Corporate Law and Governance

This essay evaluates the principles of corporate law and governance, focusing on the concept of separate legal entity and limited liability. It explores the doctrine of lifting the corporate veil and its application in recent case laws. The essay also discusses the circumstances in which the court overlooks the Salomon principle and imposes liabilities on directors and shareholders.

Corporate Law and Governance

One of the key characteristics which differentiate companies from other business structures
is their “separate legal entity” in the eyes of the law which provides them various rights such
as the ability to sign a contract under their names, hold property, sue third parties or get
sued by others.1 This principle was recognised in the case of Salomon v Salomon & Co Ltd.2
Based on this attribute, another key principle which was established through this judgement
was the “limited liability” of members or directors for the actions which they take for the
organisation. Despite the fact that the corporation acquires “separate entity”; however, it is
an artificial person, and it cannot take its decisions on its own. Its decisions are taken by
directors while taking into consideration its best interest; however, they did not suffer
negative consequences for those decisions due to the “corporate veil” which protects them
from being held personally liable.3 However, there are many instances where the court uses
the “doctrine of the lifting of the corporate veil” in order to find out who took the decision
for the company and hold them liable for their actions. There are various case judgements in
which the court “pierced the corporate veil” to impose obligations on directors or members
liable for their actions. However, it did not mean that the principle recognised by the court
in the case of Salomon did not apply; instead, the “lifting of the corporate veil” focuses on
ensuring that these principles are not misused by the parties. The objective of this essay to
evaluate the principles recognised in the Salomon case and whether they still prevail. This
essay will evaluate the scenarios or incidents in which the court prefers to “lift the corporate
veil” by analysing recent case laws.
While “lifting the corporate veil”, courts overlook the principles of the “separate legal
entity” and “limited liability” that were established by the “House of Lords in the judgement
of Salomon v Salomon”. In the judgement of this case, the concept of “corporate veil” was
established since it was held that a separate entity is acquired by a company after
incorporation based on which they are responsible for their debts and obligations rather
than their directors and shareholders.4 In case the company did not have enough money to
pay off its debts, or it becomes insolvent, then the directors or shareholders cannot be held
personally liable, and their assets cannot be used in order to fulfil their obligations of the
1 Simon Goulding, Principles of company law (Routledge 2013).
2 (1897) AC 22
3 Jonathan Macey and Joshua Mitts, ‘Finding order in the morass: The three real justifications for piercing the
corporate veil’ (2014) 100 CLR 99.
4 Kiarie Mwaura, ‘Internalization of costs to corporate groups: part-whole relationships, human rights norms
and the futility of the corporate veil’ (2012) 11 JIBL 85.

company. After this judgement, the courts had a tendency of preserving the legal
personality of companies as seen in a number of judgements such as “Lee v Lee's Air
Farming Ltd”.5 However, many people started using this veil as a “clock for hiding their fraud
and misconduct” and avoiding the liabilities which arise from their actions. Therefore, the
“doctrine of lifting of corporate veil” is important to make sure that directors and
shareholders did not use the separate entity of the company to engage in practices which
could harm the interest of the company of its stakeholders. The tendency of the courts is
changed, and they “pierced the corporate veil” in more cases to ensure adequate
punishment is given to parties for their unlawful or immoral actions to make sure that they
did not take unfair advantage of this principle.6
In the case of the United Kingdom, the Companies Act 20067 (CA) provides a wide range of
policies in order to govern the operations of companies; however, no specific policies are
included for the “piercing of the corporate veil”. Instead, there is a wide range of rules and
guidelines which are given for directors and other officers to make sure that they did not
engage in a wrongful act.8 In case these policies are violated, then the court can hold those
directors or officers directly liable for their actions through corporate veil piercing.
Moreover, other provisions are also included in “section 15” of the “Company Directors
Disqualification Act 1986”9 and section 213-217 of “Insolvency Act 1986”10 through which
courts can impose obligations on directors and other officers rather than imposing the
liability on the corporation. Most of these provisions are focused on ensuring that directors
did not engage in fraudulent activities, and they did not use their powers for improper
purposes which could harm the interest of the company. The judgement of Macaura v
Northern Assurance Co Ltd11 highlights that matters that did not involve violation of duties
and provisions by the directors or members of the company did not lead to piercing of
corporate veil by the courts.
5 [1960] UKPC 33
6 Lee Roach, Company Law (Oxford University Press 2016).
7 Companies Act 2006
8 Legislation, Companies Act 2006 (2019) <
http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf>.
9 Company Directors Disqualification Act 1986
10 Insolvency Act 1986
11 [1925] AC 619

There is still ambiguity regarding the circumstances where courts overlook the Salomon
principle; however, previous judgements have highlighted certain scenarios where
“separate entity” of organisations are likely to be avoided by courts. One of the key
elements is “fraud or improper conduct” by the directors or other officers lead to “piercing
of corporate veil”.12 The court did not allow parties to use the Salomon principle to protect
themselves from facing the liabilities which arise because they engage in fraudulent
practices and misconduct. In this regards, relevant judgements were provided in the court in
two leading cases, including “Gilford Motor Co Ltd v Horne”13 and “Jones v Lipman”.14 In the
first case, an agreement was formed between the “Gilford Motor Company” and an
employee through the employment contract to make sure that the employee did not solicit
the customers after the left the organisation. Horne was the managing director who was
fired, and he decided to launch an organisation for competing with Gilford. In the
organisation, there were no other shareholders and the responsibility for managing the
operations were also imposed on Horne.15
Gilford sued the company, and the court “lifted the corporate veil” in the judgement. It was
identified that Horne wanted to conduct “sham and fraud” and he wanted to avoid
compliance with legal restrictions based on which this principle can be applied. In this
regards, “Jones v Lipman” is an important case in which an agreement was formed for
selling of a house; however, Lipman backed on his promise and he avoided the compliance
with contractual obligations by transferring ownership of the land to a corporation in which
he was the sole director and shareholder.16 In its judgement, the court provided that the
company is established for the purpose of transferring the house and Lipman is using it as a
device of sham based on which the corporate veil can be pierced, and Lipman was held
liable. In the case of “Woolfson v Strathclyde Regional Council”17, the court provided that the
“veil can only be lifted in special circumstances” which include if the company is a “mere
façade” that is formed in order to conceal the true facts to gain an unfair advantage or
cause harm to another person.
12 Lorraine Talbot, Critical company law (Routledge 2015).
13 [1933] Ch 935
14 [1962] 1 WLR 832
15 Pey Woan Lee, ‘The enigma of veil-piercing’ (2015) 26 (1) ICCLR 28.
16 Alexander Schall, ‘The new law of piercing the corporate veil in the UK’ (2016) 13 (4) ECFLR 549-574.
17 [1978] UKHL 5

Moreover, the “corporate veil can be lifted” in the case of group enterprises in order to
identify the party that has the power to made decisions which are applicable on group
companies. The court also relies on this principle to “identify the economic realities of the
group enterprises” and impose liabilities on them based on their contribution to the
decision-making process.18 A relevant judgement in this regards was given in “DHN Food
Distributors Ltd v Tower Hamlets London Borough Council”.19 The court provided that group
companies can be treated as partners by “piercing of corporate veil” to impose liability on
them. In this case, DHN was a holding company, and it was controlling two subsidiaries that
were “wholly owned” by the organisation. A subsidiary was used in order to own vehicles
for the company, whereas the second company was used for owning land on behalf of the
holding enterprise. In a dispute, it was found that land was subject to compulsory purchase
after which DHN claimed for payment of compensation for the loss which is caused to the
business.20 The court evaluated the facts of the case and provided in its judgement that both
the subsidiaries are wholly owned and they are controlled by the directors of the holding
company based on which they are considered as a partnership in which all these enterprises
are acting as partners.
The court provided that they cannot be considered as separate entities in case one of them
failed to comply with the guidelines. Lord Denning provided that “a group of companies”
can be considered as “a single economic entity” for the purpose profit and loss account,
balance sheet and other accounts.21 Various other factors cannot also be analysed by the
court in order to determine corporate veil can be pierced or not, such as shareholding and
control. In the case of “Ord v Belhaven Pubs Ltd”22, a relevant judgement was provided by
the court. A misrepresentation suit was initiated regarding profitability of the corporation in
which the parties were “Mr and Mrs Ord and Belhaven Pubs Ltd”. The pub was a part of a
group of companies after which no assets was for the company. Mr and Mrs Ord requested
that the payment should be given by Ascott Holdings Ltd on behalf of Belhaven and the
decision was given in their favour; however, it was overturned in the appeal by the Court of
Appeal when the court provided that the corporate veil cannot be pierced because the
18 Pawel Slup, ‘Piercing the Corporate Veil-A Common Pattern?’ (2018) 24 CLR 287-305.
19 [1976] 1 WLR 852
20 Richard Hayward, Valuation: principles into practice (Taylor & Francis 2014).
21 Barry Denyer-Green, Compulsory purchase and compensation (Routledge 2018).
22 [1998] 2 BCLC 447

holding company did not have information regarding the misconduct and they did not have
an ulterior motive.23 This case shows that unless parties have engaged in illegal conduct or
they have misused their position to conduct sham or façade, the Salomon principle reign.
There are certain serious scenarios as well in which the court can lift the corporate veil to
identify who are the people that are controlling the company and taking decisions on its
behalf. A company is considered an “energy character” when the de facto control of the
company is managed by people who live in an enemy country.24 Parties who are responsible
for managing the company and their character can be identified through veil piercing. This
was established by the court in the case of “Daimler Co Ltd v Continental Tyre and Rubber Co
Ltd”25 in which the court “lifted the corporate veil” to identify the parties who were
controlling the company. The court used this principle in order to identify that the company
was being controlled by the citizen of an enemy country. The court provided that based on
the actions and character of the parties who are handling the operations, a conclusion can
be reached regarding the company’s nature as well., and it can acquire enemy character
based on the fact that its members are also enemies.
In the judgement of The Tjaskemolen26, it was held by Clarke J that there are different cases
in which the court can “lift the corporate veil”; however, the meaning of the “piercing the
corporate veil” is not the same each time and it could have different meanings based on the
scenario.27 This statement resulted in increasing ambiguity regarding the application of this
principle by the courts. However, some clarification was given in this regards in “Atlas
Maritime Co SA v Avalon Maritime Ltd (No.1)”.28 It was held by Staughton LJ that the term
“piercing of corporate veil” could be used to “treat the rights and liabilities” of the company
as the “rights and liabilities of its shareholders”. While applying this principle, the court
looks behind the legal entity to identify the shareholding of the company in order to impose
the rights and liabilities on them.29 This principle resulted in avoiding the application of the
Salomon principle after which the legal existence of the company in the eyes of the law is
23 Ross Grantham, ‘The corporate veil: An ingenious device’ (2013) 32 UQLJ 311.
24 Ernest Lim, ‘Of ‘Landmark’or ‘Leading’Cases: Salomon's Challenge’ (2014) 41 (4) JLS 523-550.
25 [1916] 2 AC 307
26 [1997] 2 Lloyd's Rep 465
27 Felix WH Chan, ‘Ascertaining a Vessel's Beneficial Ownership Or Control under the 1952 Arrest Convention
Recent Developments in Hong Kong’ (2015) 15 ABL 99.
28 [1991] 4 All ER 769
29 Brenda Hannigan, Company Law (Oxford University Press 2018).

overlooked to identify those who are responsible for the consequences which are caused to
the stakeholders of the company as a result of the actions of the organisation. “ E.B.M. Co.
Ltd. v. Dominion Bank”30 is also an important case which resulted in narrowing down the
definition of this principle.
It was held that the supreme importance of the legal entity of the company should be
clearly highlighted and recognised by the court and a distinction should be maintained in
relating to the legal entity, actions, assets, liabilities and rights of the organisation and the
entity, actions, assets, liabilities and rights of the shareholders.31 It was held that simply
because the shareholders hold the shares of the company did not allow them right over the
assets or liabilities of the company as given in Ben Hashem v Al Sharif.32 However, the use of
“piercing of corporate veil” principle is to make sure that shareholders are not able to
misuse this distinction to gain an unfair advantage. Staughton LJ provided that “lifting of the
corporate veil” is not considered as an uncommon practice and there are no provisions
given under the Companies Act which prevents the court from applying this principle.33
However, it is important that the circumstances in which this principle can be applied should
be analysed based on a narrower sense rather than a broad sense to make sure that the
interest of the parties is not affected. It was also established that the expression of “lifting of
corporate veil” must not be used by the court order while applying it in a particular case;
instead, the court should simply focus on the actions of the parties and their acts or
omissions which lead to the situation to pierce the veil.
Although the courts overlook the “legal entity of the company” while applying the doctrine
of “piercing of corporate veil”; however, “the Salomon principle’s” reign is not over. The key
issue which arises is “whether avoiding the consequences of separate personality lead to
denying it altogether?” This was justified by the court in the case of “Nedco Ltd v Clark”.34
The court provided in this case that just because the court “lifted the corporate veil for a
specific purpose”, it did not mean that the recognition of the corporation as a separate
entity is destroyed. The company continued to be “an independent and autonomous entity
30 [1937] 3 All E.R. 555
31 Nicholas Bourne, Bourne on Company Law (Routledge 2016).
32 [2009] 1 FLR 115
33 Bajul Shah and Erin Hitchens, ‘Fresh Prest juice: the consequences of the Supreme Court’s landmark
decision’ (2014)20 (5) TT 469-477.
34 (1973) 43 DLR (3d) 714

for all purposes” even after its directors or shareholders held liable for taking actions on
behalf of the company. This case shows that the use of the “doctrine of lifting of corporate
veil” is to avoid unfairness and deliver justice to make sure that parties that engage in illegal
or unethical practices found guilty for their acts or omissions.35 The rights of the victim and
aggrieved parties to receive justice and compensation for their loss is not destroyed solely
based on the fact that the person who takes such decision is hiding behind the corporate
veil of the organisation. Through this principle, directors and shareholders remain within
their limits, and they did not engage in immoral or illegal practices while hiding behind the
company since they know that they will be able held liable for their actions by the court.36 It
shows that the principle of “lifting of corporate veil” is used as a tool to deliver justice by the
court or identify the entity of parties that run the company while means that Salomon reign
and the separate entity of the company is not affected based on the application of this
principle.
Based on the above observations, it can be concluded that the corporations have a separate
entity which differentiates it from their shareholders and directors. The Salomon principle is
universally applicable; however, it can be avoided by the court through “piercing of
corporate veil”; however, provisions regarding the application of this principle are
ambiguous. The court applies in this principle to identify the true identity of the parties that
take decisions for the company and this is mostly applied in the case involving fraud, scam,
façade, agency, group enterprises and unfairness/justice. There are a number of cases in
which scenarios are highlighted, and the court lifted the corporate veil while providing the
judgement; however, it did not mean that the Salomon principle did not apply anymore.
When it comes to rights, liabilities, entity and actions taken by the enterprise, it is separate
from its shareholders and directors despite the fact that they hold its shareholders or they
are responsible for making decisions on its behalf. However, this principle is used to make
sure that the shareholders or directors are not able to “take unfair advantage” of the
principle to avoid legal consequences which they face for engaging in illegal or immoral
practices. By “looking behind the corporate veil”, the court is able to identify people who
are responsible for taking illegal or immoral actions to make sure that they are the once
35 Derek French, Stephen Mayson and Christopher Ryan, Mayson, French & Ryan on company law (Oxford
University Press 2014).
36 Judith Elkin, ‘Lifting the Veil and Finding the Pot of Gold: Piercing the Corporate Veil and Substantive
Consolidation in the United States’ (2012) 6 DRI 131.

who are found guilty for their consequences. However, it did not destroy the recognition of
the corporation as a separate entity, and the legal entity of the company prevails which
means that it continues to exist in the eyes of the law and the legal consequences of the
actions of shareholders and directors are imposed on them which shows that Salomon still
reign.

Bibliography
Books
Bourne N, Bourne on Company Law (Routledge 2016)
Denyer-Green B, Compulsory purchase and compensation (Routledge 2018)
French D, Mayson S and Ryan C, Mayson, French & Ryan on company law (OUP 2014)
Goulding S, Principles of company law (Routledge 2013)
Hannigan B, Company Law (OUP 2018)
Hayward R, Valuation: principles into practice (TF 2014)
Roach L, Company Law (OUP 2016)
Talbot L, Critical company law (Routledge 2015)
Journals
Chan FWH, ‘Ascertaining a Vessel's Beneficial Ownership Or Control under the 1952 Arrest
Convention Recent Developments in Hong Kong’ (2015) 15 ABL 99
Elkin J, ‘Lifting the Veil and Finding the Pot of Gold: Piercing the Corporate Veil and
Substantive Consolidation in the United States’ (2012) 6 DRI 131
Grantham R, ‘The corporate veil: An ingenious device’ (2013) 32 UQLJ 311
Lee PW, ‘The enigma of veil-piercing’ (2015) 26 (1) ICCLR 28
Lim E, ‘Of ‘Landmark’or ‘Leading’Cases: Salomon's Challenge’ (2014) 41 (4) JLS 523-550
Macey J and Mitts J, ‘Finding order in the morass: The three real justifications for piercing
the corporate veil’ (2014) 100 CLR 99
Mwaura K, ‘Internalization of costs to corporate groups: part-whole relationships, human
rights norms and the futility of the corporate veil’ (2012) 11 JIBL 85
Schall A, ‘The new law of piercing the corporate veil in the UK’ (2016) 13 (4) ECFLR 549-574

Shah B and Hitchens E, ‘Fresh Prest juice: the consequences of the Supreme Court’s
landmark decision’ (2014)20 (5) TT 469-477
Slup P, ‘Piercing the Corporate Veil-A Common Pattern?’ (2018) 24 CLR 287-305
Cases
Atlas Maritime Co SA v Avalon Maritime Ltd (No.1) [1991] 4 All ER 769
Ben Hashem v Al Sharif [2009] 1 FLR 115
Daimler Co Ltd v Continental Tyre and Rubber Co Ltd [1916] 2 AC 307
DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852
E.B.M. Co. Ltd. v. Dominion Bank [1937] 3 All E.R. 555
Gilford Motor Co Ltd v Horne [1933] Ch 935
Jones v Lipman [1962] 1 WLR 832
Lee v Lee's Air Farming Ltd [1960] UKPC 33
Macaura v Northern Assurance Co Ltd [1925] AC 619
Nedco Ltd v Clark (1973) 43 DLR (3d) 714
Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447
Salomon v Salomon & Co Ltd (1897) AC 22
The Tjaskemolen [1997] 2 Lloyd's Rep 465
Woolfson v Strathclyde Regional Council [1978] UKHL 5
Legislation
Companies Act 2006
Company Directors Disqualification Act 1986
Insolvency Act 1986

Others
Legislation, Companies Act 2006 (2019) <
http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf>.