge awarded a specific performance against both Mr Lipman and the company.

Another case which indicates the application of the principle is Kensington International Ltd v Congo. Kensington, the claimant, entered into a loan and credit agreement with the Republic of Congo who in this case were the defendants. The claimant obtained four judgements against the Republic of Congo which is sought to enforce using third party debt order against money payable to a company known as Sphynx who had sold oil. The oil was bought from Africa Oil, who before that bought the oil from a Congolese state owned company called SNPC. Sphynx and Africa Oil were both owned and controlled by the president and director of SNPC. The court held that the various company structures and transactions were a sham or façade and had little legal substance. The court also found that the company’s were set up with a view to defeating existing claims made by creditors against Congo. Both SNPC and Sphynx were apart of the Congolese state and had no existence separate from the state. IT wasn’t necessary for the divestment of assets which were undervalued to justify the court piercing the corporate veil with regard to the particular transactions.

In some cases some people believe just because there is fraudulent activity it means that the courts will pierce the corporate veil, but this isn’t so. In Dadourian Group v Simms there were some individuals who had misrepresented one of them as a mere intermediary when in fact the gentleman in question was a co owner and in control of a contracting company who were liable for deceit. The veil was not lifted so the individuals were not found liable by the court for the companys breach of contract. There was no conspiracy to injure the claimant and there was a genuine intent on buying the equipment.

The courts are very reluctant to lift the veil when there is an absence of a sham. Its become very clear the veil will not be lifted simply because it would be in the interests of justice. In the case of Williams v Natural Life Health Foods Ltd [10] , the defendant company was run by Mr Mistlin and he had given negligent advice to the claimant in regard to the profitability of a franchise. When the company was being wound up the claimant joined Mr Mistlin as a defendant as he assumed that he had taken personal responsibility. The house of Lords rejected the Court of Appeals finding that Mr Mistlin had taken full responsibility to the claimant, holding that in order for the direction to be personally liable for negligent advice given by the company, it must be shown that the director had assumed responsibility for the advice and that the claimant had reasonably relied on the assumption of responsibility. There had been no personal dealings between both Mr Mistlin and the claimant, so the tests were not met and the corporate veil should remain intact.

Salomon v Salomon was obviously a pivitol case in history in regard to lifting the corporate veil. The shareholders are deemed a separate entity to the company, which is deemed to have its own personality.