CONSEQUENCES OF FORMING A COMPANY

1. corporate entity (Salomon v Salomon)

2. can be an employer (Lee v Lee’s Air Farming)
3. owns it owns assets (Macaura)
4. limited liability for shareholders
5. can commit crimes and torts (may owe a DOC)
6. has to pay tax
7. has a residence
8. can be a landlord and a tenant

STATUTORY DISREGARDING OF THE CORPORATE VEIL

separate legal personality is also known as veil of incorporation
courts may disregard veil – when will this occur?
s.16(2) CA – statutory recognition that corporate personality is created upon
incorporation
Dimbleby & Son
‘The “corporate veil” in the cases of companies incorporated under the Companies
Acts is drawn by statute and it can be pierced by some other statute if such statute
so provides…’ Per Lord Diplock

STATUES WHICH ALLOW THE DISREGARDING OF A CORPORATE VEIL:

ss763, 767 CA 2006
- a public company must have a min share capital of £50,000 and the registrar at
CH will issue a certificate evidencing the compliance with the £50,000 min
- certificated called a commencement of trading certificate issued in addition to a
certificate of incorporation
- if a company borrows money or enters in a company before the CTC is issued,
the directors are personally liable
- theoretical example of statutory disregarding of corporate veil

s15 CDDA 1986

- if a director acts whilst disqualified, he is jointly and severally liable for the
company’s debts
- a criminal offence and one of strict liability

s213 Insolvency Act 1986 - Fraudulent Trading

- any person carrying on a business with intent to defraud creditors shall be
personally liable for the company’s debts
- burden of proof high within FT cases; unsuccessful convictions

s214 Insolvency Act 1986 – Wrongful Trading

- new provisions applying to directors alone – lower burden of proof; easier
convictions than under s.213
- where directors of a company carry on the business at a time when they knew or
ought to have known there was no reasonable prospect of avoiding liquidation
- if they are found to have traded wrongfully, the Act states they must make a
contribution to the company’s assets (pay a sum of money to the liquidator)
Re Produce Marketing
leading case on wrongful trading; small company; two directors; profit never made;
chased by creditors; customers lost; had not kept proper accounts; wrongful trading
found; ordered to pay £75,000 towards the debts of the company
IA provisions work better as a threat than as a cause for action
also provides a defence (the ‘every step’ defence – once realising the company
cannot avoid liquidation, after taking every step to avoid further losses, a defence is
available)

ss216 & 217 IA 1986 - prohibited names

o applicable to directors
o if a director has been director of a company which has gone into liquidation, that
person cannot be a director of a company with the same name or a similar name
for 5 years
o the director is jointly and severally liable for the new company’s debts is he
chooses to do so (as opposed to the company having corporate entity and being
liable for its own debts)
o designed to prevent ‘phoenix companies’ (new companies arising from the ashes
of old companies, aiming to protect the public)
o views the nature of the business, the geographical location, assets etc.

Ad Velorem Factors Ltd v Ricketts

‘Air Equipment Ltd’  ‘Air Components Ltd’
different words in name but similar meaning
liable under ss216 and 217

DISREGARDING OF THE CORPORATE VEIL BY THE COURTS

the courts are very reluctant to do so

o parent and subsidiary companies defined in s1159 CA 2006

o can be identified where a parent company owns the majority of shares in the
subsidiary (director of subsidiary left with minimal shares – sometimes 1 of 100)
o the Salomon doctrine will be applied to each company in a group of parent and
subsidiary companies, meaning each has a corporate entity
o as such, the parent company cannot be held liable for the debts of the subsidiary
o ‘the parent company and the other subsidiary companies may prosper to the joy
of the shareholders without any liability for the debts of the insolvent subsidiary’
(Templeman LJ in Re Southard & Co)
o creditors can therefore only seek redress through the subsidiary following the
application of the straight-forward principles of company law

RELUCTANCE
Adams v Cape Industries 1990
shows the reluctance of the courts to lift the VoI
Cape parent company within London; had subsidiary companies in US which caused
asbestos injuries to employees; employees sought to enforce the judgement against
Cape in London as the subsidiary had no assets to satisfy the judgement
employees put forward 4 arguments:
1. subsidiaries were a fraud
2. an agency relationship existed between Cape and its subsidiary companies
3. Cape and its subsidiaries should be treated as a ‘single economic unit’
4. the VoI between Cape and its subsidiaries should be lifted in the interests of
justice
all arguments failed; the claim was unsuccessful; the subsidiary company has an
entity separate from the parent company

DISREGARDING
in very exceptional cases, the courts have disregarded the VoI…

case example
Daimler v Continental Tyre and Rubber Co
the courts looked behind the veil of incorporation of a company to discover the
nationality of its shareholders, where it was claimed that the supplier had acquired
an enemy character in having German directors at a time when England were at war
with Germany

in circumstances of corporate abuse, fraud or façade

Gilford Motor Co v Horne 1933- Mr Horne was the former managing director of a
company; formed a new company and made his wife director in order to conceal the
breach of contract with his former company; judge held the company was devised
as a stratagem in order to mask the effective carrying on of a business of Horne; veil
lifted; injunction awarded

Jones v Lipman 1962 – Mr Lipman contracted to sell a house yet changed his
mind and instead sold it to a company which he was director and shareholder of;
held the company had been set up for the sole purpose of purchasing the land; held
the company was a façade used by Lipman to evade pre-existing obligation

both cases involved the courts finding that the promotors of the company were
using the company as a façade

Agency Cases
agency relationship between principle and agent, forming a contract between
principle and third party
Salomon & Salomon – claimant argued Salomon’s newly formed company was an
agent for Salomon; HoL overturned CoA’s agreement to this – held the company and
the director were two separate entities
Adams v Cape Industries 1990 – no agency relationship was found; company
was not an agent of cape; held a subsidiary is not an agent of a parent company
and they are in fact separate legal entities; provides the agency argument.
agency argument failed because court thought subsidiary was sufficiently
independent – own premises, place of business and independent directors;
single economic entity also failed here

cases prior to cape:

Smith, Stone & Knight v Birmingham Corp – the courts held land in question
was owned by S, S & K (a parent) and controlled by Birmingham Corp who acted as
their agent (a subsidiary)
This was criticised in JH Rayner v DTI - ‘In my view no conclusion of principle can
be derived from that case.’

as such, Adams v Cape Industries 1990 stands as good law

CONSIDERATION OF LIFTING THE CORPORATE VEIL

following the arguments in Adams v Cape Industries 1990

the group enterprise theory/the single economic unit argument

liability should be attached to the group as a whole as they have the same economic
goal
leading case: DHN v Tower Hamlets BC 1976
- parent company DHN created two subsidiaries - one who owned land and
another who owned vehicles
- land was subject to compulsory purchase meaning it could be purchased without
the consent of the owner; DHN sought damages for disturbance of business
- held the companies were a single economic unit and virtually the same as a
partnership
- likely to be followed where the subsidiaries have no purpose other than to own
the assets of the parent company
- compulsory purchase case

Adams v Cape Industries 1990 – Slade LJ stated that a parent company is able to
delegate its business functions to subsidiaries and still remain as a separate legal
entity

to establish an agency relationship, it must be found that there is a dominant

company which had absolute control over the affairs of another company (Griffin,
Company Law)
the courts are reluctant to use the agency argument to impose liability for a
subsidiary’s debts onto the parent company (Hicks & Goo, Cases and Materials on
Company Law)

lifting in the interest of justice

where an individual is attempting to conceal his identity or legal obligations or

liabilities through the separate legal entity of a company
was rejected in Adams v Cape Industries 1990
courts of first instance have been more open to lifting the veil for this purpose, but
the appellant courts have shown more reluctance

Prest v Petrodel 2013

- leading case on piercing the veil – analysed previous cases

- Mr Prest was wealthy and was divorcing Mrs Prest; questioned whether he was
entitled to a number of properties owned by his company or whether Mrs P was
under the MCA 1973
- held the properties were held on trust for Mr P – the VoI was not pierced
- this was not originally a case of piercing the CV, but many obiter dicta comments
were made in relation to such
- it was held there is only once instance in which piercing the corporate veil can
occur:
- We should only use piercing the veil terminology if there’s a ‘true exception’ to
the rule of Salomon & Salomon
- one ground where the veil will be pierced – evasion – according to Lord
Sumption

Lord Sumption stated:

‘I conclude that there is a limited principle of English law which applies when a
person is under an existing legal obligation or liability or subject to an
existing legal restriction which he deliberately evades or whose
enforcement he deliberately frustrates by interposing a company under
his control. The court may then pierce the corporate veil for the purpose, and only
for the purpose, of depriving the company or its controller of the advantage
that they would otherwise have obtained by the company’s separate legal
personality.’
- individual is under an existing legal liability or obligation
- he deliberately evades or frustrates its enforcement through interposing a
company under his control
- the court may then pierce the CV for the purpose of depriving the individual of
the benefit he has gained through the company having separate legal entity

Lord Sumption also held:

the concealment principle – where the interposition of a company is used to hide the
identity of its controllers; courts may look behind the CV to discover the facts the
company is concealing – this is not disregarding the CV
contrast to
the evasion principle – where a right against an individual exists and he interposes a
company so that its separate legal personality will defeat the right or frustrate its
enforcement
lifting is permitted in concealment cases; piercing is permitted in evasion cases
Lord Clarke rebuts, stating there should be no distinction between concealment
and evasion and states the restriction of PtCV to evasion cases should not be
adopted until detailed submissions are heard

unless the parent company created the subsidiary in order to defeat rights or
frustrate their enforcement, the courts cannot disregard the veil on the grounds of
evasion…
instead it could be argued that there is tortious liability, where the parent company
owes a duty of care through an existing subsidiary
TORTIOUS LIABILITY OF A COMPANY
does the parent company owe a duty of care to the subsidiary?

Caparo v Dickman
provides 3 principles of DOC

Chandler v Cape
recognised a parent company can owe a DOC to subsidiaries
- Chandler employed as a brick loader by a Cape subsidiary
- exposed to asbestos and contracted asbestosis
- successfully sued cape after the subsidiary was dissolved, arguing it owed a
direct DOC to provide a safe system of work through the existing subsidiary
- The law may impose on a parent company the responsibility for the health and
safety of its subsidiary’s employees, where:
1. The business of the parent and subsidiary are in a relevant respect the same
2. the parent, has, or ought to have, superior knowledge on some relevant aspect
of health and safety in the particular industry
3. the subsidiary’s system of work is unsafe and the parent company knew or ought
to have known
4. the parent company knew or ought to have foreseen that the subsidiary or its
employees would rely on its superior knowledge for the employees’ protection.’
(Arden LJ) – passage relied on heavily in subsequent cases
Cape was supplying health and safety expertise to a subsidiary – allowed the
requirement to be met

Thompson v The Renwick Group

facts were so different from Chandler v Cape
claim failed

HRH Okpabi v Royal Dutch Shell

case followed
claim failed

AAA v Unilever plc

held parent company could not foresee that, following elections, rebels would enter
the plantations and commit the torts and crimes
claim failed
shows fact sensitive nature of these cases

Lungowe v Vedenata Resources plc

concerning jurisdiction – was London proper place for case to be held or was it
better to hold it in Zambia?
where is the forum to hear the case? Held here to be in London, the home of the
parent company
reason for decision: worries of Zambia having enough expertise for the complexity of
the case
English courts can consider the legal system of Zambia
simply determined where the case was to be held
applying Prest, VR could only be held accountable if it was found there was instance
of evasion

director’s personal liability for the torts committed by company

Williams v Natural Life Health Foods Ltd

if a company commits a tort, are the directors personally liable? - relevant question
for small companies
Mr and Mrs W purchased franchise from NLHF
brochure aiming to attract purchases made claims about expected income
brochure inaccurate – sued for negligent misrepresentation
no money to satisfy claim
was the managing director of the company personally responsible for the tort
committed by the company?
on these facts, the managing director was not personally liable
the MD did not write the brochure and had never met Mr and Mrs W – held he had
not assumed any personal liability for the torts committed by the company
suggested that if he had written to them personally and given further reassurances
about the content of the brochure; endorsed the claims made in the brochure, he
could have been held to assume personal liability
only where personal liability is assumed. For example advertising campaigns
or meeting with customers may be sufficient; just carrying out duties as a
director unlikely to be enough
tort victims left empty handed – claim failed