Slp

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Introduction

This principle was birth forth from the case of Salomon v Salomon (1897) which says that the director and the company are two distinct entities.The director cannot be personally liable for the actions of the company.

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Today, this principle extends to parent subsidiary companies, the parent company is not to be found liable for the actions of the subsidiary. However, this is the general rule and there are exceptions to this general rule.The purpose of the exceptions is, because of circumstances where this principle can be subject to abuse by parent company who solely creates a subsidiary to absorb risky ventures. The several exceptions include, fraud,control by wrongdoer, day-day control and single economic entity.

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SALOMON v SALOMON

The facts of Salomon are crucial in understanding the purpose of SLP

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In this case, Mr. Salomon owned a sole proprietorship, he converted his business into a company. The law at that time required there to be 7 shareholders in order for a company to be incorporated. Thus, Mr.Salomon incorporated the company with his wife and five children being the shareholders. The company obtained a debenture that it was unable to repay. Mr.Broadrip (Mr. Salomon’s friend) agreed to pay off the bank and step in the position of the bank. Yet, Mr. Salomon could not repay the money and Mr.Broadrip sold off the company’s assets. The other creditors sought for Mr.Salomon to be personally liable.

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In Court the judge held that there appeared to be no SLP and found Mr. Salomon to be personally liable. However, when they appealed to the Court of Appeal, they held that there was SLP but that there was evidence of fraud because his family members were made shareholders as mere puppets and that Mr. Salomon was the brain of the company and that he should be personally liable

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In appeal to the House of Lords, they overruled the Court of Appeal’s decision and asked one question, “Was the company validly formed?” and since it was, Mr. Salomon was given SLP and could not be found personally liable. Thus, the company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient. Lord Halsbury LC stated that the statute "enacts nothing as to the extent or degree of interest which may be held by each of the 7 [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others."

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Lord McNaughton in the judgement established SLP as the company being regarded by the law as a separate person from its creditors and that the creditors should not be liable for any involvement in the company.

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The effect of Salomon are the following, formalities are to be observed, company must be incorporated, now the courts are reluctant to find shareholders to be personally liable, complete separation of the company and its members are upheld.

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The principle of SLP gave rise to the notion of limited liability, which states that when a company is insolvent the creditors can only recourse against the company and not the shareholders.

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This notion went on to be included in s.39 of the Companies Act 2006 where it states that a company registered under the Companies Act 2006 has the legal capacity of a natural person.

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Subsequent cases that followed Salomon contributed greatly into shaping SLP to what it has developed to be today.

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In the case of Gilford Motors Company Ltd. v Horne (1933) a former employee (Mr. Horne) contracted not to steal customers from his current business. Consequently, Mr. Horne opened up his own workshop and started stealing customers for his own business. Mr. Horne used SLP as a shield to avoid liability. Courts label this as a mere façade (or sham devise) and they lifted the corporate veil that SLP provided and found Mr. Horne to be personally liable.

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Similarity,in Jones v Lipman (1962) (which affirmed the case above) here Mr. Lipman agreed to sell a piece of land to Mr. Jones, he later changed his mind and decided not to. He instead incorporated a company and sold the land to the company. Mr. Jones sought relief. The courts held that specific performance is available against a contracting vendor who has it in his power to compel another person to convey the property in question.

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An order for specific performance was made against both the director and the company. The company could not escape from or divest itself of its knowledge gained through the director. The company was: ‘A creature of [the controlling director], a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.

These cases demonstrated that courts are not reluctant to look at the facts of the case and lift the corporate veil, should it be necessary.

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The expansion of SLP in terms of group structure can be seeni n the following cases of Ord v Bellhaven Pubs (1998) and Creasly vBreachwood Motors (1993) (here in after Creasly)

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In Ord v Bellhaven Pubs (1998) 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.

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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.

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HobhouseLJ also held, specifically, that the earlier case of Creasly was wrong.

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In Creasly,Mr Creasly 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 Creasly's claim. Mr Creasly applied for enforcement of the judgment against Breachwood Motors Ltd and was successful. Breachwood Motors Ltd appealed

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HELD: that Sir Richard Southwell lifted the corporate veil to enforce Mr Creasly'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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SLP with regards to Multi-National Companies has developed vastly from the pioneering case of Daimler Co Ltd v Continental Tyres (1916) (HOL).

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Here Mr. Daimler did not have to make payment to Continental Tyres as they were German spices. It was at that time an offence to trade with the enemy. The House of Lords held that if a natural person can be ill intent so can a company.

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Several years later, DHN Food Distributors Ltd v Tower Hamlets London BoroughCouncil (1976) (here in after DHN v Tower Hamlets) brought forward the appropriate footing for SLP with parent subsidiary companies. In this case, DHN was the parent company of subsidiaries that owned land and vehicles. The government sought to acquire a piece of land that was owned by the subsidiary company. Compensation for the land was awarded to the subsidiary company. The parent company sought to claim the sum as it was a single economic entity.

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In the Court of Appeal, Lord Denning referred to this case as a “Three in one.Three companies in one…”

He went on to agree with the parent company’s claimant treated the group structure as a single entity and stated that “the subsidiary company is bound by hand and foot, it is subservient to the parent company”.

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This decision was doubted in the case of Woolfson v Strathclyde Regional Council(1978). Here a bridal clothing shop 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.

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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 a company owned five floors in a building, 3 by company.

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Here the decision of the Scottish Court of Appeal was upheld by Lord Keith, 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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However,in Adams v Cape Industries Plc (1990) the courts relied on DHN v Tower Hamlets in reaching their decision. The facts of Adams v Cape are that Cape Industries plc was a UK company, head of a group. Its subsidiaries mined asbestos in South Africa. They shipped it to Texas, where a marketing subsidiary, NAAC, supplied the asbestos to another company in Texas.

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The employees of that Texas Company, NAAC, became ill, with asbestosis. They sued Cape and its subsidiaries in a Texas court. Cape was joined and argued there was no jurisdiction to hear the case. Judgment was still entered against Cape for breach of a duty of care in negligence to the employees.

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The tort victims tried to enforce the judgment in the UK courts. The requirement,under conflict of laws rules, was either that Cape had consented to be subject to Texas jurisdiction (which was clearly not the case) or that it was present in the US. The question was whether, through the Texas subsidiary, NAAC, Cape Industries plc was ‘present’. For that purpose, the claimants had to show in the UK courts that the veil of incorporation could be lifted and the two companies be treated as one.

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Scott J held that the parent, Cape Industries plc,could not be held to be present in the United States. The employees appealed in the United Kingdom.

The Court of Appeal unanimously rejected that Cape should be part of a single economic unit, that the subsidiaries were a façade and that any agency relationship existed on the facts.

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Slade LJ began by noting that to ‘the layman at least the distinction between the case where a company itself trades in a foreign country and the case where it trades in a foreign country through a subsidiary, whose activities it has full power to control, may seem a slender one….’

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Heapproved Sir Godfray’s argument ‘save in cases which turn on the wordingof particular statutes or contracts, the court is not free to disregard theprinciple of Salomon… merely because it considers that justice so requires.’ Onthe test of the ‘mere façade’, it was emphasised that the motive was relevantwhenever such a sham or cloak is alleged, as in Jones v Lipman

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However, in Lubbe v Cape Plc (2000) which sharessimilar facts to Adams v Cape the parties decided instead to settle ofand out of court settlement for £21,000,000.

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Chandler v Cape Plc (2012) has the same facts as the two cases stated above. Though, here the courts introduced a new principle to company law, to help them reach a decision. The courts held that Cape has owed a duty of care towards employees of subsidiaries too.

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They took three circumstances into consideration

1) the parent and subsidiary had the same trade of business,

2) the parent company ought to have knowledge that the subsidiary company was operating in unsafe conditions

3) remoteness.

However, this decision should be noted to be very specific to the facts of the case.

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The law today, rest in the case of Prest v Petrodell Resources (2013) (SC).Here, Mr. Prest was a director of a company, that company owned a few houses.Mr. Prest during the course of his divorce proceedings, ex-wife sought for the houses. Mr.Prest denied this as he was not the legal owner of those house, he is merely a beneficiary. Thus, the courts were not willing to lift the corporate veil for non-commercial transections

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The effect of all this cases is that the Salomon case is still being upheld just modified to fit certain circumstances, where the veil will be lifted. Clear and unequivocal exceptions to the Salomon principle is crucial to give effect to the right and liabilities of the contracting parties. The decision in Prest v Petrodell Resources promoted commercial efficiency.

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Dr Edwin C. Mujih in Piercing the corporate veil as a remedy of lastresort after Prest v Petrodel was of the view that in Prest, the Supreme Court echoed these criticisms in reaching its decision, with Lord Neuberger observing that"it is also clear from cases and academic articles that the law relating to the doctrine is unsatisfactory and confused". He agreed with critics of the rule, such as Easterbrook and Fischel, that the rule is unprincipled.

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Earlier in the judgment, Lord Sumption said that piercing the corporate veil is an expression used indiscriminately to describe a number of different things. Lord Walker agreed with him, stating that it "is not a doctrine at all in the sense of a coherent principle or rule of law. It is simply a label". In VTB Capital v Nutritek, Lord Neuberger observed that the obscure nature of the rule provides support for the claim that it is unprincipled. It is interesting to see not only how their Lordships dealt with the rule beyond acknowledging the criticisms in the Prest case, but also how the rule has fared after Prest.

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The rationale for the cases mentioned above reaching suchdecisions can be seen in the article of Peter Muchilinski in ‘HoldingMulti-Nationals to Account’ where he argues that the idea of limited liability is only for director and company. Extending it to multi-national companies allows for a sharp practice and that parent companies can rely on it to evade liability.

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However, Marc Moore in ‘Building a Temple on FaultyFoundation’ refers to the head and brains rule, also known as the genuine ultimate purpose rule, that any entity that has absolute control in a group structure is the head and brains. Implying that if it is the directors who control the company, hence being the head and brains of the company, they should also be able to bear the liability of the actions they authorize.

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Critics find problems not only with the operation of the rule but with the semantics associated with it as well, and this has contributed in no small way to the controversy surrounding the rule. Professor Christopher Nicholls notes that the phrase "piercing the corporate veil", which has been used by the courts in a number of distinct contexts, is analytically vague.

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As seen above, Lord Sumption made similar remarks in the Prest case about the indiscriminate use of the phrase.

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In conclusion, the law today may take on the role of a capitalist approach and favor giant cooperation. This could be viewed as a policy reason. Nevertheless, the Companies Act 2006 need not to have embedded SLP into it and Parliament made the right decision in not doing so.

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This is because SLP lies at the heart of company law and even with Parliament not codifying this expressly, SLP continues to beat on strong and courageouslly. Standing strong on its fundamental principle founded in Salomon.