Corporate Veil: Legal Principles, Limits and Leading Cases

Introduction

The corporate veil describes the separation between a company and the individuals behind it. Ever since Salomon v A Salomon & Co Ltd [1897] AC 22, a company formed in accordance with the law is treated as a legal person in its own right. It owns assets, enters contracts, and bears liabilities in its own name. In general, shareholders’ exposure is limited to what they invest, and directors act as agents of the company rather than incurring personal liability.

This separation is a powerful rule in UK company law. That said, it is not a licence to dodge existing duties. Courts will occasionally set aside the veil to prevent abuse, but only in tightly defined circumstances. This guide sets out the core rules, the limited exception for piercing the corporate veil, leading authorities, and practical steps for both litigators and corporate advisers.

What You'll Learn

• What separate legal personality and limited liability mean in practice
• When courts will pierce the corporate veil and the Prest v Petrodel test
• The difference between concealment and evasion
• How sham or facade reasoning has been used in cases like Gilford v Horne and Jones v Lipman
• Why the “single economic unit” idea is not the general rule, and the impact of Adams v Cape and Woolfson
• How parent company tort liability can arise without piercing the veil (Chandler v Cape)
• Why veil piercing does not add a non-party to a contract (VTB Capital v Nutritek)
• Practical tools: guarantees, injunctions, agency, trusts, and insolvency remedies

Core Concepts

Separate legal personality and limited liability

• On incorporation, a company becomes a separate legal person. It can own property, sue, and be sued independently of its members and directors.
• Limited liability means members’ financial risk is typically capped at the amount unpaid on their shares or their guarantee. Creditors contract with the company, not with its owners.
• Directors usually owe duties to the company (Companies Act 2006), and do not incur personal liability simply for causing the company to act, provided they act within their powers and without misrepresentation or tortious conduct.
• The courts do not disregard corporate separation merely because it seems fair to do so or because companies sit within a group. Strong evidence is required before the veil is set aside.

The court’s narrow power to pierce the veil

• Prest v Petrodel Resources Ltd [2013] UKSC 34 is the leading case. The Supreme Court described veil piercing as a residual remedy used only when no other principle of law provides a solution and where a company is used to evade an existing legal obligation or liability.
• Prest drew a key distinction:
  • Concealment: interposing a company to hide the real actors. The court will look through the concealment using ordinary principles (e.g., disclosure, evidence, trusts) without piercing the veil.
  • Evasion: interposing a company to avoid or frustrate enforcement of an existing obligation. In rare cases the court may pierce the veil to stop the evasion.
• Before considering veil piercing, courts will ask whether ordinary routes such as agency, resulting or constructive trust, misrepresentation, conspiracy, unjust enrichment, or specific statutory remedies can resolve the dispute.

Groups, agency and other routes to personal liability

• Group companies: cases such as DHN Food Distributors Ltd v Tower Hamlets LBC [1976] hinted at a “single economic unit” approach, but the later authorities rejected a general rule of that kind. Woolfson v Strathclyde Regional Council (1978 SLT 159) and Adams v Cape Industries plc [1990] 2 WLR 659 confirm that each company in a group has a separate legal personality.
• Agency: a subsidiary can be an agent for its parent, but only if the facts support an agency relationship. There is no presumption of agency in a group context.
• Parent company tort duties: Chandler v Cape plc [2012] EWCA Civ 525 shows that a parent may owe a direct duty of care to a subsidiary’s employees in certain circumstances. This is not veil piercing; it is a separate negligence claim based on the parent’s knowledge and assumption of responsibility.
• Contract claims: VTB Capital plc v Nutritek International Corp [2013] UKSC 5 held that veil piercing cannot be used to add a controller as a party to a contract made by the company. Contractual liability remains with the company, unless other doctrines (e.g., misrepresentation or deceit) are established against individuals.
• Statutory routes: personal liability can arise under the Insolvency Act 1986 (e.g., fraudulent trading s.213, wrongful trading s.214, transactions defrauding creditors s.423) and under director disqualification legislation. These are not veil piercing, but they are effective tools where the facts fit.

Key Examples or Case Studies

• Salomon v A Salomon & Co Ltd [1897] AC 22

  • Context: A company was formed by a sole trader and took over his business.
  • Ruling: The company was a separate legal person; Mr Salomon was not personally liable for company debts.
  • Takeaway: Separate legal personality is the default rule.

• Gilford Motor Company Ltd v Horne [1933] Ch 935

  • Context: An ex-employee bound by a non-compete set up a company to solicit customers.
  • Ruling: The company was a facade to avoid the covenant; an injunction restrained both the individual and the company.
  • Takeaway: Courts may restrain the misuse of a company to avoid existing duties.

• Jones v Lipman [1962] 1 WLR 832

  • Context: A seller transferred land to a company he formed to avoid completing a sale.
  • Ruling: Specific performance was ordered; the company was treated as a device to avoid the contract.
  • Takeaway: The veil does not protect schemes designed to defeat existing contractual obligations.

• Adams v Cape Industries plc [1990] 2 WLR 659

  • Context: Claimants tried to make the UK parent liable for a US subsidiary’s liabilities.
  • Ruling: Separate corporate personality was upheld; no general “single economic unit” principle.
  • Takeaway: Group structure alone does not justify veil piercing.

• Prest v Petrodel Resources Ltd [2013] UKSC 34

  • Context: Matrimonial proceedings where assets were held by companies controlled by the husband.
  • Ruling: The Supreme Court clarified that veil piercing is a narrow, evasion-based doctrine; on the facts, trust principles resolved most issues.
  • Takeaway: Use ordinary legal principles first; veil piercing is a last resort for evasion cases.

• Chandler v Cape plc [2012] EWCA Civ 525

  • Context: An employee of a subsidiary sued the parent for asbestos-related injury.
  • Ruling: The parent owed a duty of care based on knowledge and control.
  • Takeaway: Parent liability in tort can arise without piercing the veil.

• VTB Capital plc v Nutritek International Corp [2013] UKSC 5

  • Context: A lender sought to pierce the veil to add controllers as contracting parties.
  • Ruling: Veil piercing cannot be used to rewrite the contract parties.
  • Takeaway: Pursue personal liability via tort or fraud claims, not by adding non-parties through veil piercing.

Practical Applications

• For claimants and litigators

  • Map the obligation: identify the specific duty or liability that already exists (e.g., a non-compete, a judgment, a contract to sell land).
  • Show evasion: collect evidence that a company was interposed to dodge that duty, and that ordinary remedies are inadequate.
  • Use ordinary doctrines first:
    • Agency (did the company act as agent for the controller?)
    • Trusts (is the asset held on resulting or constructive trust?)
    • Misrepresentation, deceit, conspiracy, inducement of breach of contract
    • Transactions defrauding creditors (Insolvency Act 1986 s.423)
    • Fraudulent or wrongful trading where insolvency is involved
  • Consider injunctions: where covenants are being avoided (e.g., Gilford v Horne), seek orders against both the individual and the company.
  • Contracts and security:
    • Ask for personal guarantees or deeds of indemnity from controllers where appropriate.
    • Include anti-avoidance provisions in restrictive covenants that bind entities controlled by the covenantor.
  • Evidence tips: build a clear chronology of incorporation, asset transfers, emails, board minutes, and instructions showing purpose and control.

• For boards, in-house teams and advisers

  • Maintain corporate separation:
    • Keep separate bank accounts, records, and decision-making processes.
    • Use correct company names on letterheads, contracts, invoices, and websites.
    • Record board decisions and reasons, especially on related-party transactions.
  • Group management:
    • Be clear about roles. Central policies are common, but operational control may create a duty of care (Chandler v Cape).
    • Where the parent provides technical or safety support, document the scope and responsibility lines.
  • Deal terms:
    • Make sure counterparties know which entity they are contracting with.
    • Where risk justifies it, negotiate guarantees, security, or comfort letters.
  • Covenants and exits:
    • Draft non-competes and confidentiality clauses to cover companies controlled by the individual.
    • If selling assets or shares, include warranties against asset-stripping to defeat obligations.
  • Cross-border planning:
    • If enforcement may occur abroad, take advice on local veil-piercing rules and available remedies.

Summary Checklist

• Separate legal personality from Salomon is the starting point.
• Limited liability protects members, but not against personal wrongdoing.
• Veil piercing is rare and targets evasion of existing obligations.
• Prest v Petrodel: use ordinary doctrines first; veil piercing is a backstop.
• Sham or facade reasoning supports relief where companies are used to avoid duties.
• “Single economic unit” is not the general rule; Adams v Cape remains key.
• Parent company liability in tort may arise on ordinary negligence principles (Chandler v Cape).
• Veil piercing does not add controllers as contracting parties (VTB Capital v Nutritek).
• Consider statutory tools: fraudulent trading, wrongful trading, and s.423 transactions.
• Good corporate hygiene reduces disputes: clear records, separate finances, accurate contracting.

Quick Reference