4. Nature of the Corporation, Piercing the Corporate Veil
Reading:
- Pettet’s Company Law, chapter 2 pages 37-48 (section 2.1 from 2.1B ‘Piercing the corporate veil’ to the end of that
section).
- Gower’s Principles of Company Law Chapter 7
Definition................................................................................................................................. 1
Statutory veil lifting..................................................................................................................2
Common law veil piercing........................................................................................................2
Sham or facade.................................................................................................................. 2
Evasion of existing legal obligations (Sham and facade continued)....................................4
Agency................................................................................................................................ 5
Assumption of personal responsibility.................................................................................7
Single economic unit...........................................................................................................7
Interests of justice............................................................................................................... 8
Recent developments in piercing the veil - Prest v Petrodel....................................................9
Prest v Petrodel [2013] UKSC..........................................................................................10
Textbook notes from Pettet Lowry & Reisberg......................................................................16
Definition
Starting point: Salomon
● Upon incorporation, separate personality ensues
● Members’ liability limited, limited liability even for controlling shareholders
● → Are there circumstances in which we can disregard separate personality?
What does “veil piercing” mean?
● “to pierce the corporate veil is an expression that I would reserve for treating the rights
or liabilities or activities of the company as the rights or liabilities or activities of
its shareholders”, Atlas Maritime Co S.A. v Avalon Maritime Ltd (no 1) [1991] 4 All ER
769, [779] (Staughton LJ)
○ Treating the rights + liabilities of the company as the rights + liabilities of
its shareholders
● “disregarding the separate personality of the company … only … those cases which are
true exceptions to the rule in Salomon”, Prest v Petrodel [2013] UKSC 34, [16] (Lord
Sumption)
○ Veil piercing only in cases where there is a “true exception”
What are the consequences of veil piercing?
● Looking behind the veil, what are the shareholders’ facts, what other avenues can we
take to render them liable
● Corporate personality disregarded
● To render shareholders liable (as an exception to the general rule that they are
shielded by corporate personality)
● BUT
, ○ Only to remedy a particular wrong
○ This is not a wholesale disregard of incorporation
Challenges:
● Undermines Salomon
● Potential commercial implications
● When will the court pierce the veil?
● Lack of coherence? Uncertainty
Statutory veil lifting
Often focuses on group scenarios, which would mean that each company in the group would
file its own accounts.
● s 399, CA 2006 (group accounts)
● ss 409-410, CA 2006 (parent to provide subsidiary information)
● s 993, CA 2006 and s 213, IA 1986 (fraudulent trading), s 214, IA 1986 (wrongful
trading) are sometimes defined as statutory veil piercing but in reality are simply
additional offences.
Continue to note piercing vs. lifting
- Piercing to do with allocating liability - against limited liability
Common law veil piercing
Sham or facade
Where the court accepted that the company was a sham/facade →
therefore it is justified in piercing the veil
Ask:
● Is the company a mere sham or facade?
● Defining facade:
○ Ordinary construction
○ Concealing true facts
○ Outward appearance or front, especially a deceptive one
● In Prest, the point was made: “is sham even the correct term? Veil piercing implies
that the company exists”
● Note one purpose of incorporation is to limit liability: need to figure out where the tipping
point is
, *Woolfson v Strathclyde Regional Council (1979) 38 P&CR 521:
● Piercing the veil only when the company is a facade concealing true facts.
● Facts: when selling land, you need 2 payments: loss of land payment AND an uplift: in
selling the land, you’ve lost not just the land itself but the value of your business.
○ In a holding company, one subsidiary is owned by Mr and Mrs W (Campbell Ltd).
999 shares to Mr W, 1 share to Mrs W.
○ When the local authority bought the land from Campbell Ltd, Ws did not
have to pay the uplift.
● Issue: W argued that they should receive both payments (in selling the land), but in
reality the Ws were the business proprietors.
● Held: That would mean piercing the veil, which was not the case here.
○ You can’t structure for tax gain on the one hand and then argue that it’s a sham.
Because it means arguing that it is appropriate to pierce the veil
○ ‘ …it is appropriate to pierce the corporate veil only where special circumstances
exist indicating that it is a mere facade concealing the true facts...’
○ Company not a facade – company structure used for tax gain.
● Context of the cases: slum clearances, new concepts in how cities should be built, local
authorities took up ideas / huge tracts of cities
● The court distinguishes this case from: DHN Food Distribution case
*Adams v Cape Industries plc [1990] BCLC 479
● Facts: Cape Industries holding for subsidiaries NAAC (marketing of asbestos) (USA) and
Multiple Mining Entities (South Africa)
● Employees of the company in the US became seriously ill with asbestosis, sued the
employer and were awarded judgment in their favour.
● Issue: argued that the holding company should be liable for the judgment debt.
● The argument:
○ Single economic unit?
○ Agency between Cape and NAAC?
○ Subsidiaries were a facade?
■ The business was at all times Cape plc, and that Cape knew they were
working with a dangerous substance
● Held: ‘it is appropriate to pierce the veil only where special circumstances exist
indicating that it is a mere façade concealing the true facts’ (Woolfson approach)
○ This exists only when you are evading the rights of a relief a third party
already possesses (where liability already exists)
○ Cannot pierce the veil in relation to future issues which might arise, not the rights
of relief a third party may acquire in the future
○ Like it or not, what Cape did was perfectly acceptable and inherent within Eng
company law - that you can anticipate that you might face liabilities in the future
and incorporate a company to reduce your exposure to that.
○ Did not pierce the veil.
Reading:
- Pettet’s Company Law, chapter 2 pages 37-48 (section 2.1 from 2.1B ‘Piercing the corporate veil’ to the end of that
section).
- Gower’s Principles of Company Law Chapter 7
Definition................................................................................................................................. 1
Statutory veil lifting..................................................................................................................2
Common law veil piercing........................................................................................................2
Sham or facade.................................................................................................................. 2
Evasion of existing legal obligations (Sham and facade continued)....................................4
Agency................................................................................................................................ 5
Assumption of personal responsibility.................................................................................7
Single economic unit...........................................................................................................7
Interests of justice............................................................................................................... 8
Recent developments in piercing the veil - Prest v Petrodel....................................................9
Prest v Petrodel [2013] UKSC..........................................................................................10
Textbook notes from Pettet Lowry & Reisberg......................................................................16
Definition
Starting point: Salomon
● Upon incorporation, separate personality ensues
● Members’ liability limited, limited liability even for controlling shareholders
● → Are there circumstances in which we can disregard separate personality?
What does “veil piercing” mean?
● “to pierce the corporate veil is an expression that I would reserve for treating the rights
or liabilities or activities of the company as the rights or liabilities or activities of
its shareholders”, Atlas Maritime Co S.A. v Avalon Maritime Ltd (no 1) [1991] 4 All ER
769, [779] (Staughton LJ)
○ Treating the rights + liabilities of the company as the rights + liabilities of
its shareholders
● “disregarding the separate personality of the company … only … those cases which are
true exceptions to the rule in Salomon”, Prest v Petrodel [2013] UKSC 34, [16] (Lord
Sumption)
○ Veil piercing only in cases where there is a “true exception”
What are the consequences of veil piercing?
● Looking behind the veil, what are the shareholders’ facts, what other avenues can we
take to render them liable
● Corporate personality disregarded
● To render shareholders liable (as an exception to the general rule that they are
shielded by corporate personality)
● BUT
, ○ Only to remedy a particular wrong
○ This is not a wholesale disregard of incorporation
Challenges:
● Undermines Salomon
● Potential commercial implications
● When will the court pierce the veil?
● Lack of coherence? Uncertainty
Statutory veil lifting
Often focuses on group scenarios, which would mean that each company in the group would
file its own accounts.
● s 399, CA 2006 (group accounts)
● ss 409-410, CA 2006 (parent to provide subsidiary information)
● s 993, CA 2006 and s 213, IA 1986 (fraudulent trading), s 214, IA 1986 (wrongful
trading) are sometimes defined as statutory veil piercing but in reality are simply
additional offences.
Continue to note piercing vs. lifting
- Piercing to do with allocating liability - against limited liability
Common law veil piercing
Sham or facade
Where the court accepted that the company was a sham/facade →
therefore it is justified in piercing the veil
Ask:
● Is the company a mere sham or facade?
● Defining facade:
○ Ordinary construction
○ Concealing true facts
○ Outward appearance or front, especially a deceptive one
● In Prest, the point was made: “is sham even the correct term? Veil piercing implies
that the company exists”
● Note one purpose of incorporation is to limit liability: need to figure out where the tipping
point is
, *Woolfson v Strathclyde Regional Council (1979) 38 P&CR 521:
● Piercing the veil only when the company is a facade concealing true facts.
● Facts: when selling land, you need 2 payments: loss of land payment AND an uplift: in
selling the land, you’ve lost not just the land itself but the value of your business.
○ In a holding company, one subsidiary is owned by Mr and Mrs W (Campbell Ltd).
999 shares to Mr W, 1 share to Mrs W.
○ When the local authority bought the land from Campbell Ltd, Ws did not
have to pay the uplift.
● Issue: W argued that they should receive both payments (in selling the land), but in
reality the Ws were the business proprietors.
● Held: That would mean piercing the veil, which was not the case here.
○ You can’t structure for tax gain on the one hand and then argue that it’s a sham.
Because it means arguing that it is appropriate to pierce the veil
○ ‘ …it is appropriate to pierce the corporate veil only where special circumstances
exist indicating that it is a mere facade concealing the true facts...’
○ Company not a facade – company structure used for tax gain.
● Context of the cases: slum clearances, new concepts in how cities should be built, local
authorities took up ideas / huge tracts of cities
● The court distinguishes this case from: DHN Food Distribution case
*Adams v Cape Industries plc [1990] BCLC 479
● Facts: Cape Industries holding for subsidiaries NAAC (marketing of asbestos) (USA) and
Multiple Mining Entities (South Africa)
● Employees of the company in the US became seriously ill with asbestosis, sued the
employer and were awarded judgment in their favour.
● Issue: argued that the holding company should be liable for the judgment debt.
● The argument:
○ Single economic unit?
○ Agency between Cape and NAAC?
○ Subsidiaries were a facade?
■ The business was at all times Cape plc, and that Cape knew they were
working with a dangerous substance
● Held: ‘it is appropriate to pierce the veil only where special circumstances exist
indicating that it is a mere façade concealing the true facts’ (Woolfson approach)
○ This exists only when you are evading the rights of a relief a third party
already possesses (where liability already exists)
○ Cannot pierce the veil in relation to future issues which might arise, not the rights
of relief a third party may acquire in the future
○ Like it or not, what Cape did was perfectly acceptable and inherent within Eng
company law - that you can anticipate that you might face liabilities in the future
and incorporate a company to reduce your exposure to that.
○ Did not pierce the veil.
