Ronald

issue: Was there an agency relationship between PNL and PNIF and would the
corporate veil be lifted to liquidated the company to pay creditors.

Law: ““Piercing the corporate veil” refers to the judicially imposed exception to
the separate legal entity principle, whereby courts disregard the separateness
of the corporation and hold a shareholder responsible for the actions
of the corporation, as if it were the actions of the shareholder.” (2001: 2)

447. (1) If in the course of the winding up of a Company it appears that any
business of the company has been carried on-
(a) with intent to defraud creditors of the company or the creditors of
any other person or for any fraudulent purpose;

(4) Where any business of a company is carried on with such intent or

for such purpose as is mentioned in subsection (1), every person who
was knowingly a party to the carrying on of the business in that manner
is guilty of an offence.

Smith, Stone and Knight Ltd v Lord Mayor, Aldermen and Citizens of the City of
Birmingham [1939] 4 All ER 116, Atkinson J asked:
The first point was: Were the profits treated as the profits of the company?
(when I say “the company” I mean the parent company). Secondly,
were the persons conducting the business appointed by the parent
company? Thirdly, was the company the head and the brain of the trading
venture? Fourthly, did the company govern the adventure, decide what
should be done and what capital should be embarked on the venture?
Fifthly, did the company make the profits by its skill and direction? Sixthly,
was the company in effectual and constant control? (at 121).

The “Single Economic Unit” Argument

Adams v Cape Industries Plc [1990] Ch. 433

There is no general principle that all companies in a group of companies

are to be regarded as one. On the contrary, the fundamental principle is
that “each company in a group of companies (a relatively modern concept)
is a separate legal entity possessed of separate legal rights and
liabilities:” The Albazero [1977] A.C. 774, 807, per Roskill L.J. (at 532).

If a company chooses to arrange the affairs of its group in such a way

that the business carried on in a particular foreign country is the business
of its subsidiary and not its own, it is, in our judgment, entitled to do so.
Neither in this class of case nor in any other class of case is it open to
this court to disregard the principle of Salomon v. A. Salomon & Co. Ltd .
[1897] A.C. 22 merely because it considers it just so to do.

Analysis:
PNL is the holding company which contain subsidiaries with PNIF being one of
them. Although PNIF is a subsidiary company according to common law in the case of
Adams vs Cape Industries where it states “the fundamental principles is that “each
company in a group of companies is a separate legal entity possessed of separate legal
rights and liabilities. In this case PNFI should not be held responsible for the parent
company liabilities.

Further it goes on to state that if a company chooses to arrange the affairs of its group
in such a way that the business carried on in a particular foreign country the court
would not lift the corporate veil merely because it considers it just to do so.

Recommendation: PNIF would not be liable for the debts incurred by the parent
company PNL.
Kevon
UNIT 2
1. Pretty Nick Limited (PNL) was the holding company in a group containing
subsidiaries in many countries with a diversified range of interests. In 1997, a new
wholly-owned subsidiary, Pretty Nick International Finance Ltd ('PNIF'), was
incorporated in the Cayman Islands. PNL transferred 200 million US dollars to
PNIF who deposited the amount in the Cayman Islands. PNIF then took a loan for
150 million US dollars in the Cayman Islands which was in turn re-lent to PNL. The
directors of PNIF were appointed by the directors of PNL. PNL has now gone into
financial difficulties and its creditors are seeking access to any surplus funds being
held by PNIF to satisfy debts incurred by PNL. Please advise PNIF.
ISSUE: Was the special relationship between the subsidiary PNIF and parent company PNL sham or
façade? OK
LAW: ““Piercing the corporate veil” refers to the judicially imposed exception to the separate legal
entity principle, whereby courts disregard the separateness of the corporation and hold a shareholder
responsible for the actions of the corporation as if it were the actions of the shareholder.” (2001: 2)

. In Smith, Stone and Knight Ltd v Lord Mayor, Aldermen and Citizens of the City of Birmingham [1939] 4
All ER 116, Atkinson J asked:

The first point was: Were the profits treated as the profits of the company? (when I say “the company” I
mean the parent company). Secondly, were the persons conducting the business appointed by the
parent company? Thirdly, was the company the head and the brain of the trading venture? Fourthly, did
the company govern the adventure, decide what should be done and what capital should be embarked
on the venture? Fifthly, did the company make the profits by its skill and direction? Sixthly, was the
company in effectual and constant control? (at 121).

“the parent company had full and exclusive access to the subsidiary’s books, the subsidiary had no
employees other than a manager, it oc-cupied the parent’s premises for no consideration and the
only evidence of its purportedly independent existence was its name on the stationery”
(Ohrenstein,2008: 11).

Where the corporate veil is used as a sham or for a fraudulent or improper purpose, the court is
entitled to look behind the corporate structure (Sutherland, 1993: 26)

“the parent company had full and exclusive access to the subsidiary’s books, the subsidiary had
no employees other than a manager, it oc-cupied the parent’s premises for no consideration and
the only evidence of its purportedly independent existence was its name on the stationery”
(Ohrenstein, 2008: 11).

[t]he “agency” ground has been used to argue that the shareholder of a company (whether it be
a parent company or human shareholder) has such a degree of effective control that the
company is held to be an agent of the shareholder, and the acts of the company are deemed to
be the acts of the shareholder. Agency has also been used interchangeably by the courts with the
phrase “alter ego” (Ramsay and Noakes, 2001: 8).
GOOD. WHAT OTHER CASE SUPPORTS AGENCY BETWEEN COMPANIES?

ANALYSIS: Pretty Nick Limited seemed to be the parent company of wholly-owned PNIF in 1997 since
this newly formed organization was a subsidiary of PNL. The corporate veil should be lifted since this
newly built entity PNIF was simply a sham or façade to wrongfully dispose millions of dollars into PNIF.
PNIF should of ensured that their legal rights of their shareholders were met before PNL coming into play
by assigning members of the board at PNIF without intervention of creditors/any level of shareholders.
PNIF reacted in an alter ego manner since it strictly followed the path and leadership of their parent
company PNL.
YOUR ANALYSIS IS OK, BUT IT FOCUSES ON LAW THAT ADDRESSES INDIVIDUAL
SHAREHOLDERS, RATHER THAN CORPORATE. USE THE LAW FOR CORPORATE
SHAREHOLDERS TO COMPLETE YOUR ANALYSIS.
RECOMMENDATION: PNIF should act in the best interests of its shareholders by winding up its
organization to pay for each shareholder’s contribution.