Since the Salomon decision, the courts have been called upon to apply the principles of separate legal personality in what might be called difficult situations. In some cases, they have upheld the principle and in others, they did not. The aim of my essay is to critically discuss the above statement with particular reference to developments since 1966. The recognition of the legal personality of the company is clearly its most important feature in law (Schmitthoff, 1976). This recognition derives from the decision in Salomon v Salomon & Co Ltd1.
In this leading case, the House of Lords held that, regardless of the extent of a particular shareholders interest in the company, and notwithstanding that such shareholder has sole control of the company's affairs as its governing director, the company's act were not his acts, nor were its liabilities his liabilities. Thus, the fact that one shareholder controls all or not virtually all, the shares in a company is a sufficient reason for ignoring the legal personality of the company. A veil of incorporation is said to hang between the company and its members in law.
The identification of a company is known as lifting the veil of incorporation. It appears however that it can be often difficult to be precise about the circumstances in which a judge will lift the corporate veil. Keenan et al (2002) say that the power to do so is a tactic used by the judiciary in a flexible way to counter fraud, sharp practice, oppression and illegality. Ferrar (2002) states that the courts have not moved away from Salomon in a systematic way by defining the proper ends of incorporation.
They have instead moved from one case to the next. There is inconsistency and confusion because there are no compounded principles arising out of case law. The courts may lift the veil only to get information involving the persons who control the company. Ottolenghi (1990) coins this as 'peeping behind the corporate veil'. When the courts have harvested the information they require the veil is pulled back down and the company will be considered as a separate legal personality. A good example can be seen in the case of Daimler v Continental Tyre Co2.
The House of Lords decided that the court has a jurisdiction to draw aside the corporate veil in some cases to see who the persons in control of the company's affairs are. If as in this case the persons in control of the company were enemy aliens, the company could so be regarded for the purposes of the law relating to trading with the enemy. It is apparent that the courts have penetrated the veil. The tactic can be expressed as reaching through the veil and seizing the controlling shareholders personally.
By doing this the courts can apportion responsibility upon the shareholders for the acts of the company and ascertain their direct interest in the company's assets. The recognition of a direct interest of the shareholder in the company's assets is very interesting. Although it is important, the courts are reluctant to create a direct relationship between the shareholder and the company's assets. This strict approach stems from the case of Macaura v Northern Assurance Co3 where Lord Buckmaster commented that, 'no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein'.
Lord Wrenbury went further by adding that 'the corporator even if he holds all the shares is not the corporation and neither he nor the creditor of the company has any property rights legal or equitable in the assets of the corporation'. Macaura's claim was dismissed on the ground that he had no insurable interest in the assets. Authors have commented that this ruling was an example of 'carrying the logic of Salomon's case to absurd lengths'. This strict approach has not always been adhered to. Different attitudes have been adopted in different cases.
Most notably the views of Lord Halsbury in the previously mentioned Daimler. Lord Halsbury suggested two orders to which the separate legal entity of the company could have been preserved devoid of any requirement to penetrate the veil. Another way in which the courts can penetrate the veil is by establishing that an agency relationship exists between the controlling shareholder and his company. The House of Lords denied such an existence of this type of relationship in Salomon however, Schmitthoff (1976) and Pennington (2002) both agree that agency is one of the situations in which the court will lift the corporate veil.
Agency however is only a way in which the courts penetrate the veil thus it is not an aim but the means in which the courts lift the veil. The relationship of agency is established by the judiciary with the sole aim of apportioning responsibility to the principal for the acts of his agent. In Smith, Stone & Knight Ltd v Birmingham4 the court held that agency relationship must be apparent at the off set and not inferred merely from the control of a company or ownership of its shares.
If judges were able to infer an agency relationship from the control of a company then the veil could lifted at anytime and this would certainly create unpredictability within the law. In two cases Lord Denning 'ripped' off the veil. The first being Littlewoods Mail Order Stores Ltd v IRC5. In this case Lord Denning declined to treat the subsidiary as a separate and independent entity. He went onto say that the courts often and do draw aside the veil thus pulling off the mask to see what really lies behind a company.
Fork Manufacturing Co Ltd should be regarded for what it is. Thus being the wholly owned subsidiary of Littlewoods. Lord Denning stated 'it is the preacher, the puppet, of Littlewoods, in point of fact and it should be so regarded in point of law'. In second case Wallersteiner v Moir6, even though Lord Denning agreed that the commercial concerns, which were operated by Dr Wallersteiner, were separate legal entities he maintained that they were just puppets of Dr Wallersteiner and he controlled their every movement.
He goes on to say that they were agents to do so as he commanded and the court should pull aside the corporate veil and treat these concerns as being his creatures. His dictum demonstrates that the peeping behind the veil and ascertaining the true relationship between the controlling shareholder and companies actually penetrated the veil in the form of creating the agency relationship. This made the controlling shareholder responsible for the acts of the company.