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Company Law: Piercing the Corporate Veil
- Module
- Company Law
- Institution
- Kings College London (KCL)
Comprehensive notes on Company Law in the UK: Piercing the Corporate Veil.
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TOPIC 3COMPANY LAW
3. PIERCING THE CORPORATE VEIL
(EXCEPTIONS TO LIMITED LIABILITY):
1. INTRODUCTION:
WHAT IS MEANT BY ‘PIERCING THE VEIL’?
The Salomon principle has had beneficial effects upon shareholders, providing
them the protection of a corporate veil which ensures that liability does not
flow to them from the company. Instead, the company’s creditors must bear
the loss.
Ò CORPORATE VEIL: the segregation of the company assets from the assets of
the company’s members/shareholders. Indeed, section 74(2)(d) of Insolvency
Act 1986 and section 3(1) of CA 2006 provide for limited liability – upon the
winding up of the company, shareholders need not contribute beyond
amounts unpaid on their shares or the amount they have invested in that
company.
*This diagram illustrates the protection of the shareholders by the
corporate veil (they are the only ones protected by this).
However, there is an exception to this principle of limited liability:
Ò VEIL-PIERCING: this is a doctrinal concession to the ordinary rules of
separate legal personality and limited liability. If one pierces the veil, they
look behind the company in order to make its members/shareholders
personally liable to third parties, meaning their limited liability is lost. –
Muchlinski (2010)
HOW CAN THE VEIL BE PIERCED?
The way in which the veil is pierced is two-fold:
,TOPIC 3
COMPANY LAW
(i) The veil can be pierced by the legislature, by statutory means.
(ii) The veil can be pierced by way of case law, where the judiciary has
intervened.
ò
2. THE HISTORICAL DEVELOPMENT OF VEIL-PIERCING:
After Denning’s judgment in the below case, it was thought that the court had
the power to pierce the veil.
a DHN Food Distributors Ltd v Tower Hamlets LBC (1976): a subsidiary was
acquired. The parent company of the subsidiary received compensation but
wished to be paid over and above the amount that was paid. Lord Denning
viewed the parent company and the subsidiary as one entity and in doing so,
disregarded the corporate veil so that the parent company could benefit from
greater compensation.
! It was questioned whether this could be done – whether the corporate veil could be
disregarded so that benefits flow from the company to its shareholders.
However, there was a regression in the below cases – it was said that the veil
must be respected and upheld.
a Wilson v Strathclyde (1978): Lords disapproved of Denning’s view, stating that
the sanctity of the veil must be respected and that it must be upheld, unless that
veil is being used as a façade.
a Smith, Stone and Knight Ltd v Birmingham Corporation: in opposition to DHN,
liabilities in this case were not extended from the subsidiary companies to the
parent company – thus, the veil was not technically pierced. However, the CA
conferred a benefit onto the parent company.
The below cases indicate that the veil begun being lifted where there was
impropriety related to a corporate structure / where the veil was being used
as a front.
Trustor AB v Smallbone: in this case, the veil was lifted because the corporate
structure was used to hide something that the defendant had done wrong. The Vice
Chancellor emphasised the fact that impropriety by itself was insufficient – that
impropriety had to be linked to the corporate structure.
Gilford Motor Company v Horne (1933): Mr Horne, a former employee of a
company, was bound by a restrictive covenant from his former employer. Therefore,
he set up his own company and essentially argued that though he was personally
bound by the restrictive covenant, his new company was not (as it was its own legal
person). Thus, he was able to steal the customer list from his former employer.
However, the court concluded that this company was a mere front for Mr Horne and
thus, the veil had to be disregarded in order to look who was behind the company.
ò
, TOPIC 3
COMPANY LAW
3. THE GENERAL RULE & THE EXCEPTION:
A. GENERAL RULE CORPORATE VEIL APPLIES:
STARTING POINT: Salomon recognised the corporate veil (by recognising the
effects of limited liability at law). Further, the statutory definitions of the
corporate veil in section 3(1) CA 2006 and section 74(2)(d) Insolvency Act
recognise the corporate veil.
Section 3(1) Companies Act 2006: “a company is a ‘limited company’
is the liability of its members is limited by its constitution. It may be
limited by shares or limited by guarantee.”
Section 74(2)(d), Insolvency Act: “in the case of a company limited by
shares, no contribution is required from any member exceeding the
amount (if any_ unpaid on the shares in respect of which he is liable as
a present or past member.”
a R v Boyle Transport (NI) Ltd: Court of Criminal Appeal affirmed that limited
liability is at the heart of English company law. This means that a company has a
legal status and existence separate from its shareholders and in accordance with
this, the assets of the company do not belong to the shareholders.
FACTS: a father and son duo were running a haulage company, with a 50.1%
shareholding in the company. They, alongside other drivers for the company,
were later convicted of conspiring to make false instruments to financially
benefit. However, there was a judicial reluctance to lift the veil to hold the
father and son, as shareholders, liable and thus, it was not pierced.
$
B. EXCEPTION CORPORATE VEIL CAN BE DISREGARDED:
The obiter dicta of the below case recognised the doctrine of veil piercing for
the first time.
Specifically, it highlighted that where a member under an existing legal
obligation/restriction deliberately evades or frustrates its enforcement, the
veil will be pierced.
! However, note that this case was not specifically about veil-piercing. It was more of
a dispute concerning financial provisions on divorce. However, its decision had wide
implications and in reaching their decision, the court considered the law surrounding
the piercing of the corporate veil.
Before this case, there had not been a single instance where the doctrine was
properly and successfully invoked. Further, there was doubt as to whether it
actually existed.
a Prest v Petrodel Resources Ltd [2013]: this case concerned Michael Prest, a
wealthy tycoon, and his former wife, Yasmin Prest. During matrimonial
proceedings concerning the division of assets, Yasmin Prest applied to have
certain residential properties transferred to her. However, these properties were
not owned by Michael Prest, but a group of companies that he operated and
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