The Defence of the Corporate Veil – Parent Companies Beware!

Much interest has recently been shown in the potential consequences of the judgment given in Stocznia Gdanska SA -v- Latvian Shipping Co and others, which was substantially upheld by the Court of Appeal on 21 June 2002. Although the case related to Shipbuilding Contracts, the result has reinforced the traditional view that the Courts will not countenance any further erosion of the fundamental principle of English Company Law that a company is to be regarded as a legal entity with a separate legal personality, distinct from that of its members.

However, the case has highlighted potential alternative sources of liability for parent companies establishing wholly owned single-purpose subsidiaries – in many industry sectors, including shipping, property and big-ticket asset finance. The principle of separate corporate personality has been established for over a century. In the leading case of Salomon -v- Salomon & Co. (1897), the House of Lords held that, regardless of the extent of a particular shareholderi??

s interest in the company, and notwithstanding that such shareholder had sole control of the companyi?? s affairs as its governing director, the companyi?? s acts were not his acts; nor were its liabilities his liabilities. Thus, the fact that one shareholder controls all, or virtually all, the shares in a company is not a sufficient reason for ignoring the legal personality of the company; on the contrary, the i?? veil of incorporationi?? will not be lifted so as to attribute the rights or liabilities of a company to its shareholders.

The basic principle established in Salomon in relation to single companies was extended to groups of companies by a comparatively recent decision of the Court of Appeal in Adams -v- Cape Industries PLC (1990). In that case, the Court of Appeal held that, as a matter of law, it was not entitled to lift the corporate veil against a defendant company, which was a member of a corporate group, merely because the corporate structure had been used so as to ensure that the legal liability in respect of particular future activities of the group would fall on another member of the group rather than on the defendant company.

In effect, the Court of Appeal rejected the argument that the corporate veil should be pierced just because a group of companies operated as a single economic entity. A corollary of the basic Salomon principle is that a company cannot be characterised as an agent of its shareholders unless there is clear evidence to show that the company was in fact acting as an agent in a particular transaction or series of transactions. The mere fact that one company is the subsidiary of another (even a wholly-owned subsidiary) is not of itself sufficient to make that subsidiary an agent of its holding company.

Various attempts have been made to convince the Courts that the circumstances warranting the piercing of the corporate veil ought to be broadened. A clear attempt of this kind was made in Trustor AB -v- Smallbone and Others (2001); but, whilst holding that the corporate veil could be pierced on the grounds that one of the recognised exceptions had been established, the Court upheld the strict approach adopted in previous cases by refusing to acknowledge any further exceptions to the basic principles.