The judiciary should be prepared to "lift the corporate veil" in the interests of justice. Discuss. Following the judgement of that found in Salomon1, it has become a fundamental principle in company law that the corporate veil ( or veil of incorporation), often enables members of a company a sense of limited liability, protected by the principle that constitutes the "separate personality" of the company.
In the following discussion, we shall establish to what degree this ruling and subsequent ones are adhered to in regard to both a corporate sense, but also in a judicial capacity by the courts. Supported by Salomon, upon incorporation, a firm becomes a separate legal entity distinct and separate from the individuals contained within it, such as shareholders and its directors2. As a company is a corporation, it is therefore seen as a person before the eyes of the law, quite distinct from the individuals that are its members.
In this way, as a distinct person, the company can own property, have rights and therein be subject to certain liabilities3. Furthermore, the company does not hold any property for example merely as an agent or trustee for its members4, they cannot sue individually or collectively to enforce rights which the company has against third persons otherwise than in exceptional circumstances5, nor can they be sued in respect of its liabilities6.
This legal recognition of the corporate entity's independence strengthens what we have established as the corporate veil, and separates the legal identity of the company from that of its individual constituents. However, the principle may cause a certain amount of difficulty and it has become apparent that the veil may be lifted so that the human and commercial reality behind the corporate personality can be taken account of7 ultimately in the interests of justice.
Indeed, the law therefore has had to develop so as to not deny the obvious legitimate opportunities and economic benefits that the veil of incorporation provides. An example being the encouragement for the setting up of financially risky ventures without the possibility of the individual facing bankruptcy8 – and the abuses that the veil is open to by allowing the veil to offer a shield of inequity to those that wish to deflect the power of the provisions of the Companies Act9.
In this way, the corporate veil can be seen as a tool to further and encourage investment within companies, especially as the liability for doing so may be limited. Regardless of some disdain for companies to have separate legal personality10, without the veil protecting individuals, corporations may find it increasingly hard to seek external and internal investment in the aim to expand. A further example can also be seen if a subsidiary company declines into insolvency, the parent company may not necessarily be liable for any debts caused therein11.
This last point therefore introduces the theme as to when the corporate veil should be lifted in the interests of justice. Furthermore, although the courts would generally not hold an individual liable for an action that is legally the responsibility of the corporation, it may do so if the individual's actions were to perpetrate a fraud or to attempt to pass personal liability to the company.
Moreover, as shall be discussed, the lifting of the veil may ensue if holding only the corporation liable would be unfair to the claimant in certain circumstances. Even through the advantages detailed above regarding the use of the corporate veil, the internal affairs of a company are never completely concealed from view since publicity has always accompanied incorporation12. In addition to this, there are several situations where the courts are prepared to lift the veil of incorporation.
Either to diminish the corporate personality to account for individual members, or to ignore the separate personality of several companies in a group, in favour of the economic entity constituted by the group as a whole. As suggested, the Companies Act 1985 enables a company to be incorporated with a separate legal identity and limited liability. However, specific provisions of the Act13, and similarly other related legislation14, have, in certain instances paved the way for the piercing of the corporate veil.
Yet having said this, the courts usually require a clear and unambiguous statutory provision when it comes to holding individuals accountable15. For the majority of the examples that shall be given below, judges do not seek to extinguish the corporate veil so as to deny the existence of the corporate entity; instead they are aimed at penalising the human constituents of a company for some form of malpractice in the overall interest of maintaining law and justice.
Furthermore, when it does come to the possibility of lifting the veil, some judges are unwilling to do so lightly, which we should examine as to whether a more lenient approach should be adopted by the courts16. "It is only in special circumstances which indicate that there 'is a mere fai?? ade concealing the true facts' that it is appropriate to pierce the corporate veil… 17" Thus, the scope and rational of the doctrine provides checks and balances whereby the court has various legal mechanisms by which it can pierce the protective layer of the veil where needs justify it.
The courts will look at the realities of the situation when deciding whether or not it is prudent to lift the veil, and impose liability to those responsible for the actions of the company18. Firstly, it was seen in the case of Daimler19, that the courts have been willing to lift the corporate veil when the country is at war, or a degree of economic conflict. The justification for this being, that upon lifting the veil, it would prevent, for example, the payment of monies from companies registered within the UK to terrorist organisations or groups.
This can be seen to be extremely relevant with the current stance given regarding acts of terror by the British government, and subsequently through the introduction of the Terrorism Act therein20. Obviously this example of the judicial lifting of the corporate veil is rather extreme, and has a limited amount of application, but it is good to give an example as to how the case law has developed the test for checks and balances regarding this issue.
Further to this, the avoidance of legal obligations of individuals within a company has prompted other significant case law regarding the doctrine in question. It is helpful at this point to look back at the Salomon decision, and to gauge that the motive behind a company's incorporation is highly relevant to the determination of whether or not the corporate veil may be dislodged by the courts to impose a liability on the individual members21.
Subsequently following the judgement in Salomon, the legislature as a whole have always been concerned to minimise the extent to which the principle of separate legal entity could be used as an instrument to perpetrate fraud. As a result, the offence of fraudulent trading for example was introduced within the Insolvency Act 198622. The general lifting of the veil is found when in the course of the winding up of a company, it appears to the court that any business of the firm has been carried out with the intent to defraud creditors of the company for any fraudulent purpose.
Therein, the courts can rule that those individuals can be called upon to contribute to the overall debts of the company because of their own, individual, activities involved. In Re Todd23, a director was found liable to contribute over i?? 70,000 to the debts of the company, and moreover, there is always a possibility that criminal liability for the individual could ensue thereafter following the piercing of the veil to account for their actions.
Through statute such as this, a good example can be seen on how the judiciary are able to use legislation made available to them to hold directors24 and members of the company liable for fraudulent activities. This tool enables the courts to maintain the principle found in Salomon, but also acts as a good measure of checks and balances to hold corporations accountable for any degree of malpractice engaged by individuals within the company.