Introduction
The principle of separate legal personality establishes that a company is a distinct legal entity, separate from its shareholders or directors. This concept, affirmed in Salomon v A Salomon & Co Ltd [1897] AC 22, allows companies to enter into contracts, own property, and conduct business in their own name. However, the concept of "piercing the corporate veil" is a legal doctrine that allows courts to disregard this separation in certain limited circumstances. This action enables the court to hold those in control of a company personally liable for the company’s actions or debts. Such action represents an exception to the usual legal treatment of a company as an independent entity. The case of Jones v Lipman [1962] 1 WLR 832 serves as a notable example of this principle being applied, demonstrating that the corporate form cannot be used as a tool to evade existing contractual obligations. This judgment established an early precedent for when the courts might disregard separate legal personality.
The Facts of Jones v Lipman
In Jones v Lipman, the defendant, Mr. Lipman, entered into a contract to sell a property to Mr. Jones for £5,250. Subsequently, Mr. Lipman changed his mind and, with the intention of avoiding the sale, formed a new company with a nominal capital of £100. He appointed himself as the director and owner of this newly formed entity. He then transferred the land, which was the subject of the original sale contract, to this new company for a sum of £3,000. This was achieved with a bank loan for a substantial part of the amount and the remaining money was owed to various other sources. Mr. Jones, the prospective buyer, sought specific performance of the contract against both Mr. Lipman and the new company under the Rules of the Supreme Court Order 14A. The central issue before the court was whether an order of specific performance could be enforced in such circumstances, particularly when considering the newly formed company and its role in the transaction. The court had to decide if Mr. Lipman was using the corporate structure to avoid legal responsibility.
Judgment and Reasoning in Jones v Lipman
The High Court, presided over by Russell J, delivered a judgment that favoured the plaintiff, Mr. Jones. The court determined that Mr. Lipman's company was not a genuine entity engaged in independent business operations. Instead, the court found that the company was created for the sole purpose of circumventing his existing contractual obligations with Mr. Jones. Russell J described the company as ‘a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity’. This judgment represents a powerful statement about the limitations of corporate personality. The court concluded that the company was merely an extension of Mr. Lipman, who retained complete control over the entity and the property. The court ordered specific performance against both Mr. Lipman personally and his company. This outcome meant that Mr. Lipman was legally bound to complete the original sale of the property to Mr. Jones, and he could not hide behind the legal structure of his newly incorporated company. This case, therefore, firmly established that the court would not permit the use of a corporate structure to evade obligations and that it would apply equitable remedies against the controlling individual.
The "Sham" or "Facade" Exception to Separate Legal Personality
The Jones v Lipman case is a prime example of the “sham” or “facade” exception to the principle of separate legal personality. This exception allows the courts to disregard the legal separation between a company and its owners when the corporate structure is used for improper purposes. The “sham” company is not seen as a genuine, independent entity; instead, it is treated as an extension of its controlling individual. A key component of this exception is that the company was created specifically to avoid an existing legal obligation, as was the case with Mr. Lipman's newly formed company. In this situation, the company is not seen as conducting genuine business, but as acting as a tool for personal gain and avoidance of responsibility. This case shows that if a company is merely a means of evading existing legal responsibilities or contractual commitments, the courts have the power to look beyond its separate legal personality and assign the associated liabilities or duties to those in control. This doctrine works to maintain the integrity of the legal system.
Jones v Lipman in Relation to Subsequent Case Law
The principles established in Jones v Lipman have been considered and referenced in numerous subsequent cases, although the precise application of the "piercing the corporate veil" doctrine has been subject to some debate. Cases such as Adams v Cape Industries plc [1990] 2 WLR 659 have attempted to set boundaries around when the corporate veil should be pierced. In Adams v Cape, the court held that arrangements intended to limit future liabilities did not constitute grounds for piercing the corporate veil. The court also stated that the corporate structure could not be ignored simply because it ensured that liability for future activities would fall on a different company within the group. In contrast, the case of VTB Capital plc v Nutritek International Corp [2013] UKSC 5 further refined the boundaries of piercing the corporate veil. In VTB Capital, the Supreme Court ruled that the principle could not be applied to add a controller of a company as a party to a contract that the company had entered. Lord Neuberger, in VTB Capital, even considered the possibility that there is no principled basis for piercing the corporate veil at all, although he ultimately rejected that argument. These cases demonstrate a continuous effort to define the circumstances under which separate legal personality can be disregarded, with courts often balancing the need to prevent injustice against the principle of separate legal personality. These judgements highlight that it is a narrow remedy only available in limited situations.
Distinguishing Jones v Lipman from Other Scenarios
The situation in Jones v Lipman differs significantly from other instances where the courts have considered piercing the corporate veil. In cases like DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852, the court considered the concept of a "single economic entity" in the context of a group of companies, raising the question as to whether a parent company could be liable for the acts of its subsidiary. However, this reasoning was restricted in subsequent cases like Adams v Cape where the Court of Appeal explained that the DHN decision was, in fact, a case of statutory interpretation. Cases concerning statutory exceptions, such as those under the Insolvency Act 1986 sections 213 and 214, have demonstrated when a court may disregard the corporate veil if a company’s business has been carried on with the intent to defraud its creditors or in cases of wrongful trading by a director. Additionally, situations like wartime, where a company's control is determined by an enemy, or when an agency relationship exists between a company and its shareholders are unique cases with specific criteria. The key distinction in Jones v Lipman is the direct use of the corporate structure specifically to evade a pre-existing legal obligation. In other words, the company was a pure sham or a mask. This sets it apart from other veil-piercing cases where the context or motive may be different.
Conclusion
Jones v Lipman [1962] 1 WLR 832 remains an influential case in the realm of company law, clearly illustrating a scenario in which the courts will disregard the principle of separate legal personality. This case established that a company cannot be used as a device or sham to evade an existing contractual obligation. The court's decision to order specific performance against both the individual and the company underscores the principle that legal form should not be permitted to obscure the true substance of a transaction, particularly when fraud or an attempt to avoid existing liability is evident. While subsequent cases such as Adams v Cape Industries plc and VTB Capital plc v Nutritek International Corp have refined the application of piercing the corporate veil and clarified it is a narrow exception, the core principle that the corporate veil may be pierced in cases of a pure sham or a façade remains important. The precedent set by Jones v Lipman serves as a continuing reminder that the corporate structure is not a tool for circumventing justice and that the courts will look behind the corporate veil where appropriate to ensure equitable outcomes, thus upholding the integrity of contractual agreements and the legal framework.
