When the Corporate Veil Can Be Pierced

Introduction

The corporate veil separates a company from its owners. Once incorporated, a company has its own legal personality: it can own property, enter contracts, sue and be sued, and is responsible for its own debts. Shareholders’ liability is usually limited to their investment. This settled rule was confirmed in Salomon v A Salomon & Co Ltd [1897] AC 22.

That shield is not absolute. In rare cases, the court may “pierce” or “lift” the corporate veil and hold controllers liable. Modern case law, especially Prest v Petrodel Resources Ltd [2013] UKSC 34, shows that this is a narrow, last‑resort remedy focused on stopping the evasion of an existing legal obligation. Most disputes can be resolved using other routes, such as trusts, agency, misrepresentation, or a parent company’s own duty of care.

What You'll Learn

• What separate legal personality and limited liability mean after Salomon
• The narrow veil‑piercing rule: evasion of an existing obligation (Prest) versus concealment
• Classic fraud/sham cases: Gilford Motor Co v Horne and Jones v Lipman
• Agency and group companies: why Adams v Cape limits veil‑piercing within corporate groups
• Why VTB Capital v Nutritek confines veil‑piercing and rejects adding controllers to contracts
• How courts impose liability without piercing: trusts (Prest) and a parent’s duty of care (Chandler v Cape)
• Statutory routes that create personal exposure (fraudulent trading, wrongful trading, s.423 IA 1986)
• Practical steps for structuring companies and running litigation effectively

Core Concepts

Separate Legal Personality and Limited Liability

• A company is a separate legal person from its shareholders and directors.
• Shareholders usually risk only what they have invested; the company’s debts are its own.
• Salomon confirms that proper incorporation is enough; motives for using the company are not relevant to separate personality.
• This separation supports investment and risk management but does not excuse misconduct. Personal liability can arise under statute (for example, fraudulent trading and wrongful trading) or through personal acts (such as deceit or guarantees).

Key statutory touchpoints to know:

• Insolvency Act 1986 s.213 (fraudulent trading) and s.214 (wrongful trading)
• Companies Act 2006 s.993 (criminal fraudulent trading)
• Insolvency Act 1986 s.423 (transactions defrauding creditors)

These are not “piercing” in the strict sense; they create direct liability by statute or other legal doctrines.

The Narrow Veil‑Piercing Principle (Prest)

Prest v Petrodel sets the modern limits:

• Piercing is a last resort to prevent a person from evading an existing obligation by inserting a company under their control.
• Courts distinguish between:
  • Concealment: the company is used to hide the real facts. The court can look behind the veil without piercing it.
  • Evasion: the company is interposed to defeat a pre‑existing legal duty. Here, limited veil‑piercing may be used.
• If another legal route will do (for example, trust, agency, misrepresentation, or statutory claim), the court should prefer that route. As Lord Sumption put it, “If it is not necessary to pierce the corporate veil, it is not appropriate to do so.”

Fraud, Sham or Facade

Earlier authorities show how courts respond when companies are used to dodge obligations:

• In Gilford Motor Co Ltd v Horne [1933] Ch 935, a former employee used a new company to avoid a non‑compete. The court granted an injunction against both the individual and the company.
• In Jones v Lipman [1962] 1 WLR 832, a vendor formed a company to avoid a land sale contract. The court ordered specific performance against the individual and the company.

These decisions align with the Prest approach: the company was a device to defeat an existing duty, so the court intervened.

Agency and Group Companies

• A subsidiary can, in principle, act as an agent for a parent, but this needs evidence of an agency agreement or conduct pointing clearly to agency.
• Adams v Cape Industries plc [1990] Ch 433 confirms that:
  • The corporate veil is not pierced just because a group is structured to limit liability.
  • Control is not the same as agency.
  • Each group company is a separate person unless there is a genuine agency relationship or another recognised rule applies.
• Early ideas about treating a group as a single unit (for example, DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852) were not endorsed by the House of Lords in Woolfson v Strathclyde Regional Council 1978 SLT 159.

Residual Nature and Alternative Routes

• VTB Capital plc v Nutritek International Corp [2013] UKSC 5 rejected using veil‑piercing to add a controller as a contracting party. It reinforced that veil‑piercing is tightly confined.
• Courts often resolve cases without piercing by:
  • Recognising a trust or beneficial ownership (as in Prest, where assets were held on trust)
  • Finding an agency relationship (where the facts support it)
  • Imposing a duty of care on a parent company (Chandler v Cape plc [2012] EWCA Civ 525)
  • Using statutory claims (s.213, s.214, s.423 IA 1986)
  • Applying tort and contract principles (for example, deceit, misrepresentation, or personal guarantees)

Key Examples or Case Studies

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

• Context: Mr Salomon incorporated his boot business; creditors tried to reach him personally.
• Principle: A properly incorporated company is a separate legal person; motives are irrelevant.
• Practical point: Start from the presumption of separateness and limited liability.

Gilford Motor Co Ltd v Horne [1933] Ch 935

• Context: A former employee bound by a non‑compete set up a company to solicit customers.
• Principle: The company was a facade to avoid a contractual restriction; injunction granted against both.
• Practical point: Courts will restrain schemes designed to dodge pre‑existing duties.

Jones v Lipman [1962] 1 WLR 832

• Context: A seller formed a company to avoid completing a land sale.
• Principle: Specific performance ordered against the individual and the company used as a device.
• Practical point: The court will not let a company be used to defeat a concluded obligation.

Adams v Cape Industries plc [1990] Ch 433

• Context: Claimants sought to hold a UK parent liable for the acts of its overseas subsidiary.
• Principle: No veil‑piercing merely due to group structure or control; agency requires proper proof.
• Practical point: Structure your group carefully, but note that agency requires clear evidence, not mere influence.

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

• Context: Attempt to use veil‑piercing to add controllers as parties to a contract entered by the company.
• Principle: Veil‑piercing cannot be used to make someone a contracting party; remedy strictly limited.
• Practical point: Use misrepresentation, deceit, or warranty claims rather than veil‑piercing to reach controllers.

Prest v Petrodel Resources Ltd [2013] UKSC 34

• Context: Matrimonial proceedings involving companies holding assets associated with the husband.
• Principle: Clear split between concealment and evasion. Assets were held on trust; veil‑piercing not needed.
• Practical point: Before alleging piercing, test trust, agency, and other routes; courts prefer these.

Chandler v Cape plc [2012] EWCA Civ 525

• Context: An employee of a subsidiary sued the parent for asbestos‑related injury.
• Principle: A parent can owe a direct duty of care to a subsidiary’s employees in certain circumstances (same business, superior knowledge, and reliance).
• Practical point: Liability can fall on a parent without piercing if it assumes responsibility or has relevant knowledge and control over safety.

DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852; Woolfson v Strathclyde Regional Council 1978 SLT 159

• Context: Treating group companies as a single entity for compensation.
• Principle: DHN’s approach was limited by Woolfson; separate legal personality of group companies prevails.
• Practical point: Expect courts to treat each company as separate unless a recognised exception applies.

Practical Applications

For companies and directors

• Keep corporate formalities tight: separate bank accounts, proper minutes, independent decision‑making, and clear contracts.
• Avoid using new entities to bypass existing obligations (for example, restrictive covenants, court orders, or debts).
• Document commercial reasons for restructurings. If timing coincides with an adverse judgment or claim, expect scrutiny.
• Do not mix personal and company assets. Maintain clear ownership records for property, IP, and receivables.

For group structures

• Use written intra‑group agreements and charge appropriate prices for shared services.
• Make sure subsidiaries act in their own right. Avoid blur in branding, policies, and decision lines that might suggest agency.
• If the parent provides health and safety systems or specialised oversight, ensure they are robust; this can create a direct duty of care (Chandler).

For contracts and finance

• If you need recourse to controllers, obtain personal guarantees, security, or warranties. Do not rely on veil‑piercing.
• Conduct due diligence on group structures and asset ownership. Check for trusts and inter‑company charges.
• Consider covenants that deter transfers of key assets and require notice of reorganisations.

For disputes and insolvency

• When alleging veil‑piercing, plead the pre‑existing obligation and the evasion clearly. Show control of the company used as the device.
• Explore alternative claims first: trust/beneficial ownership, agency, deceit/misrepresentation, unjust enrichment (where applicable), s.423 IA 1986, wrongful or fraudulent trading.
• Seek targeted remedies: injunctions to stop breaches of restrictive covenants, proprietary claims to recover assets, freezing orders where justified.
• Keep evidence tight: board minutes, emails about restructuring motives, payment trails, beneficial ownership, and any steps suggesting concealment or evasion.

Summary Checklist

• Start from Salomon: the company is a separate legal person with limited liability
• Piercing is rare and a last resort; focus on evasion of an existing obligation (Prest)
• Concealment (looking through facts) is different from piercing (disregarding the separate person)
• Fraud/sham cases (Gilford, Jones) are classic examples of courts stopping avoidance schemes
• Group ownership or control is not enough: agency needs proper proof (Adams v Cape)
• You cannot add controllers to a contract via veil‑piercing (VTB Capital)
• Consider alternative routes: trust/beneficial ownership, agency, tort duty of care (Chandler), and statutory claims
• Keep corporate formalities and records strong; avoid asset shuffling to defeat creditors or orders
• Use guarantees and security if you need recourse beyond the company

Quick Reference