Corporate Legal Personality And Lifting Of The Veil

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Salomon V Salomon

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Mr Salomon a shoe manufacturer had sold his business to a limited liability company where he and his wife and five children where the shareholders and directors of the company (to comply with the Companies Act of 1862 which required a minimum of 7 members). Mr Salomon owned 20,001from the 20,007 shares of the company with the remaining 6 shared equally amongst his wife and children. The company ran into some financial difficulties and sort a loan of £5,000 from one Mr Edmund Broderip who granted the loan. Subsequently the company went into more financial difficulties and was unable to pay its debt of which an action for liquidation was carried out against it. When Mr Edmund's failed to realise his unsecured loans he instituted an action claiming for Mr Salomon's personal liability. The High Court and Court of Appeal held Mr Salomon liable. Upon appeal to the House of Lords, it overturned the decision arguing that a company had been duly created and cannot be deprived of its separate legal personalityRead more at Law Teacher: http://www.lawteacher.net/free-law-essays/company-law/separate-legal-personality.php#ixzz3XCNGG3Ws

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Macaura v Northern Assurance Co Ltd

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Mr Macaura owned a timber estate. He decided to sell his timber estate to a company and in return he received almost all the shares of this company. Thus, Mr Macaura was the sole shareholder and was also the company’s creditor to a large extent. He also decide to insure the timber against loss by fire in his own name. Shortly after, the timber was destroyed by fire and he claimed compensation to the insurance. The insurance company denied to pay out stating that Mr Macaura did not have insurable interest in the timber since the timber were of the company. The House of Lord dismissed the appeal. As stressed by Lord Sumner [xxiii] , Lord Wrenbury clearly and concisely affirmed:“My Lords, this appeal may be disposed of by saying that the corporator even if he holds all the shares is not the corporation, and that neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.”

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Lee v Lee’s Air Farming Ltd

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The question was raised before the Privy Council due the claim of the widow of Mr. Lee for the compensation of her husband, who died while he was working. Mr Lee was the only shareholder of the company, the sole governing director of it and he was employed by the company as a chief pilot. Having established that widow of Mr. Lee was entitled to compensation, the Privacy Council stated that: firstly, the company and Mr. Lee “were two separate and distinct legal persons” and consequently capable of establishing legal relations between them; secondly, there was “no reason to doubt that a valid contractual relationship could be created between” the company, “as a master”, and the sole director in quality of employee, “as a servant”; and lastly,“a man acting in one capacity [sole governing director] can give orders to himself in another capacity[chief pilot of the company] than there is in holding that a man acting in one capacity[employer] can make a contract with himself in another capacity [employee].”

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DHN Food Distributors Ltd v Tower Hamlets

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According to Lord Denning MR, the subsidiaries were “bound hand and foot to the parent company” and therefore they had to do only what the parent company said. In addition he added that the group of three companies was virtually similar to a partnership and hence they were partners. Therefore, he concluded that this group of three companies for the purpose object of the judgment, which was the right of compensation for disturbance, had to be considered as one, and in the same manner the parent company has to be regarded as that one. Thus, the parent company was entitled to exercise its right of compensation. It follows that in this case it was pierced the veil of incorporation on the ground of the specific facts related with it. In fact, this consideration has been stressed by Goff LJ that claimed: “I would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil, but in this case the two subsidiaries were both wholly owned; further, they had no separate business operations whatsoever”. Thus, it seems that in such situation piercing the veil of the separate legal personality assumes an exceptional character due to the “single economic unit”

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Woolfson v Strathclyde

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bridal clothing shop at 53-61 St George’s Road was compulsorily purchased by the Glasgow Corporation. The business in the shop was run by a company called Campbell Ltd. But the shop itself, though all on one floor, was composed of different units of property. Mr Solomon Woolfson owned three units and another company, Solfred Holdings Ltd owned the other two. Mr Woolfson had 999 shares in Campbell Ltd and his wife the other. They had twenty and ten shares respectively in Solfred Ltd. Mr Woolfson and Solfred Ltd claimed compensation together for loss of business after the compulsory purchase, arguing that this situation was analogous to the case of DHN v Tower Hamlets LBC.

Lord Keith upheld the decision of the Scottish Court of Appeal, refusing to follow and doubting DHN v Tower Hamlets BC. He said that DHN was easily distinguishable because Mr Woolfson did not own all the shares in Solfred, as Bronze was wholly owned by DHN, and Campbell had no control at all over the owners of the land. The one situation where the veil could be lifted was whether there are special circumstances indicating that the company is a ‘mere façade concealing the true facts’ .

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Adams v. Cape Industries plc

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Cape, an English company, mined and marketed asbestos. Its worldwide marketingsubsidiary was another English company, Capasco. It also had a US marketing subsidiary incorporatedin Illinois, NAAC. In 1974, some 462 plaintiffs sued Cape, Capasco, NAAC and others inTyler, Texas, for personal injuries allegedly arising from the installation of asbestos in a factory.These actions were settled. Between 1978 and 1979, a further 206 similar actions were commencedand default judgments entered against Cape and Capasco. In 1978, NAAC ceased tocarry on business and other subsidiaries replaced it. The plaintiffs sought to enforce the judgmentsin England. The defendants denied that the Texas court had jurisdiction over them for the purposesof English law.Held – by the Court of Appeal – that the defendants were neither present within the USA, nor hadthey submitted to the jurisdiction there. The method of computing damages of the individual plaintiffswas contrary to the English law concept of natural justice. Accordingly, the actions would bedismissed.

court will lift the corporate veil where a defendant by the device of acorporate structure attempts to evade (i) limitations imposed on his conduct by law; (ii) such rights ofrelief against him as third parties already possess; and (iii) such rights of relief as third parties may inthe future acquire.

For the purpose of enforcement of a foreign judgment, the defendant would only be regarded asfalling under the jurisdiction of the foreign court where it was present within the jurisdiction or hadsubmitted to such jurisdiction.

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Jones v Lipman

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Lipman sold a house to Jones but ultimately refused to complete the sale. In order to ensure thathe would not have to sell the house to Jones, Lipman executed a sham transfer of the house to acompany controlled by him (which was in fact a shelf company he had purchased) just beforecompletion of the sale contract to Jones. Lipman and a clerk of his solicitors were the only shareholdersand directors. Jones applied under Ord 14a for specific performance against Lipman andthe company.Held – specific performance should be ordered against both. Russell J stated:The defendant company is the creature of the first defendant, a device and a sham, a mask which heholds before his face in an attempt to avoid recognition by the eye of equity. The case cited illustrates that an equitable remedy is rightly to be granted directly against the creature in such circumstances[. . .] The proper order to make is an order on both the defendants specifically to perform the agreementbetween the plaintiffs and the first defendant.

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Gilford Motor Co v Horne

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aformer employee bound by a restraint of trade set up a company in order to evade its provisions,claiming that he as a person might be bound by the restraint but the company, being aseparate entity, could not be. An injunction to prevent solicitation of Gilford’s customers wasgranted against both him and his company which the court described as ‘a device, a stratagem[. . .] a mere cloak or sham’.

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Creasey v Breachwood Motors Ltd

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the Adams case has not always been applied, even recently.

Mr Creasey was dismissed from his post of general manager at Breachwood Welwyn Ltd. He claimed that this constituted wrongful dismissal, in breach of his employment contract. However, before he could claim, Breachwood Welwyn Ltd ceased trading, and all assets were moved to Breachwood Motors Ltd, which continued the business. Other creditors were paid off, but no money was left for Mr Creasey's claim, which was not defended and held successful in an order for £53,835 against Breachwood Welwyn Ltd. Mr Creasey applied for enforcement of the judgment against Breachwood Motors Ltd and was successful. Breachwood Motors Ltd appealed.

Mr Richard Southwell lifted the corporate veil to enforce Mr Creasey's wrongful dismissal claim. He held that the directors of Breachwood Motors Ltd, who had also been directors of Breachwood Welwyn Ltd, had themselves deliberately ignored the separate legal personality of the companies by transferring assets between the companies without regard to their duties as directors and shareholders.

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Ord v Belhaven Pubs Ltd

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following Adams v Cape, in addition to the subsidiary beingused or set up as a mere façade concealing the true facts, the motives ofthe perpetrator may be highly relevant.

Mr and Mrs Ord ran the Fox Inn in Stamford, Lincolnshire. They were in an ongoing dispute with the freehold owner, Belhaven Pubs Ltd, formisrepresentation about the level profitability of the pub. However Belhaven Pubs Ltd was part of a company group structure that had been reorganised, and had no assets left. Mr and Mrs Ord requested that a company with money, Ascott Holdings Ltd, be substituted for Belhaven Pubs Ltd to enforce the judgment. At first instance the judge granted this order. Belhaven Pubs Ltd appealed.

The Court of Appeal overturned the judge and held that the reorganisation was a legitimate one, and not done to avoid an existing obligation. Hobhouse LJ argued that the reorganisation, even though it resulted in Belhaven Pubs Ltd having no further assets, was done as part of a response to the group's financial crisis. There was no ulterior motive.Hobhouse LJ also held, specifically, that the earlier case of Creasey v Breachwood Motors Ltd was wrong.

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Trustor AB v Smallbone

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Mr Smallbone had been the managing director of Trustor AB, and it was claimed that in breach of fiduciary duty he transferred money to a company that he owned and controlled. Trustor AB applied to treat receipt of the assets of that company as the same as the assets of Mr Smallbone. It argued that Smallbone's company was a sham to help breaches of duty, it had been involved in improper acts and the interests of justice demanded the result.

Court held that there was enough evidence to lift the veil on the basis that it was a "mere facade". He noted the tension between Adams v Cape Industries plc and later cases and stated that impropriety is not enough to pierce the veil, but the court is entitled to do so where a company is used ‘as a device or façade to conceal the true facts and the liability of the responsible individuals.’