Lifting the corporate veil Lecture and Tutorial notes, all you need to feel best prepared for your tutorials, mocks and exam. I go through the lecture materials in detail and give you a detailed answer to Tutorial activities and past exam questions. I have also included a sample essay plan that you...
LECTURE 2 2. Broadly three categories of piercing the veil:
a) Application of statute: Parliament is free to decide
LIFTING THE CORPORATE VEIL whether the doctrine of limited liability should be
overruled.
THE SEPARATE PERSONALITY OF A COMPANY: b) Application of contractual term: arguably this is in line
with the very principle from Salomon. The company has
A fundamental principle of company law is that a company has all the right to enter into contractual obligations in his
separate legal personality, it is an entity that is distinct from its owners. own name and the shareholders are free to contract out
- Company’s assets are owned by the Company and not the of their limited liability is they so choose. The
shareholders. justification here for piercing the veil is that this was the
- Company can be sued and sue in its own name, intention of the parties. Rare interpretation.
- A company will continue to exist even if its shareholders or c) Common law
directors change.
STATUTE:
Liability of shareholders is limited so the creditors to whom the
company owns money can assert their rights fully against the company. First it is crucial to distinguish:
But if the company has got insufficient funds to meet its liabilities, the - Where the courts decide the separate legal personality is
company's creditors cannot then pursue their claims against the disregarded
shareholders. The shareholders will be only liable for what they have - or where the courts decide the separate legal personality is
invested by subscribing for shares. disregarded and then go further and decide that the
shareholders are made liable for the company’s debts. It is only
Salomon v Salomon & Co Ltd [1897] The principle of separate legal in this latter case where the doctrine of limited liability is set
personality was established. aside.
Facts: Salomon was a sole trader who incorporated a company.
Salomon was a shareholder in the company and received £10,000 This can be done by the courts only where the statute expressly
worth of debentures. The business went into liquidation soon and the provides this.
liquidator argued that Salomon should be personally liable for the
company’s debts since the company could be seen as his agent/trustee. Proceeds of Crime Act 2002 This act provides a statutory basis for
piercing the corporate veil.
Held: Lords Halsbury, Watson, Hershell, Macnaghten, Morris & Davey
in the House of Lords unanimously held that Salomon was not liable R v Sale (2013) The Court of Appeal has determined three
for the debts of the company as the company had a separate legal circumstances in which it is justified to lift the corporate veil to give
personality. One of the Lords noted that when the Memorandum is effect to the Proceeds of Crime Act 2002.
signed and registered, the body corporate is formed.
Facts: attempts to shelter behind a corporate façade or veil to hide his
Salomon is an important case for two reasons: crime and his benefits from it. Offender does acts in the name of the
1. It accepted that a company could be set up simply as a strategic company, which, with the relevant mens rea, constitute a criminal
vehicle to shield its shareholders/directors from liability and offence which leads to the offender's conviction.
this was legitimate.
2. It recognised that a company was valid even if it was run by one Held: Where the transaction or business structures constitute a
person (at the time, due to the previous legislation – Companies "device", "cloak" or "sham", to disguise the true nature of the
Act 1862 – companies needed to have 7 members as a transaction or structure so as to deceive third parties or the courts. This
minimum, however, the other members were dormant in this case built on not the evasion principle but the concealment principle.
case and that was acceptable)
ss.399, 403-406 Companies Act 2006 The act provides that parent
LIMITED LIABILITY: companies are to prepare Consolidated Group Accounts. These
accounts show the affairs of a company and subsidiaries. Some
A company's liability is limited; it means that the shareholders' liability commentators have described this as just 'peeping' behind the
(i.e. shareholders' responsibility for the company's debts) is limited to corporate veil rather than piercing it. This is an example of the courts
the amount the shareholders have agreed to pay for the shares. looking behind the separate legal personality of the company, rather
than disregarding its existence.
The creditors to whom the company owes money can assert their rights So the parent company whilst obliged to prepare the accounts, does
in full against the company but if the company has insufficient funds to not become liable for the debts of the subsidiary company, so arguably
meet its liabilities the company's creditors cannot then pursue their this is not a true example of piercing the veil.
claims against the shareholders.
If their company becomes insolvent the shareholders will be liable to s.214 Insolvency Act 1986 An example of piercing the veil. This section
lose the money that they have invested in the company by subscribing imposes personal liability on directors for Wrongful trading. (When a
for its shares, but that is the extent of their liability. company continues to trade despite of it having no reasonable
prospects of avoiding insolvency.) They are not minimising the losses
when they are obliged to.
LIFTING THE VEIL: Not a true example of piercing the veil as it imposes liability on the
directors for the way they were running the company rather than
Lifting the corporate veil = disregarding the separate legal personality imposing liability on shareholders.
of a company. It is essentially an exception to limited liability and it
means removing the veil of incorporation so that shareholders are Lee v Lee’s Air Farming The court refused to lift the veil to the benefit
liable for the debts and other obligations of the company. Different of the employee or shareholder.
synonyms: lifting, penetrating, piercing the veil.
Facts: Mr. Lee incorporated Lee's Air Farming Ltd and he held the
Narrow jurisdiction: the court can only lift the veil when it is deemed majority of the shares. He was also the governing director and the chief
absolutely necessary - piercing the veil is very rare in practice. The pilot. This case was very similar to Salomon, so he was a sole trader.
reason for this is to maintain certainty and that the courts do not wish Two years after incorporation, he was killed in a plane crash. Mr. Lee's
to undermine the purpose of incorporation. widow claimed under the company insurance policy, as Lee was a
worker.
Having incorporated therefore the company have a reasonable
expectation that the courts will not dispute the separate legal Held: The Privy Council emphasized that Mr Lee and the company had
personality of a company and will apply the rule in Salomon v Salomon. separate legal entities and they have entered into contract with each
Therefore they expect that the liability of the shareholders will be other. He was also a worker under the company so he has entered into
limited. a contract with himself. However, as he was a worker, his widow could
get compensation under the Workers Compensation Act 1922.
Even when the veil is pierced, the courts will only do this to the extent
necessary to address the particular circumstance. - So as a result, the Transfer of Undertakings (Protection of Employment) Regulations
shareholders will not automatically be liable for all debts of the 2006 Modern employment law rides over the fact that on a sale of a
company but rather only for the amount necessary to remedy the business from one company to another, the transferor companies and
particular wrong. transferee companies are separate legal entities. Instead, the
employees have a right to automatically transfer over to the new
Lifting the veil: business.
1. Historically lack of coherence: many academics criticised the
courts. The cases however, cover a wide range of circumstances
and it can be very difficult to categorise the cases.
Company – Lifting the corporate veil – Outstanding prep | Page 1 of 4
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