Veil Lifting - Full Study Notes. PDF

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Summary

 VEIL LIFTINGLifting the Veil-- Occasionally the separate legal identity of the company will be disregarded and this is known as lifting the corporate veil. - Remove the veil of incorporation so that shareholders are liable for the debts and other obligations of the companyUseful points- - Narrow j...

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 VEIL LIFTING Lifting the Veil-

Occasionally the separate legal identity of the company will be disregarded and this is known as lifting the corporate veil. Remove the veil of incorporation so that shareholders are liable for the debts and other obligations of the company

Useful points- Narrow jurisdiction: Lifting the corporate veil is very rare, and is used sparingly. o this is to maintain certainty - shareholders have an expectation that the courts will apply Salomon v Salomon criteria. - when the courts do lift the veil, they will only do this to the extent that is necessary to address the particular circumstance. - if the courts lifted the veil regularly this would undermine Salomon. - many commentators have criticised the courts lack of coherence in lifting the veil. - 3 different instances of piercing the veil: by statute, by contractual term (as this is the intention of the parties), by common law.

Lifting the Veil By: Statute-

Crucial to distinguish between: o Courts decide the separate legal personality is disregarded o Courts decide the separate legal personality is disregarded and the shareholders are made liable for the company’s debts  Only where statute Expressly provides this

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Proceeds of Crime Act 2002- provides the statutory basis for piercing the veil o R v Sale  CA confirmed the 3 circumstances where the court is justified in piercing the veil to give effect to the Proceeds of Crime Act 2002. the courts stated, these 3 situations are not examples of the evasion principle but the concealment principle. 1. Attempts to shelter behind a corporate façade or veil to hide his crime and his benefits from it 2. Offender does acts in the name of the company, which, with the relevant mens rea, constitute a criminal offence which leads to the offender’s conviction

3. Where the transaction or business structures constitute a ‘device’, ‘cloak’ or ‘sham’, to disguise the true nature of the transaction or structure so as to deceive third parties or the courts -

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ss.399, 403-406 Companies Act 2006 o Parent companies must prepare consolidated group accounts, which show the affairs of a parent company and its subsidiaries  this has been described as ‘peeping’ the corporate veil rather than piercing it o Parent company does not become liable for the debts of the subsidiary company s214 Insolvency Act 1986 o imposes liability on directors for wrongful trading when a company continues to trade despite there being no reasonable prospect of them avoiding insolvency  Directors continue to trade rather than minimise their losses o This is not a true example of piercing the corporate veil, as it imposes liability on directors who are running the company, rather than imposing liability on shareholders. Lee v Lee’s Air Farming o Workers Compensation Act 1922 o CASE:  The court refused to lift the veil to the benefit of the shareholder.  Mr Lee incorporated Lee Air Farming Ltd and Mr L held most of the shares. Mr Lee was the governing director and the pilot. He was killed which left behind a widow and children. The Widow claimed under the Company insurance company as Lee was a worker.  Privy Council emphasised that Mr Lee and the company were 2 different entities, and as such Mr Lee had entered into a contract with the company. Thus, Mr Lee was an employee of the company, so he met the requirements of a worker, and the Widow could claim.  so Mr Lee was both master and servant at the same time.  Under Transfer of Undertakings (Protection of Employment) Regulations 2006, the employees have an automatic right to transfer over to the new business.

Common Law: Façade/Shamo Historic: Façade/Sham  At common law the courts have been reluctant to pierce the veil due to the desire to promote certainty.  Argument that if the company is a sham or facade, then the directors will be liable  Gilford Motor Co v Horne

a formal employee who was bound by a covenant not to solicit customers from its employer. Set up a company in competition. Court found the new company to be a front, and they made an order for an injunction.  Jones v Lipman  L entered into a contract with J for sale of land. L then changed his mind, so he formed a company to avoid the sale. Court found the company as a facade, and made an order for specific performance. Company was being used as a mask to avoid his pre-existing obligation to convey property to Claimant.  Trustor v Smallbone  almost £39 million gone missing, and £20 million ending up with another company that was a front for Smallboune. Smallboune was the former managing director of the claimant. C sought that Smallboune was joint and severally liable on the basis of corporate receipt and that the corporate veil needs to be broken to establish the receipt by the company was receipt under the relevant information. In this case, the company was a means for which Smallboune committed unauthorised and inexcusable breaches of duty as a director of the company. so Smallboune was not allowed to receive the money. o Tham: argues that these cases are not examples of lifting the veil but are examples of equitable relief for the breach of contract. o Following the Courts decision in PREST, these cases are unlikely to be decided on veil lifting today. 

Single Economic Unit- where a group of companies is operated as a single unit for business purposes the court shoulld ignore the distinction between them and treat them as one. - Advocated by Denning in DHN Food Distributors v Tower Hamlet- he held hat a group of companies is in reality a single economic unit which should be treated as one. Decision of CA. - Woolfson v Strathclyder Regional Council- HL specifically disproved Denning’s view on group structures. HL Held, that the Veil incorporating would be upheld unless there was a facade. - The single economic unit was further disproved in Adams v Cape Adams v Cape Industries PC - FACTS: o this case considered the liability in the group of companies, and the purpose of the claim was to remove the separate legal personality of the subsidiary to make the parent company liable for its actions. o Cape Industries was the parent company, and subsidiary companies were mind asbestos and South Africa. The asbestos was shipped to Texas where a subsidiary supplied the asbestos to another company in Texas. The employees of the Texas company became ill with Asbestosis, they sued Cape and the subsidiary companies in a Texas Court. Cape, argued that the Texas court did not have

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jurisdiction to hear the case. A case was still brought against Cape for breach of duty of care. DECISION: o Was Cape present in the US through its Subsidiaries for the Texas Court to hear the case? o The claimants had to show in the UK Courts that the veil could be lifted and that the 2 companies should be treated as 1 (single economic unit), the CA rejected the submission. o The CA confirmed, a company will only have presence in a particular jurisdiction by having a fixed place of business, through which it carries business through employees or agent. The English company (CAPE) had no presence in Texas, so the activities of the subsidiary company, which was neither a branch operator or agent, was not enough. CA rejected all arguments that made Cape liable.  Therefore, the Court did consider the agency argument, in order to establish an Agency relationship- one will be looking for a situation where a representative of the company had, for more than a minimal period of time, carried on the company’s business, at or from a fixed place of business. o Court did accept that there was one recognised example of piercing the veil through a facade or sham.

Agency- Company has power to act as agent and may do so for its parent company or its individual shareholders if authorised - likely to arise if there is an agency agreement or other clear circumstances demonstrating that the alleged agent is carrying on the companies business o but difficult to establish when no express agreement - Based on law of agency, so the Principal will be liable.

VTB Capital PLC v Nutritrek International Corp and others- Facts: o the dispute concerned the allegations of fraud and conspiracy brought by the Claimant bank (UK) against 3 companies and a Russian citizen, in relation to the sale of 6 Russian Dairy businesses and 3 associated businesses. VTB lent one of the Russian companies an excess of 2 million dollars, to enable the Russian company to buy a competitor (Nutritrek). The Russian company defaulted on its loan, and VTB claimed it only lent the money based on misrepresentations given by Nutritek. VTB sought to pierce the corporate veil, to make the controllers of Nutritrek liable for breach of contract. - Decision: o Court assumed there was a principle of piercing the veil, but they refused to pierce the veil in this instance. As if the court held to do so, would be to extent the principle further than ever before, and that would be contrary to the principle. o Court mentioned, that VTB could claim in tort, so it was not necessary to pierce the veil, as there was an alternate remedy available.

Prest v Petrodel Resources Ltd-

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Facts: o KEY CASE- SUPREME COURT- leading case on piercing the veil. o Family law case, which involved a divorce and the allocation of assets. the Husband wholly owned and controlled a number of companies, so he was shareholder. These companies owned a number of residential properties in the UK, including the matrimonial home. o The Wife, sought an order to transfer the properties to her on the basis they were held by the companies on trust for her husband. Decision: o Lord Sumption gave the leading judgement  Sumption started off with the principle in Saloman v Saloman. He stated, that there are many instances where the law attributes the acts or property of a company to those who control it without disregarding its separate legal personality. He said that piercing the corporate veil does not refer to those situations  2 Principles  Concealment Principle o does not involve piercing the veil at all, it simply describes cases where the company is used to hide the identity of the real actors.  Evasion Principle o Principle does involve piercing the corporate veil o it describes cases where a person has control of a company subject to a legal right, and puts the company between himself and the legal right, so that the corporate personality would defeat that right or frustrate its enforcement. Evasion Principle: o Piercing the Corporate Veil Piercing the corporate veil is the process of depriving the company of the advantage they would have obtained for being a separate legal personality.  Must identify the shareholders to attach consequences to them, and deprive them of the advantage they would have obtained as a separate legal personality.  so we pierce the veil to prevent the abuse of the company’s separate legal personality  it is not an abuse to simply cause the company to incur legal liability  Hanagan states, the language between piercing and lifting the veil, is very similar. o Another Legal Remedy?  if there is another legal remedy, then piercing the veil will not be necessary

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Prest v Petrodel Resources- the court held there was no basis for piercing the corporate veil. but the husband could be shown as the beneficial owner of the properties from the way the properties were purchased, so an order can be made against those properties in favour of the wife, via a tort remedy. For Jones and Gilford, the court today would not pierce the veil as other remedies could be sought.

Evaluation of Lord Sumptions approach: o Lord Sumption’s approach received qualified approval from the remainder of the court o Baroness Hale stated it wasn’t necessarily possible to classify all cases neatly as concealment or evasion o Difficulties:  evasion/ concealment principle does not provide all encompassing solution

After Prest- R v Sale o concealment not veil lifting - Pennyfeathers Ltd & Others v Pennyfeathers Property Co o evasion principle, and not veil lifting - Antonio Gramsci Shipping Corporation and others v Aivars Lembergs o veil not lifted Tort Liability- Potential for a shareholder to be liable in Tort, due to the existence of a duty of care owed by Shareholders. - Using Tort liability, maintains the principle of separate legal personality - Chandler v Cape PLCo the court concluded that a parent company may be found to owe a duty of care to its subsidiary companies in certain circumstances. A duty of care was owed in this case. o Here, the employees were exposed to asbestos. Both the Parent company and Subsidiary were in the same line of business, the parent companies long experience in the industry gave it superior knowledge, the subsidiary system of work was deemed unsafe and the Parent company knew, Lastly, the parent company ought to have foreseen that the subsidiary or its employees would rely on the parent company using its superior knowledge for its protection. o Court found, Parent company to owe a duty of care to the employees of the subsidiary company....