Jones v Lipman [1962] 1 WLR 832

Facts

• Mr. Lipman contracted to sell property to Mr. Jones for £5,250.
• After agreeing to the sale, Mr. Lipman changed his mind and formed a new company with nominal capital, appointing himself as director and owner.
• He transferred the contracted land to this new company for £3,000, using a bank loan and other finance, with the intention of avoiding the original sale to Mr. Jones.
• Mr. Jones sought specific performance of the contract against both Mr. Lipman and the newly created company.
• The court examined whether the company was used to circumvent Mr. Lipman’s pre-existing contractual obligation to Mr. Jones.

Issues

1. Whether specific performance of the contract could be ordered against both Mr. Lipman and his newly formed company.
2. Whether the use of the corporate structure in this instance justified piercing the corporate veil due to it being a “sham” or “facade” intended to avoid legal responsibility.

Decision

• The court found in favour of Mr. Jones, ordering specific performance against both Mr. Lipman and the company.
• Russell J determined the company was created solely to help Mr. Lipman evade his contractual obligation and described it 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.”
• The court held that a company cannot be used as an instrument to evade an existing contractual obligation, disregarding the separate legal personality in such circumstances.

Legal Principles

• The principle of separate legal personality allows a company to be treated as a distinct entity, but courts may pierce the corporate veil in limited circumstances.
• The “sham” or “facade” exception enables courts to look beyond the company structure where a company is created expressly to evade existing legal obligations.
• Courts retain equitable jurisdiction to enforce remedies directly against controllers of such sham entities where justice requires.
• The judgment established that legal form should not be used to obscure the substance of a transaction, especially when there is evidence of fraud or avoidance of an existing liability.
• Subsequent case law, such as Adams v Cape Industries plc and VTB Capital plc v Nutritek International Corp, has affirmed that veil-piercing is a narrow exception, only available when the company is a mere mask for wrongdoing.

Conclusion

Jones v Lipman [1962] 1 WLR 832 firmly established that the courts will pierce the corporate veil when a company is used as a sham or facade to evade pre-existing legal obligations, ensuring that equity prevails over the misuse of corporate structure to defeat contractual rights.