Introduction
The concept of the corporate veil is a foundational principle in company law, establishing a legal separation between a corporation and its owners, the shareholders. This separation, also termed separate legal personality, means that a company is regarded as a distinct legal entity, with rights and liabilities separate from those of its members. The key technical principle at play is the idea that a company, once incorporated, can act in its own name, enter into contracts, own property, and be subject to legal action, independently of its shareholders. The formal requirements for maintaining this separation generally include proper incorporation under applicable company law, adherence to governance procedures, and the company’s conduct of its own affairs in a manner distinct from its shareholders' interests. The concept of the corporate veil was firmly established by the House of Lords in Salomon v A Salomon & Co Ltd [1897] AC 22, which determined that a company’s existence as a separate legal entity cannot be ignored merely because the majority shareholder also controls its management.
The Doctrine of Separate Legal Personality
The separation of a company from its owners is not a mere technicality but a fundamental principle that affects many aspects of business and law. The doctrine is based on the notion that the company is a 'legal person' distinct from its shareholders. This means that a shareholder's liability for the company's debts is generally limited to the amount they have invested. The company itself is liable for its debts and other obligations, not its shareholders. As Lord Halsbury stated in Salomon v A Salomon & Co Ltd, “…the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.” This principle underpins the very structure of modern business, as it allows for investment without the risk of unlimited personal liability. This allows companies to engage in a variety of commercial activities, raise capital, and manage risk independently of the personal affairs of its shareholders.
Circumstances for Piercing the Corporate Veil
While the corporate veil provides a crucial layer of protection, there are exceptions. The term "piercing the corporate veil" refers to the legal principle where courts disregard a company's separate legal personality and hold its shareholders or directors liable for the company's actions. This principle is invoked in specific, limited circumstances where the veil of incorporation is seen to be abused. Historically, several exceptions have emerged through case law which relate to situations that can broadly be categorized into fraud, sham or facade, evasion, and agency. However, the courts have adopted a more circumspect approach in recent times, restricting veil-piercing to limited, specific cases.
Fraud or Sham
One of the most established grounds for piercing the corporate veil occurs where a company is used as a device to perpetrate fraud or evade existing legal obligations. In Gilford Motor Company v Horne [1933] Ch 935, the court issued an injunction against a company that was formed as a device to circumvent a non-compete clause. Similarly, in Jones v Lipman [1962] 1 WLR 832, the court ordered specific performance of a land sale contract not only against the vendor, but against a company he had established to evade his contractual obligation. These cases illustrate that where a company is set up to deliberately disguise or circumvent obligations, courts may treat the company as a façade and look through it to the individuals behind it. These early cases established the principle that a company used to avoid existing legal duties may be disregarded by the courts.
Evasion of Liability
A more refined principle for piercing the corporate veil was established in Prest v Petrodel Resources Ltd [2013] UKSC 34. Lord Sumption stated that there is only a limited principle of English law where the corporate veil can be pierced. The doctrine is applicable where a person deliberately evades a pre-existing legal obligation or liability by interposing a company under their control. In this case, assets held within a corporate structure were examined during a divorce proceeding. The Court held that the company was not simply a sham used to avoid existing obligations but instead, that the company held the assets on trust for Mr Prest. The key distinction drawn was between "concealment" of assets where the court looks behind the veil and "evasion" where the corporate veil may be pierced. The court clarified that it is not an abuse of the separate legal personality to cause liability to be incurred by a company, but it is an abuse to rely on the fact that a liability is the company’s and not the controller’s.
Agency
Another area where the corporate veil may be lifted is when a subsidiary acts as an agent for a parent company. However, in cases such as Adams v Cape Industries plc [1990] 2 WLR 659, the Court of Appeal was very reluctant to make a parent company liable for the actions of a subsidiary. The Court stated it would not pierce the corporate veil merely because a corporate structure ensures that liability will fall on another member of the group. In essence, the Court held that the corporate veil should not be disregarded to impose liability on a parent company for the actions of its subsidiary merely on the basis of group structure. While the concept of agency was argued, the court ruled that a mere presence of control of a subsidiary by the parent company is not in itself sufficient to establish an agency relationship.
The Residual Nature of Piercing the Corporate Veil
The Supreme Court's position in VTB Capital plc v Nutritek International Corp [2013] UKSC 5, and Prest v Petrodel Resources Ltd highlights that the principle of piercing the corporate veil is a limited, residual remedy. In the VTB Capital case, it was made clear that piercing the corporate veil is not applicable to add a controller of a company to a contract that the company had entered into. Lord Neuberger noted that there was great force in the argument that the principle does not exist at all, but in the end rejected this argument. These judgments emphasize that veil piercing should only be invoked when no other legal remedy is available. Lord Sumption in Prest v Petrodel stated, "if it is not necessary to pierce the corporate veil, it is not appropriate to do so." This reflects a desire to maintain the integrity of the separate legal entity principle, which provides predictability and stability in commercial relations.
The Impact of Chandler v Cape on Parent Company Liability
While the Adams v Cape case limits the ability of courts to pierce the corporate veil, the case of Chandler v Cape Plc [2012] EWCA Civ 525, demonstrates an approach where the courts can impose liability on a parent company. In Chandler v Cape, the Court of Appeal established that a parent company can owe a duty of care to employees of its subsidiaries. This approach does not involve piercing the corporate veil. Rather, the court established factors that would lead to a direct duty of care being owed by a parent company to a subsidiary's employees. These factors include that the parent and subsidiary's business are the same, the parent had superior knowledge on health and safety matters, and that the parent knew or should have foreseen that the subsidiary and its employees relied on that superior knowledge. The case indicates the modern approach taken by the courts, where liability can be imposed on the parent company without disregarding the separate legal personality of the subsidiary.
Group Enterprises and the Corporate Veil
The issue of applying the corporate veil within group enterprises, where there is a parent company and multiple subsidiaries, is a complex one. The earlier cases such as DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852 suggested the potential for the group to be treated as one single entity for liability purposes. However, this approach was rejected by the House of Lords in Woolfson v Strathclyde Regional Council 1978 SLT 159. The courts generally upheld the separate legal personality of each company within a group, unless fraud or evasion could be proven. The courts have consistently shown that while group structures are common, each individual company is treated as a separate legal personality, unless very specific circumstances, like those described in Prest v Petrodel are present.
Conclusion
The corporate veil stands as a critical component of modern company law, offering protection to shareholders from the liabilities of their companies. The doctrine of separate legal personality, established by Salomon v A Salomon & Co Ltd, has enabled the structure of modern business. However, this protection is not absolute. The principle of piercing the corporate veil serves as a residual mechanism, applied by the courts to prevent misuse of the corporate form. Cases such as Gilford Motor Company v Horne, Jones v Lipman, and the more recent Prest v Petrodel Resources Ltd, have refined the circumstances under which a court can look beyond the separate legal identity of the company. The courts are generally very reluctant to pierce the corporate veil and will only do so in very limited circumstances, where there is evasion of existing legal liability. Cases such as Chandler v Cape demonstrate an alternative way of holding the parent company liable, without piercing the veil, if they owe a direct duty of care to a subsidiary's employees. While the concept of separate legal personality remains a cornerstone of English law, its application remains a subject of ongoing evolution within the legal and commercial context.
