When Can Veil of Corporation be Lifted

A registered company is a corporate body separate and distinct from its shareholders. The leading case on the fundamental importance of the separate personality of a company is Salomon v Salomon and Co Ltd, [1] where the court held the company’s acts were not his acts regardless of the numbers of shares and debentures owned by one man, even where other shares were held in trust for him. Neither were its liabilities his liabilities even if he has sole control of the company’s affairs as governing director. [2] However, there are certain situations where the courts have been willing to lift the veil of incorporation. This brief critically examines when the veil of incorporation can be listed. It starts by describing what it means by lifting veil of incorporation. Then, it critically examines situations whether the veil of incorporation can be lifted.

Lifting the veil of incorporation

The veil of incorporation may refer to the consequences of separate legal personality. Lifting the veil of incorporation means that the court ignores or sets aside the company separate legal personality by making the shareholders personally liable. [3] This is often described in metaphorical terms as removing a veil of incorporation. It may also be described as piercing, setting, lifting or going behind the veil. The use of these vague metaphors makes it difficult to know what the true issues are. [4] Whilst a metaphor may be used to example a principle, it may also be used to substitute an analysis and my hence obscure reasoning. [5] In Atlas Maritime Co SA v Avalon Maritime Ltd No. 1, [6] Slaughton described piercing the corporate veil as an expression reserved to treat the rights, liabilities or activities of a company as those of its shareholders. [7] In Woolfson v Strathclyde Regional Council, Lord Keith stated that the veil of incorporation could be lifted only where special circumstances exist. However, His Lordship did not explain what he mean by lifting the corporate veil or consider previous cases.

When the veil of incorporation can be lifted?

It is asserted that courts are able to lift the veil of incorporation in certain situations. These situations can be distinguished where the court is applying the terms of a statute, a contract or common law. [8] In the case of applying the terms of a statute, for example, section 213 of the Insolvency Act 1986 (IA 1986) imposes personal liability on any person who knowingly carries on a company business with the intention to defraud creditors or for other fraudulent purposes. However, this does not mean that the Parliament intended to allow the fiction created by the Companies Act to be used as a vehicle of fraud. Rather, the liability is to make a payment to the company, which is hardly a denial of the separate personality of the company. [9] 

Similarly, under section 761 of the Companies Act 2006 (CA 2006), a public company may not do business or borrow unless it has complied with the minimum requirements as to the minimum share capital. Directors are personally liable for any loss or damage suffered by a third party who has entered into a transaction with a company which is in contravention of section 767(3) of the CA 2006. However, this liability is only imposed if the company fails to comply with its obligations under the transaction and it is hard to see how this provision affects the principle of corporate personality. [10] Accordingly, whilst the terms of a statute may impose personal liability on shareholders, directors and others in breach of formal requirements consequent upon incorporation, this does not mean that the veil of incorporation is ignored or disregarded. [11] The courts are always committed to the preservation of separate legal personality of companies except where the terms of the statute clearly requires this. [12] 

Challenges to the principle of separate legal personality have been formulated to lift the veil of incorporation under common law. These include fraud, the company being a sham or façade, the company being agent of the members, the company as being part of a single economic entity, for the interests of justice or impropriety. It is well accepted that the courts will not allow corporate form to be used for the purpose of fraud [13] or as a device to evade a contractual or other legal obligation. However, the courts have been reluctant to accept the agency, single economic entity, interests of justice or impropriety arguments than arguments based on particular statutes or terms of contracts. Adam v cape Industries plc [14] is the leading case on this area. In this case, it was argued that although each company in a group companies was a separate legal entity with separate rights and liabilities, in certain circumstances, the court could ignore the distinction between them by treating them as one. However, the court rejected this argument.

However, on the issue of a company being merely a façade or sham, the court accepted that there is a well recognised exception to the rule prohibiting the lifting of corporate veil. This exception permits the courts to disregard the company when the corporate structure is a “mere façade concealing the true facts" – “façade" or “sham" having replaced the an assortment of epithets. [15] This can be seen in a number of cases, where a person subject to a legal obligation has employed company to evade that obligation. In this situation, the court has ordered both the person and the company to comply with the obligation, describing the company as a sham, usually in conjunction with other terms such as cloak or mask. [16] However, it is irrelevant that the entities used to evade the obligations are companies. For example, in John v Lipman, [17] the court made orders against the individual defendant as well as the company, thereby recognising rather than ignoring the separate personality of the company. [18] 

The agency argument goes that if a company has power to act as an agent, it may do so as agent for its parent company or for its members if there is authorisation to do so. In such situation, the parent company or the members will be bound by acts of its agent provided that those acts are within the scope of actual or apparent authority. The courts have found that a holding company was in fact carrying on a business through the agency of its subsidiary company. However, there is no presumption of any such agency relationship between company and members and it will be difficult to establish unless there is an express agreement between the parties. [19] 

This argument failed in Cape Industries because although it was clear that the subsidiary company rendered services to the parent company and in some cases acted as its agents in particular transactions, that did not suffice to satisfy the conditions which the court had held to be necessary if the parent company was to be regarded as present in the United States as the subsidiary company had carried on its own business from its own fixed place of business in the United States. The mere fact that one company is the subsidiary of another is not by itself sufficient to make the subsidiary an agent of its holding company. [20] The activities of the subsidiary must be so closely controlled and directed by the parent company that the latter can be regarded as merely acting an agent conducting the business of the parent company. [21] 

There has also been an argument on the use of interests of justice to provide policy impetus to lift the veil of incorporation. However, the concept of public interests was rejected in Adam Industries because is too vague and does not provide the courts or businesses a clear guidance on when the normal principles of company law should be displaced. [22] As a result, there are limited cases where the interests of justice have been argued successfully. [23] The courts have also considered whether the veil of incorporation can be lifted on the grounds of impropriety, i.e. the company has been used to carry on an unlawful activity or to avoid a court order. However, in such cases, the principle of limited liability is not affected if the veil is lifted because it is the company which is being made liable in some way for members’ obligations. [24] For certain purposes, the courts whilst respecting the separate legal personality of a company, have treated the conduct of characteristics of its directors, managers or members as attributable to the company itself. However, this attribution does not in the true sense involve lifting of the veil of incorporation. [25] 

Conclusion

The doctrine of lifting of the veil of incorporation is a technique to the courts to deal with those abusing the corporate legal personality. However, the role played by the doctrine in England and Wales is small. This is so even in one-person company or group companies where the case for applying the doctrine may seem strong. The doctrine has not been developed in such a way to address abuse of limited liability. This is different from the law in the United States where the lifting of the veil of incorporation is more readily. However, even in the United States, the courts are reluctant to lift the veil of incorporation to remove limited liability in both private and public companies. [26] Instead of addressing the problem through lifting the veil of incorporation, the law of England and Wales has chosen to address it through the statutory doctrine of wrongful trading. This is probably because the British law approach to regulation of the abuse of limited liability is that of a combination of self-help and statutory constraints.