Question 2

2.0 Introduction

Legal entity is separate and independent from its founders who own property, enter
into commitments and act as a plaintiff or defendant in court. Immanent feature of
independent nature of the legal entity defines as limited liability of its founders which they
are not liable for the obligations of a legal entity, for example, under the “veil.” This doctrine
is known as the doctrine of “lifting the veil of incorporation” or “piercing the veil of
incorporation” and is present in the corporate law of many countries, including the UK and
the USA. In the UK, the concept of joint – stock company, which is separate from its
shareholders, was first introduced to the law by the Act of 1844 (Maltby 1998). Companies
received limited liability later in 1855 (Cameron 2013). In 1862, there was adopted the first
Companies Act (Pulbrook 1865), which has become a progenitor of Companies Act of 2006
(The National Archives 2007) (ESSAY.WS ,2007).

Based on the concepts of English Company Law, the most famous Company Law is
the case of Salomon v Salomon & Co Ltd(1896) UKHL 1,(1897) AC 22. The company as a
separate entity was firmly established in the landmark decision in Salomon v. Salomon &
Co. Ltd. Salomon, a sole trader, sold his manufacturing business to Salomon & Co. Ltd.
which the company he incorporated. The company and Mr. Salomon were one and the
same or alternatively, that the company carried on business on Salomon’s behalf. On appeal,
the House of Lords held that Salomon & Co. Ltd. that the debts of the corporation were not
the debts of Mr. Salomon because they were two separate legal entities; and that once the
artificial person has been created, “it must be treated like any other independent person
with its rights and liabilities appropriate to itself.” ( Singh.S,2013).

The doctrine of “lifting the veil of incorporation” admits the fundamental possibility
of imposing liability for company’s obligations to its controlling person. There can be an
opposite situation, when the penalty for a person or entity is drawn to the assets the company
under control. Sometimes shareholder himself requires “piercing the veil of incorporation”.
This usually it concerns not obligations, but the rights of company, which shareholder wishes
to have. “Lifting the veil”, in fact, means that for the purposes of the dispute and only for this
purpose, the Court acknowledges that the company is not separate entity from the controlling
person, and attributes obligations and/or rights of company to this person (Macmillan 2000).
However, “lifting the veil” is allowed only in certain exceptional circumstances, which are
discussed below. (ESSAY.WS,2007).

The courts will lift the veil of incorporation if the veil has been misused to protect the
owners or management of a company such that creditors and third parties are disadvantaged.
In such instances, the veil of incorporation must be lifted to identify the persons responsible
and make them liable. However, the veil will only be lifted in certain situations: Perman Sdn
Bhd& Ors v European Commodities Sdn Bhd& Anor (2005) 4 CLJ 750. Nonetheless, the
categories where the veil is lifted are probably not closed. In this case, Gopal Sri Ram JCA
held that “it not open to a court to disregard the corporate personality of a limited company
save in very exceptional circumstances” and that “a litigant who seeks the court’s
intervention to pierce the corporate veil must establish special circumstances showing that the
company in question is a mere façade concealing the true facts.” (Krisnan, Rajoo &
Vergis,2015).

2.2 Fraud and Avoid Contractual Liability

One of the grounds for lifting of the corporate veil is fraud. The courts have pierced
the corporate veil when it feels that fraud is or could be perpetrated behind the veil. The
two classic cases of the fraud exception are Gilford Motor Company Ltd v. Horne (1993)
Ch 935, in which Mr. Horne was an ex-employee of The Gilford motor company and his
employment contract provided that he could not solicit the customers of the company. In
order to defeat this he incorporated a limited company in his wife’s name and solicited the
customers of the company. The company brought an action against him. The Court of
appeal was of the view that “the company was formed as a device, a stratagem, in order to
mask the effective carrying on of business of Mr. Horne. “In this case it was clear that the
main purpose of incorporating the new company was to perpetrate fraud.” Thus the court of
appeal regarded it as a mere sham to cloak his wrongdoings. (ESSAY.WS ,2007).

In the second case of Jones v. Lipman (1962) 1 WLR 832, a man contracted to sell
his land and thereafter changed his mind in order to avoid an order of specific performance
he transferred his property to a company. Russel J specifically referred to the judgments in
Gilford v.Horne (1993) Ch 935 and held that the company here was “a mask which (Mr.
Lipman) holds before his face in an attempt to avoid recognition by the eye of equity” he
awarded specific performance both against Mr. Lipman and the company. Under no
circumstances will the court allow any form of abuse of the corporate form and when such
abuse occurs the courts will step in (Anusuya.S,2000-2016).
2.3 Group Of Companies
The second ground for piercing of corporate veil covers group enterprises. Sometimes
in the case of group of enterprises the Solomon principal may not be adhered to and the
court may lift the veil in order to look at the economic realities of the group itself. In the
case of D.H.N. Food products Ltd. v. Tower Hamlets London Borough Council(1976) 1
WLR 852, it has been said that the courts may disregard Solomon’s case whenever it is just
and equitable to do so. The court of appeal thought that the present case where it was one
suitable for lifting the corporate veil. There are three subsidiary companies were treated as
a part of the same economic entity or group and were entitled to compensation
(Anusuya.S,2000-2016).

Lord Denning has remarked that we know that in “many respects a group of
companies are treated together for the purpose of accounts, balance sheet, and profit and
loss accounts”. The nature of shareholding and control would be indicators whether the
court would pierce the corporate veil. In the case of Woolfson v Strathclyde Regional
Council [1978] UKHL 5 ,held that there was “no basis consonant with the principle upon
which on the facts of this case the corporate veil can be pierced to the effect of holding
Woolfson to be the true owner of Campbell’s business or the assets of Solfred, “the two
subsidiary companies that were jointly claiming compensation for the value of the land and
disturbance of business. The House of Lords in the above mentioned case had remarked
“properly applied the principle that it is appropriate to pierce the corporate veil only where
special circumstances exist indicating that it is a mere facade concealing the true facts” In
the figurative sense facade denotes outward appearance especially one that is false or
deceptive and imports pretence and concealment. That the corporator has complete control
of the company is not enough to constitute the company as a mere facade rather that term
suggests in the context the deliberate concealment of the identity and activities of the
corporator (Anusuya.S,2000-2016).

The separate legal personality of the company, although a “technical point” is not a
matter of form it is a matter of substance and reality and the corporator ought not, on every
occasion, to be relieved of the disadvantageous consequences of an arrangement voluntarily
entered into by the corporator for reasons considered by the corporator to be of advantage
to him. In particular “the group enterprise” concept must obviously be carefully limited so
that companies who seek the advantages of separate corporate personality must generally
accept the corresponding burdens and limitations (Anusuya.S,2000-2016).

In some cases the corporate veil has not been lifted prime examples of that are Adams
V. Cape Industries (1990) Ch 433. This was a case involving a foreign judgment against a
company. The court in this case held that each company in the group is a separate entity.
However one area where the courts have been particularly reluctant to recognize the concept
of group entity is with relation with corporate debts. Though it is not possible to in absence of
agency or trust to hold one group liable for the debts of another in America equitable
doctrines are applied and in New Zealand as well as Ireland there are statutory provisions for
pooling of assets (Anusuya.S,2000-2016).
2.4 Agency
The third ground for piercing the corporate veil is agency. In the case of Salomon v A
Salomon & Co Ltd (1896) UKHL 1, (1897) AC 22 expressed that the company was nothing
but an agent of Solomon. “That this business was Mr. Solomon’s business and no one else’s;
that he chose to employ as agent a limited company; that he is bound to indemnify that
agent the company and that this agent, the company has lien on the assets………” However
on appeal to the House of Lords it was held that a company did not automatically become
an agent of the shareholder even if it was a one man company and the other shareholders
were dummies (Anusuya.S,2000-2016).

A company having power to act as an agent may do so as an agent for its parent
company or indeed for all or any of the individual members if it or they authorize it to do so.
If so the parent company or the members will be bound by the acts of its agent so long as
those acts are within actual or apparent scope of the authority. But there is no presumption
of any such relationship in the absence of an express agreement between the parties it will
be difficult to establish one. In Adams v Cape Industries plc (1990)Ch 433 case attempt to
do so failed. In cases where the agency agreement holds good and the parties concerned
have expressly agreed to such an agreement them the corporate veil shall be lifted and the
principal shall be liable for the acts of the agent (Anusuya.S,2000-2016).

The courts may pierce the corporate veil to look at the characteristics of the
shareholders. In the case of The Abbey Malvern Wells Ltd v Ministry of Local Government
and Planning (1951) Ch 728 the court lifted the corporate veil. In this case a school was run
like a company but the shares were held by trustees on educational charitable trusts. They
pierced the veil in order to look into the terms on which the trustee held the shares.
Sometimes tax legislations warrant the lifting of the corporate veil. The courts are prepared
to disregard the separate legal personality of companies in case of tax evasions or liberal
schemes of tax avoidance without any necessary legislative authority (Anusuya.S,2000-
2016).

2.5 Trust

The courts may pierce the corporate veil to look at the characteristics of the
shareholders. In the case of The Abbey Malvern Wells Ltd v Ministry of Local Government
and Planning (1951) Ch 728 the court lifted the corporate veil. In this case a school was run
life a company but the shares were held by trustees on educational charitable trusts. They
pierced the veil in order to look into the terms on which the trustee held the shares
(Anusuya.S,2000-2016).

2.6 Conclusion

As conclusion, development of civil law led to development of a list of exceptions to

the principle that legal entity is separate and independent from its founders. This doctrine is
called “lifting the veil of incorporation”. It is present in the corporate law of many countries,
including the UK, and the USA. English law is one of the most developed in this sphere.
Basic principles of the independence of the legal person were laid at the end of 19th century.
Since they have been constantly actively developed and refined.The concept of «lifting the
veil of incorporation» is of imperative importance. And it is used not only in civil law, but
can have criminal legal context too. ESSAY.WS. (2009).
ESSAY.WS. (2009). The concept “lifting the veil of incorporation”essay. Retrieved from
http://www.essay.ws/the-concept-lifting-the-veil-of-incorporation-
essay/?from=singlemessage&isappinstalled=0

Singh.S(2013). Lifting of corporate veil with reference to leading case. Retrieved from
http://artismc.com/index.php/blogs/view/55/221/

Krishnan,L.& Rajoo,P. & Vergis,A.C.(2015) Principles of Business and Corporate Law,

Malaysia.

Anusuya.S.(2000-2016). Lifting the corporate veil. Retrieved from

http://www.legalserviceindia.com/articles/corporate.htm