Introduction
The concept of the "company veil," also referred to as the "corporate veil," denotes the legal separation between a corporation and its shareholders or members. This separation, initially established in Salomon v A Salomon & Co Ltd [1897] AC 22, treats the company as a distinct legal entity, capable of possessing its own rights, obligations, and liabilities, separate from those who own or manage it. The technical principle at play here is the concept of separate legal personality. It underpins the idea that the company can engage in contracts, own property, and be sued in its own name, without directly implicating the personal assets of its members. A core requirement for this legal structure to function effectively is that the company is genuinely operating as an independent entity, and not as a mere façade for the personal activities of its controllers. The company must also be duly incorporated under the existing companies’ legislation for this distinction to be valid.
The Rationale Behind the Corporate Veil
The establishment of a separate legal personality offers a mechanism for individuals to pursue an economic objective without jeopardizing personal financial resources. This encourages business activity and investment by limiting liability, such that owners/members are liable only up to the value of their capital contribution. This principle facilitates commerce by permitting corporations to undertake risks, with the understanding that, in the event of financial failure, personal assets will be shielded, except in cases of specific legal breaches. As such, the company has rights, obligations, and liabilities, discrete from those of its shareholders, where the latter are responsible only to the extent of their capital contributions. This is central to facilitating large-scale economic undertakings.
Piercing the Corporate Veil: An Exception
The doctrine of the corporate veil is not absolute, and courts retain the right to "pierce" or "lift" it in circumstances where it is deemed necessary to prevent abuse of the principle. This involves disregarding the separate legal personality of the company to hold its members, directors, or controlling parties liable for its obligations. This power is sparingly applied. As Lord Sumption stated in Prest v Petrodel Resources Ltd [2013] UKSC 34, piercing the corporate veil is a residual remedy, available only when ordinary legal principles are insufficient to address evasion or fraud.
Evasion and Concealment
Prest v Petrodel Resources Ltd introduced a distinction between "concealment" and "evasion." Concealment involves hiding the identity of the real actors behind a corporate structure without any specific attempt to avoid liability. In contrast, evasion occurs when someone deliberately seeks to circumvent an existing legal obligation or liability by interposing a company under their control. The corporate veil may be pierced to prevent evasion, but not for concealment alone. As Prest v Petrodel Resources Ltd confirmed, the corporate veil may be pierced only to prevent the abuse of corporate legal personality. It may be an abuse of the separate legal personality of the company to use it to evade the law or frustrate its enforcement.
Sham and Facade
Early common law cases frequently used the terms "sham" or "facade" when determining the scope of veil piercing. Gilford Motor Company v Horne [1933] Ch 935 provides an early example. In this case, an employee created a company to circumvent a non-competition clause. The court, considering the company a sham, granted an injunction against both the employee and the company. Likewise, Jones v Lipman [1962] 1 WLR 832 shows an instance where the court deemed the company a “cloak” and “sham” because the defendant conveyed the land to a company he formed solely for that purpose. Such cases demonstrate the courts' willingness to pierce the veil when companies are formed primarily to avoid existing legal responsibilities.
Agency and Group Enterprises
The "single economic unit" theory, as applied in DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852, suggested that groups of companies, particularly parent-subsidiary relationships, could be treated as a single entity, disregarding their separate incorporation. However, the House of Lords rejected this principle in Woolfson v Strathclyde Regional Council 1978 SLT 159, where the separate legal personalities of companies in the same group were upheld. The case affirmed that piercing the veil based on a group relationship alone would not be permissible under existing law. In the case of Adams v Cape Industries plc [1990] 2 WLR 659, the court specifically rejected the “single economic unit” and “agency” arguments, which were attempts to make a parent company responsible for the liabilities of its subsidiaries.
Tortious Liability
Although the corporate veil shields companies from certain liabilities, parent companies may be held liable for the tortious actions of their subsidiaries under specific circumstances, as illustrated in Chandler v Cape Plc [2012] EWCA Civ 525. If the parent company is found to have sufficient knowledge or control over the operations of the subsidiary, it could be held to owe a duty of care to the employees of the subsidiary. The court outlined the circumstances in which a parent company could owe a duty of care for the health and safety of its subsidiary’s employees. It is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely.
Limits of Piercing the Corporate Veil
The courts are not inclined to pierce the corporate veil when there is no attempt to evade an existing liability. In VTB Capital plc v Nutritek International Corp [2013] UKSC 5, the Supreme Court ruled that piercing the corporate veil could not be used to include a controller of a company as a party to a contract that the company had entered. The ruling established that the circumstances where a person is added as a party to a contract does not lie within the scope of piercing the corporate veil, as it would lead to the controller of the company being held liable, when the contract was only with the company and he was not party to it. The case reinforces the fundamental concept that a company has its own legal personality that is separate and distinct from its members. The court determined that extending this scope was unnecessary for policy, based on existing legal principles.
Policy Considerations and the Future
The principle of the corporate veil is considered a critical element of company law, facilitating commercial activity and encouraging investment. However, the courts must balance this principle with the necessity to prevent abuse. The decisions in cases such as Prest v Petrodel Resources Ltd highlight the judiciary's intention to restrict the conditions under which the veil will be pierced, particularly when other areas of the law provide a remedy.
The ongoing development of case law in areas like tortious liability and the emergence of new issues like environmental and human rights concerns may push the limits of the corporate veil further. As multi-national companies grow, the interaction between different jurisdictions and their corporate veil piercing principles will continue to be relevant. The principle of separate legal personality remains critical, and it continues to be upheld; however, this protection is not absolute, particularly when companies are used to evade legal responsibilities. Future developments in case law and legislation will continue to define the scope of the company veil and determine when it is appropriate to pierce it.
Conclusion
The principle of the company veil, originating from Salomon v A Salomon & Co Ltd, stands as a foundational concept of modern company law. The courts, while maintaining its importance, have identified situations where it may be necessary to pierce the veil. The tests of evasion and the use of a company as a sham, established through cases like Gilford Motor Company v Horne, Jones v Lipman and clarified in Prest v Petrodel Resources Ltd guide current law. Cases such as Chandler v Cape Plc indicate an expansion of the legal boundaries in the field of tort liability of parent companies. The current state of company law requires a careful analysis to determine the limitations of corporate separation. This balance will continue to be refined by future judicial and legislative decisions.
