Corporate Veil: Legal Analysis and Cases

This assignment delves into the legal concept of the corporate veil and its piercing in different contexts. It examines key case law, including Salomon v. Salomon & Co Ltd., Macaura v. Northern Assurance Co Ltd., Lee v. Lee Air Farming Ltd., Williams v. Natural Life Health Foods Ltd, Gilford Motor Co Ltd v Horne, Jones v Lipman, and D.H.N Food Products Ltd v Tower Hamlets London Borough Council. Students are expected to analyze these cases and understand the legal principles surrounding the corporate veil, its purpose, and the circumstances under which it can be pierced.

LLM (Corporate Law And
Governance)

ABSTRACT:
The present report will be based on whether the Salomon Principle is still applicable
within the law or does court have same power to lift corporate veil. All the companies that are
registered under the Companies Act 2006 will be having legal and separate entity from its
shareholders or incorporation whosoever. Directors and shareholders of company will be distinct
and company will be different from them. Court is having power to disregard and held all its
liable shareholders or owners as having unlimited liabilities. Which just implies that investors
will be held at risk for all bad behaviours in name of organization they would not have
appropriate to get away on bases of Salomon guideline.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
CONCLUSION................................................................................................................................7
TABLE OF CASES:........................................................................................................................9
UK Legislations...............................................................................................................................9
REFERENCES..............................................................................................................................10
BIBLIOGRAPHY..........................................................................................................................11
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
CONCLUSION................................................................................................................................7
TABLE OF CASES:........................................................................................................................8
UK Legislations...............................................................................................................................8
REFERENCES................................................................................................................................9
BIBLIOGRAPHY..........................................................................................................................10

INTRODUCTION
All the companies that are registered under the Companies Act 2006 will be having legal
and separate entity from its shareholders or incorporation whosoever. Directors and shareholders
of company will be distinct and company will be different from them. This was found in the case
judgement in Salomon v. Aron Salomon and Co. Ltd [1897]1. The High Court and Court of
Appeal found Aron Salomon liable and guilty of using his power but on the other hand The
House of Lords gave judgement that he has followed allfollowed all rules laid done down in
Company Act. The case is landmark in UK Company and Corporate Act which is having it sits
own significance into history of England. The present report would be based on this and other
similar cases which would be telling whether Salomon is still reigned.
MAIN BODY
The case:
Aron Salomon was a very successful leather merchant or manufacturer who
incorporatemanufacturer who incorporated his firm in 1892. AfterLater which on, he decided to
incorporate his firm as Limited Company which means that he would only be responsible for
payment of those debts to an extent which he had invested as capital within company. In this
company, he was the owner of about 20001 shares and rest 6 shares were divided equally among
his wife and 5 children. At the time when company went into liquidation, the liquidator claimed
that Aron had misused his powers of security for debtfor debt and this was a case of fraud. In
this regard, the judge Vaughan Williams J. mentioned that Aron Salomon had solely
incorporated this company which was then transferred to his business, so, company was acting as
his agent and he was the principal of companyof company.
Company as separate legal entity:
According to Quinn and Connolly, (2017) company which is incorporated and registered
under Company Act 2006 of UK will be having a separate legal identity from that of owner or
director of that company. So, in the landmark case of Salomon v. Aron Salomon and Co. Ltd
[1897]2 it was argued on both grounds that whether Aron and company was having separate
legal identity or not. The High court of UK claimed that Aron himself was responsible for all
1 Salomon v. Aron Salomon and Co. Ltd [1897] AC 22
2 Ibid 2
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dues and debts as he incorporated company as Limited limited company and he solely took
initiative for the formulation. But On the other hand, House of Lords marked that Aron was not
liable for all dues as he and company is having separate legal identity. Sikka and Stittle, (2017)
said that when organization which will be viewed to as fake individual then this must be dealt
with like two unique people who are unmistakable from each other.
It was also seen in the case of Macaura v. Northern Assurance Co. Ltd [1925]3 which
was casewas case of lifting the corporate veil. In this respective case, Macaura took an insurance
policy in his name and not that of company. After two weeks, there was fire in company causing
harm to timbers in which Northern Assurance company refused to pay amount stating that timber
was owned by company not by Macaura. Also, insurance was in name of Macaura not that of
company so they were not liable to pay any amount. According to Waqas and Rehman, (2016) in
another case of Lee v. Lee Air farming Ltd [1960]4 Mrs. Lee was entitled to get the compensation
on death of her husband who was controlling the firm but was an employee or worker in
company. This shows that both proprietor or supervisor and friends was a different lawful
element holding particular personality. SoTherefore, Mrs. Lee would be getting worker's
compensation after death of her husband.
Consequence of having separate legal entity:
Yebisi, (2014) said that there are major benefits of having separate legal entity or identity
which would be that of if organization as entire is worrisome or causing any obligation at that
point organization itself might be at risk for instalment not the proprietor. As long as company is
a running concern, it will only bbe liable for all debts and obligations incurred by company and
directors or shareholders would not be responsible for the same. As seen in case of Williams v.
Natural Life Health Foods [1998]5 which would explain the fact that director of company that of
Limited liability stated that owners would be personally liable for all actions which isare taken
by the company towards any other party.
3 Macaura v. Northern Assurance Co. Ltd [1925] AC 619
4 Lee v. Lee Air farming Ltd [1960] 3 AllER 420
5 Williams v. Natural Life Health Foods [1998] H L 3 0
2

It was also stated by Khimji and Nicholls, (2015) that company after death of any of the
owners or managers would be having perpetual succession which means that the company will
still be into existence after incident of death of its owners. One of the benefits of having separate
legitimate substance would be that organization in its full limit having ideal to sue and be sued
by any other individual yet into its own name as it were.
Lifting Corporate Veil:
According to Schall, (2016) lifting or piercing of corporate veil will be a legal decision as
per court of law which will be treating rights and duties of corporation as linked to its
shareholder. This would be meaning that court or law will be disregarding the fact that owner
and company are separate entity. Which This is majorly mainly done in order to put both party
parties into same line so that liabilities and obligations that of company could be met with that of
it sits members. Mucha, (2017) said that lifting of veil will be taken only in case of individual
cases or after it is has been authorised by statue in conditions. In this doctrine, it is done so that
court could choose at what time would they like to choose investor are held at risk for their
obligations for commitments of organization. On general sense, it is said that investor or
shareholder of company would be liable to only that extent to which they have invested their
money in their company and beyond that, they would not be held liable for any dues er or debts
of company. It is based on the Salomon principle which is stating that company and person who
isare incorporating it are two separate entity entities but not in all cases that court could blindly
follow this principle.
Lo, (2017) mentioned that court will be having right of overwrite this guideline and
punctured or cover the corporate law at whatever point they are feeling that false exercises are
been directed in the interest of this rule. As seen in case of Gilford Motor Co. Ltd v. Horne
[1933]6 in which Horne was an ex-employee of company who under his employment agreement
has signed that he could not solicit customers of Gilford companyCompany. But after sometime,
he also opened a company in the name of his wife and solicited the customers of his ex-
company. So, Gilford companyCompany sued Horne after which court found that Horne formed
his company just to solicit the customers of Gilford. This struck to the heart that principle reason
for organization was executed misrepresentation just which was viewed to as bad behaviors of
6 Gilford Motor Co. Ltd v. Horne [1933]
3

Horne. So, in this case, court pierce the corporate veil on grounds that company which was set up
by Horne was in accordance to misrepresentation just so both organization and proprietor would
be dealt with as one identity.
Another case was of Jones v. Lipman [1962]7 in which Mr. Lipman was at starting
wanted to sale sell his land at starting. Thereafter, he changed his mind and formed a company
where he himself was owner. He then transferred the land which he was trying to sell to his own
company. Jones filed the case against Mr. Lipman. Court found that organization was found on
grounds of extortion with the goal that exceptional execution of exchange of land to his own
particular organization to should be possible. Court under judgements of Gilford Motor Co. Ltd
v. Horne [1933]8 said that Mr Lipman was holding a mask before his face in order to avoid
recognition by eye of law and so that he could easily avoid.
Singh, (2016) said that court is having right to lift the principle of Salomon whenever
they found that there is any kind of fraudulent activity been being done. At the time when a
group of companies would be formed so that they could perpetrate fraud at that time also court
would not be required to adhere to Salomon principle. As it was seen in case of D.H.N Food
products Ltd. v. Tower Hamlets London Borough Council [1976]9 where court decided that they
could disregard Salomon case whenever they could or just adjust it as per their knowledge. In
this above case, D.H.N organization was having 3 auxiliaries and they were just having area or
premises as their advantages of D.H.N were having licenses. In 1970, LBC acquired premises of
D.H.N in order to build a house and company had to close down. But for which this, company
received a compensation which was about one and half times more than that the value of land.
At this point it is especially certain that convention of lifting of shroud of consolidation
would imply that investors on what grounds could be held subject. As they are dependable till
the degree of capital been contributed by them. So, piecing will be calledbe called to as if they
are overriding this fact and not considering firm and shareholders as a separate entity. Court
found out at several times that if shareholder areshareholders are forming a part of corporate
7 Jones v. Lipman [1962]
8 Ibid 4
9 D.H.N Food products Ltd. v. Tower Hamlets London Borough Council [1976] 1 WLR
852
4

entity, they will be in line of committing fraudulent activities. So, in that case, court could look
out of the box and try to see correct face behind the mask of fraud or wrongdoings of that
person.
Pearce and Barr, (2015) said that it is not at all necessary that shareholder and company
are been all times considered to as separate legal entity. If they find that legal entity has been
incorporated for defeating public convenience, involving into wrongdoings, protecting any fraud
done by them or defending crime. Then in all these above cases, court would be regarding both
corporation and person who are associated with it to be one. It is not correct that court is every
time following the principle of Salomon into their judgements treating shareholders and
company as one particular entity is accurate as per Companies Act 2006. However, there are a
decent arrangement of condition in which court could lift the corporate cloak which they
consider to be right and legitimate on previously mentioned grounds.
Circumstance under which court can lift the corporate veil:
The instance which could fall under fact that corporate veil would be lifted or pierced by
court directors, owners or shareholders could not bbe given protection under these circumstances
or instances. From the above mentioned cases, following points are have been concluded:
At the time when company is avoiding or trying to avoid legal obligations- In the event that
any sort of legitimate commitment has been maintained a strategic distance from or not been
trailed by organization whether at time of consolidation or while doing its working. Court is
having energy to neglect and held all it's at risk investors or proprietors as having boundless
liabilities. Which essentially implies that investors will be held at risk for all bad behaviours in
name of organization they would not have appropriate to get got away on bases of Salomon
standard.
At time when character of company needs to be determined- As seen in case of Gilford
Motor Co. Ltd v. Horne [1933]10 when company was set up only to compete with other enemy
company and to take solicitations of their customers. If court is in doubt that company is only
owned or incorporated by opposition, at that time, they could easily ignore corporate fiction and
examine against that shareholder or owner whosoever responsible.
10 Ibid 5
5

At time when fraud is suspected- court amid its listening ability and indictment discovered that
there is any sort of extortion which is been occurring inside organization and for the sake of
organization. As of now additionally court is capable not to take after Salomon standard or when
it is crushing cases of banks.
Important to protect interest of revenue- There are many times when shareholders or owners
are found avoiding tax obligations. So, if court found that corporation is has been evading tax or
it was formed only for tax evasion, then court could break through corporate veil (Osuntogun,
2018). In the event that it is critical to ensure enthusiasm of income and investor are not
concurring themselves to be indistinguishable with organization at that point court could
countervail Salomon rule.
When company is acting as agent- There are several times when one company is has been
acting as agent otor trustee of another company. So, during this, the agent company will be
identified with its members only. As seen in the landmark case of Salomon v. Aron Salomon and
Co. Ltd [1897]11 where company and Aron was having agent and principal relationship as
organization organisation was a limited company.
When company is pretending- it could be time when organization is holing up behind the veil
and imagining or masking its real recognizable proof all together they could de their fake
exercises. Then Court will also be having power to go beyond their legislations and not
following the Salomon Principle.
Against interest of public- in the event that the organization is been set up just to conflict with
enthusiasm of open when they are not following their corporate social obligations at that point
court could be lifting the corporate cloak too.
Group enterprise- As seen in the case of D.H.N Food products Ltd. v. Tower Hamlets London
Borough Council [1976]12 Salomon principle could not be followed or they could look beyond
this. As there is a group of companies which are under one same name; so, they all would be
treated as part of same economic entity as they would be having same balance sheet, profit and
loss statement and other financial statements.
11 Ibid 6
12 Ibid 6
6

Statutory provisions in support of lifting the veil:
Under the section 24 of Company Act of UK, it is depended dependent upon the time
when company is carrying out business. If company is carrying out its business and if investors
are been available in organization for over a half year then no one but they could be sued or
argument could be documented against them. This area might cover the individuals or investors
of organization, not the executives of that organization have been incorporated inside segment.
Under area 213 of Company Act of UK at the season of liquidation of firm in the event that it
creates the impression that on of the organization has been set up keeping in mind the end goal to
cheat its loan bosses of organization. Then by application of liquidator, owner of company could
bbe declared as fraudulent as they would be liable to make all contribution. But this could not be
done only on the application of that liquidator, they also need to prove some important
components in order to pierce corporate veil.
Resulting damage or harm- the person who is bringing other gathering into official courtroom
must demonstrate to law that he is been experiencing misfortune or mischief by the
demonstration of respondent. In this, one who is taking other into court is known as plaintiff. Till
the time when plaintiff has proved that defendant has caused a harm to him, the defendant would
be treated to be as victim only.
Control and domination- This is the basic thing which plaintiff needs to prove that defendant is
having some part or share in that company. He must be proving complete domination in
company of defendant as proving majority of shares will not work every time. For this, court
would be obtaining evidence regarding capitalizationcapitalisation, failure in following corporate
formalities or that assets are been kept for non corporatenon-corporate purpose.
Improper purpose or use- After proving that there is complete domination of defendant,
plaintiff would be proving that there is misuse of powers which is given to him (Phiri, 2017).
Committing fraud or improper use of powers should be proven otherwise, lifting of corporate
veil would not be there in this regard.
CONCLUSION
From the above corporate law, it was concluded that both company and owner or
shareholders should be treated as a separate legal entity. It is very much important for law to
7

distinguish between both of them so that liabilities of owner could be taken out. Shareholders are
having limited liabilities within working and at time of liquidation as well, which would bbe
limited till amount which that was invested by them. But there are several times when this law
would be moulded out as per requirement of court which is known as lifting the veil of
incorporation.
8

TABLE OF CASES:
S a l o m o n v . A r o n S a l o m o n a n d C o . L t d [ 1 8 9 7 ] AC 22
Macaura v. Northern Assurance Co. Ltd [1925] AC 619
Lee v. Lee Air farming Ltd [1960] 3 AllER 420
Williams v. Natural Life Health Foods [1998] H L 3 0
Gilford Motor Co. Ltd v. Horne [1933]
Jones v. Lipman [1962]
D.H.N Food products Ltd. v. Tower Hamlets London Borough Council [1976] 1 WLR 852
UK Legislations
Companies Act [2006]
9

REFERENCES
Books:
Mucha, A., 2017. Piercing V. Lifting the Corporate Veil: Prest Decision in the Light of the
Economic Analysis of the Company's Limited Liability.
Pearce, R.A. and Barr, W., 2015. Pearce & Stevens' Trusts and Equitable Obligations. Oxford
University Press, USA.
Sikka, P. and Stittle, J., 2017. Debunking the myth of shareholder ownership of companies:
Some implications for corporate governance and financial reporting. Critical Perspectives on
Accounting.
Singh, E., 2016. Parent Company Liability for Environmental Disaster Caused by Subsidiary
Company. Imperial Journal of Interdisciplinary Research. 2(7).
Osuntogun, T.A., 2018. PROTECTION OF WHISTLEBLOWERS IN THE NIGERIAN
CORPORATE ORGANISATION: A LEGAL APPROACH. Ajayi Crowther University Law
Journal. 1(2).
Journals:
Khimji, M.F. and Nicholls, C.C., 2015. Corporate Veil Piercing and Allocation of Liability:
Diagnosis and Prognosis. Banking & Finance Law Review. 30(2). p.211.
Lo, S.H., 2017. Piercing of the corporate veil for evasion of tort obligations. Common Law
World Review. 46(1). pp.42-60.
Phiri, S., 2017. Piercing the corporate veil: a critical analysis of section 20 (9) of the
companies act 71 of 2008 (Doctoral dissertation, University of Venda).
Quinn, J. and Connolly, B., 2017. The non-financial information directive: An assessment of
its impact on corporate social responsibility. European Company Law. 14(1). pp.15-21.
Schall, A., 2016. The New Law of Piercing the Corporate Veil in the UK. European Company
and Financial Law Review. 13(4). pp.549-574.
Waqas, M. and Rehman, Z., 2016. Separate Legal Entity of Corporation: The Corporate
Veil. International Journal of Social Sciences and Management. 3(1). pp.1-4.
10

Yebisi, E.T., 2014. The Corporate Veil and Its Relevance to Co-Operative Societies in
Nigeria. JL Pol'y & Globalization. 29. p.140.
BIBLIOGRAPHY
<https://www.trans-lex.org/310810/_/salomon-v-salomon-co-ltd-%5B1897%5D-ac-22/>
<https://www.lawteacher.net/cases/macaura-v-northern-assurance.php>
<https://www.ato.gov.au/law/view/view.htm?docid=JUD/*1960*3AllER420/00001>
<http://swarb.co.uk/williams-and-another-v-natural-life-health-foods-ltd-and-another-hl-30-
apr-1998/>
<http://swarb.co.uk/gilford-motor-co-ltd-v-horne-ca-1933/>
<http://swarb.co.uk/jones-v-lipman-and-another-chd-1962/>
<https://www.lawteacher.net/cases/dhn-v-tower-hamlets.php>
11