Adams v Cape Industries plc [1990] 2 WLR 659 (CA)

Facts

• Cape Industries plc, a British parent company, owned American subsidiaries involved in asbestos production, leading to health problems among local residents in the US.
• A class action lawsuit in Texas resulted in a judgment against the US subsidiaries and Cape Industries.
• The subsidiaries had minimal assets in the US, so the claimants sought to enforce the judgment against Cape Industries in the UK.
• The claimants argued that Cape Industries was present in the US via agency, that a “single economic unit” existed, or that the corporate veil should be pierced as the structure was designed to avoid liabilities.

Issues

1. Whether the relationship between Cape Industries and its subsidiaries constituted an agency such that Cape was present in the US.
2. Whether the “single economic unit” theory could be used to disregard the corporate separateness of the group.
3. Whether the court should pierce the corporate veil due to fraudulent design or use of subsidiaries as a sham to avoid existing legal obligations.

Decision

• The Court of Appeal rejected the agency argument, finding the subsidiaries acted independently and not solely on behalf of the parent.
• The “single economic unit” theory was not accepted as a basis to disregard the corporate structure; economic analysis could not replace legal principles.
• The court refused to pierce the corporate veil, holding there was no evidence the structure was set up to evade existing liabilities or perpetrate fraud.
• The mere structuring of corporate groups to limit future liabilities did not justify piercing the veil.
• The decision emphasized that responsibility cannot be imposed on a parent solely because a group structure allocates liabilities among entities.

Legal Principles

• The principle of separate corporate personality, as established in Salomon v A Salomon and Co Ltd [1897] AC 22, remains fundamental.
• Piercing the corporate veil is only permissible where the company structure is a sham or established to avoid existing legal obligations.
• The “single economic unit” concept does not override established company law unless fraud or evasion is demonstrated.
• Dishonesty or abuse of corporate structure is required to justify veil piercing.
• Piercing the veil is a remedy of last resort, limited to cases with evidence of deliberate evasion or fraud.

Conclusion

Adams v Cape Industries plc confirmed that the separate legal personality of a company will be upheld except in narrowly defined circumstances, such as where corporate structures are used to evade existing obligations or perpetrate fraud. The case reaffirmed the limited scope for piercing the corporate veil, supporting predictability and certainty in company law.