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Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may 'pierce' or 'lift' the corporate veil.[1]
A simple example would be where a businessman has left his job as a director and has signed a contract to not compete with the company he has just left for a period of time. If he sets up a company which competed with his former company, technically it would be the company and not the person competing.[2] But it is likely a court would say that the new company was just a 'sham', a 'cover' or some other phrase, and would still allow the old company to sue the man for breach of contract.
Despite the terminology used which makes it appear as though a shareholder's limited liability emanates from the view that a corporation is a separate legal entity, the reality is that the entity status of corporations has almost nothing to do with shareholder limited liability.[3] For example, English law conferred entity status on corporations long before shareholders were afforded limited liability. Similarly, the United States' Revised Uniform Partnership Act confers entity status on partnerships, but also provides that partners are individually liable for all partnership obligations. Therefore, this shareholder limited liability emanates mainly from statute.[3]
- 3United Kingdom
- 4United States
- 4.1Factors for courts to consider
Basis for limited liability[edit]
Corporations exist in part to shield the personal assets of shareholders from personal liability for the debts or actions of a corporation. Unlike a general partnership or sole proprietorship in which the owner could be held responsible for all the debts of the company, a corporation traditionally limited the personal liability of the shareholders.
Dead or alive 5 last round mods. You’ll note I said ‘PS3’ there and not ‘PS4’. Inexplicably, the PC version of the game is missing the enhanced ‘soft’ shading effects seen in the PS4 version of the game and as a result, looks closer to the crusty PS3 version insteadNicknamed ‘The Soft Engine’, the visual improvements that this engine permits on the PS4 and Xbox One versions of Last Round, such as more natural-looking skin and a smattering of other character model related details, are nowhere to be seen in the PC version.
Piercing the corporate veil typically is most effective with smaller privately held business entities (close corporations) in which the corporation has a small number of shareholders, limited assets, and recognition of separateness of the corporation from its shareholders would promote fraud or an inequitable result.
There is no record of a successful piercing of the corporate veil for a publicly traded corporation because of the large number of shareholders and the extensive mandatory filings entailed in qualifying for listing on an exchange.
Germany[edit]
German corporate law developed a number of theories in the early 1920s for lifting the corporate veil on the basis of 'domination' by a parent company over a subsidiary. Today, shareholders can be held liable in the case of an interference destroying the corporation. The corporation is entitled to a minimum of equitable funds. If these are taken away by the shareholder the corporation may claim compensation, even in an insolvency proceeding.[4]
United Kingdom[edit]
The corporate veil in UK company law is pierced very rarely. After a series of attempts by the Court of Appeal during the late 1960s and early 1970s to establish a theory of economic reality, and a doctrine of control for lifting the veil, the House of Lords reasserted an orthodox approach. According to a 1990 case at the Court of Appeal, Adams v Cape Industries plc, the only true 'veil piercing' may take place when a company is set up for fraudulent purposes, or where it is established to avoid an existing obligation.[5] The veil is also often ignored in the process of interpreting a statute,[6] and as a matter of tort law it is open as a matter of authority that a direct duty of care may be owed by the managers of a parent company to accident victims of a subsidiary.[7] There are also significant statements still among the judiciary in support of a broader veil lifting approach in the interests of 'justice'.
The issue is discussed at length in a 2013 UK Supreme Court case, Prest v Petrodel Resources Ltd.[8]
Tort victims and employees[edit]
Tort victims and employees, who did not contract with a company or have very unequal bargaining power, have been held to be exempted from the rules of limited liability in Chandler v Cape plc. In this case, the claimant was an employee of Cape plc's wholly owned subsidiary, which had gone insolvent. He successfully brought a claim in tort against Cape plc for causing him an asbestos disease, asbestosis. Arden LJ in the Court of Appeal held that if the parent had interfered in the operations of the subsidiary in any way, such as over trading issues, then it would be attached with responsibility for health and safety issues.[9] Arden LJ emphasised that piercing the corporate veil was not necessary. There would be direct liability in tort for the parent company if it had interfered in the subsidiary's affairs. The High Court before it had held that liability would exist if the parent exercised control, all applying ordinary principles of tort law about liability of a third party for the actions of a tortfeasor. The restrictions on lifting the veil, found in contractual cases made no difference.
'Single economic unit' theory[edit]
It is an axiomatic principle of English company law that a company is an entity separate and distinct from its members, who are liable only to the extent that they have contributed to the company's capital: Salomon v Salomon [1897]. The effect of this rule is that the individual subsidiaries within a conglomerate will be treated as separate entities and the parent cannot be made liable for the subsidiaries' debts on insolvency. Furthermore, it can create subsidiaries with inadequate capitalisation and secure loans to the subsidiaries with fixed charges over their assets, despite the fact that this is 'not necessarily the most honest way of trading'.[10] The rule also applies in Scotland.[8]
While the secondary literature refers to different means of 'lifting' or 'piercing' the veil (see Ottolenghi (1959)), judicial dicta supporting the view that the rule in Salomon is subject to exceptions are thin on the ground. Lord Denning MR outlined the theory of the 'single economic unit' - wherein the court examined the overall business operation as an economic unit, rather than strict legal form - in DHN Food Distributors v Tower Hamlets.[11] However this has largely been repudiated and has been treated with caution in subsequent judgments.
In Woolfson v Strathclyde BC,[11] the House of Lords held that it was a decision to be confined to its facts (the question in DHN had been whether the subsidiary of the plaintiff, the former owning the premises on which the parent carried out its business, could receive compensation for loss of business under a compulsory purchase order notwithstanding that under the rule in Salomon, it was the parent and not the subsidiary that had lost the business). Likewise, in Bank of Tokyo v Karoon,[12] Lord Goff, who had concurred in the result in DHN, held that the legal conception of the corporate structure was entirely distinct from the economic realities.
The 'single economic unit' theory was likewise rejected by the CA in Adams v Cape Industries,[13] where Slade LJ held that cases where the rule in Salomon had been circumvented were merely instances where they didn't know what to do. The view expressed at first instance by HHJ Southwell QC in Creasey v Breachwood[14] that English law 'definitely' recognised the principle that the corporate veil could be lifted was described as a heresy by Hobhouse LJ in Ord v Bellhaven,[15] and these doubts were shared by Moritt V-C in Trustor v Smallbone (No 2):[16] the corporate veil cannot be lifted merely because justice requires it. Despite the rejection of the 'justice of the case' test, it is observed from judicial reasoning in veil piercing cases that the courts employ 'equitable discretion' guided by general principles such as mala fides to test whether the corporate structure has been used as a mere device.[17]
Perfect obligation[edit]
The cases of Tan v Lim,[18] where a company was used as a 'façade' (per Russell J.) to defraud the creditors of the defendant and Gilford Motor Co Ltd v Horne,[19] where an injunction was granted against a trader setting up a business which was merely as a vehicle allowing him to circumvent a covenant in restraint of trade are often said to create a 'fraud' exception to the separate corporate personality. Similarly, in Gencor v Dalby,[20] the tentative suggestion was made that the corporate veil was being lifted where the company was the 'alter ego' of the defendant. In truth, as Lord Cooke (1997) has noted extrajudicially, it is because of the separate identity of the company concerned and not despite it that equity intervened in all of these cases. They are not instances of the corporate veil being pierced but instead involve the application of other rules of law.
Reverse piercing[edit]
There have been cases in which it is to the advantage of the shareholder to have the corporate structure ignored. Courts have been reluctant to agree to this.[21] The often cited case Macaura v Northern Assurance Co Ltd[22] is an example of that. Mr Macaura was the sole owner of a company he had set up to grow timber. The trees were destroyed by fire but the insurer refused to pay since the policy was with Macaura (not the company) and he was not the owner of the trees. The House of Lords upheld that refusal based on the separate legal personality of the company.
Criminal law[edit]
In English criminal law there have been cases in which the courts have been prepared to pierce the veil of incorporation. For example, in confiscation proceedings under the Proceeds of Crime Act 2002 monies received by a company can, depending upon the particular facts of the case as found by the court, be regarded as having been 'obtained' by an individual (who is usually, but not always, a director of the company). In consequence those monies may become an element in the individual's 'benefit' obtained from criminal conduct (and hence subject to confiscation from him).[23] The position regarding 'piercing the veil' in English criminal law was given in the Court of Appeal judgment in the case of R v Seager[24] in which the court said (at para 76):
There was no major disagreement between counsel on the legal principles by reference to which a court is entitled to 'pierce' or 'rend' or 'remove' the 'corporate veil'. It is 'hornbook' law that a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders. A court can 'pierce' the carapace of the corporate entity and look at what lies behind it only in certain circumstances. It cannot do so simply because it considers it might be just to do so. Each of these circumstances involves impropriety and dishonesty. The court will then be entitled to look for the legal substance, not the just the form. In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced. First if an offender attempts to shelter behind a corporate façade, or veil to hide his crime and his benefits from it. Secondly, where an offender does acts in the name of a company which (with the necessary mens rea) constitute a criminal offence which leads to the offender's conviction, then 'the veil of incorporation is not so much pierced as rudely torn away': per Lord Bingham in Jennings v CPS, paragraph 16. Thirdly, where the transaction or business structures constitute a 'device', 'cloak' or 'sham', i.e. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts.
United States[edit]
In the United States, corporate veil piercing is the most litigated issue in corporate law.[25] Although courts are reluctant to hold an active shareholder liable for actions that are legally the responsibility of the corporation, even if the corporation has a single shareholder, they will often do so if the corporation was markedly noncompliant with corporate formalities, to prevent fraud, or to achieve equity in certain cases of undercapitalization.[26][27]
In most jurisdictions, no bright-line rule exists and the ruling is based on common law precedents. In the United States, different theories, most important 'alter ego' or 'instrumentality rule', attempted to create a piercing standard. Mostly, they rest upon three basic prongs—namely:[28]
- 'unity of interest and ownership': the separate personalities of the shareholder and corporation cease to exist,
- 'wrongful conduct': wrongful action taken by the corporation, and
- 'proximate cause': as a reasonably foreseeable result of the wrongful action, harm was caused to the party that is seeking to pierce the corporate veil.
However, the theories failed to articulate a real-world approach which courts could directly apply to their cases. Thus, courts struggle with the proof of each prong and rather analyze all given factors. This is known as 'totality of circumstances'.[29]
There is also the matter of what jurisdiction the corporation is incorporated in if the corporation is authorized to do business in more than one state. All corporations have one specific state (their 'home' state) to which they are incorporated as a 'domestic' corporation, and if they operate in other states, they would apply for authority to do business in those other states as a 'foreign' corporation. In determining whether or not the corporate veil may be pierced, the courts are required to use the laws of the corporation's home state. This issue can be significant; for example, California law is more liberal in allowing a corporate veil to be pierced, while the laws of neighboring Nevada makes doing so more difficult. Thus, the owner(s) of a corporation operating in California would be subject to different potential for the corporation's veil to be pierced if the corporation was to be sued, depending on whether the corporation was a California domestic corporation or was a Nevada foreign corporation operating in California.
Generally, the plaintiff has to prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols, such as voting to approve major corporate actions in the context of a duly authorized corporate meeting. This is quite often the case when a corporation facing legal liability transfers its assets and business to another corporation with the same management and shareholders. It also happens with single person corporations that are managed in a haphazard manner. As such, the veil can be pierced in both civil cases and where regulatory proceedings are taken against a shell corporation.
Factors for courts to consider[edit]
Factors that a court may consider when determining whether or not to pierce the corporate veil include the following:[29][1]
- Absence or inaccuracy of corporate records;
- Concealment or misrepresentation of members;
- Failure to maintain arm's length relationships with related entities;
- Failure to observe corporate formalities in terms of behavior and documentation;
- Intermingling of assets of the corporation and of the shareholder;
- Manipulation of assets or liabilities to concentrate the assets or liabilities;
- Non-functioning corporate officers and/or directors;
- Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances);
- Siphoning of corporate funds by the dominant shareholder(s);
- Treatment by an individual of the assets of corporation as his/her own;
- Was the corporation being used as a 'façade' for dominant shareholder(s) personal dealings; alter ego theory;
It is important to note that not all of these factors need to be met in order for the court to pierce the corporate veil. Further, some courts might find that one factor is so compelling in a particular case that it will find the shareholders personally liable. For example, many large corporations do not pay dividends, without any suggestion of corporate impropriety, but particularly for a small or close corporation the failure to pay dividends may suggest financial impropriety.[30]
Examples[edit]
- Berkey v. Third Avenue Railway, 244 N.Y. 602, 155 N.E. 914 (1927). Benjamin Cardozo decided there was no right to pierce the veil for a personal injury victim.
- Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 (4th Cir. 1992).[31] The Fourth Circuit held that no piercing could take place merely to prevent 'unfairness' or 'injustice', where a corporation in a real estate building partnership could not pay its share of a lawsuit bill
- Fletcher v. Atex, Inc., 68 F.3d 1451 (2d Cir. 1995)[32], finding insufficient that a parent company so dominated the operations of a subsidiary that the corporate veil should be disregarded.
- Minton v. Cavaney, 56 Cal.2d 576 (1961).[33] Mr. Minton's daughter drowned in the public swimming pool owned by Mr. Cavaney. Then-Associate Justice Roger J. Traynor (later Chief Justice) of the Supreme Court of California held: 'The equitable owners of a corporation, for example, are personally liable..when they provide inadequate capitalization and actively participate in the conduct of corporate affairs.'
- Kinney Shoe Corp. v. Polan, 939 F.2d 209 (4th Cir. 1991).[34] The veil was pierced where its enforcement would not have matched the purpose of limited liability. Here a corporation was undercapitalized and was only used to shield a shareholder's other company from debts.
Internal Revenue Service[edit]
In recent years, the Internal Revenue Service (IRS) in the United States has made use of corporate veil piercing arguments and logic as a means of recapturing income, estate, or gift tax revenue, particularly from business entities created primarily for estate planning purposes.[35] A number of U.S. Tax Court cases involving Family Limited Partnerships (FLPs) illustrate the IRS's use of veil-piercing arguments.[36] Since owners of U.S. business entities created for asset protection and estate purposes often fail to maintain proper corporate compliance, the IRS has achieved multiple high-profile court victories.[37][38]
Reverse piercing[edit]
Reverse veil piercing is when the debt of a shareholder is imputed onto the corporation. Throughout the United States, the general rule is that reverse veil piercing is not allowed.[39] However the California Court of Appeals has allowed reverse veil piercing against a limited liability company (LLC) based largely on the difference in remedies available to creditors when it comes to attaching assets of a debtors' LLC as compared to attaching assets of a corporation.[40][41]
See also[edit]
Notes[edit]
- ^ abLarson, Aaron (12 July 2016). 'Piercing the Corporate Veil'. ExpertLaw. Retrieved 9 September 2017.
- ^See, e.g., Henn, Harry G.; Alexander, John R. (1983). Law of Corporations (3 ed.). West Group. ISBN0314092293., ch 7, 344, n 2 for a list of terms the court uses. They are, mere adjunct, agent, alias, alter ego, alter idem, arm, blind, branch, buffer, cloak, coat, corporate double, cover, creature, curious reminiscence, delusion, department, dry shell, dummy, fiction, form, formality, fraud on the law, instrumentality, mouthpiece, name, nominal identity, phrase, puppet, screen, sham, simulacrum, snare, stooge, subterfuge, tool.
- ^ abEisenberg, Melvin A. (2005). Corporations and Other Business Organizations, Cases and Materials (9 ed.). Foundation Press. ISBN1587788799., ch 4, 171
- ^Piercing the Corporate Veil in American and German Law - Liability of Individuals and Entities: A Comparative View in: Tulsa Journal of Comparative and International Law, from 3-1-1995
- ^e.g. Gilford Motor Ltd v Horne and Jones v Lipman
- ^e.g. Daimler v Continental Tyre and Re FG Films Ltd
- ^e.g. Lubbe v Cape Plc
- ^ abMacLeod, Ceit-Anna (January 2014). 'Case Commentary: Prest v Petrodel'. Scottish Parliamentary Review. Edinburgh: Blacket Avenue Press. I (2).
- ^See further, E McGaughey, 'Donoghue v Salomon in the High Court' (2011) 4 Journal of Personal Injury Law 249, on SSRN
- ^see The Coral Rose (No 1) [1991], per Staughton LJ.
- ^ ab[1976]
- ^[1987] (PC)
- ^[1990]
- ^[1992]
- ^[1998]
- ^[2001]
- ^Capuano, Angelo (2009), 'The Realist's Guide to Piercing the Corporate Veil', Australian Journal of Corporate Law, 23 (1): 56–94, SSRN1369110
- ^[1962]
- ^[1933]
- ^[2000]
- ^Lindgren, Kevin E.; R. B. Vermeesch (1995), Business Law of Australia, Butterworths, ISBN0-409-30675-4
- ^[1925] AC 619
- ^David Winch, 'Confiscation: lifting the veil of incorporation' (2013)
- ^[2009] EWCA Crim 1303
- ^Thompson, Robert B. (1991), 'Piercing the Corporate Veil: An Empirical Study', Cornell Law Review, 76: 1036–1074
- ^Gelb, Harvey (December 1982). 'Piercing the Corporate Veil - The Undercapitalization Factor'. Chicago Kent Law Review. 59 (1). Retrieved 9 September 2017.
- ^Macey, Jonathan; Mitts, Joshua (2014). 'Finding Order in the Morass: The Three Real Justifications for Piercing the Corporate Veil'. Cornell Law Review. 100. Retrieved 9 September 2017.
- ^Rands, William J. (1998). 'Domination of a Subsidiary by a Parent'(PDF). Indiana Law Review. 32: 421. Retrieved 9 September 2017.
- ^ abBarber, David H. 'Piercing the Corporate Veil'. Williamette Law Review. 17: 371. Retrieved 9 September 2017.
- ^Macey, Jonathan R. (27 March 2014). 'The Three Justifications for Piercing the Corporate Veil'. Harvard Law School Forum on Corporate Governance and Financial Regulation. Retrieved 9 September 2017.
- ^'Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc., 974 F.2d 545 (4th Cir. 1992)'. Google Scholar. Google. Retrieved 9 September 2017.
- ^'Fletcher v. Atex, Inc., 68 F. 3d 1451 (2d Cir. 1995)'. Google Scholar. Google. Retrieved 9 September 2017.
- ^'Minton v. Cavaney, 56 Cal. 2d 576 (1961)'. Google Scholar. Google. Retrieved 9 September 2017.
- ^'Kinney Shoe Corp. v. Polan, 939 F. 2d 209 (4th Cir. 1991)'. Google Scholar. Google. Retrieved 9 September 2017.
- ^'Notice CC-2012-002'(PDF). Office of Chief Counsel. Internal Revenue Service. 2 December 2011. Retrieved 9 September 2017.
- ^Gans, Mitchell M.; Blattmachr, Jonathan G. (2006). 'Family Limited Partnership Formation: Dueling Dicta'. Capital University Law Review. Retrieved 9 September 2017.
- ^Higham, Scott (8 April 2016). 'For U.S. tax cheats, Panama Papers reveal a perilous new world'. Washington Post. Retrieved 9 September 2017.
- ^Blank, Joshua D.; Staudt, Nancy C. (May 2012). 'Corporate Shams'(PDF). NYU Center for Law, Economics and Organization. New York University School of Law. Retrieved 9 September 2017.
- ^Gaertner, M.J. (1988). 'Reverse Piercing the Corporate Veil: Should Corporation Owners Have It Both Ways'. William and Mary Law Review. 30: 667. Retrieved 9 September 2017.
- ^'Curci Investments, LLC v. Baldwin, Cal. Ct. App. Case No. G052764 (Aug. 10, 2017)'. Google Scholar. Google. Retrieved 9 September 2017.
- ^'Stephen Bainbridge'. ProfessorBainbridge.com. 12 August 2017. Retrieved 9 September 2017.
References[edit]
- Books
Piercing The Corporate Veil
- TL Hazen and JW Markham, Corporations and Other Business Enterprises (2003) ISBN0-314-26476-0 pg. 124-144.
- Articles
- AW Machen, 'Corporate Personality' (1910) 24 Harvard Law Review 253
- J Dewey, 'The Historic Background of Corporate Legal Personality' (1926) 35 Yale Law Journal 655
- C Alting, 'Piercing the corporate veil in German and American law - Liability of individuals and entities: a comparative view' (1994–1995) 2 Tulsa Journal Comparative & International Law 187
- AA Berle, 'The Theory of Enterprise Entity' (1947) 47(3) Columbia Law Review 343
- EJ Cohn and C Simitis, Lifting the Veil' in the Company Laws of the European Continent' (1963) 12(1) 'The International and Comparative Law Quarterly 189
- H Hansmann, R Kraakman and R Squire, 'Law and the Rise of the Firm' (2006) 119 Harvard Law Review 1333
- H Hansmann and R Kraakman, 'Toward unlimited shareholder liability for corporate torts' (1991) 100(7) Yale Law Journal 1879
Retrieved from 'https://en.wikipedia.org/w/index.php?title=Piercing_the_corporate_veil&oldid=899157023'
This article is part of a series on | ||||||
Corporate law | ||||||
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| ||||||
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Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may 'pierce' or 'lift' the corporate veil.[1]
A simple example would be where a businessman has left his job as a director and has signed a contract to not compete with the company he has just left for a period of time. If he sets up a company which competed with his former company, technically it would be the company and not the person competing.[2] But it is likely a court would say that the new company was just a 'sham', a 'cover' or some other phrase, and would still allow the old company to sue the man for breach of contract.
Despite the terminology used which makes it appear as though a shareholder's limited liability emanates from the view that a corporation is a separate legal entity, the reality is that the entity status of corporations has almost nothing to do with shareholder limited liability.[3] For example, English law conferred entity status on corporations long before shareholders were afforded limited liability. Similarly, the United States' Revised Uniform Partnership Act confers entity status on partnerships, but also provides that partners are individually liable for all partnership obligations. Therefore, this shareholder limited liability emanates mainly from statute.[3]
- 3United Kingdom
- 4United States
- 4.1Factors for courts to consider
Basis for limited liability[edit]
Corporations exist in part to shield the personal assets of shareholders from personal liability for the debts or actions of a corporation. Unlike a general partnership or sole proprietorship in which the owner could be held responsible for all the debts of the company, a corporation traditionally limited the personal liability of the shareholders.
Piercing the corporate veil typically is most effective with smaller privately held business entities (close corporations) in which the corporation has a small number of shareholders, limited assets, and recognition of separateness of the corporation from its shareholders would promote fraud or an inequitable result.
There is no record of a successful piercing of the corporate veil for a publicly traded corporation because of the large number of shareholders and the extensive mandatory filings entailed in qualifying for listing on an exchange.
Germany[edit]
German corporate law developed a number of theories in the early 1920s for lifting the corporate veil on the basis of 'domination' by a parent company over a subsidiary. Today, shareholders can be held liable in the case of an interference destroying the corporation. The corporation is entitled to a minimum of equitable funds. If these are taken away by the shareholder the corporation may claim compensation, even in an insolvency proceeding.[4]
United Kingdom[edit]
The corporate veil in UK company law is pierced very rarely. After a series of attempts by the Court of Appeal during the late 1960s and early 1970s to establish a theory of economic reality, and a doctrine of control for lifting the veil, the House of Lords reasserted an orthodox approach. According to a 1990 case at the Court of Appeal, Adams v Cape Industries plc, the only true 'veil piercing' may take place when a company is set up for fraudulent purposes, or where it is established to avoid an existing obligation.[5] The veil is also often ignored in the process of interpreting a statute,[6] and as a matter of tort law it is open as a matter of authority that a direct duty of care may be owed by the managers of a parent company to accident victims of a subsidiary.[7] There are also significant statements still among the judiciary in support of a broader veil lifting approach in the interests of 'justice'.
The issue is discussed at length in a 2013 UK Supreme Court case, Prest v Petrodel Resources Ltd.[8]
Tort victims and employees[edit]
Tort victims and employees, who did not contract with a company or have very unequal bargaining power, have been held to be exempted from the rules of limited liability in Chandler v Cape plc. In this case, the claimant was an employee of Cape plc's wholly owned subsidiary, which had gone insolvent. He successfully brought a claim in tort against Cape plc for causing him an asbestos disease, asbestosis. Arden LJ in the Court of Appeal held that if the parent had interfered in the operations of the subsidiary in any way, such as over trading issues, then it would be attached with responsibility for health and safety issues.[9] Arden LJ emphasised that piercing the corporate veil was not necessary. There would be direct liability in tort for the parent company if it had interfered in the subsidiary's affairs. The High Court before it had held that liability would exist if the parent exercised control, all applying ordinary principles of tort law about liability of a third party for the actions of a tortfeasor. The restrictions on lifting the veil, found in contractual cases made no difference.
'Single economic unit' theory[edit]
It is an axiomatic principle of English company law that a company is an entity separate and distinct from its members, who are liable only to the extent that they have contributed to the company's capital: Salomon v Salomon [1897]. The effect of this rule is that the individual subsidiaries within a conglomerate will be treated as separate entities and the parent cannot be made liable for the subsidiaries' debts on insolvency. Furthermore, it can create subsidiaries with inadequate capitalisation and secure loans to the subsidiaries with fixed charges over their assets, despite the fact that this is 'not necessarily the most honest way of trading'.[10] The rule also applies in Scotland.[8]
While the secondary literature refers to different means of 'lifting' or 'piercing' the veil (see Ottolenghi (1959)), judicial dicta supporting the view that the rule in Salomon is subject to exceptions are thin on the ground. Lord Denning MR outlined the theory of the 'single economic unit' - wherein the court examined the overall business operation as an economic unit, rather than strict legal form - in DHN Food Distributors v Tower Hamlets.[11] However this has largely been repudiated and has been treated with caution in subsequent judgments.
In Woolfson v Strathclyde BC,[11] the House of Lords held that it was a decision to be confined to its facts (the question in DHN had been whether the subsidiary of the plaintiff, the former owning the premises on which the parent carried out its business, could receive compensation for loss of business under a compulsory purchase order notwithstanding that under the rule in Salomon, it was the parent and not the subsidiary that had lost the business). Likewise, in Bank of Tokyo v Karoon,[12] Lord Goff, who had concurred in the result in DHN, held that the legal conception of the corporate structure was entirely distinct from the economic realities.
The 'single economic unit' theory was likewise rejected by the CA in Adams v Cape Industries,[13] where Slade LJ held that cases where the rule in Salomon had been circumvented were merely instances where they didn't know what to do. The view expressed at first instance by HHJ Southwell QC in Creasey v Breachwood[14] that English law 'definitely' recognised the principle that the corporate veil could be lifted was described as a heresy by Hobhouse LJ in Ord v Bellhaven,[15] and these doubts were shared by Moritt V-C in Trustor v Smallbone (No 2):[16] the corporate veil cannot be lifted merely because justice requires it. Despite the rejection of the 'justice of the case' test, it is observed from judicial reasoning in veil piercing cases that the courts employ 'equitable discretion' guided by general principles such as mala fides to test whether the corporate structure has been used as a mere device.[17]
Perfect obligation[edit]
The cases of Tan v Lim,[18] where a company was used as a 'façade' (per Russell J.) to defraud the creditors of the defendant and Gilford Motor Co Ltd v Horne,[19] where an injunction was granted against a trader setting up a business which was merely as a vehicle allowing him to circumvent a covenant in restraint of trade are often said to create a 'fraud' exception to the separate corporate personality. Similarly, in Gencor v Dalby,[20] the tentative suggestion was made that the corporate veil was being lifted where the company was the 'alter ego' of the defendant. In truth, as Lord Cooke (1997) has noted extrajudicially, it is because of the separate identity of the company concerned and not despite it that equity intervened in all of these cases. They are not instances of the corporate veil being pierced but instead involve the application of other rules of law.
Reverse piercing[edit]
Piercing The Corporate Veil Examples
There have been cases in which it is to the advantage of the shareholder to have the corporate structure ignored. Courts have been reluctant to agree to this.[21] The often cited case Macaura v Northern Assurance Co Ltd[22] is an example of that. Mr Macaura was the sole owner of a company he had set up to grow timber. The trees were destroyed by fire but the insurer refused to pay since the policy was with Macaura (not the company) and he was not the owner of the trees. The House of Lords upheld that refusal based on the separate legal personality of the company.
Criminal law[edit]
In English criminal law there have been cases in which the courts have been prepared to pierce the veil of incorporation. For example, in confiscation proceedings under the Proceeds of Crime Act 2002 monies received by a company can, depending upon the particular facts of the case as found by the court, be regarded as having been 'obtained' by an individual (who is usually, but not always, a director of the company). In consequence those monies may become an element in the individual's 'benefit' obtained from criminal conduct (and hence subject to confiscation from him).[23] The position regarding 'piercing the veil' in English criminal law was given in the Court of Appeal judgment in the case of R v Seager[24] in which the court said (at para 76):
Piercing The Corporate Veil Quizlet
There was no major disagreement between counsel on the legal principles by reference to which a court is entitled to 'pierce' or 'rend' or 'remove' the 'corporate veil'. It is 'hornbook' law that a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders. A court can 'pierce' the carapace of the corporate entity and look at what lies behind it only in certain circumstances. It cannot do so simply because it considers it might be just to do so. Each of these circumstances involves impropriety and dishonesty. The court will then be entitled to look for the legal substance, not the just the form. In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced. First if an offender attempts to shelter behind a corporate façade, or veil to hide his crime and his benefits from it. Secondly, where an offender does acts in the name of a company which (with the necessary mens rea) constitute a criminal offence which leads to the offender's conviction, then 'the veil of incorporation is not so much pierced as rudely torn away': per Lord Bingham in Jennings v CPS, paragraph 16. Thirdly, where the transaction or business structures constitute a 'device', 'cloak' or 'sham', i.e. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts.
United States[edit]
In the United States, corporate veil piercing is the most litigated issue in corporate law.[25] Although courts are reluctant to hold an active shareholder liable for actions that are legally the responsibility of the corporation, even if the corporation has a single shareholder, they will often do so if the corporation was markedly noncompliant with corporate formalities, to prevent fraud, or to achieve equity in certain cases of undercapitalization.[26][27]
In most jurisdictions, no bright-line rule exists and the ruling is based on common law precedents. In the United States, different theories, most important 'alter ego' or 'instrumentality rule', attempted to create a piercing standard. Mostly, they rest upon three basic prongs—namely:[28]
- 'unity of interest and ownership': the separate personalities of the shareholder and corporation cease to exist,
- 'wrongful conduct': wrongful action taken by the corporation, and
- 'proximate cause': as a reasonably foreseeable result of the wrongful action, harm was caused to the party that is seeking to pierce the corporate veil.
However, the theories failed to articulate a real-world approach which courts could directly apply to their cases. Thus, courts struggle with the proof of each prong and rather analyze all given factors. This is known as 'totality of circumstances'.[29]
There is also the matter of what jurisdiction the corporation is incorporated in if the corporation is authorized to do business in more than one state. All corporations have one specific state (their 'home' state) to which they are incorporated as a 'domestic' corporation, and if they operate in other states, they would apply for authority to do business in those other states as a 'foreign' corporation. In determining whether or not the corporate veil may be pierced, the courts are required to use the laws of the corporation's home state. This issue can be significant; for example, California law is more liberal in allowing a corporate veil to be pierced, while the laws of neighboring Nevada makes doing so more difficult. Thus, the owner(s) of a corporation operating in California would be subject to different potential for the corporation's veil to be pierced if the corporation was to be sued, depending on whether the corporation was a California domestic corporation or was a Nevada foreign corporation operating in California.
Generally, the plaintiff has to prove that the incorporation was merely a formality and that the corporation neglected corporate formalities and protocols, such as voting to approve major corporate actions in the context of a duly authorized corporate meeting. This is quite often the case when a corporation facing legal liability transfers its assets and business to another corporation with the same management and shareholders. It also happens with single person corporations that are managed in a haphazard manner. As such, the veil can be pierced in both civil cases and where regulatory proceedings are taken against a shell corporation.
Factors for courts to consider[edit]
Factors that a court may consider when determining whether or not to pierce the corporate veil include the following:[29][1]
- Absence or inaccuracy of corporate records;
- Concealment or misrepresentation of members;
- Failure to maintain arm's length relationships with related entities;
- Failure to observe corporate formalities in terms of behavior and documentation;
- Intermingling of assets of the corporation and of the shareholder;
- Manipulation of assets or liabilities to concentrate the assets or liabilities;
- Non-functioning corporate officers and/or directors;
- Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances);
- Siphoning of corporate funds by the dominant shareholder(s);
- Treatment by an individual of the assets of corporation as his/her own;
- Was the corporation being used as a 'façade' for dominant shareholder(s) personal dealings; alter ego theory;
It is important to note that not all of these factors need to be met in order for the court to pierce the corporate veil. Further, some courts might find that one factor is so compelling in a particular case that it will find the shareholders personally liable. For example, many large corporations do not pay dividends, without any suggestion of corporate impropriety, but particularly for a small or close corporation the failure to pay dividends may suggest financial impropriety.[30]
Examples[edit]
- Berkey v. Third Avenue Railway, 244 N.Y. 602, 155 N.E. 914 (1927). Benjamin Cardozo decided there was no right to pierce the veil for a personal injury victim.
- Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 (4th Cir. 1992).[31] The Fourth Circuit held that no piercing could take place merely to prevent 'unfairness' or 'injustice', where a corporation in a real estate building partnership could not pay its share of a lawsuit bill
- Fletcher v. Atex, Inc., 68 F.3d 1451 (2d Cir. 1995)[32], finding insufficient that a parent company so dominated the operations of a subsidiary that the corporate veil should be disregarded.
- Minton v. Cavaney, 56 Cal.2d 576 (1961).[33] Mr. Minton's daughter drowned in the public swimming pool owned by Mr. Cavaney. Then-Associate Justice Roger J. Traynor (later Chief Justice) of the Supreme Court of California held: 'The equitable owners of a corporation, for example, are personally liable..when they provide inadequate capitalization and actively participate in the conduct of corporate affairs.'
- Kinney Shoe Corp. v. Polan, 939 F.2d 209 (4th Cir. 1991).[34] The veil was pierced where its enforcement would not have matched the purpose of limited liability. Here a corporation was undercapitalized and was only used to shield a shareholder's other company from debts.
Internal Revenue Service[edit]
In recent years, the Internal Revenue Service (IRS) in the United States has made use of corporate veil piercing arguments and logic as a means of recapturing income, estate, or gift tax revenue, particularly from business entities created primarily for estate planning purposes.[35] A number of U.S. Tax Court cases involving Family Limited Partnerships (FLPs) illustrate the IRS's use of veil-piercing arguments.[36] Since owners of U.S. business entities created for asset protection and estate purposes often fail to maintain proper corporate compliance, the IRS has achieved multiple high-profile court victories.[37][38]
Reverse piercing[edit]
Reverse veil piercing is when the debt of a shareholder is imputed onto the corporation. Throughout the United States, the general rule is that reverse veil piercing is not allowed.[39] However the California Court of Appeals has allowed reverse veil piercing against a limited liability company (LLC) based largely on the difference in remedies available to creditors when it comes to attaching assets of a debtors' LLC as compared to attaching assets of a corporation.[40][41]
See also[edit]
Notes[edit]
- ^ abLarson, Aaron (12 July 2016). 'Piercing the Corporate Veil'. ExpertLaw. Retrieved 9 September 2017.
- ^See, e.g., Henn, Harry G.; Alexander, John R. (1983). Law of Corporations (3 ed.). West Group. ISBN0314092293., ch 7, 344, n 2 for a list of terms the court uses. They are, mere adjunct, agent, alias, alter ego, alter idem, arm, blind, branch, buffer, cloak, coat, corporate double, cover, creature, curious reminiscence, delusion, department, dry shell, dummy, fiction, form, formality, fraud on the law, instrumentality, mouthpiece, name, nominal identity, phrase, puppet, screen, sham, simulacrum, snare, stooge, subterfuge, tool.
- ^ abEisenberg, Melvin A. (2005). Corporations and Other Business Organizations, Cases and Materials (9 ed.). Foundation Press. ISBN1587788799., ch 4, 171
- ^Piercing the Corporate Veil in American and German Law - Liability of Individuals and Entities: A Comparative View in: Tulsa Journal of Comparative and International Law, from 3-1-1995
- ^e.g. Gilford Motor Ltd v Horne and Jones v Lipman
- ^e.g. Daimler v Continental Tyre and Re FG Films Ltd
- ^e.g. Lubbe v Cape Plc
- ^ abMacLeod, Ceit-Anna (January 2014). 'Case Commentary: Prest v Petrodel'. Scottish Parliamentary Review. Edinburgh: Blacket Avenue Press. I (2).
- ^See further, E McGaughey, 'Donoghue v Salomon in the High Court' (2011) 4 Journal of Personal Injury Law 249, on SSRN
- ^see The Coral Rose (No 1) [1991], per Staughton LJ.
- ^ ab[1976]
- ^[1987] (PC)
- ^[1990]
- ^[1992]
- ^[1998]
- ^[2001]
- ^Capuano, Angelo (2009), 'The Realist's Guide to Piercing the Corporate Veil', Australian Journal of Corporate Law, 23 (1): 56–94, SSRN1369110
- ^[1962]
- ^[1933]
- ^[2000]
- ^Lindgren, Kevin E.; R. B. Vermeesch (1995), Business Law of Australia, Butterworths, ISBN0-409-30675-4
- ^[1925] AC 619
- ^David Winch, 'Confiscation: lifting the veil of incorporation' (2013)
- ^[2009] EWCA Crim 1303
- ^Thompson, Robert B. (1991), 'Piercing the Corporate Veil: An Empirical Study', Cornell Law Review, 76: 1036–1074
- ^Gelb, Harvey (December 1982). 'Piercing the Corporate Veil - The Undercapitalization Factor'. Chicago Kent Law Review. 59 (1). Retrieved 9 September 2017.
- ^Macey, Jonathan; Mitts, Joshua (2014). 'Finding Order in the Morass: The Three Real Justifications for Piercing the Corporate Veil'. Cornell Law Review. 100. Retrieved 9 September 2017.
- ^Rands, William J. (1998). 'Domination of a Subsidiary by a Parent'(PDF). Indiana Law Review. 32: 421. Retrieved 9 September 2017.
- ^ abBarber, David H. 'Piercing the Corporate Veil'. Williamette Law Review. 17: 371. Retrieved 9 September 2017.
- ^Macey, Jonathan R. (27 March 2014). 'The Three Justifications for Piercing the Corporate Veil'. Harvard Law School Forum on Corporate Governance and Financial Regulation. Retrieved 9 September 2017.
- ^'Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc., 974 F.2d 545 (4th Cir. 1992)'. Google Scholar. Google. Retrieved 9 September 2017.
- ^'Fletcher v. Atex, Inc., 68 F. 3d 1451 (2d Cir. 1995)'. Google Scholar. Google. Retrieved 9 September 2017.
- ^'Minton v. Cavaney, 56 Cal. 2d 576 (1961)'. Google Scholar. Google. Retrieved 9 September 2017.
- ^'Kinney Shoe Corp. v. Polan, 939 F. 2d 209 (4th Cir. 1991)'. Google Scholar. Google. Retrieved 9 September 2017.
- ^'Notice CC-2012-002'(PDF). Office of Chief Counsel. Internal Revenue Service. 2 December 2011. Retrieved 9 September 2017.
- ^Gans, Mitchell M.; Blattmachr, Jonathan G. (2006). 'Family Limited Partnership Formation: Dueling Dicta'. Capital University Law Review. Retrieved 9 September 2017.
- ^Higham, Scott (8 April 2016). 'For U.S. tax cheats, Panama Papers reveal a perilous new world'. Washington Post. Retrieved 9 September 2017.
- ^Blank, Joshua D.; Staudt, Nancy C. (May 2012). 'Corporate Shams'(PDF). NYU Center for Law, Economics and Organization. New York University School of Law. Retrieved 9 September 2017.
- ^Gaertner, M.J. (1988). 'Reverse Piercing the Corporate Veil: Should Corporation Owners Have It Both Ways'. William and Mary Law Review. 30: 667. Retrieved 9 September 2017.
- ^'Curci Investments, LLC v. Baldwin, Cal. Ct. App. Case No. G052764 (Aug. 10, 2017)'. Google Scholar. Google. Retrieved 9 September 2017.
- ^'Stephen Bainbridge'. ProfessorBainbridge.com. 12 August 2017. Retrieved 9 September 2017.
References[edit]
- Books
- TL Hazen and JW Markham, Corporations and Other Business Enterprises (2003) ISBN0-314-26476-0 pg. 124-144.
- Articles
- AW Machen, 'Corporate Personality' (1910) 24 Harvard Law Review 253
- J Dewey, 'The Historic Background of Corporate Legal Personality' (1926) 35 Yale Law Journal 655
- C Alting, 'Piercing the corporate veil in German and American law - Liability of individuals and entities: a comparative view' (1994–1995) 2 Tulsa Journal Comparative & International Law 187
- AA Berle, 'The Theory of Enterprise Entity' (1947) 47(3) Columbia Law Review 343
- EJ Cohn and C Simitis, Lifting the Veil' in the Company Laws of the European Continent' (1963) 12(1) 'The International and Comparative Law Quarterly 189
- H Hansmann, R Kraakman and R Squire, 'Law and the Rise of the Firm' (2006) 119 Harvard Law Review 1333
- H Hansmann and R Kraakman, 'Toward unlimited shareholder liability for corporate torts' (1991) 100(7) Yale Law Journal 1879
Retrieved from 'https://en.wikipedia.org/w/index.php?title=Piercing_the_corporate_veil&oldid=899157023'
The corporate veil in the United Kingdom is a metaphorical reference used in UK company law for the concept that the rights and duties of a corporation are, as a general principle, the responsibility of that company alone. Just as a natural person cannot be held legally accountable for the conduct or obligations of another person, unless they have expressly or implicitly assumed responsibility, guaranteed or indemnified the other person, as a general principle shareholders, directors and employees cannot be bound by the rights and duties of a corporation. This concept has traditionally been likened to a 'veil' of separation between the legal entity of a corporation and the real people who invest their money and labour into a company's operations.
The corporate veil in the UK is, however, capable of being 'lifted', so that the people who run the company are treated as being liable for its debts, or can benefit from its rights, in a very limited number of circumstances defined by the Courts. It generally only happens when there is wrongdoing by the people/person in control.[1] This matters mostly when a company has gone insolvent, because unpaid creditors will wish to recover their money if they can prove wrongdoing by the people in control.
30 And to all the beasts of the earth and all the birds in the sky and all the creatures that move along the ground—everything that has the breath of life in it—I give every green plant for food. They will be yours for food.
- 4Lifting the veil
- 5International comparisons
Separate legal personality[edit]
The Corporation of London, which governs the Square Mile from the Griffin at Temple Bar to the Tower of London, is an early example of a separate legal person.
English law recognised long ago that a corporation would have 'legal personality'. Legal personality simply means the entity is the subject of legal rights and duties. It can sue and be sued. Historically, municipal councils (such as the Corporation of London) or charitable establishments would be the primary examples of corporations.[2] Without a body to be kicked or a soul to be damned,[3] a corporation does not itself suffer penalties administered by courts, but those who stand to lose their investments will. A company will, as a separate person, be the first liable entity for any obligations its directors and employees create on its behalf.[4] If a company does not have enough assets to pay its debts as they fall due, it will be insolvent - bankrupt. Unless an administrator (someone like an auditing firm partner, usually appointed by creditors on a company's insolvency) is able to rescue the business, shareholders will lose their money, employees will lose their jobs and a liquidator will be appointed to sell off any remaining assets to distribute as much as possible to unpaid creditors. Yet if business remains successful, a company can persist forever, even as the natural people who invest in it and carry out its business change or pass away.
Limited liability[edit]
Most companies adopt limited liability for their members, seen in the suffix of 'Ltd' or 'plc'. This means that if a company does go insolvent, unpaid creditors cannot (generally) seek contributions from the company's shareholders and employees, even if shareholders and employees profited handsomely before a company's fortunes declined or would bear primary responsibility for the losses under ordinary civil law principles. The liability of a company itself is unlimited (companies have to pay all they owe with the assets they have), but the liability of those who invest their capital in a company is (generally) limited to their shares, and those who invest their labour can only lose their jobs.[5] However, limited liability acts merely as a default position. It can be 'contracted around', provided creditors have the opportunity and the bargaining power to do so.[6] A bank, for instance, may not lend to a small company unless the company's director gives her own house as security for the loan (e.g., by mortgage). Just as it is possible for two contracting parties to stipulate in an agreement that one's liability will be limited in the event of contractual breach, the default position for companies can be switched back so that shareholders or directors do agree to pay off all debts. If a company's investors do not do this, so their limited liability is not 'contracted around', their assets will (generally) be protected from claims of creditors. The assets are beyond reach behind the metaphorical 'veil of incorporation'.
Assumption of responsibility[edit]
- Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830
Lifting the veil[edit]
Whitechapel High Street, where Aron Salomon, the most famous litigant in company law, went insolvent.
If a company goes insolvent, there are certain situations where the courts lift the veil of incorporation on a limited company, and make shareholders or directors contribute to paying off outstanding debts to creditors. However, in UK law the range of circumstances is heavily limited. This is usually said to derive from the 'principle' in Salomon v A Salomon & Co Ltd.[7] In this leading case, a Whitechapelcobbler incorporated his business under the Companies Act 1862. At that time, seven people were required to register a company, possibly because the legislature had viewed the appropriate business vehicle for fewer people to be a partnership.[8] Mr Salomon met this requirement by getting six family members to subscribe for one share each. Then, in return for money he lent the company, he made the company issue a debenture, which would secure his debt in priority to other creditors in the event of insolvency. The company did go insolvent, and the company liquidator, acting on behalf of unpaid creditors attempted to sue Mr Salomon personally. Although the Court of Appeal held that Mr Salomon had defeated Parliament's purpose in registering dummy shareholders, and would have made him indemnify the company, the House of Lords held that so long as the simple formal requirements of registration were followed, the shareholders' assets must be treated as separate from the separate legal person that is a company. There could not, in general, be any lifting of the veil.[9]
Wrongful trading[edit]
The principle in Salomon's case is open to a series of qualifications. Most significantly, statute may require directly or indirectly that the company not be treated as a separate entity. Under the Insolvency Act 1986, section 214 stipulates that company directors[10] must contribute to payment of company debts in winding up if they kept the business running up more debt when they ought to have known there was no reasonable prospect of avoiding insolvency.
Statutory purpose[edit]
A number of other cases demonstrate that in construing the meaning of a statute unrelated to company law, the purpose of the legislation should be fulfilled regardless of the existence of a corporate form. For example, in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd,[11] the Trading with the Enemy Act 1914 said that trading with any person of 'enemy character' would be an offence. So even though the Continental Tyre Co Ltd was a 'legal person' incorporated in the UK (and therefore British) its directors and shareholders were German (and therefore enemies, while the First World War was being fought).[12]
- Tunstall v Steigmann [1962] 2 QB 593
Avoiding a pre-existing duty[edit]
There are also case based exceptions to the Salomon principle, though their restrictive scope is not wholly stable. The present rule under English law is that only where a company was set up to commission fraud,[13] or to avoid a pre-existing obligation can its separate identity be ignored. This follows from the leading case, Adams v Cape Industries plc.[14] A group of employees suffered asbestos diseases after working for the American wholly owned subsidiary of Cape Industries plc. They were suing in New York to make Cape Industries plc pay for the debts of the subsidiary. Under conflict of laws principles, this could only be done if Cape Industries plc was treated as 'present' in America through its US subsidiary (i.e. ignoring the separate legal personality of the two companies). Rejecting the claim, and following the reasoning in Jones v Lipman,[15] the Court of Appeal emphasised that the US subsidiary had been set up for a lawful purpose of creating a group structure overseas, and had not aimed to circumvent liability in the event of asbestos litigation.
Tort victims[edit]
The harsh effect on tort victims, who are unable to contract around limited liability and may be left only with a worthless claim against a bankrupt entity, has been ameliorated in cases where a duty of care in negligence may be deemed to be owed directly across the veil of incorporation.
- Lee v Lee’s Air Farming Ltd [1961] AC 12, a statutory compensation system in part operated because the veil was not lifted, and a director was treated as a worker of the company
- Connelly v RTZ Corp Plc [1998] AC 854
- Lubbe v Cape Plc [2000] 1 WLR 1545
- Chandler v Cape plc [2011] EWHC 951 (QB) held that a parent company (Cape plc) owed a duty of care to one of the employees of a subsidiary company
Company groups[edit]
Even if tort victims might be protected, the restrictive position remains subject to criticism where a company group is involved, since it is not clear that companies and actual people ought to get the protection of limited liability in identical ways. An influential decision, although subsequently doubted strongly by the House of Lords,[16] was passed by Lord Denning MR in DHN Ltd v Tower Hamlets BC.[17] Here Lord Denning MR held that a group of companies, two subsidiaries wholly owned by a parent, constituted a single economic unit.[18] Because the companies' shareholders and controlling minds were identical, their rights were to be treated as the same. This allowed the parent company to claim compensation from the council for compulsory purchase of its business, which it could not have done without showing an address on the premises that its subsidiary possessed. Similar approaches to treating corporate 'groups' or a 'concern' as single economic entities exist in many continental European jurisdictions. This is done for tax and accounting purposes in English law, however for general civil liability the rule still followed is that in Adams v Cape Industries plc. It is very rare for English courts to lift the veil.[19] The liability of the company is generally attributed to the company alone.
- Creasey v Breachwood Motors Ltd [1992] B.C.C. 638, now overruled, enforcing a claim for wrongful dismissal by a director of an insolvent subsidiary against a parent
- Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447, Court of Appeal overturns High Court that treats a company group as a single economic unit
- Farstad Supply A/S v Enviroco Ltd [2011] UKSC, held that where the shares in a company had been pledged, that company ceased to be a subsidiary company CA 1985 s 736, now CA 2006 s 1159 and Sch 6, because the company which pledged the shares ceased to be a member.
- Duport Steels Ltd v Sirs [1980] ICR 161, strike action against a parent company
- EU Seventh Company Law Directive 83/349, on groupaccounts
- EU Draft Ninth Company Law Directive, on corporate groups
Criminal law[edit]
In English criminal law there have been cases in which the courts have been prepared to pierce the veil of incorporation. For example, in confiscation proceedings under the Proceeds of Crime Act 2002 monies received by a company can, depending upon the particular facts of the case as found by the court, be regarded as having been 'obtained' by an individual (who is usually, but not always, a director of the company). In consequence those monies may become an element in the individual's 'benefit' obtained from criminal conduct (and hence subject to confiscation from him).[20]A useful brief summary of the position regarding 'piercing the veil' in English criminal law was given in the Court of Appeal judgment in the case of R v Seager [2009] EWCA Crim 1303 in which the court said (at para 76):
'There was no major disagreement between counsel on the legal principles by reference to which a court is entitled to 'pierce' or 'rend' or 'remove' the 'corporate veil'. It is 'hornbook' law that a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders. A court can 'pierce' the carapace of the corporate entity and look at what lies behind it only in certain circumstances. It cannot do so simply because it considers it might be just to do so. Each of these circumstances involves impropriety and dishonesty. The court will then be entitled to look for the legal substance, not the just the form. In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced. First if an offender attempts to shelter behind a corporate façade, or veil to hide his crime and his benefits from it. Secondly, where an offender does acts in the name of a company which (with the necessary mens rea) constitute a criminal offence which leads to the offender's conviction, then 'the veil of incorporation is not so much pierced as rudely torn away': per Lord Bingham in Jennings v CPS, paragraph 16. Thirdly, where the transaction or business structures constitute a 'device', 'cloak' or 'sham', i.e. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts.'
International comparisons[edit]
Germany[edit]
- Durchgriffshaftung
United States[edit]
- Berkey v. Third Avenue Railway, Cardozo J decides there was no right to pierce the veil for a personal injury victim
- Walkovszky v. Carlton 223 N.E.2d 6 (NY 1966) where the New York Court of Appeals refused to pierce the veil merely because a subsidiary was undercapitalised. A corporation was set up for every taxi cab in that was in fact being run by Mr Carlton's company, each with $10,000 of insurance. One of the cab's hit a pedestrian and damages were more than the insurance, but by a majority the court held the veil could not be lifted.
- Minton v. Cavaney, 56 Cal. 2.d 576 (1961) Justice Roger Traynor pierced a veil so a girl who drowned in a swimming pool would be compensated, saying parent companies or shareholders would be treated as liable 'when they provide inadequate capitalization and actively participate in the conduct of corporate affairs.'
- Kinney Shoe Corp. v. Polan 939 F.2d 209 (4th Cir. 1991) the veil was pierced where its enforcement would not have matched the purpose of limited liability. Here a corporation was undercapitalised and was only used to shield a shareholder's other company from debts.
- Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 (4th Cir. 1992) holding that no piercing could take place merely to prevent 'unfairness' or 'injustice', where a corporation in a real estate building partnership could not pay its share of a lawsuit bill
- Fletcher v. Atex, Inc 8 F.3d 1451 (2d Cir. 1995)
- Taylor v. Standard Gas Co. 306 U.S. 307 (1939), insiders who become creditors of a company are subordinated to other creditors when the company goes insolvent. This will happen where it is 'equitable', and is known as the 'Deep Rock doctrine'.
- Sindell v. Abbott Laboratories, 607P 2d 924 (Cal), 449 US 912 (1980), California Supreme Court holds drug manufacturers liable to injured victims according to their portion of market share
See also[edit]
Notes[edit]
- ^'Piercing the corporate veil: Supreme Court clarifies the English law position'. incelaw.com. Ince & Co. 23 September 2013. Retrieved 20 November 2016.
- ^In 1612, Sir Edward Coke remarked in the Case of Sutton's Hospital (1612) 10 Rep 32; 77 Eng Rep 960, 973, 'the Corporation itself is onely in abstracto, and resteth onely in intendment and consideration of the Law; for a Corporation aggregate of many is invisible, immortal, & resteth only in intendment and consideration of the Law; and therefore it cannot have predecessor nor successor. They may not commit treason, nor be outlawed, nor excommunicate, for they have no souls, neither can they appear in person, but by Attorney. A Corporation aggregate of many cannot do fealty, for an invisible body cannot be in person, nor can swear, it is not subject to imbecilities, or death of the natural, body, and divers other cases.'
- ^The turn of phrase used in Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 1 WLR 1133, per Walton J, 'Mr. Price argued that, in effect, there are two separate sets of persons in whom authority to activate the company itself resides. Quoting the well known passages from Viscount Haldane LC in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, he submitted that the company as such was only a juristic figment of the imagination, lacking both a body to be kicked and a soul to be damned.' n.b. Lord Haldane never used such figurative words. They may trace back to Lord Chancellor Thurlow (1731–1806), who is said to have asked rhetorically, 'did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked?' Though it seems his exact phrase was, 'Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like.' John Poynder, Literary Extracts (1844) vol 1, p 2 or 268
- ^For a very old example, see Edmunds v Brown and Tillard (1668) 83 ER 385-387
- ^See Insolvency Act 1986s 74(2)(d) in the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member'.
- ^See generally, PL Davies, An Introduction to Company Law (Clarendon 2002) ch 4
- ^Salomon v A Salomon & Co Ltd [1897] AC 22
- ^See R Grantham, 'The Doctrinal Basis of Company Law' (1998) 57 Cambridge Law Journal 554, 560
- ^See also, Lee v Lee's Air Farming Ltd
- ^Or 'shadow directors', defined under IA 1986 s 251 as 'a person in accordance with whose directions or instructions the directors of the company are accustomed to act'. See Re Hydrodam (Corby) Ltd [1994] BCC 161.
- ^Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307
- ^See also, Re FG Films Ltd [1953] 1 WLR 483, where the film 'Monsoon', although owned by a UK company, was considered 'made' under the Cinematograph Film Act 1948 by the Americans who financed and worked on it.
- ^e.g. Re Darby, ex parte Brougham [1911] 1 KB 95
- ^[1990] Ch 433
- ^Jones v Lipman [1962] 1 WLR 832, where to avoid an order for specific performance, Mr Lipman sold his house to a company. Russell J held that this attempt to avoid a pre-existing obligation meant the court could ignore the separate legal identity of the company and award specific performance as a remedy anyway.
- ^See Woolfson v Strathclyde Regional Council (1978) SLT 159; see also, The Albazero [1977] AC 774, 807; Re A Company [1985] 1 BCC 99421; Bank of Tokyo Ltd v Karoon [1987] AC 45n, 64; cf Canada Safeway Ltd v Local 373, Canadian Food and Allied Workers (1974) 46 DLR (3d) 113, and contrast Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 All ER 751
- ^DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852; see also Littlewoods Mail Order Stores v Inland Revenue Commissioners [1969] 1 WLR 1214; Wallersteiner v Moir [1974] 1 WLR 991
- ^This terminology follows from AA Berle, 'The Theory of Enterprise Entity' (1947) 47(3) Columbia Law Review 343, and is a concept used in German company law. See C Alting, 'Piercing the corporate veil in German and American law - Liability of individuals and entities: a comparative view' (1994–1995) 2 Tulsa Journal Comparative & International Law 187.
- ^See C Mitchell, 'Lifting the Corporate Veil in the. English Courts: An Empirical Study' (1999) 3 Company, Financial and Insolvency Law Review 15.
- ^David Winch, 'Confiscation: lifting the veil of incorporation' (2013)
References[edit]
- C Alting, 'Piercing the corporate veil in German and American law - Liability of individuals and entities: a comparative view' (1994–1995) 2 Tulsa Journal Comparative & International Law 187
- AA Berle, 'The Theory of Enterprise Entity' (1947) 47(3) Columbia Law Review 343
- P Halpern, M Trebilcock and S Turnbull, 'An Economic Analysis of Limited Liability' (1980) 30 University of Toronto Law Journal 117
- H Hansmann and R Kraakman, 'The Essential Role of Organizational Law' (2000) 110 Yale Law Journal 387
- O Kahn-Freund, 'Some Reflections on Company Law Reform' (1944) 7 Modern Law Review 54
- C Mitchell, 'Lifting the Corporate Veil in the. English Courts: An Empirical Study' (1999) 3 Company, Financial and Insolvency Law Review 15
External links[edit]
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