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The Corporate Veil Is an Outdated Concept.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

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The Corporate Veil Is an Outdated Concept.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It Is Lifted by the Judiciary at Every Oppurtunity and Certainly Whenever Justice Demands It The corporate veil is an outdated concept.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) “façade. 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 Salomon’s 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 employee’s 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.
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