Fundamental principle of English law

Piercing the corporate veil is a technique by which the courts extend it so it embraces a number of companies. It is the enterprise entity that the courts focus their attention on. Generally the veil is extended in the case of several companies. The provision in s227 Companies Act 1986 is the most prominent example of the legislation relating to the economic entity theory. It is evident that the courts have started to adopt this principle and in some cases have taken this approach to a group of companies, without attributing too much importance to the separate entities of its various components.

When the court is satisfied that the holding company did not have full control over the subsidiary, it did not regard them as one entity. The case of DHN Food Distributors Ltd v London Borough of Tower Hamlets7 illustrates this point. DHN was a holding company, which ran its business through two wholly owned subsidiaries, Bronze and Transport. Bronze owned the premises from which the business was conducted and Transport ran the distribution. Tower Hamlets compulsorily acquired the premises in Bow for the purpose of building houses under the Housing Act 1957.

Compensation was payable to DHN under the Land Compensation Act 1961. For the value of the land Tower Hamlets were prepared to pay i?? 360,000 however refused to pay DHN for disturbance of the their business as they had no interest in the land. The loss of the premises caused all three companies to go into liquidation. Lord Denning stated that there was a tendency to ignore the separate legal entities of the various companies within a group and more regard should be given to the economic framework of the group as whole.

He emphasised that when a parent company owns all the shares of the subsidiaries, these subsidiaries are bound to the parent company therefore these three companies should, for present purposes, be treated as one. Shaw LJ stated 'why then should this relationship be ignored in a situation in which to do so does not prevent abuse but would on the contrary result in what appears to be a denial of justice'. It cannot be said from this case that there is a general principle of group entity. Much depends upon the circumstances of the case.

Woolfson v Strathclyde Regional Council8 emitted uncertainty over the judgment in DHN as to the whether the Court of Appeal had appropriately applied the principle that it is apt to pierce the veil only where special circumstances exist, indicating that it is a mere facade concealing the true facts. The House of Lords did not follow the ruling in DHN Foods even though the facts were comparable. The ground behind this was that the subsidiaries in Woolfson were operational trading companies and not as in DHN, mere shells. It is evident that the English Courts have come close to adopting the 'single economic unit' approach.

However, both DHN and Woolfson are generally now regarded as having been decided on their own facts and not to be of general application. In Adams v Cape Industries plc,9 the Court of Appeal firmly rejected the 'single economic unit' test, stating that groups were entitled to use the corporate veils to ring fence liabilities (Bromilow, 1998). In Adams, a company in the USA was alleged to be liable for injuries caused by asbestos dust but the US company was insolvent. The plaintiffs therefore sued its UK parent, Cape Industries plc. The claim failed.

The Court of Appeal held that Cape was entitled to the protection of the separate legal personality and limited liability rules. The subsidiary was a separate company, not Capes agent and the group could not be regarded as a single economic unit for this purpose. The court went further and said 'the law will not permit the lifting of the corporate veil because the interest of justice is better served doing so'. It would appear that the courts are prepared to lift the veil in situations where the corporateness has been abused for an unlawful or improper use.

By doing this they are said to be ignoring the veil completely. In Guilford Motor Co Ltd v Horne10 an ex managing director subject to a post contract non-solicitation clause set up a company to carry on a competing business. The court held that the company was a mere cloak or sham which was a mere device for enabling him to breach his contract. The court issued an injunction against him and the new company. Another illustration can be seen in Jones v Lipman11. Lipman contracted to sell land to Jones, but then changed his mind. He set up a company to which he sold the land.

He hoped that his company as a separate person would be able to keep the land. The court ordered both him and the company to transfer the land as originally agreed. In his judgement, Russell J made reference to Guilford and said, 'the defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face, in an attempt to avoid recognition by the eye of equity'. The more recent decision in Creasey v Breachwood Motors Ltd12 was important because it established that a company can be a facade even though it was not originally incorporated with any deceptive intent.

However the decision by Mr Southwell QC in Creasey has been expressly overruled by the Court of Appeal in Ord v Belhaven Pubs Ltd13. Bromilow (1998) believes that the misinterpretation of Creasy led to the overrulement in Ord. His main argument being that on its proper interpretation Creasy provided a sensible and appropriate basis on which the courts could look behind the corporate personality. In Ord the Court of Appeal granted the appeal on the ground that there was justification for lifting the veil in this particular instance since nothing improper was done by neither the companies nor their directors.

There was no evidence to suggest that the company was a mere facade or concealed the true facts. For the same reason, the Court of Appeal also expressly rejected the ruling in Creasey. In reaching this decision the Court of Appeal cited with approval its own previous decision in Adams v Cape Industries plc. However if the Court of Appeal considered themselves bound by Adams, then they had to allow the appeal and refuse to lift the veil. In conclusion it is useful to look at the most recent cases where the corporate veil has been considered.

The case of Williams's v Natural Life Health Foods14 illustrates that a director can avoid the risk of personal liability by trading through a limited company so long as he does nothing to show that he is accepting any personal liability for what he does. However a director cannot hide behind the vicarious liability of his company where he is fraudulent. This was the situation in Standard Chartered Bank v Pakistan National Shipping Corporation (No. 2)15 where a director knowingly and deliberately made a false statement in order to obtain payment on a letter of credit.

The reasoning in Williams could not apply in this case, as this was fraud. Lord Hoffman said that 'no-one can escape liability for his fraud by saying I wish to make it clear that I am committing this fraud on behalf of someone else and am not to be personally liable'. However in this case the director was liable under tort law as he had personally committed a fraud. Most recently the veil of incorporation was discussed in Trustor AB v Smallbone16. This case is significant because the Court of Appeal were invited to lay down rules as to when the veil of incorporation may be lifted.

The Court of Appeal lifted the veil on the first two grounds however refused to lift the veil in that it was necessary that the veil should be lifted in the interests of justice. They cited Adams v Cape Industries plc as their authority which held that the veil should not be lifted merely because legal technicalities resulted in injustice. It may be said that the courts will now only lift the veil of incorporation where a company is a sham or where the company is a party to a fraud. This recent judgement has confirmed that the courts will not countenance any further erosion of this fundamental principle of English law.