Piercing the Corporate Veil

Company Law

Separate Legal Personality. The seminal case which established the concept of

the registered company being a separate legal personality is Salomon v Salomon & Company (1897).

Disregarding separate legal personality is called ‘lifting the corporate veil’

There are four situations in which court will look behind corporate form.

Statutory exceptions.

Misuse of corporate form.

Agency.

Single economic entity.

Salomon v Salomon & Company Mr Salomon ran a successful leather business as a sole trader.

Set up a company and company law was observed at all times.

Issue- whether his secured debt of £10,000 should take

precedent over unsecured creditors.

Three Courts – 1.Court of first instance accepted the creditors

view notion was company was his nominee or agent. 2. Court of

Appeal held the creditors should be paid by Mr Salomon ‘abused

privileges of incorporation should only be enjoyed by bona fide

shareholders who had a mind and will of their own and were not

mere puppets’ 3. House of Lords This view was unanimously

rejected as company was validly incorporated the debts are the

debts of the company McNaughton L.J –’The company is at law

a different person altogether from the subscribers. Same as it

was before, and the same persons are managers, same hands

receive the profits.

Statutory Exceptions to Separate

Legal Personality Not exhaustive – See Courtney 255 - 265

Failure to correctly state the company’s name Section 114(4) of the 1963 Act provides that where the

correct and full registered name of the company does not appear on a cheque or order for money or goods, the signatory will be personally liable to pay. –Remember how important the name on the cheque was in Quigley Meats!

Failure to keep proper records Section 202 of CA 1990 requires every company to keep

proper books of account – if they don’t and the failure contributes to companies inability to pay debts, creates uncertainty as to assets and liabilities of company or impedes orderly winding up – officers of the company can be held liable personally for debts.

Case Law

Farrar v Farrar’s Limited (1888) “A sale by a

person to a corporation of which he is a member

is not either in form or substance a sale by a

person to himself”

Macaura v Northern Assurance Company 1925

–Timber owned by Plaintiff he sold it to a

company in exchange for all the share capital.

BUT timber was insured in his personal name not

in the company’s name. OOPS!!! Destroyed by

fire and the court found in favour of the defendant

the insurance co and followed Salomon

Case Law O’ Neill v Ryan (1993) – Plaintiff alleged that

breaches in competition law by the 4 defs caused drop in share price in Ryanair Ltd. Supreme Court held this did not cause a personal loss to the plaintiff as a shareholder BUT it was held that such a loss is merely a reflection of the loss suffered by the company –shareholder does not suffer any personal loss

Prudential Assurance company Ltd. v Newman Industries Ltd 1982 “Plaintiff shares are merely a right of participation in the company on the terms of the articles of association’

Case Law

Roundabout Limited v Beirne 1959 –Principle

has been used to avoid obligations. Staff joined a

trade union –controllers of company unwilling to

employ unionised staff. Company closed the pub

and dismissed all of the staff. Staff picketed –

controllers of the pub formed a new company

leased the public house from the first company to

it. Had no employees-new company could not be

classed as an employer would not be subject to

trade dispute. New company sought and were

granted an injunction restraining the strikers

Statutory Exceptions to Separate

Legal Personality Fraudulent or reckless trading

Section 297 A of CA 1963 as inserted by s138 of CA 1990, provides that if , during the course of examinership or winding up, a person is found guilty of fraudulent or reckless trading then the court can declare that person responsible for some or all of company’s debts

Tax Legislation

Tax law often includes provisions that attempt to prevent people from using companies to conceal tax liabilities.

Criminal Responsibility

Many regulatory statutes include provisions making officers of companies personally criminally liable where the company is shown to have committed an offence – eg Safety, Health and Welfare at Work Act 1995 and Competition Act 2002

Misuse of Corporate Form. The courts will not allow the corporate form to be used to avoid legal

obligations.

Jones v Lipman [1962] 1ALLER 442 The defendant who had contractedto sell his house to the plaintiff tried to avoid a claim for specificperformance by conveying the house to a company that he controlled.Russell J rejected a defence based on the company being a separateentity, describing the company as: ‘the creature of the defendant, a device a sham, a mask which he

holds before his face in an attempt to avoid recognition by the eyeof equity.’

Gilford Motor Company v Horne [1933] Ch 939 The defendant’scontract of employment with the plaintiff provided that he would notcompete with the plaintiff should his contract be terminated. Upontermination the defendant set up a company with his son in directcompetition with plaintiff and although he was neither the director of nora shareholder in the company – everyone called him ‘boss’. The courtset aside the separate legal personality of the company. (Griffith CollegeFE1 Manual 2013-2014)

Agency or Alter Ego Principle

Subsidiaries are frequently found to be the agent

of the parent company. Best example is Smith,

Stone and Knight v Birmingham Corporation

1939. The test is based on the control over the

day-to-day operations. Six factors to be

considered:

Agency Smith, Stone & Knight v Birmingham Corporation

[1939] 4 ALL ER 116.

A subsidiary of the plaintiff company took over a waste business carried out by the plaintiff. The subsidiary was beneficially owned by the plaintiff company, and was treated in day to day running as a department of the plaintiff’s business. All of the profits from the subsidiary went to the plaintiff. When lands owned by the plaintiff were compulsorily acquired by Birmingham corporation, the plaintiff successfully claimed compensation for disturbance to the subsidiary’s business.

Court held that the subsidiary was carrying on the business as agent of the plaintiff.

Agency Six Factors

Were the profits of the subsidiary treated as the profits of the holding company?

Were the persons who were conducting the business of the subsidiary appointed by the holding company?

Was the holding company the ‘head and brains’ of the subsidiary?

Did the holding company govern the venture? Were the profits made by the subsidiary company made

by the skill and direction of the holding company? Was the holding company in effective and constant

control of the subsidiary?

Atkinson J felt that all 6 questions could be answered in the plaintiff’s favour.

Agency Most of Atkinson’s criteria focus on the question of

control.

If they were applied to every case in which the day-to-day affairs of a company are controlled by a member, then most companies would be regarded as agents of their members

Separate legal personality would become the exception rather than the rule.

However the courts tend to apply the agency exception only to situations in which the company is controlled by another company, not when it is controlled by a natural person.

Agency Fyffes plc v DCC plc [2009] 2 IR 417 the

The court reviewed the law and held that one company could be regarded as the agent of another ‘if to do otherwise would lead to an injustice. Whether it should be, depends on whether the inference is factually justified’

The court also held that two companies could be treated as a single economic entity ‘ for the purpose of preventing the avoidance’ of statutory provisions.

In this case the companies involved were found neither to be the agents of one and other or to be a single economic entity BUT

Laffoy J held that this was a possibility.

Agency and Tax An inference of agency between related companies tends to be

readily drawn where there is a possibility of tax evasion

Firestone Tyre v Llewlelin [1957]

An American company formed a wholly-owned subsidiary in England for the purpose of manufacturing tyres and supplying them to the European market. The English company received payment for the tyres and after deducting a sum representing 5% of the payment, transferred the balance to the American company.

When the American company was assessed for English tax on the profits of its business, it sought to avoid liability by claiming that it was a separate legal person from its subsidiary. Nevertheless the House of Lords held the English company to be an agent of the American company on the basis of the actual manner in which the companies arranged their affairs.

Mrs J. Laffoy

Reviewed the law whereby a company might be

deemed the agent of another. As a matter of law

Lotus Green may be regarded as having acted as

the agent of DCC in relation to the holding and

disposal of the shares in Fyffes, if to do otherwise

would lead to an injustice. She adopted the

proviso that a subsidiary would only be

deemed an agent of its parents where such an

inference was factually justified

On the facts of the case she did not find that

Lotus Green was an agent of DCC.

Single Economic Entity. Controversial exception to the Salomon principle

In 1970s and 1980s courts put forward a justification for the disregarding of the separate legal personality of related companies based on ‘the requirements of justice.’

They regarded related companies as a ‘single economic entity’

This is different to the agency exception because it regards a number of related companies as one legal entity. The agency exception recognises the existence of two legal persons.

Has been employed by Irish courts, received approval in general terms from the Supreme Court – scope severely restricted by the English Court of Appeal and more recently by the Irish Supreme Court.

Single Economic Entity First accepted by Lord Denning in DHN Food Distributors Limited

v Tower Hamlet London Borough Council [1976] 3 ALL ER 462.

A holding company conducted business on land owned by one of its wholly owned subsidiaries. When the Council compulsorily acquired the land, the holding company entered a claim for compensation in respect of the disturbance caused to it. The Court of appeal upheld the claim with Denning holding that the court could look to the economic entity of the whole group and treat the business as being carried on by that group. [t]his group is virtually the same as a partnership in which all the

three companies are partners. They should not be treated separately so as to be defeated on a technical point. They should not be deprived of the compensation which should justly be payable for disturbance. The three companies should, for present purposes be treated as one.

Single Economic Entity Lord Denning’s views were adopted in Ireland by Costello J in

Power Supermarkets Ltd v Crumlin Investments Limited & Dunnes Stores (Crumlin) Limited (UR High Court 1981).

The issue in this case was whether the first defendant could avoid liability to the plaintiff on a covenant in a lease of a unit in a shopping centre to the plaintiff which restricted the use of a part of the shopping centre. The first defendant sought to avoid liability by conveying the freehold of a different part of the shopping centre to the second defendant which was, like the first defendant controlled by the Dunne family.

Costello J held that ‘if the justice of the case required’ the court could treat two or more related companies as a single entity so that the business carried on by one will be regarded as the business of the group, or another member of the group.

Single Economic Entity Allied Irish Coal Supplies v Powell Duffryn

International Fuels Ltd [1998]

The correct defendant had been sued by the plaintiff but they later discovered that it had no money and so tried to add a different, related but less financially challenged company, as defendant.

Supreme Court held that were a court to allow such an application – making the assets of one company within a group liable for the debts of another – creditors and the defendant itself would be severely prejudiced.

Power Supermarkets was distinguished on the basis that the relevant holding company was a shell – no meetings of the board or shareholders were ever held and commercial decisions were not ratified in the normal way.

Single Economic Entity Adams v Cape Industries PLC [1990] CH 433

Court of appeal - the defendant was part of a group of companies and attempted to take advantage of its corporate structure to reduce the risk that any member of the group would be subject to US law and thus liable for injury caused by asbestos.

The plaintiff argued that it should not be permitted to do this but should be treated as a single economic entity.

Court of appeal rejected this argument and approved the statement of Robert Goff LJ in Bank of Tokyo Ltd Karoon[1987] AC 45 ‘Counsel suggested beguilingly that it would be technical for us to

distinguish between parent and subsidiary company in this context; economically, he said, they were one. But we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be bridged.

Single Economic Entity Adams v Cape Industries PLC [1990] CH 433

The court of appeal held that the restructuring of the group had not been done to deprive anyone of their existing rights and there was no actual or potential illegality.

Carrying out changes in the corporate structure in order to deprive third parties of future relief was permissible and would not result in the corporate veil being lifted. Counsel for the plaintiffs urged on us that the purpose of the

operation was in substance that Cape would have the practical benefit of the group’s asbestos trade in the United States, without the risk of tortious liability. This may be so. However, in our judgment, Cape was in law entitled to organise the group’s affairs in that manner and ...to expect that the court would apply the principle of Salomon in the ordinary way.

Single economic entity? So what is the position of the single economic entity

exception to Salomon?

Power Supermarkets allowed it ‘justice of the case’

Allied Irish Coal Suppliers rejected it – Costello J-subsidiaries ‘whether wholly or partially owned or controlled by the parent are a well established feature of our company law’

Adams v Cape Industries – English decision – rejected it

Court will not pierce the veil because of who owns or controls the company.

Cannot pierce the veil ‘in the interests of justice’

Court may pierce the veil if there is some evidence of impropriety