Lecture 3 lifting the veil PDF

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COMPANY LAW LECTURE: 3 30/01/2020 LIFTING THE VEIL

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Lifting the veil is a phrase used to describe situations where the separate legal personality of the company is disregarded, either wholly or partly. The veil ie ‘cover’ of incorporation is thus lifted. Some cases involve shareholder limited liability issues, and some involve corporate groups. Removing the cover so that person behind the corporate form are seen/understood/liable. If you remove the cover then law can ascribe liability to the shareholders – contrary to S v People may hide behind the company and structure of companies to commit fraud.

Corporate groups: -

Parent company wants to limit its liability so can create; Subsidiary companies which are in themselves limited. Whatever liability is placed on subsidiary company cannot infringe on the parent company.

Lifting the veil of incorporation: Incorporation, separate legal personality and limited liability may cause problems because persons can hide behind the veil between the company and its members to exploit their position. To give justice to those who have hidden behind the company to achieve fraud or illegal acts, the veil may be lifted To give human/commercial justice the veil may be lifted by: 1. Parliament – statutory 2. Judiciary – case law

Statutory Taxation and Disclosures- wise businessmen can use corporate form to avoid tax, there are provisions in the law to give clearer pictures. Corporate Groups Sec 399 CA 2006 when companies render their account, they have to render accounts of entire corporate group – such as subsidiary companies. Sec 409 CA 2006 parent company must provide details of the subsidiaries. Insolvency Act 1986- sec 213-215 Directors may be held personally liable where fraudulent or wrongful trading has occurred.

Sec 213- if in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors…or for any fraudulent purpose… If business of company has been carried out with intent to defraud, then whoever is responsible will face personal liability – shareholders. Veil can be lifted to reveal. People who may not need to contribute to the company can be found liable. To find someone liable under Sec 213, you must show dishonest intent – because of the criminal liability intentions. It is difficult to achieve prosecution, standards are high. 214 – wrongful trading; negligence, do not have to prove dishonesty, just have to show that people managing company were negligent in trying to use corporate form or failed to prevent unreasonable forms of trading to create fraud. Re Produce Marketing Consortium Ltd (No 2)[1989]- Sec 214 directors would not liquidate the company, got to point were company had to be ended but have acquired debt. Directors had to contribute to the debt of the company because they were negligent to not liquidate the company. Sec 767 CA 2006 - Directors are jointly and severally liable to indemnify a person who suffers loss or damage due to the company default where no certificate to trade or borrow is received from the Registrar ( ie contravention of sec 761). If a company does not have a certificate and goes into business and someone suffers loss then directors can be liable for the loss incurred.

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These provision extent personal liability to lift the veil.

Judiciary – case law

Illegality - from case law then allowed to lift the veil Daimler v Continental Tyre & Rubber Co [1916] whether a company should be labelled as an enemy company, needed to lift the veil to find out that the company was owned by Germans. Therefore, an enemy company during war. Had to lift the veil. Company can acquire enemy character on the basis of the its members – Trading with the Enemy Act

Sham or pretence or mere façade: Gilford Motor Company v Horne [1933] – former employee entered covenant to not to steal customers from former employer, then set up company to sell to customers of previous company. Court said that company was a sham and was set up to just ignore contractual obligations with former employment. Re Bugle Press [1961]- majority shareholders wanted to buy out but minority would not sell. They set up a company and offered to buy all the shared – agreed and forced minority to sell all their shared. Company set up to buy the shares was a sham because could not achieve this within own company.

Jones v Lipman [1962] – Lipman agreed to sell land and then changed his mind, set up a company and conveyed land to company. Court argued that company is a sham because wanted to escape liability and Lipman could not argue that the land was owned by the company and not him.

Parent/Holding & Subsidiary Companies: DHN Food Distributors v London Borough of Tower Hamlets [1976] – LD argued that corporate group is one single economic entity and treat it as such, we should readily lift the veil when it comes to groups. Woolfson v Strathclyde Regional Council [1978]- HOL disagreed and argued that LD was not reasonable, only piercing of veil should occur when there is a sham. And believed that S v S principle should stand and separate legal personality would be upheld. There was separate activities going on, they were separate entities because business was occurring – SLP could exist. Adams v Cape Industries Plc [1990] – COA investigated lifting the veil and deciding when appropriate to lift the veil, specifically corporate groups. English company in asbestos market, had another subsidiary for WW marketing and another in America. 1974 – 462 people sued in USA under personal injury at work with asbestos. Cape protested jurisdiction and argued that USA had no power over them as UK company. Settled the case in USA and subsequently sold off its USA subsidiary. 206 more claims brought, Cape again protested and didn’t want to settle. Cape sold all its assets in USA so judgement creditors now wanted to come to UK and claim against assets they had in USA. Was Cape subject to USA judgement, only could be if they had presence, by nature of subsidiary. Court: Cape may not have ‘presence’ in USA, only way this could happen would be: to lift the veil, only if view Cape and subsidiaries are one economic entity and if by virtue, subsidiaries were a sham, or agents of Cape and not their own entity. There was no sham, there was good reason for the company. The structure separated them and may have masked liability but was not illegal. COA – no general principle that companies should be regarded as one, only in cases where they are one unit or just holding assets that they are not separate. USA subsidiary was separate to the SA and UK entities. “no general principle that all companies in a group of companies are to be regarded as one....each company within a group of companies is a separate, legal entity possessed of separate legal rights and liabilities” “...save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v Salomon merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities.” Three issues considered: 1. Single economic unit 2. Mere façade-concealing the true facts 3. Agency Agency = If we can prove that subsidiary is an agent of the parent company – can subscribe liability. Ben Hashem v Al Shayif & Anor - In this 2008 case, the court reviewed all the authorities on the corporate veil and summarised the main principles:

1. Ownership and control of a company are not of themselves sufficient to justify piercing the veil. 2. The court cannot pierce the corporate veil, even where there is no unconnected third party involved, merely because it is thought to be necessary in the interests of justice. 3. The corporate veil can only be pierced if there is some "impropriety." 4. The court cannot pierce the corporate veil just because the company is involved in some impropriety. The impropriety must be linked to the use of the company structure to avoid or conceal liability. 5. If the court is to pierce the veil it is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is, (mis)use of the company by them as a device or façade to conceal their wrongdoing. The motive of the wrongdoer is therefore, highly relevant. 6. The court will pierce the veil only if it is necessary to provide a remedy for the particular wrong which those controlling the company have done.

Prest v Petrodel Resources [2013] Supreme Court     

Concerned financial relief following divorce proceedings. Issue was whether Mr Prest was entitled to 8 residential houses owned by 2 companies in which he was the controlling shareholder. Held- veil could not be pierced- no impropriety. Properties were transferred to Mrs Prest, but based on a ‘trust’ argument. Still a reluctance to lift the veil – S v S is entrenched

Lord Sumption and Lord Neuberger:   

In limited circumstances, the veil may be lifted if a person deliberately ‘evades’ a legal obligation or liability… Or if a person deliberately frustrates the enforcement of a legal obligation by interposing a company under his control… 2 underlying principles- ‘the concealment principle’ and ‘the evasion principle’.

Tortious liability •

Involuntary creditors- such as employees or members of the public could be put at risk by the actions of companies.

Connelly v RTZ Corporation Plc [1998]- miner worked by subsidiary of UK company, got cancer after being exposed to elements in mines, brough action against parent company. Argued that London was not the right place to sue and should have sued the subsidiary. Connelly argued that he could not sue the subsidiary and therefore preferred to sue parent. HOL – Namibia would not have been the right place and therefore London was the right place due to complexity and expenses. The parent company argued to have control over H&S procedures. Case couldn’t go further because it was barred due to time lapse but opened the way to allow parent companies to be liable. Lubbe v Cape Industries Plc [2000]- 3000 people in South Africa brought claim of personal injury for asbestos and whether the UK should be the right forum. Court – SA may be the right forum but

because of lack of legal representation and expenses then UK company settled and took liability. Parent companies can owe a DOC in tort for actions by the subsidiary company. Chandler v Cape Plc [2012]- landmark – employee contracted asbestos and argued that company owed a DOC. Whether parent company exercise enough control over subsidiary to have DOC. Health and Safety policy was actually developed and pushed by parent company and therefore there was a special relationship between employee and parent company because of a reasonable amount of control they had. Must have an aspect of control. Note: the parent company’s veil may be lifted by virtue of its control over the subsidiary.

Commercial Tort – distinct rather than tort. Williams v Natural Life Health Foods Ltd [1998]- accused director of NLHF of being liable for losses he had occurred because he had looked at brochure and relied on the info and invested based on that. He sued because he had lost money. Court- could not sue in personal capacity, director was not liable because he did not take personal responsibility of the brochure, he was representing the company. And was not reasonable for C to rely on the statement. If the tort is deceit rather than negligence, the courts will allow the flow of personal liability. MCA Records Inc v Charly Records Ltd (no 5) [2003]- director went into actions which infringed copyright act, could be held liable because he went into acts and went beyond his power. Entered into realm of prescribing personal liability onto himself. Director liable as a facilitator for tort.

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The principles and cases in the area of lifting the veil require clear understanding. Recent case law has tended towards ascribing liability in tort cases- Okpabi v Royal Dutch Shell Plc [2017]; - COA and SC – waiting for determination. Claims against shell on behalf on Nigeria on basis of HR violation, gas leaks in water. Could not be responsible for Nigeria subsidiary. COA dismissed on absence of evidence. Trying to lift veil to seek compensation from Shell as subsidiary isn’t wealthy. Lungowe v Vedanta Resources Plc [2017]. DOC can exist between subsidiary and PC, lifted veil. There are indeed costs and benefits to the principle of limited liability. Law more open to ascribe liability to parent companies .

Question 1. Harry, a lead miner working for Special Metals Co (South Africa) Ltd, which is a company registered in South Africa, contracted a serious illness as a result of the poor health and safety conditions that he had to work in. His illness meant that his life expectancy was seriously reduced and he was unable to continue working. Special Metals Co (South Africa) Ltd is a subsidiary of Prime Industries Ltd which is a company registered in the United Kingdom. Prime Industries Ltd controls the manner in which Special Metals Co (South Africa) Ltd operates on a daily basis. Harry has decided to take legal action against Prime Industries Ltd in the UK. Advise Harry on the factors that would affect the outcome of his legal action.

Would veil be lifted – company controls subsidiary on a daily basis and may be lifted on virtue of its control. There is a chance it may be lifted. Tortious liability as people have been harmed. -

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Connelly v RTZ Corporation Plc [1998]- miner worked by subsidiary of UK company, got cancer after being exposed to elements in mines, brough action against parent company. Argued that London was not the right place to sue and should have sued the subsidiary. Connelly argued that he could not sue the subsidiary and therefore preferred to sue parent. HOL – Namibia would not have been the right place and therefore London was the right place due to complexity and expenses. The parent company argued to have control over H&S procedures. Case couldn’t go further because it was barred due to time lapse but opened the way to allow parent companies to be liable. Lubbe v Cape Industries Plc [2000]- 3000 people in South Africa brought claim of personal injury for asbestos and whether the UK should be the right forum. Court – SA may be the right forum but because of lack of legal representation and expenses then UK company settled and took liability Chandler v Cape Plc [2012]- landmark – employee contracted asbestos and argued that company owed a DOC. Whether parent company exercise enough control over subsidiary to have DOC. Health and Safety policy was actually developed and pushed by parent company and therefore there was a special relationship between employee and parent company because of a reasonable amount of control they had. Must have an aspect of control. Lungowe v Vedanta Resources Plc [2017]. DOC can exist between subsidiary and PC, lifted veil. Difficulties with prescribing tortious liability.

Question 2. How have statutory provisions eroded the principle in Salomon v Salomon?

The veil may be lifted – removing SLP and limited liability. People may be found liable for the actions of the company. Insolvency Act = Directors may be held personally liable where fraudulent or wrongful trading has occurred. In the statutory exceptions, the principle in S v S (SLP) may be dismissed, lifting the veil and disregarding SLP. Check and balance on companies  removing protection for people who are behaving inappropriately .

Question 3. Why have the courts been reluctant to lift the corporate veil? -

Courts don’t want to interfere with business May discourage people from starting businesses if they will be liable for all the actions The more exceptions to principles of company law (SLP) creates more uncertainty – will they have a separate personality? Only in exceptional circumstances when the veil will be lifted. Parent companies will always have control over subsidiary – only in established exceptions where it will be lifted....