Lifting the Corporate Veil

The “corporate veil” metaphorically symbolises the distinction between the company as a separate legal entity and the shareholders who own the shares in the company. The effect of ‘lifting’ or ‘piercing’ the corporate veil is that the shareholders, rather than the company, are regarded as the relevant actors on whom liability of the obligations of the company are placed.

Lifting the veil can be used to impose liability upon the shareholders or for other purposes, such as ascertaining appropriate jurisdiction. Whilst there is a general reluctance to lift the corporate veil, there is a body of case law where the courts have considered doing so. This article will examine the most recognised instances and will discuss some of the rulings on this issue.

The Single Economic Unit Argument

This argument for lifting the veil is targeted at companies within a corporate group. The basis of this argument is that despite the separate legal personalities of the companies within the group, they in fact constitute a single unit for economic purposes and should therefore be seen as one legal unit.  Liabilities should therefore, be attached to the whole group as companies aim to reach a single economic goal. This argument was advanced successfully in the 1976 case of DHN Food Distributors v Tower Hamlets where the veil was lifted for the benefit of the parent company in a group situation. DHN were treated as owning the land of its subsidiary and entitled to compensation for the corporate torts committed by Tower Hamlets.

This case appears to have been the exception, rather than the rule in terms of advancing this argument as subsequent case law has rejected this ground on the basis that the argument is based on economics, and not the law.

Façade, Sham or Fraud

The basis of this argument is that the company that was incorporated is a façade/sham to escape pre-existing legal obligations and therefore the veil of incorporation should be lifted to reveal the true identity of the persons who must be responsible. This has proven to be a more successful line of argument in past case law.

In Woolfson v. Strathclyde Regional Council it was held that the veil could be pierced where special circumstances exist indicating that the company is a façade concealing the true facts. In Re Darby, ex Brougham which dates back to 1911, the veil was lifted where career-fraudsters had incorporated companies to disguise their true involvement as sole beneficiaries of the fraudulent scheme. In the case of Gilford Motor Company v Horne, the defendant (who was managing director of the claimant) entered into an agreement not to solicit, interfere with or endeavour to entice away from the company any customers of the claimant during and after his employment as managing director.  However, he set up a separate company in his wife’s name so that he could solicit customers of the claimant during and after his employment.  The veil was lifted to grant an injunction against Horne and the new company. In Jones v Lipman the defendant attempted to evade a contract for the sale of land by transferring it to a company. The court lifted the veil and required specific performance from both the defendant and company. In Trustor AB v Smallbone a director of the claimant stole money from Trustor AB and paid it to his own company Introcom. The veil was lifted in order to make Smallbone jointly and severally liable for the sums received by Introcom.

Agency

The principle of agency asserts that the company can act as an agent for its shareholders. In a corporate group it may be argued that the subsidiary is an agent of the parent company. It is generally presumed that there is no such agency relationship and that in principle, a company is not an agent of its shareholders (as established in Salomon v Salomon). Agency relations have to be proved on the evidence in each case and cannot be inferred from the control exercised by the shareholders.

Interests of Justice

The argument that it would be in the interests of justice to lift the veil has seem some success in the past but, the general consensus is that the courts should not pierce the veil merely because to do so would be in the interests of justice. This concept is now considered too vague, lacking in clear guidance and could cause uncertainty and inconsistency in the law and in business.

Impropriety

The corporate veil can only be pierced when there is impropriety. Impropriety must be linked to the use of a company structure to conceal or avoid liability. It is necessary to show both control of the company by the wrongdoer and impropriety. A company can be considered a façade/sham (as considered above) even if it was not incorporated for that purpose.

Case law

Ben Hashem v Al Shayif & Anor

In this 2008 case, the court reviewed all the authorities on the corporate veil and summarised the main principles:

1. Ownership and control of a company are not of themselves sufficient to justify piercing the veil.
2. The court cannot pierce the corporate veil, even where there is no unconnected third party involved, merely because it is thought to be necessary in the interests of justice.
3. The corporate veil can only be pierced if there is some "impropriety."
4. The court cannot pierce the corporate veil just because the company is involved in some impropriety. The impropriety must be linked to the use of the company structure to avoid or conceal liability.
5. If the court is to pierce the veil it is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is, (mis)use of the company by them as a device or façade to conceal their wrongdoing. The motive of the wrongdoer is therefore, highly relevant.
6. The court will pierce the veil only if it is necessary to provide a remedy for the particular wrong which those controlling the company have done.

VTB Capital plc v Nutritek International Corp

This 2013 case concerned a claim for fraudulent misrepresentation pertaining to a loan agreement. The court looked at whether the corporate veil could be lifted in order to hold the person controlling the company liable, as if he had been a co-contracting party with the company concerned, to a contract where the company was a party but he was not, and where neither he nor any of the contracting parties intended him to be. The court decided it would be contrary to existing authority or principle to pierce the veil in this way.

The court explicitly left open the question of whether the veil could be pierced on appropriate facts, to achieve a just result or whether courts would only have the power to do so in circumstances where the language of a statute expressly or impliedly requires or permits it.

Prest v Petrodel Resources Ltd

Very soon after the above case, the decision of Prest v Petrodel was handed down.

This is the first time that the highest court in the land has acknowledged that the existence of a principle of English law which enables courts to pierce the corporate veil. This principle exists in very limited circumstances “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 is then able to lift the veil in order to deprive the company or its controller of the advantage which they would have obtained due to the company’s separate legal personality.

The majority of the court suggested that this is as far as it would be willing to go in deviating from the established principle of a company being a separate legal personality.

Conclusion

It is hard to deny that there exists within English law a doctrine of piercing the corporate veil, although its actual limits remain unclear. It is well established that courts should only have the power to pierce the veil when all other remedies have been exhausted. Those circumstances will of course be rare. The majority of cases dealing with this issue recognise the principle rather than apply it. There is yet to be enough of a consensus amongst members of the court on the underlying principle of the doctrine and therefore it seems development in this area of law will continue to be slow and incremental.