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Company Law Essay
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Explain the scope and rationale of the doctrine of piercing the veil.
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Explain the scope and rationale of the doctrine ofpiercing the veil.
1
, The fundamental principle of corporate law is that shareholders are not liable for the
obligations of the enterprise beyond the capital they contribute in exchange for their shares
which is known as limited liability.1 A consequence of this general principle is reflected in
the decision of Salomon v Salomon2 which the court look at corporate personality where it
was held that “every company is to be treated as an entirely separate person, with its own
liabilities, assets and capacity to act which are separate from those of its members”. However
this concept is not absolute as in certain situations the courts have ignored this principle.3
Piercing the veil is an expression meaning that the courts will disregard the separate
personality of the company4 allowing the courts to “lift the veil” to look behind the real
person who are in the control of the company and hold them liable for the actions of the
company like it was their own, undermining the notion in Salomon.5
Most of the cases where the courts have lifted the veil concern instances where the
shareholders are using the company, deliberately or otherwise, as a devise to achieve certain
benefits or to avoid obligations. Where there is possibly an abuse of the corporate form, the
courts may regard the company for this purpose only as a mere cloak or sham and lift the
veil. But it is difficult to define when the courts will do this. The courts sometime justify their
decision by saying that they are interpreting different statute laws / agency arguments,
holding that the subsidiary is merely the agent of the principal.6 Such instances where the
court have lifted the veil are: Daimler Co Ltd v Continental Tyre and Rubber Co (Great
Britain) Ltd7 where the veil was lifted to determine whether the company was an “enemy”
during the First World War.8 Another example is in Re Bugle Press9 where the court
prevented the transaction as the second company was a mere façade for the majority
shareholders.10 One of the leading cases on piercing the veil is Adams v Cape Industries Plc11
where the court found that the only way that the veil could be lifted is either by treating the
Cape group as one single entity or finding that the subsidiaries were a mere façade or they
were agents for Cape. The Court of Appeal (CA) held that the parent company was not liable
and the subsidiary was not a façade or sham as the group has been structured that way only to
minimize future liabilities. Therefore this has led commentators to conclude that, “gone are
the wild and crazy days when the CA would lift the veil to achieve justice irrespective of the
legal efficacy of the corporate structure”.12 As a result of the decision, this has restores
primacy of Salomon.13
1
R. Thompson, “Piercing the Corporate Veil: An Empirical Study” (1991) Cornell Law Review, 1039
2
[1897] AC 22
3
A Dignam, “Hicks and Goo's Cases and Materials on Company Law”, (2011), Oxford University Press,
Oxford, 28.
4
Prest v Petrodel Resources [2013] UKSC 34
5
A. Dignam and J.Lowry, “Company Law”, (2014), Oxford University Press, 30
6
n(3) 105
7
1916 2 AC 307
8
n(5) 34
9
1961 Ch 270
10
n(5) 34
11
[1990] Ch 433
12
n(5)38
13
n(2)
2
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