Essay question was: In what circumstances are the courts willing to pierce or lift the corporate veil and do these circumstances remain effective and relevant to date?
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In Salomon v A Salomon & Co Ltd1 the House of Lords held that the
shareholders were not liable for the company’s debts, as the company,
from the juristic point of view, was deemed to be a separate entity. It was
also recognized in this case that a person could legitimately set up a
company to shield the controllers behind the company from liability and
this is clearly open to abuse.
This essay will examine the circumstances under which the corporate ‘veil’
may be ‘lifted’ or ‘pierced’ by the courts, so that those who are liable for
the company’s debts and obligations can be held responsible for their
wrongdoing. Although the courts have made attempts to pierce the
corporate veil, this is rarely done in practice and the veil will only be
pierced in exceptional circumstances.
Circumstances when the veil could be lifted:
There are two broad categories in which the veil may be lifted and these
are by application of statute and by virtue of common law and this essay
will start by examining the statutory basis for lifting the veil before moving
on to discuss the common law position.
Statutory grounds:
Since Salomon, the doctrine of corporate personality has been bestowed
by statute, currently in s.16(2) of the Companies Act 2006, and thus, it
follows that statute can also lift the corporate veil. One notable example of
this is the confiscation order set out in the Proceeds of Crime Act 2002. In
R v Sale2 the Court of Appeal lifted the veil where a company made a profit
via bribery for the controller’s sole benefit.
Another example is fraudulent and wrongful trading. Fraudulent trading is
an offence where the controllers of the company knowingly continue
1
[1897] AC 22 (HL).
2
[2013] EWCA Crim 1306.
, business operations during the winding up process of a company with an
intention to defraud creditors while wrongful trading deals with situations
involving negligence rather than fraud. In these instances, the courts are
prepared to lift the corporate veil and the directors of the company may
be found personally liable for the company’s losses.3
The common law position:
When discussing the common law position on piercing the veil, it can be
seen that although there have been several judicial attempts to pierce the
corporate veil, in general, the courts are reluctant to do this. The decision
in Adams v Cape Industries plc4 clearly demonstrates this reluctance, as
the Court of Appeal strongly reaffirmed the Salomon doctrine with Slade LJ
stating that ‘the court is not free to disregard the principle of Salomon,
merely because it considers that justice so requires.’5
The main reason for the courts’ reluctance to pierce the veil appears to be
that it would undermine certainty. When incorporating a company,
shareholders must be certain that the courts will uphold the principle of
limited liability and the separate legal personality of a company.
The first example of the courts lifting the veil relying on common law
grounds is where cases involve using the company as a ‘sham’ or ‘façade’.
In the case of Gilford Motor Co Ltd v Home 6 the court decided to lift the
corporate veil as the company was merely formed to be used as a device
to evade existing obligations and responsibility for wrongdoings. In Jones v
Lipman7 the defendant set up a company in order to evade existing
obligations under a contract for the sale of land. Here, the court held that
the veil should be lifted and thus an order for specific performance has
3
Dignam, A. & Lowry J., Company Law (OUP 2018) 31-33.
4
[1990] Ch 433 (CA).
5
[1990] Ch 433 (CA) p. 536.
6
[1933] CH 935 (CA).
7
[1962] 1 WLR 832.
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