Piercing The Corporate Veil

One of the most uncertain areas in company law today is the situation in which a court is willing to set aside the separate legal personality of a company. Separate legal personality i.e. where a company is regarded by the courts as a legal person with its own rights and responsibilities and that it is capable of owning property amongst other things. Laffoy J stated in Fyffes Plc v Dcc Plc & Ors ,

"It has been a fundamental principle of Irish company law since the decision of the House of Lords in Salomon v. Salomon and Company Limited [1897] A.C. 22 that a company registered under the Companies Acts is an artificial legal entity separate and distinct from the members, whether natural or corporate persons, of which it is composed."

In Salomon v. Salomon and Company Limited as stated by Marc Moore in his recent article, the House of Lords,

"emphasised that the formally separate personality of a company should prevail in the eyes of the law and, consequently, in the opinion of a court, regardless of any economic or moral considerations that might otherwise justify regarding a registered company as the mere extension of its de facto incorporators."

The facts of the Salomon case were that Mr. Salomon ran a successful leather business as a sole trader. He then set up a company in which he was the main shareholder. He loaned the company money which he secured with the assets of the company. He observed the tenets of company law at all times. He was also the main shareholder and further to that the main creditor due to the loan. The question in this case was whether Mr. Salomon debts should take precedence over the unsecured creditors when the company was wound up. If Mr. Salomon won the case, the creditor would receive no money.

In the High Court, Mr. Salomon lost the case and was ordered to pay the debts. This decision was founded in the idea that the company was his nominee or agent.

Mr. Salomon appealed the decision, where he once again lost the case. It was held here that he had lost because he abused the privileges of incorporation. Lopes LJ stated in relation to this,

"The Act contemplated the incorporation of seven independent bona fide members, who had a mind and will of their own, and were not mere puppets of an individual who, adopting the machinery of the Act carried on his old business in the same way as before, when he was a sole trader. To legalise such a transaction would be scandalous."

Mr Salomon took the case further to the House of Lords, where he won the case and the foundations of the modern law were laid. The court held that the company was indeed a separate legal entity and separate from its members. Lord McNaughten held,

"The company is at law a different person altogether from the subscribers to the memorandum and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not at law the agent of the subscriber or a trustee for them. Nor are the subscribers as members liable, in any shape or form except to the extent and manner provided in the act."

The result of this was that Mr Salomon's debts were given priority. Also a legal person could be created by observing the tenets of company law. Furthermore this case created the Salomon principle, "The Veil of Incorporation." The courts will not go behind this wall to look at the controlling minds of the company except in certain circumstances.

The Corporate veil does not only apply to small companies, in 1991 the English Court of Appeal extended it to cover the complex scenario of a multinational corporation, where there is a parent controlling company, that works through a number of smaller subsidiaries. Marc Moore states that the English courts have refused to affirm the validity of any alleged exceptions to the principle in Salomon except in a limited range of cases and the courts favour a more "laissez faire" attitude to the determining of the legality of attempts by traders to exploit the legal machinery of separate legal personality.

Adams v. Cape Industries is the prime example of opportunist companies hiding behind the corporate veil. Here the Court of Appeal refused to lift the corporate veil and expose the defendants as the controlling mind and will behind a complex arrangement, which allowed the hazardous material to be marketed overseas using subsidiary companies. L.J Slade in his judgment in this case said that a member of a corporation is allowed to use company law in a way so,

"...as to ensure that the legal liability (if any) in respect of future particular activities of the group ...will fall on another member of the group rather than the defendant company."

The courts in the hope of stopping the exploitation of the jurisdiction, has resulted in a limited range of exceptions to the principle espoused in Salomon to stop extreme abuses of the doctrine of separate legal personality.

There were limited circumstances stated in the Salomon case, in which the courts would look behind the corporate veil. These were situation where there was,

"Ð'...no fraud and no agency and if the company was a real one and not a fiction or a myth."

When the corporate veil is lifted, the controllers of the company will be made personally liable for the actions of the company. The situations when the corporate veil will be lifted are very narrow and have not changed in many years.

The main circumstances in which the courts will pierce the corporate veil,

1. Agency

2. Single Economic Entity

3. Fraud

4. Avoidance of legal duty

I will only discuss the first two situations because of the size restrictions on the essay and the need for a detailed discussion of these points.

The first of these I will discuss is agency. The main thing about Salomon was that the company and its members were separate. The company was not an agent of the members

The issue of whether a subsidiary is an agent of the parent company is where this circumstance comes up most. The best case to illustrate this is Smith Stone & Knight .v. Birmingham Corporation . In this case a subsidiary of the plaintiff company was treated like a department of the parent company. The subsidiary ran a waste disposal business on land owned by its parent company. The defendants compulsory purchased the land