The UK's approach to the lifting of the corporate

The following essay will begin by providing an introduction to the practice of lifting the corporate veil. It will then discuss the arbitrary situations where the veil of incorporation is lifted whilst highlighting the uncertainty and unfairness in the UK court’s approach to it.

When a company is created, it is said to have a separate legal personality, one that is distinct from its directors and shareholders. Under the principle of limited liability the members of the company cannot be personally held liable for the debts of the company. In the event that the judiciary or the legislature decide to ‘lift the corporate veil’ they can hold the members of a company personally liable for the debts of the company. Therefore, even from its definition one can see that lifting the corporate veil is an exception and not the rule.

The courts will generally lift the veil of incorporation on a ‘case to case’ basis and some commentators argue that courts employ ‘equitable discretion’ while so doing [1] . This arbitrary discretion at the hands of the judges itself reveals ‘lack of certainty and fairness.’

It is in situations of group corporate structures that lifting the corporate veil has created most difficulty. This is because, according to the general principle, the parent company or the holding company has a separate legal personality from that of its subsidiaries. [2] However, this often allows the parent company to conduct its more ‘risky’ or ‘liability prone activities’ through its subsidiary companies. Furthermore, group structures provide the companies with an enhanced opportunity to evade tax liability when assets are occasionally shifted amongst the different companies in the group.

The Companies Act 2006 is cognisant of this and demands under s 339 that parent companies must produce group accounts as well as provide details of the subsidiary companies under s 409.

It is unfortunate that whereas the Companies Act 2006 has understood the problem generated by not lifting the corporate veil in group structures, apart from a few sections providing for checks on group structures, the Act has not gone further and provided for clear guidance when it would be legally viable to lift the corporate veil. The inability of the legislature to provide set circumstances when the corporate veil may or may not be lifted further enhances the UK’s ‘lack of certainty and fairness’ in lifting the corporate veil.

It is inevitable that whenever there is going to be mention of lifting the corporate veil, the discussion will start with Adams v Cape Industries [3] as it provided the most thorough analysis of this procedure seen in the UK courts.  Here, the Court of Appeal did not allow the veil to be lifted from an English parent company which had a subsidiary that had been successfully sued in the United States and the subsidiary had insufficient assets to pay off the American litigants. It was also in this seminal case where it was concluded that the corporate veil will not be lifted just because it would be more just to do so.

I feel that it is pertinent to mention here that the judgment of Adams v Cape Industries reduces the situations in which the corporate veil may be lifted to three. However, as will be seen later this does not add great certainty or fairness to the law.

The three situations according to Adams where the veil of incorporation may be lifted are:

Firstly, when the court is interpreting either a statute or a document. However, under this exception the court may only proceed to treat the group as a single entity where it finds lack of clarity whilst interpreting a particular statute or document. [4] 

Secondly, the courts may lift the veil of incorporation where there are special circumstances which exist to show that the company is a ‘mere façade concealing the true facts.’ It appears from this exception that the courts are more willing to hold the companies morally culpable then uphold certainty and fairness in the law. [5] 

The third situation where the court may lift the veil of incorporation in group structures is where there has been an express or implied agency agreement. However, the difficulty of applying this exception is more than evident because a group of companies will hardly ever enter into an express agency agreement when their motive is to enter into ‘liability prone activities.’

The greatest contention with UK’s approach to lifting the corporate veil is that since the decision in Saloman [6] the court has inconsistently either upheld the principle of separate legal personality or has lifted the veil of incorporation to hold the members personally liable for the debts of the company. There is no set pattern that may be deciphered and this naturally leads to those cases holding murky precedential value. Alan and Dignam have also dwelled on this uncertainty and in their book [7] they have tried to clarify this uncertainty by providing a list of situations when the court has lifted the veil of incorporation. These are as follows:

‘Where the company is an agent of another, where there is fraud,

tax issues, or employment issues or a group of companies exist

the court will lift the veil of incorporation.’

The irony is that whereas there are examples of the court lifting the veil of incorporation in all these situations, there are also instances of the court upholding the principle of separate legal personality in similar cases.

It could be argued that there were periods when the court was more consistent in its approach towards veil lifting. However this was mostly due to extrinsic factors such as the practice statement, which had not been issued and so the House of Lords was not at liberty to overrule its previous decision.

Described most articulately as the ‘Classical veil lifting period, 1897-1966,’ [8] throughout this period the House of Lords upheld the sanctity of the principle of a company having a separate legal personality, apart from in some cases [9] where the company was being used as a mere façade for fraud.

During ‘The Interventionist Years, 1966-1989’ the courts were more eager to lift the corporate veil and a seminal example of this was seen in the case of DHN Food Distributors Ltd v Tower Hamlets. [10] Here Lord Denning boldly declared that a group of companies should be treated as a single economic entity. However merely two years later the House of Lords specifically overruled Lord Denning and remarked that ‘the veil of incorporation will be upheld unless it was a mere façade.’

One could argue that had the House of Lords only stuck to lifting the veil of incorporation in situations where the company was being used as a mere ‘sham or façade’ there would’ve still been some degree of certainty in the law [11] . However, as is clearly visible from the stream of case law there is no consistency in when the veil of incorporation is lifted by the courts.

Gallagher and Zeigler [12] also seem to share my view and have gone ahead to add that the uncertainty inherent in lifting the corporate veil ‘can have negative impacts on other aspects of the law such as director’s duty to the company as a whole, individual taxation principles and the rule in Foss v Harbottle (1843) [13] .’

Australian courts have also developed a number of tests when the corporate veil may be lifted. These include; in the case of control exhibited by the parent company over the subsidiary, when there is an act warranting the piercing of the corporate veil and when the company was established with a ‘mala fide’ intent. Whereas these listed situations add some certainty to the law, they are claimed to be not very helpful practically [14] .

Another reason why piercing the corporate veil lacks both certainty and fairness is because the courts will mostly lift the corporate veil in small privately held businesses with limited assets. The reason for this is that in big public corporations, that trade on the stock exchange, the number of shareholders are too great and the court seldom has the resources or time to handle these. Not only does this give undue advantage to larger corporations but the practice is unfair and arbitrary in nature.

Another area where the uncertainty inherent in lifting the corporate veil has caused great unfairness is in cases of tortuous liability. On more than one occasion, parent companies have used the principle of limited liability to avoid paying compensation for personal injury [15] .

This injustice was side stepped in the case of Connelly v RTZ Corporation Plc [16] which held that a claim could be brought against a parent company for the actions of its subsidiary which was based abroad. However, this was only possible if the parent company exerted substantial control over the subsidiary. So it is mostly in theory that a duty of care can be owed by the parent company to the workers of its subsidiary. [17] 

Cases of tortuous veil lifting are differentiated from cases of commercial torts where the members of a company will be held personally liable if it can be established that they assumed a personal responsibility towards the claimant.

This was seen most explicitly in the case of Williams v Natural Life Health Foods [18] where a director evaded personal liability whilst trading through a limited company because he was not personally involved in the dealings. The House of Lords held that the test to determine whether a director was personally responsible was an objective one.

The reason cases of tortuous liability are being mentioned here is because their effect is to try and evade the principle of limited liability. Whereas, the interests of justice require that a company or its members be accountable for personal injury to a third party, here this only aggravates the uncertainty prevalent in the law [19] . Not only do these cases provide for another exception to the general principle, the rule requiring the establishment of ‘personal responsibility so as to create a special relationship’ with the claimant is inherently vague and uncertain in itself. [20] 

This essay would be incomplete without mention of the Insolvency Act 1986. Under s 213 [21] of the 1986 Act, a director will not be able to avoid personal liability where he has used the company for fraudulent trading [22] . However this section barely proved to remedy the states the law was in because the difficulty experienced whilst establishing fraud continues to contribute to the uncertainty and unfairness in the law. [23] 

Furthermore, s 213 requires proof of ‘dishonest intent’ with the result that those directors which engage in activities recklessly are not caught by the provision. In order to overcome this loophole, s 214 IA 1986 was introduced which provided the offence of ‘wrongful trading’ which has succeeded in providing the law with the most fairness seen in this area. [24] 

Whereas amongst the benefits of limited liability is the fact that it encourages enterprise and allows for individuals to invest in more than one business without the overwhelming fear of having their personal assets confiscated in case the business goes insolvent. The bigger concern is, whether it is fair to allow this principle to be the rule when it tends to levy the costs of business failure on society at large. Furthermore, this externalisation of business risks and costs should be a further moral excuse for the courts to generate greater certainty in the law of veil lifting.

After considering the aforementioned situations and the arbitrary way in which the practice is conducted, it may be confidently said that the 'The UK's approach to the lifting of the corporate veil lacks both certainty and fairness.’ Therefore, if the UK courts wish to avoid this they need to establish set situations when the veil of incorporation may be lifted instead of ‘when justice so requires.’ It would also be useful if the legislature would provide a section which had fewer grey areas and which would help clarify the law so that it is no longer this vague and impractical.


IA Insolvency Act

JBL Journal of Business Law

MULR Melbourne University Law Review

OUP Oxford University Press