Piercing the Veil

Table of Contents

Reading -- Textbook

Gower Chapter 8: Limited Liability and Lifting the Veil 27

The Rationale for Limited Liability 27

Legal Responses to Limited Liability 28

Lifting the Veil 28

Conclusion 30

Cases 27

Prest v Petrodel Resources Ltd [2013] UKSC 34 30

Chandler v Cape plc [2011] EWCA Civ 525 31

Salomon v Salomon & Co Ltd [1897] 32

Adams v Cape Industries plc [1990] 33

Ord v Belhaven Pubs [1998] 33

DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 33

Williams v Natural Life Health Foods Ltd [1998] 33

Standard Chartered v Pakistan Shipping Corp [2003] 34

Glencor ACP v Dalby [2000] 34

Trustor AB v Smallbone (No 2) [2001] 34

VTB Capital plc v Nutritek International Corp [2013] 34

Articles and Comment 14

Gallagher and Ziegler, Lifting the Corporate Veil in the Pursuit of Justice (1990) JBL 292 34

Ruane, Metaphysics and the Corporate Veil (2005) 26 Company Lawyer 62 35

Reading – Textbook

Gower Chapter 8: Limited Liability and Lifting the Veil

The Rationale for Limited Liability

Apparent asymmetry of risk – when a company does well, shareholders receive the benefits of its success through dividends but losses are limited to the value of their investment if it collapses – S74(2)(d) Insolvency Act 1986.

So why have limited liability?

• Main (1800s) policy argument was that limited liability would allow for raising of capital from members of the public who did not know about running companies – if their liability was not limited, they would be less willing to invest.

• Halpern, Tebilcock and Turnbull (1980): limited liability facilitates the function of a public securities market because it relieves the investor of the need to be concerned with the wealth of other investors (IA 1986 S74(1) – default rule is that all shareholders would be jointly and severally liable if not for limited liability)

• Limited liability encourages equity investment by those of modest means by facilitating diversification of investment across a number of companies in different sectors, reducing company and country-specific risks.

The first two reasons only really apply to publically listed companies – but what of Salomon type cases?

Alternatives to current approach of limited liability:

• Hicks, Drury & Smallcombe (1995): simpler, unlimited liability structure for small businesses; keep limited liability for those willing to comply with the rigours of company law and possibly increase the minimum capital requirements.

  • Company Law Review rejected a separate vehicle for small businesses as this would be a barrier to expansion; instead proposed deregulation wrt small businesses.

  • Note that the G has provided an alternative in the form of the LLP

• More ex post protection

• Note debate on whether limited liability should apply to a company or to a corporate group wrt holding companies etc but there is a clear argument for asset partitioning and its ability to simplify matters for would-be creditors

• Note that limited liability is not always the case – small businesses and personal guarantees over houses or guarantees from parent company

• Incentivising risk may encourage entrepreneurial activity which adds social value

Legal Responses to Limited Liability

Opportunistic conduct induced by this doctrine may be instigated by shareholders or, more commonly, by directors. In tackling this, the law tends to mitigate against the effects of limited liability by imposing directors duties.

The law has also responded by making information available eg use of suffix Ltd, publishing of accounts, membership and constitution. However, beyond this, incorporation often acts as a veil except eg in the case of inspectors who have access to confidential company documents. When the veil is removed altogether to make shareholders liable, this is either a question of explicit legislative policy or judicial creativity. Judicial creativity limited by Salomon; tends to be sporadic. Legislative policy became more relevant after 1980s insolvency reforms – Cork Committee (1982). Reforms increased grounds for disqualification as director of a company and preventing improper removal of assets from a company prior to winding up.

Lifting the Veil

Under Statute or Contract

Statue – very rare – not only must court decide that separate legal personality should be disregarded, but, in consequence of that, shareholders should be made personally liable for the company’s debts or other obligations.

More often, as a result of ignoring the separate legal personality of a company, some other result will follow (not the undoing of limited liability) – eg

• US films and incorporation of a UK shell company to claim that a film was ‘British-produced’ – FG (Films) Ltd, Re [1953] – meant that the subsidiary could not claim a subsidy due to British-produced films.

• SCA 1981 S51(3); CPR 48.2(1) – non-party costs order for situations where the controllers of a company use it as a litigation vehicle

Under such specific statutory situations, the approach of the court would depend on the purpose of the Act and the specific context.

However, the courts are very reluctant to ignore separate legal personality unless the statute says they have no choice. However, note the vigorous defence of the right of workers not to have their employment compulsorily transferred: Nokes v Doncaster Amalgamated Collieries [1940] – transfer of employment under what is now S900 CA (note modern position has changed – employment law gives employees the option to transfer instead). [I don’t understand this illustration?]

Another example of a refusal to lift the veil, to the benefit of a shareholder or employee is in Lee v Lee’s Air Farming Ltd [1961] – Lee incorporated a company to carry out his business of aerial top-dressing. He was sole shareholder and employee; killed in a flying accident – held his widow was entitled to workmen’s compensation – because of separate legal personality, he could be employer and employee at the same time.

At Common Law

General...

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