UCL 2022-23 Lecture notes: Piercing the corporate veil
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Course
Company Law
Institution
University College London (UCL)
UCL 2022-23 Lecture notes: piercing the corporate veil, covering: Salomon v Salomon, theories of veil piercing (agency, sham or facade, evasion of existing legal obligations, assumptions of personal responsibility, single economic units, interests of justice), and more. Contains casenotes on fundam...
4. Nature of the Corporation, Piercing the Corporate Veil
Reading:
- Pettet’s Company Law, chapter 2 pages 37-48 (section 2.1 from 2.1B ‘Piercing the corporate veil’ to the end of that
section).
- Gower’s Principles of Company Law Chapter 7
Definition................................................................................................................................. 1
Statutory veil lifting..................................................................................................................2
Common law veil piercing........................................................................................................2
Sham or facade.................................................................................................................. 2
Evasion of existing legal obligations (Sham and facade continued)....................................4
Agency................................................................................................................................ 5
Assumption of personal responsibility.................................................................................7
Single economic unit...........................................................................................................7
Interests of justice............................................................................................................... 8
Recent developments in piercing the veil - Prest v Petrodel....................................................9
Prest v Petrodel [2013] UKSC..........................................................................................10
Textbook notes from Pettet Lowry & Reisberg......................................................................16
Definition
Starting point: Salomon
● Upon incorporation, separate personality ensues
● Members’ liability limited, limited liability even for controlling shareholders
● → Are there circumstances in which we can disregard separate personality?
What does “veil piercing” mean?
● “to pierce the corporate veil is an expression that I would reserve for treating the rights
or liabilities or activities of the company as the rights or liabilities or activities of
its shareholders”, Atlas Maritime Co S.A. v Avalon Maritime Ltd (no 1) [1991] 4 All ER
769, [779] (Staughton LJ)
○ Treating the rights + liabilities of the company as the rights + liabilities of
its shareholders
● “disregarding the separate personality of the company … only … those cases which are
true exceptions to the rule in Salomon”, Prest v Petrodel [2013] UKSC 34, [16] (Lord
Sumption)
○ Veil piercing only in cases where there is a “true exception”
What are the consequences of veil piercing?
● Looking behind the veil, what are the shareholders’ facts, what other avenues can we
take to render them liable
● Corporate personality disregarded
● To render shareholders liable (as an exception to the general rule that they are
shielded by corporate personality)
● BUT
, ○ Only to remedy a particular wrong
○ This is not a wholesale disregard of incorporation
Challenges:
● Undermines Salomon
● Potential commercial implications
● When will the court pierce the veil?
● Lack of coherence? Uncertainty
Statutory veil lifting
Often focuses on group scenarios, which would mean that each company in the group would
file its own accounts.
● s 399, CA 2006 (group accounts)
● ss 409-410, CA 2006 (parent to provide subsidiary information)
● s 993, CA 2006 and s 213, IA 1986 (fraudulent trading), s 214, IA 1986 (wrongful
trading) are sometimes defined as statutory veil piercing but in reality are simply
additional offences.
Continue to note piercing vs. lifting
- Piercing to do with allocating liability - against limited liability
Common law veil piercing
Sham or facade
Where the court accepted that the company was a sham/facade →
therefore it is justified in piercing the veil
Ask:
● Is the company a mere sham or facade?
● Defining facade:
○ Ordinary construction
○ Concealing true facts
○ Outward appearance or front, especially a deceptive one
● In Prest, the point was made: “is sham even the correct term? Veil piercing implies
that the company exists”
● Note one purpose of incorporation is to limit liability: need to figure out where the tipping
point is
, *Woolfson v Strathclyde Regional Council (1979) 38 P&CR 521:
● Piercing the veil only when the company is a facade concealing true facts.
● Facts: when selling land, you need 2 payments: loss of land payment AND an uplift: in
selling the land, you’ve lost not just the land itself but the value of your business.
○ In a holding company, one subsidiary is owned by Mr and Mrs W (Campbell Ltd).
999 shares to Mr W, 1 share to Mrs W.
○ When the local authority bought the land from Campbell Ltd, Ws did not
have to pay the uplift.
● Issue: W argued that they should receive both payments (in selling the land), but in
reality the Ws were the business proprietors.
● Held: That would mean piercing the veil, which was not the case here.
○ You can’t structure for tax gain on the one hand and then argue that it’s a sham.
Because it means arguing that it is appropriate to pierce the veil
○ ‘ …it is appropriate to pierce the corporate veil only where special circumstances
exist indicating that it is a mere facade concealing the true facts...’
○ Company not a facade – company structure used for tax gain.
● Context of the cases: slum clearances, new concepts in how cities should be built, local
authorities took up ideas / huge tracts of cities
● The court distinguishes this case from: DHN Food Distribution case
*Adams v Cape Industries plc [1990] BCLC 479
● Facts: Cape Industries holding for subsidiaries NAAC (marketing of asbestos) (USA) and
Multiple Mining Entities (South Africa)
● Employees of the company in the US became seriously ill with asbestosis, sued the
employer and were awarded judgment in their favour.
● Issue: argued that the holding company should be liable for the judgment debt.
● The argument:
○ Single economic unit?
○ Agency between Cape and NAAC?
○ Subsidiaries were a facade?
■ The business was at all times Cape plc, and that Cape knew they were
working with a dangerous substance
● Held: ‘it is appropriate to pierce the veil only where special circumstances exist
indicating that it is a mere façade concealing the true facts’ (Woolfson approach)
○ This exists only when you are evading the rights of a relief a third party
already possesses (where liability already exists)
○ Cannot pierce the veil in relation to future issues which might arise, not the rights
of relief a third party may acquire in the future
○ Like it or not, what Cape did was perfectly acceptable and inherent within Eng
company law - that you can anticipate that you might face liabilities in the future
and incorporate a company to reduce your exposure to that.
○ Did not pierce the veil.
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