The Law Months, Part IV: Lifting the Veil

Save for cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v Salomon & Co Ltd. [1987] A.C. 22 merely because it considers that justice so requires” (Slade LJ).

To what extent, if at all, do you agree with the above statement? You should illustrate your answer with reference to decided cases.

This question is about separate personality and lifting the corporate veil. In this essay I will look in detail at relevant case law and subsequent principles of law to conclude under what circumstances the courts will lift the veil of incorporation.

It is well established from the case of Salomon v Salomon & Co. Ltd that companies are legally separate from their shareholders, and thus established the legal principle that shareholders have limited liability. This means that the shareholders of a company are not personally liable to account for a company’s debts should it fall insolvent. This principle of limited liability is also referred to as the ‘veil on incorporation’. Salomon is still good law (Adams v Cape Industries), and under this principle, a claim made on a company may not be transferred on shareholders, and similarly onto a parent company or those companies in the same group (The Albazero).

However, under certain circumstances, the courts or statute may allow the veil to be ‘lifted’, disregarding the usual distinction between a company and its members, a parent and subsidiary, and companies within the same group i.e. disregarding the general rule in Salomon. Traditionally, there were three arguments for lifting the veil; agency, single economic unit and ‘sham’ or ‘façade’ (Adams v Cape Industries), although the ‘sham’ argument was considered to be the only exception to the rule (Gilford Motor Co Ltd. v Horne, Jones v Lipman).

It was not until 2013 where judgement by Lord Sumption from the case of Petrodel v Prest made some new principles; concealment and evasion, which were to replace the unhelpful term of ‘façade’. The concealment principle does not involve piercing the veil, but simply ‘looks behind’ the company ‘façade’ to see who the members are and if their identity is legally relevant. The evasion principle was to enable a company that had been purposely created to avoid a legal right or obligation owed to the claimant to be prosecuted. These principles were retrospectively applied to the cases of Gilford Motor Co Ltd. v Horne and Jones v Lipman, where remedies were awarded against the defendant (individual) on the concealment principle, and the defendant (company) on the evasion principle.

The resulting laws that followed Prest have subsequently been heavily criticised, as although it is now acknowledged when the courts are entitled to pierce the veil, it is only used as a last resort if all other conventional methods have proved inadequate (Hanningan, 2013). Similarly, despite being heard by seven justices (compared to the usual five) there were many disagreements, for example, Lord Hale and Lord Wilson were reluctant to classify all cases into concealment or evasion. Lord Mance and Lorde Clarke agreed with Lord Sumption so far as the cases involved concealment and evasion, but also said that the distinction was not definitive and that it may be possible to establish further exceptions. This ruling was therefore viewed by many as a disappointment as it delivered so little clarity on an eagerly awaited judgement.

In conclusion, the case of Petrodel v Prest seems to define the evasion principal as now (virtually) the only grounds for lifting the veil, but there are still some uncertainties that need to be clarified. Similarly, Lord Walker has stated that piercing the veil is not a coherent rule of law, but simply a label as to when the rule in Salomon v Salomon & Co Ltd. would be disregarded. However, from all of the case law in the law surrounding the veil, it is clear that the general rule in Salomon will generally prevail (Re Lewis’s Will Trusts). Therefore, the argument that this case is the “unyielding rock” (Templeman LJ) of English company law remains true, with minor exceptions that occur exceptionally and occasionally.

Click here for a downloadable copy of explanatory notes for each of the cases used in this essay.

Table of Cases

Adams v Cape Industries [1990] Ch 433

Gilford Motor Co. Ltd. v Horne [1933] Ch 235 (CA)

Jones v Lipman [1962] 1 WLR 832

Petrodel Resources Ltd. v Prest [2013] UKSC 34

Re Lewis’s Will Trusts [1984] 3 All ER 930

Salomon v Salomon & Co. Ltd. [1897] AC 22

The Albazero [1977] AC 774

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Categories: Law

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