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The corporate veil is an outdated concept.

Quite rightly, it is
lifted by the judiciary at every oppurtunity and certainly
whenever justice demands it. Discuss.

Fuller once said, the trouble with the law does not lie in its
use of concepts, nor the use of 'lump concepts', the difficulty
lies in part... in the fact that we have often forgotten that the
'lumps' are the creation of our own minds.' Pioneering the
area of separate legal personality, the orthodox case of
Salomon v Salomon exists both as a powerful metaphor and
a judicial reality. It should be understood that the 'company
is at law a different person' as per Lord Macnaghten words
culminating to the ratio of Salomon.
In Salomon, we see an evident use of the metaphor to vividly
express the fact that Salomon's incorporation was legitimate
according to legislation and therefore he should be allowed
to benefit from limited liability.In this case Mr Salomon a
shoe manufacturer had sold his business to a limited liability
company where he and his wife and five children where the
shareholders and directors of the company (to comply with
the Companies Act of 1862 which required a minimum of 7
members). Vaughan Williams J in the High Court accepted
the argument that since Mr. Salomon had created the
company solely to transfer his business to it, at prima facie,
the company and Salomon were a singular unit; the
company was in reality his agent and he as principal was
liable for debts to unsecured creditors. The COA was no
different and also ruled against Mr.Salomon, reading that the
shareholders were "mere puppets" in this showcase and he
was the brains of the company. The lord justices in multiple
occassions described the company as a myth and a fiction
and said that the incorporation of the business by Mr.
Salomon had been a scheme to enable him to carry on as

before but with limited liability.


Unanimously the House of Lords stepped in and recognised
that one trader and six dummies would suffice and that the
statutory conditions were mere machinery. Held that the
formation of the company was complete and the veil of
incorporation was what made Mr. Salomon the individual,
different from Salomon & Co. Ltd once all rules and
regulations had been complied with. This was also
propounded in Macaura v Nothern Assurance where it was
upheld that a corporation is a separate person and its
members are not liable for its debts.
To lay down the ingredients of how a company is formed
under the Company Act 2006, the two vital steps include
how once the registrar issues the certificate of incorporation,
the company comes into existence with its separate legal
personality, or rather it may continue in existence
indefinitely" as per section 16(2) CA 2006. This principal
where a company is a legal person distinct from its members
could be referred to as the 'veil of incorporation'. The
reference to veil here is to a fictional veil between the
company and its members. It should be understood that
under certain circumstances the court may be poised to
entirely disregard this principle and pierce the corporate veil
or will ignore the corporate veil entirely to reach the person
behind the veil or to reveal the true form and character of
the concerned company. A clear rationale for this is that the
law will not allow the corporate form to be a venue to be
misused or abused. In those circumstances in which the
Court regards that the corporate form is used as a tool it will
fiercely rip through the corporate veil and expose its true
character and nature disregarding the Salomon principal as
laid down by the House of Lords. This could be traced back
to misdemeanours where the veil of incorporation was

blatanly used as a mask for fraud and improper conduct.


In the authenticity of the landmark English Court of Appeal
case Adams v Cape Industries plc the case law on Salomon
was subject to an absolute review. This case involved
primarily concerned itself to liability within a group of
companies. The claimant, Adams, sought to ignore the
separate legal personality of a parent (Cape) and its
subsidiary company and to hold the parent liable for the
obligations of the subsidiary. The court had to determine
whether the defendant, a producer of asbestos, had
presence in the United States and, thus, whether the Texan
judgement could be enforced against them. It was held that
the court is not free to disregard the principles of Salomon v
A. Salomon & Co Ltd merely because the justice so
requires.This decision is crucial to the understanding of
lifting the corporate veil because the Court of Appeal arrived
at three possible justifi cations for piercing the veil: (i)
single economic unit, (ii) agency, and (iii) faade.

In the US the veil is readily lifted, however in UK, there are


two types of provisions for the lifting of the corporate veil,
firstly the Judicial Provisions and Statutory Provisions.
Concerning judicial provisions, the courts have been more
than ready to pierce the corporate veil when it feels that
fraud is or could be perpetrated behind the veil. The courts
abhor the use of Salomon principle as an engine of fraud.
The two quintessential cases of the fraud are Gilford Motor
Company Ltd v. Horne and Jones v. Lipman alike. Mr. Horne in
the first case was an ex-employee of The Gilford motor
company and his employment contract provided that he
could not solicit the customers of the company. In order to
defeat this, he incorporated a limited company in his wife's
name and did the dirty deed of soliciting the customers. The

company thus brought an action against him. The Court of


appeal was of the view that "the company was formed as a
device, a stratagem, in order to mask the effective carrying
on of business of Mr. Horne" in this case it was transparent
that the main motivation of incorporating the new company
was to execute fraud. Thus the Court of appeal regarded it as
a mere sham to cloak his wrongdoings under the name of
running a corporation.
Evidenced in Jones v. Lipman, a man contracted to sell his
land and thereafter changed his mind in order to avoid an
order of specific performance he transferred his property to a
company. Gilford v. Horne was referred to and held that the
company here was "a mask which (Mr. Lipman) holds before
his face in an attempt to avoid recognition by the eye of
equity" .Therefore the court awarded specific performance
both against Mr.Lipman and the company.

In the corporate veil doctrine revisited: a comparative study


of the English and the US corporate veil doctrines, Thomas
Cheng has pointed out that until the late 1970s, English
courts have demonstrated a rather considerable willingness
to pierce the veil when justice so required. In the case of
DHN food products Ltd. V. Tower Hamlets, it has been said
that the Courts may disregard Salomon's case whenever it is
just and equitable to do so. In the above-mentioned case the
Court of appeal thought that the present case was one which
was suitable for lifting the corporate veil. Here the three
subsidiary companies were treated as a part of the same
economic entity or group and were entitled to compensation.
Lord Denning held that in many respects, a group of
companies are treated together for the purpose of accounts,
balance sheet, and profit and loss accounts, "so DHN are
entitled to claim compensation accordingly."

Stemming from this, it had been said that there is but a


short step to the proposition that the courts may disregard
Salomons principle whenever it is just and equitable to do
so. Situations as such are now commonly considered as
exceptional and the verdict in the DHN case has been
subject to doubt several times since, exampli gratia, in
Woolfson v Strathclyde Regional Council and also in
Industrial Equity Limited and Others v Tower Hamlets. In
Woolfson, the House of Lords not only distinguished the
earlier decision of the Court of Appeal in DHN but also
doubted whether the Court of Appeal properly applied the
principle that it is appropriate to pierce the corporate veil
only where special circumstances exist indicating a mere
facade concealing true facts.

A dilemma was faced and a question was raised in Daimler


co ltd v Continental Tyre and Rubber co (Great Britain) 1916 ,
if a company incorporated in the UK could carry on a
business in an enemy country? The answer to this was that it
would be in contrary to the Enemy Act Trading 1917.
Moreover when the action was instituted, all the directors
were German residents in Germany. The English corporate
veil doctrine has had a topsy-turvy career. The attitude of
the courts towards the doctrine has oscillated from
enthusiasm to outright hostility. This can be seen in Creasey
v Breachwood Motors ltd 1993 when the common owners of
two companies transferred assets of the first company to the
second to avoid an impending judgment, the veil was lifted
because the judge thought it in the interests of justice on the
employees behalf who would not get any compensation if
both the companies were treated as separate companies.
Nevertheless, the hopes of the legal community in assuming
that the courts are becoming lenient with the doctrine of veil

piercing were dashed in Ord v Belhaven Pubs ltd 1998 in


which it overruled Creasey and returned back to the Salomon
principle where it was decided that a shareholder enjoy
limited liability and it is not liable for the debts of the
companies whose shares it owns, i.e. subsidiary companies.

With respect to the U.K. it is important to mention that the


creditors are, inter alia, protected by numerous statutory
provisions in relation to piercing the corporate veil. The
Parliament always has the upper hand to enact exceptions to
the Salomon principle and has done as evidenced in
instances of misjustice. The courts, therefore, have to accept
that even though the principle of separate legal entity may
cause injustice, they should not interfere unless the
Parliament in its Act allows them. A vital exception enacted
by the Parliament in the 1986 Insolvency Act is Section 213
(fraudulent trading), Section 214 ( wrongful trading) and
Section 216 ( prohibition to be involved in the management
of the company). Briefly, the creditors are protected where
the business of the company has been carried out to defraud
them, and the courts on a winding-up are entitled to look
behind the corporate veil in such a case.

To tie a kot, the traditional English common law exceptions


to the Salomon principle according to Hicks,says, it is fair to
say that the courts probably will not lift the corporate veil in
order to impose liability on a shareholder for the companys
debts. He also states that in rare instances the courts will
look to the substance rather than the form to deny benefits
of corporate status which they think should not be enjoyed.
He berates in contemplation that it is difficult to predict
when the courts will do so, however, the judges subjective

perception of fairness or policy might be a useful guide to


come to a consesus.