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Lifting the Corporate Veil UK Law.

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The essay analyses and scrutinises under which circumstances the corporate veil can be disregarded in the UK.  Cases and Articles have been used to set out the main principles in which the law is based.

Introduction

When carrying on business, seeking an appropriate corporate structure which accommodates to the needs of the intended business and provides extensive protection in case of adversity is paramount in order to avoid incommensurable consequences. Limited liability and separate corporate personality were introduced in the landmark case of Salomon v Salomon.[1] Once a company is incorporated under the provisions of the Companies Act 2006 [2] and the registrar issues a certificate of the incorporation of the company, [3]it acquires separate legal personality, and as a result the company´s rights and liabilities belong to the company and not to its members or shareholders, thereby preventing creditors from getting to their personal assets in case of insolvency. These principles were subsequently confirmed in the cases of Macaura v Nothern Assurance[4] and Lee v Lee´s Air farming Ltd,[5] ushering in a new era of greater protection for investors since any liability was limited to the shares acquired[6] as found in section 74(2) of the insolvency act 1986,[7]spurring them on to engage in further and more intricate business transactions. It is argued that the rationale of the members’ limited liability is aimed to allow ´small people´[8] to participate in the economy, as this principle encouraged a larger amount of individuals with few means to venture in business as a result of the shield provided by limited liability.[9] However, it seems that this principle facilitates entrepreneurial activity at all levels, as investors are more prone to engage in more risk-bearing transactions, inducing investment and encouraging trade.[10]Introduction

Development of the principle of ´lifting the corporate veil´

The advantages provided by this principle, inevitably gave  rise to situations which may be against our notions of fairness, responsibility and good sense.[11] Consequently, ´lifting the corporate veil´, thereby disregarding the separate personality of the company tends to be the vehicle to pursue justice. Yet, the courts are reluctant to do so as evidenced in the stringent judgment given in Salomon v Salomon, which represented a paradigm shift in company law, when the courts relied on the literal meaning of the words without considering whether it was a genuine company.[12] After a period of interventionism which culminated with Lord Denning’s speech in Littlewoods Mail Order Stores v IRC,[13] Adams v Cape[14] attempted to provide some legal basis to veil lifting, narrowing it to 3 different possibilities.[15]  It departed from the interventionist period where the veil was lifted by the courts ´to achieve justice irrespective of the efficacy of the corporate structure´,[16] as they did for example in Re a Company.[17] However, It can be argued that this was just mere guidance as evidenced in Creasey v breachwood Motors Ltd[18]  or Raja v Van Hoogstraten[19] where the court decided to ignore the principles laid out in Adams. It seems  that Adams have now been superseded by recent case law, arguably further restricting the possibilities under which it is possible to lift the corporate veil. Moritt gave a modern impetus to ´lifting the veil´ in trustor v smallbone,[20] where the veil was lifted on the basis of the façade exception, yet it was stressed that there had to be a connection between the impropriety and the use of the corporate structure. It was suggested that otherwise it would make undue inroads into the principle of Salomon v Salomon.

New approach to ´lifting the corporate veil´

Different legal principles have developed over the last century attempting to attribute one person´s property, rights or liabilities such as statutory provisions or contractual provisions.[21] In Ben Hashem v Shayif,[22] Munby J sought to put an end to family disputes and looser views in lifting the corporate veil. He set out that the veil can be only lifted when control and ownership of the company involves impropriety which is linked to the use of the company structure to conceal or avoid liability. However, it was asserted that the veil will be lifted in so far as it is necessary to provide a remedy to the affected party as a result of the actions of the controller of the company. This principle was confirmed in VTB Capital Plc v Nutritek International Cor. [23]Despite attempts of the court to shed light on this obscure area of law, lifting the veil was still subject to extensive review and uncertainty. Although the courts have set out in numerous cases legal principles which justify lifting the veil, it lacked binding effect and there was uncertainty as to its scope. It may be suggested that there it has never been general principle of law which entitled an individual to lift the corporate veil, as asserted in VTB v Nutriek.[24] As a result, it is rare to find cases where corporate veil has been lifted. Although the case of Prest v Petrodel[25] gave rise to a resulting trust and the supreme court found that the veil could not be lifted under section 24 of the the matrimonial clause act 1973[26] in the facts of the case, the supreme court entered into detailed analysis contending that it has never existed in law any power to lift the corporate veil. Also, it can be argued that the court attempted to settle the increasing amount of litigations in commercial and family areas that were being resolved in the light of feeble principles.

Lord Sumption, seeking to clarify the matter identified the situations which were to be considered as true exceptions to the Salomon principle in Prest v Petrodel.  He stated that the controller of the company may be personally liable, when he deliberately evades an existing legal obligation by interposing a company under his control and misusing it, therefore concurring with the criterion set out in Bem Hashem. However, the difficulty remained in identifying the relevant wrongdoing, as emphasized by Lord Sumption. Accordingly, he narrowed it to two possible alternatives, namely the ´concealment principle´ and ´evasion principle´[27].

In addition to the remedies found at common law, the courts may lift the corporate veil and hold the controller or shareholder of the company personally liable under numerous specific legal principles such as statutory or contractual provisions, or alternatively the controller may be personally liable when he has employed the company as its agent or joint actor.[28]

In Antonio Gramsci Shipping Corporation v Stepanovs[29] it was discussed whether in case of fraud the acts of the company should be attributed to its owner or controller. This is a delicate matter as it involves privity of contract,  therefore it was analysed whether the scope of the principle of lifting the veil could expand to make a non-party being liable of contract of which they are not signatories. It was held in Gramsci that the the veil could be lifted and a claim for damages made if it complied with the principles of the previously discussed case Trustor v Smallbone. There must have been a fraudulent misuse of the company structure and a wrongdoing committed ´ dehors´ the company. The findings of this case received strong criticism by Annold J in VTB Capital. He disagreed with this statement given in Gramsci, stating that the case of Trustor is rather an authority of knowing receipt.  In such a case a receipt by the company will be treated as receipt by the individual who is in control, provided it complies with the test set out in Trustor.  Arnold further argued that this principle ignores the privity of contract rather than lifting the veil. Arnold J was not persuaded with the arguments provided by Burton in Gramsci. Therefore, Gramsci was arguably overridden in VTB capital, where they did not enforce the contract.  Arnold J concluded why if the defendant is being treated as a party of a contract, why can he not enforce claims such as for unpaid sums. It appears that the approach adopted in VTB Capitals has become authority, as it was followed in the subsequent case of Linsen International v Lumpuss.[30]

The concealment Principle

Lord Sumption considered that this principle did not necessarily involve lifting the veil, but it arises when the company or companies have been interposed in a transaction in order to conceal or mask the true principles of that particular transaction.[31] The concealment principle is neither a principle of liability nor one of non-liability, yet it may attract the application of other legal rules.[32]The judges in these cases of Gencor ACP Ltd v Dalby[33] and Trustor Ab v Smallbones[34] were wrong to find that they were lifting the corporate veil under the concealment principle, as followed in the recent case of Pennyfeathers v Pennyfeathers Property .[35]  The court  simply try to look behind the veil in order to  discover the true facts; as evidenced in Grenco where the court intended to discover the relationship between the company and Mr Dalby, giving rise to ordinary equitable claims .

Evasion Principle

This principle is applied when an individual is interposing the company to evade or discharge his legal obligations, and as a result he just uses the company to obtain an advantage by reason of its separate personality.[36] This principle is aimed to deprive the company or the controller of this advantage by lifting the corporate veil. The leading example in this area of law is the case of Gilford Motor Co Ltd V Horne, [37]  where it was held that the company was created as a stratagem, in order to mask the business that Mr Horne was carrying out. The court intervened and compelled the defendants to comply with their obligations. Jones v Lipman[38] or German Breweries Ltd v Chelsea Corporation Inc[39] are other cases regarded to be falling under the evasion principle, as the corporate veil was lifted for the purpose of preventing the defendants from evading their existing legal obligations.

Confusion between the evasion and Concealment Principle

The principles under which the courts can justify lifting the veil is arguably well established by the authorities, as despite the corporate veil was not lifted  in this case and the principles are obiter, it appears to be a consensus as to when the court may disregard the corporate veil. However, it remains a difficulty to identify what is a relevant wrongdoing. It has been much confusion as to the distinction between the concealment and the evasion principle.

In Gilford Motors v Horne it can be argued that it gave rise to the concealment principle , as Mr Horne contravened the covenant by which he was prevented from soliciting customers from his former employer, by trading through a company which he formed in the name of his wife, JM Horne & Co Ltd in order to mask his identity. Although this case has largely been regarded as falling under the evasion principle, it may be argued that the corporate veil was not disregarded as pointed out by Toulson J in Yokong,[40] as the court just intended to discover what the corporate structure was really covering, namely the identity of the controller, which was legally relevant since he was bound by the aforesaid covenant. Although the company was in his wife´s name, it was considered that ‘it was the channel through which EB Horne carried on his business´. Therefore, the reason of setting the company was seen as a front since he intended to induce the parties concerned that the business was being carried on by someone else. Hence, it may be argued that the nature of the injunction against Horne is based on the concealment principle.

In contrast, the injunction against the company was held to be based on the evasion principles by the rationale given by Lord Hanworth , as his centered his view in the evasive´s motive of Mr Horne for creating the company.  However, the only clear conclusion that can bet drawn is that there exists a very thin line between these two principles since they tend to overlap, as evidenced in this particular case. It must be noted that the arguments defining the evasion and concealment principle as well as it scope is contained in obiter, lacking the authoritative character which is to be expected from the rules governing such a delicate matter of law.

Discussion as to when the veil may be lifted

Lord Neuberger and Lord Clark in Prest relied on Bem Hashem, contending that it was only appropriate to lift the corporate veil when all other remedies are not available.[41] Lord Neuberger justified this view, asserting that there is a lack of coherent principles, failing to define when is appropriate to disregard the corporate veil.  Lord Walker´s view dissented with Neuberger, as he claimed that the doctrine of lifting the veil is not based on coherent principles or rules of law, whereupon is just a label. In VTB Capital plc v Nutriek International Corp Munby J held that there was not necessary that there was no other remedy available in order to lift the corporate veil, therefore departing from the strict view of this principle.

It must be noted that in Bem Hashem[42] it was used the word necessity, not of last resort as used by Lord Neuberger, Lord Mance and Lord Clark. Arguably the meaning of necessity does not equate with the one of last resort, thus relaxing the test. This was evidenced in R v Secretary of State for Foreign and Commonwealth Affairs[43], where it was held that the court will not require the requested information unless necessary to provide it.[44] In Rugby Football Union v Consolidated information Service[45] it was held that the test of necessity does not require it to be of last resort. Therefore, it can be argued that there is nothing in any authority suggesting a more stringent test other than the twisted construction of some judges of the wording employed in Bem Hashem.[46] It may be suggested that the courts refused to lift the corporate veil in Dadourian in a case involving misrepresentation because there was other remedies available, yet as Warren J in Dadourian held, there was simply not necessary to lift the veil in order to remedy the claimant. He further stated that the courts have only lifted the corporate veil in case of ´necessity or convenient´. In brief, the area of long has been subject to extensive change, seeking to provide more clear and satisfactory judgments.

Unlike the ´last resort´ doctrine which would prevent the veil being lifted in most situations, the necessity test appears as a more sensible approach, as it limits the principle, yet does not rule it out in case of necessity. It must be noted that limited liability sought to promote investment and the economy by the security provided by this principle once a company becomes incorporated. The principle of lifting the veil is inevitably subject to the pressure and influence of the concerned parties, including most powerful and influential companies as well as individuals. As a result, the only conclusion that can be drawn is that it is a delicate matter, as if for example there was a relaxed test for lifting the test, insecurity may ensue. The uncertainty that a lenient test would create for lifting the veil would discourage business and investment, which could result in important consequences for the economy. Hence, drawing a perfect balance is paramount and to be expected in future case law.

Future of Veil Lifting

In Prest v Petrodel Resources Ltd Lord Sumption and Lord Neuberger stated that lifting the corporate veil could only be used when applying the evasion principle, provided it is necessary to do so. Lord Neuberger analysed cases when the veil had been lifted in the past, concluding that it had been unnecessary in light of the facts of most cases. He asserted that there is not a single example where this doctrine has been applied properly and successfully. Although Lord Mance and Lord Clarke contended that the principle of lifting the veil should not expand to other situations other than those covered by the evasion principle, Lord Mance did not discard the possibility of other situations arising under which it would be necessary to lift the corporate veil, yet he emphasised that they are unlikely and, thereby they will be novel and very rare. [47]In Antonio Gramsci Shipping Corporation v Recoletos it was argued that there is not any underlying reason in the principle of lifting the veil, doubting as to whether it is possible to further develop this area of law. Beaton LJ considered this principle as an anomaly which does not have room for further development.  Therefore, Prest is deemed to be the starting point of any discussion as to whether the veil should be lifted, as even though the judgment was contained in obiter, these principles have been confirmed in Antonio Gramsci Shipping and R v sale[48]. In R v Sale it was the ratio decidendi, giving it a binding effect.[49] Although Prest arguably lays down a high test to satisfy, it may be argued that the protection provided by contractual, statutory provision, agent situation and beneficiary ownership of trust are sufficient to safeguard the interest of the affected parties without need of a further test.  Ergo, the strict test introduced in Prest, arguably attempted to foster and maintain the advantages provided by limited liability, curbing the doctrine of lifting the veil to genuine exceptions to the rule in Salomon.

Conclusion

The doctrine of lifting the veil has been subject to extensive criticism and change in the last centuries, making it a contentious area of law. Prest v Petrodel tried to provide some clarity to this principle, by reconciling the conclusions reached in previous case law.  The Supreme Court drew arguably a difficult test to satisfy, as it needs to be a case of necessity which complies with the previously outlined test.  Some commentators went further by stating that necessity equated to last resort, hindering innocent individuals to engage this principle when persuading justice and redress. In order words, the affected parties must first try to apply first the the the specific legal principles outlined above, such as contractual and statutory provisions.

However, it must be noted, that if a more lenient test was introduced, it may lead to a turning point, as the economy and consequently the living standard enjoyed by the population in the UK could be at stake.  Even though the principle laid out in Prest appears to be the main authority, it is not certain whether it will be followed in future case law. Although the test set out in Prest was contained in obiter, it appears to have been confirmed in cases such as Antonio Gramisce and R sale. Even though it appears to be consensus as to the principles laid down, and is excepted to be followed in future cases, modification of some of the requirements may followed if the court encounter novel and rare set of facts which do not adequate to the test. It can be concluded that Prest is the starting point when discussing as to whether is appropriate to lift the corporate veil, and unless extraordinary circumstances spring up, it is expected to remain as the leading authority of this area of law.

 

 

Word Count: 3244

 

Bibliography:

 

Legislation:

Companies Act 2006

Insolvency act 1986

Matrimonial Clauses Act 1973

Books:

Dignam A & Lowry J, Company Law (7th, Oxford University Press, Oxford 2014)

Kershaw D, Company Law in Context (2nd, Oxford University Press, Oxford 2012)

Mayson S, French D & R , Company Law (31th, Oxford University Press, Oxford 2014-2015)

Articles:

Farat A & Michon D, ‘Lifting the Corporate Veil: Limited Liability of the Company Decision-Makers undermined’ [2008] 9 Common L. Rev.

Bull, Stephen, ‘Piercing the Corporate Veil – In England and Singapore’ [2014] 2014 Sing. J. Legal Stud.

Graham T, ´ the doctrinal basis of company law´ (1998) 57 Cambridge Law.

Prest v Petrodel Resources Ltd; Kim, May H, ‘Piercing the Corporate Veil as a Last Resort’ .

32 Int’l Fin. L. Rev. 43 2013-2014

Newspapers:

The times(27 July 1855

 

[1] Salomon v A Salomon & Co Ltd [1896] UKHL 1

[2] Companies Act 2006

[3] Section 15(1) Companies Act 2006

[4] Macaura v Nothern Assurance Co[1925] AC 619 HOL

[5] Lee v Lee´s Air farming Ltd [1961] AC 12

[6] David Kershaw, Company Law in Context (2nd, Oxford University Press, Oxford 2012) p.20

[7] S. 74(2) of the insolvency act 1986

[8]  Small people in this context is defined as follows: A person who has limited funds to participate in business.

[9] The times(27 July 1855) p.8

[10] Anna Farat & Denis Michon, ‘Lifting the Corporate Veil: Limited Liability of the Company Decision-Makers undermined’ [2008] 9 Common L. Rev.  , p.21

[11] Supra at 4 p.47

[12] R. Graham, ´ the doctrinal basis of company law´ (1998) 57 Cambridge Law review  p.554,560

[13] Littlewoods Mail Order Stores v IRC (1970) 75 ITR 327

[14] Adams v Cape [1990] Ch 433

[15] In Adams it was established that the corporate veil can only be lifted under 3 circumstances: First;´ Single Economic Unit´( as in Samengo-Turner v J&H Marsh & Mc Lennan). Second; ´special circumstances indicating that it is a mere facade concealing the true facts´( Jones v Lipman). Third, if the company was used as its agent( Millam v The Print Facotory (London) ).

[16] Blackwell, ‘Lifting the Veil'<https://bookshop.blackwell.co.uk/extracts/9780199232871_dignam.pdf> accessed [07/04/2015]

[17] Re a Company(1985)[1985] BCLC 333

[18] Creasey v Breachwood Motors Ltd (1993)

[19]Raja v Van Hoogstraten [2006] All ER (D) 86

[20] Trustoor AB v Smallbone (No 2) (2001)

[21] Statutory provisions is the starting point when trying to resolve a matter concerning  an advantage taken by a person when using the separate personality of the corporation. Further below are outlined some of the main contractual provisions:

Section 213 as well as section 14 of the insolvency act 1986 imposes liability in members of the company in case of fraudulent and wrongful trading respectively. S.24(1)(a) of the Matrimonial  clauses act 1973 was engaged in the case of Prest, where it was held that the properties were being held in trust  by the company for the benefit of his wife.

[22] Ben Hashem v Al Shayif [2008] EWHC 2380 (Fam)

[23] VTB v Nutritek [2013] UKSC 5.

[24] Ibid

[25]Prest v Petrodel [2013] UKSC 34

[26] Matrimonial Clauses Act 1973

[27] Sadam Adamik, ‘Piercing the Corporate veil Where are we now?’ (New Square Chambers 2010) <http://www.newsquarechambers.co.uk/files/Publications/Simon%20Adamyk%20Article%20Dec%202013.pdf> accessed accessed 09/04/2014

[28] Stephen Mayson, Derek French & Ryan , Company Law (31th, Oxford University Press, Oxford 2014-2015) p.127

[29]  Antonio Gramsci Shipping Corporation v Stepanovs EWHC 333 (Comm) [2011]

[30]  Linsen International v Lumpuss [2010] All ER (D) 258 (Feb)

[31]  The concealment principle: … Is that the interposition of a company or perhaps seval companies so as to conceal the identiy of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the ´facade´, but only looking behind it to discover the facts whicfh the corporate structure is concealing. Stephen Mayson, Derek French & Ryan , Company Law (31th, Oxford University Press, Oxford 2014-2015) p.133

[32] Bull, Stephen, ‘Piercing the Corporate Veil – In England and Singapore’ [2014] 2014 Sing. J. Legal Stud.  p.29.

[33] Gencor ACP Ltd v Dalby [2000] 2 BCLC 734.

[34] Trustor AB v Smallbone (No 2) [2001] 1 WLR 177.

[35] Pennyfeathers Jersey proceeded to take a conditional contract in respect of the land and to enter options to acquire surrounding lands.  The court lifted the corporate veil on Pennyfeathers by virtue of the director´s ownership and control of the Jersey Company and held that the directors were accountable to Pennyfeathers Ltd for the profit. Pennyfeathers Ltd and Others v Pennyfeathers Property Company Ltd and Others [2013] EWHC 3530 (Ch)

[36] Evasion Principle:…Pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company´s separate legal personality ( Lord Sumption at [35], Lord Neuberger at [81] in Prest v Petrodel Resources Ltd). Id

[37]  A former employee was bound by a covenant to to solicit customers from his former employers  and he set a company to do. The court found that the company was just a front for Mr Horne and issued an injunction against the company and the defendant. Gilford Motor Co Ltd v Horne[1933] Ch 935

[38] Jones v Lipman [1962]1 WLR 832

[39] Anglo German Breweries Ltd v Horne [1933] All ER 109

[40] Toulson J in Yokong Line at 308

[41] Prest v Petrodel Resources Ltd; Kim, Ho May, ‘Piercing the Corporate Veil as a Last Resort’ [2014] 26 SAcLJ 249 p.243

[42] In Bem Hashem it was stated as follows: The court will pierce the veil only so far as is necessary to provide a remedy for the particular wrong which those controlling the company have done. In other words, the fact that the courts pierces the veil for one purpose does not mean that it will necessarily be pierced for all purposes.

[43] R v Secretary of State for Foreign and Commonwealth Affairs [2008] EWHC 2048 (admin) at [94]

[44] The case based it judgment in the principles set out in Norwich Pharmacal Co v  Customs and Exercise Comissioners.

[45] Rugby Football v Consolidated information services Ltd [2013] 1 All ER 928

[47] Alan Dignam & John Lowry, Company Law (7th, Oxford University Press, Oxford 2014) p.43

[48] R v Sale [2013] EWCA Crim 1306

[49] 32 Int’l Fin. L. Rev. 43 2013-2014

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