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Lifting the Corporate Veil

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HomeBrud.gifCompany LawBrud.gifLifting the Corporate Veil

Normally, Companies has a separate legal personality. The courts will not normally look beyond the facade of the company to the shareholders who comprise it.

The screen separating the company from its individual shareholders and directors is commonly referred to as "the veil of incorporation".

Lifting the Corporate Veil is the removal of this shield.

It is the judicial process by which Courts will determine the negative / evil character of a company, if any. In the process the corporate identity of the company would be temporarily / permanently removed.

Situations of lifting the veil

Some instances when this will be necessary are:

To determine the true character of the company

Determination of residence for tax purposes

Evasion of statutory provisions - inference of agency to prevent it

Trustees

Tax evasion and inference of agency to prevent it

Court may lift the veil on the basis that one company is merely carrying on business as the agent of another - so that transactions entered into by the subsidiary can be regarded as transactions of the holding company:

  • Smith, Stone & Knight v Birmingham Corporation: The parent company was entitled to compensation in respect of a business carried on by a subsidiary on the basis that the subsidiary was in reality carrying it on on behalf of the parent company.
  • Firestone Tyre & Rubber Co v Lewellin: An American company formed a wholly-owned subsidiary company in England to manufacture and sell its brand of tyres in Europe. The distributors sent their orders to the subsidiary direct and the orders were met without any consultation with the American company. The subsidiary received the money for the tyres sold to the distributors and after deducting its manufacturing expenses pus 5 percent, it forwarded the balance of the money to the American company. All the directors resided in England except one who was the president of American company and they managed the subsidiaries affairs free from day-to-day control by the American company. It was held that the American company was carrying on business in England through its English subsidiary ‘acting as its agent’ and it was consequently liable to pay UK tax.
  • Adams v Cape Industries Ltd: Adams v Cape Industries plc [1990] Ch 433 is the leading UK company law case on separate legal personality and limited liability of shareholders. The case also addressed long-standing issues under the English conflict of laws as to when a company would be resident in a foreign jurisdiction such that the English courts would recognise the foreign court's jurisdiction over the company.

Fraud and evasion of contractual obligation

Courts will examine the reality behind the company where the company was set up purely to evade a legal obligation, or to allow someone to do something he would not be allowed to do as an individual:

  • Gilford Motor Co Ltd v Horne [1933] Ch 935 is a UK company law case concerning piercing the corporate veil. It gives an example of when courts will treat shareholders and a company as one, in a situation where a company is used as an instrument of fraud.
  • Jones v Lipman [1962] 1 WLR 832 is a UK company law case concerning piercing the corporate veil. It exemplifies the principal case in which the veil will be lifted, that is, when a company is used as a "mere facade" concealing the "true facts", which essentially means it is formed to avoid a pre-existing obligation.
  • In Re: Bugle Press Limited [1961] Ch. 270 , A, B, and C were the only shareholders of the company. A and B held 45% of the shares each and C held 10 %. A and B then made an offer to purchase C’s shares but he refused. A and B then formed a company which made an offer to acquire all the shares of the first company which A and B accepted. The new company purported to acquire C’s shares compulsorily pursuant to Section 210 of the Act. C applied to the Court to disallow the takeover bid. The Court lifted the veil of the new company and disallowed the bid.

Single Economic Unit

In the past, courts have been willing to lift the veil on the basis that a group of companies was not a group of separate persons, but a single economic unit:

  • DHN Food Distributors v Tower Hamlets

Later cases have doubted this principle:

  • Woolfson v Strathclyde Regional Council
  • Adams v Cape Industries Ltd

State of Hostility

In times of war, courts may regard a British company as an enemy alien if the company is controlled by nationals of an enemy country:

  • Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd

Justice and Equity

Courts have sometimes been prepared to pierce the corporate veil where they feel this is in the interests of justice:

  • Re a Company
  • Creasey v Breachwood Motors Ltd

But see

  • Adams v Cape Industries Ltd
  • Ord v Belhaven Pubs Ltd

Yukong Lines Ltd v Rendsburg Investment Corp (Case 34)

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