For very many years, since a precedent was set in the case of Salomon vs A Salomon & Co. LTD in 1897, it has been a fundamental tenet in the English company law that a company duly formed and registered within the law was a separate legal entity with rights and liabilities similar, but distinct from those of its shareholders. As a matter of fact, the Companies Act 2006 sec 16[2&3] does emphasize that an incorporated company has a personality that distinguishes it from the personalities of its member shareholders. For this particular reason, the English courts have been very firm in the interpretation of the doctrine of separate legal personality for cases involving incorporated companies.
For some reason, however, the strict interpretation of the doctrine has been challenged by some quarters with some viewing it as a leeway created by law to avoid justice. Some of the legal practitioners who oppose or call for leniency in the strict application of the doctrine have advanced their argument that notwithstanding the legal standing of the doctrine the courts should, in certain circumstances, consider the substance of the situation at hand before making a determination in order for fairness and justice to be seen to be done. This argument is often referred to as a piercing or lifting the veil of incorporation, and sometimes described as an upholding substance over form which is akin to identifying the spirit of a statement in the law, rather than just following the script in the law. To the effect that English courts have since softened their stance in the application of the Salomon principle in order to pursue justice and fairness, as suggested by Mohanty and Bhandari in their statement. In my opinion, I contest that this has not been the case. In the subsequent discussion, I intend to show that English courts have been particularly cautious in lifting the corporate veil4 and merely serving justice.
In the United Kingdom, the latter view that the strict interpretation of the doctrine of separate legal entity should be exercised with a bit of caution has somehow received some lukewarm acceptance in the English courts. In many cases, the English courts held that it was simply not justifiable to pierce the corporate veil in pursuit of justice, or simply because there has been some impropriety. However, for the courts to allow such advancements, the claimant[s] must show, beyond any doubt, that the corporate structure for which they are trying to persuade the court to disregard, was used with a very clear intent of perpetrating the fraud. A case in point somehow ushered the concept of lifting the veil in common law practice, but as the contrary illustrates, also the English court’s reluctance to pierce the corporate veil merely for the purpose of pursuing justice is the Adams v Cape Industries Plc [1990]. B.C.C. 786.
In the particular referred case, the matter at hand that required the court’s determination was whether a ruling made in the US seeking to compel Cape a British company to be held responsible over actions of its dissolved subsidiary in the US. The court ruling, however, was very clear about the circumstances under which the corporate veil could be pierced. The court ruling, in its determination of the case, identified three instances where the corporate veil could be pierced to allow liability over actions by a subsidiary to be transferred to the parent company. First, the court of appeal found that if the veil of incorporation was to be lifted, it will only be possible if it treats the Cape group as one single economic entity. However, the judges observed that where such a view had been adopted previously in court rulings the court was either trying to resolve clarity in the interpretation of a statute or a document. For this reason, the court ruled that no interpretation of a statute or document was required in the Cape case and, as such, it could not apply the single entity principle. In coming to the determination of this matter, the court concluded that;
save in cases that turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v Salomon & Co Ltd [1897] AC 22 merely because it considers that justice so requires. Our law, for better or worse, recognizes the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities.
The second instance was where the incorporation in question was merely a façade to conceal impropriety and thirdly, where there was proof that the subsidiary was expressly acting as an agent of the parent company.
Since the above-mentioned landmark ruling over how and when an exception to the Salomon principle can be granted, there have been various attempts to persuade the courts to lift the veil based on the circumstances identified in the Adams v. Cape Industries case as the basis for exemption of the Salomon principle. Over the single economic unit, a circumstance most notably after the ruling in DHN Food Distributors v Tower Hamlets wherein the court treated the overall business operation as a single economic unit, there has been some reluctance to follow this precedence in subsequent judgments. Among cases where this has been declined is the Bank of Tokyo v Karoon case where Lord Goff held the legal conception of the corporate structure was very much independent from the economic construction, and in Ord v Bellhaven where Hobhouse LJ described as heresy, English law allowed lifting the corporate veil sentiments also shared by Moritt in Trustor v Smallbone10 that corporate veil could not merely be lifted because justice requires it.
Aside from the grounds seeking to persuade the court to apply the single economic entity principle, several other grounds have been used to persuade the court to pierce the corporate veil. Most notably, two circumstances have succeeded in persuading the courts to disregard the principle of the separate legal entity of a corporation. These are; where it has been shown that the incorporation was intended to façade or hide behind the corporate veil to commit fraud and, in rare occasions, where it was in the interest of shareholders to disregard the corporate structure. Whereas on these two grounds English courts have been persuaded to pierce the carapace of the corporate entity, it should be noted that this has not been done based on the company law, but on some application of other statutes in the rule of law. A case in demonstration is the R v Seager [2009] where the court of appeal determination relied on the English criminal law to lift the veil. In Antonio Gramsci Shipping Corp & Ors v Stepanovs [2011], Burton J. cautioned defendants against persuading the court to lift the veil to serve justice. Particularly, he refuted their reliance on a ruling in Dadourian Group International Inc v Simms & Ors [2006] saying that necessity to serve justice was not “fetter” to a claim to lift the corporate veil which, on the contrary, required to be “pleaded or proved in limine”.
References
Antonio Gramsci Shipping Corp & Ors v Stepanovs [2011], EWHC 333 (Comm), Web.
Dadourian Group International Inc & Ors v Simms & Ors [2006] EWHC 2973 (Ch). Web.
Gallagher, L. & P. Zeigler ‘Lifting the corporate veil in the pursuit of justice’, [1990]. Web.
Linsen International Ltd & Ors v Humpuss Sea Transport Pte Ltd & Ors, Neutral Citation Number: [2011] EWHC 2339 (Comm). Case No: 2009. Web.
Lowry, J.P. ‘Lifting the corporate veil’, JBL 41, January, pp.41–42, 1993.
Lowry, J.P. & Edmunds ‘Holding the tension between Salomon and the personal liability of directors’, Can Bar Rev 467, 1998.
Muchlinski, P.T. ‘Holding multinationals to account: recent developments in English litigation and the Company Law Review’, Co Law, p.168, 2002.
Rixon, F.G. ’Lifting the veil between holding and subsidiary companies’, 102 LQR415, 1986.
Trustor AB v Smallbone & Ors [2001] EWHC 703 (Ch), Web.