Corporate Veil: Analysis of English Courts Approach and Case Studies

This report delves into the concept of the corporate veil, a fundamental principle in corporate law, exploring its significance and practical implications. It examines the separate legal identity of corporations, the rationale behind limited liability, and the responsibilities of corporate governance. The report focuses on the "lifting of the corporate veil" and the approaches adopted by English courts, analyzing key case laws such as Salomon v A Salomon & Co Ltd and Adams v Cape Industries Plc. It contrasts the English approach with international perspectives, particularly those of the Australian and American legal systems, highlighting the circumstances under which courts may disregard the corporate entity to address fraud, evasion of legal duties, and other improper activities. The report discusses the reluctance of English courts to pierce the corporate veil, emphasizing the preference for conventional legal instruments and agency principles, while also noting the development of the doctrine in other jurisdictions.

international corporate law

THE CASE OF CORPORATE VEIL 1
Contents
Introduction................................................................................................................................2
Separate Legal Identity: An evaluation......................................................................................2
Lifting of Corporate Veil: Significance and Obligation............................................................3
Piercing of the Corporate Veil: Approach of the English Courts..............................................5
Conclusion..................................................................................................................................8
Bibliography.............................................................................................................................10

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Introduction
With the enhanced complexities in the business operations, companies are lately being
managed by the professionals that are separate from the various stakeholder groups of the
entity, rendering the corporate a separate legal identity. The concept of separate legal identity
is comprised of several practical as well as theoretical contemplations in the context of the
application and associated outcomes. The authority to administer the affairs of the corporate
comes with the responsibility to avoid the conflict of interests and act in best interests of the
stakeholders including the shareholders. Yet another significant term is corporate governance,
which refers to the framework by which the corporates are directed and controlled. It is the
responsibility of the directors or the management of the enterprise and the other members to
uphold the highest levels of the corporate governance standards within the enterprise. The
disregarding of the corporate personality or the ‘Lifting of corporate veil’ is one of the widely
used terms in the corporate world over the years, where the management of the corporate is
scrutinised for the acts done in the name of the corporate concerned. The following work is
aimed at exploring the various facets of the lifting of the corporate veil. The approaches taken
by the English courts in the context of this subject would be explored, taking into account the
popular English case laws for superior understanding.
Separate Legal Identity: An evaluation
Earlier the company legal relationships were primarily based on dealings and activities amid
the ‘real or natural’ persons. However, owing to the reasons of the inherent risks of failure
and the losses in the business environment due to the recession, poor business management,
accidents and others; the legal principle of limited liability of shareholders was adopted to
encourage the business ventures. Thus, the legal personality principle grants protection to the
businessmen who are hesitant to organise the business ventures and provides ample
opportunities for varieties of business transactions and schemes. Thus, the rights of the
creditors owning a right against the company are limited to the assets of the company and
cannot be extended to the individually private assets of the shareholders in the process of
discharge of their claims. The distinct corporate identity of the company is representative of
one of the most foundational principle of the corporate law in UK and other parts of the globe
as well which was first established by the House of Lords in the popular case law of Salomon
v A Salomon & Co Ltd1. It was stated by Lord Macnaghten in the said case that the
1 [1896] UKHL 1, [1897] AC 22.

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subscribers to the memorandum and the company are two different persons in the eyes of the
law. Thus, one of the most critical characteristics of a registered company is both an entity
separate from the members as well as an association of persons. With the said pronouncement
the following implications came into existence as listed below.
As the company is registered under the Companies Act, the company in the capacity of the
separate person can carry out various business transactions such as the entering into contracts
with the third parties, owning the property and incurring the debts. The company can be sued
by other persons or can sue the other persons as held in the case-law of Jameel v Wall Street
Journal Europe2. Besides, any of the members can be sued by the company under the
separate legal identity. It was held in the case-law of Macaura v Northern Assurance Co Ltd3
that the shareholder even after holding all or maximum shares of the corporation is not the
corporation and neither any of the creditors nor the shareholders possess any legal or
equitable property in the assets of the corporation. Thus, the company by the reason of
separate legal identity is dually the beneficial as well as the legal owner of its property and
not the trustee of the property with the members of the company. There are numerous case
laws according to the above principle such as J J Harison (Properties) Ltd v Harrison4 and
Ayton Ltd v Popley5. In addition to the above, the members and the company being a discrete
person from the members can enter into transactions with each other. The creation of a
contractual relationship was affirmed in the popular case law of Lee v Lee’s Air Farming
Ltd6. One of the yet another striking significance of the discrete legal personality is that a
company survives in spite of the death of its members. Thus, post the formal compliance
requirements in the context of the formation of the companies the company acquires its
separate distinctiveness.
Lifting of Corporate Veil: Significance and Obligation
One of the yet another significant topics of interest in the corporate world, both in terms of
literature and the practical significance is the act of the “Piercing of the Corporate Veil.” It
refers to a process whereby the courts find out the real persons behind the acts of the
companies and thus remove the cover of the separation of the corporation from the members.
The basis as pronounced by the international authorities and courts for the said piercing of the
2 [2006] UKHL 44, [2007] 1 AC 359.
3 [1925] AC 619.
4 [2001] EWCA Civ 1467, [2002] 1 BCLC 162, at [25].
5 [2005] EWHC 810 (Ch), LTL 19/9/2005.
6 [1961] AC 12.

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corporate veil are highlighted as follows. In the Australian context, the corporate veil is lifted
by the reason of person using the company for the furtherance of dishonesty and
inappropriate objectives that are a sham or for the avoidance of an existing legal duty7. The
breach of the existing legal duties of the directors as stated in the various pronouncements are
using the company as a means for fraud, evasion of the tax liability and in the interests of the
stakeholders. Further inclusive bases in the above list are the use of the company for assisting
the directors in the breach of their fiduciary duties, parent company having a shadow director
to control the whole group, and the subsidiary company acting as agents of the parent
company. Thus, it can be seen that a wide and comprehensive approach has been adopted in
the controlling and direction of the companies.
The American corporation law is also appreciative the principle that each corporation is a
separate legal person on its own, possessing the rights and liabilities distinct from the
members. The America law states to pierce the corporate identity in the following situations
as listed below. The corporate cloak can be lifted in the event of lack of the sufficient assets
to meet the obligations by the company, and when case litigation requires to investigate into
the affairs of the company in terms of the operations of any of the parent company or the
subsidiary company; based at the US as well8. The conditions also include the binding of
judgement on the parent in the context of the subsidiary and for the purpose of the recovery
of the punitive damage, by extending the claim to the assets of the parent company as well.
The following is a description of the situations and the reasons by which the various Lords of
English Courts, historically have either lifted the corporate veil (very fewer cases) or have
given an explanation of the same. In the judgements of Lord Sumption, only the “Evasion
Principle” or the noncompliance of the existing obligations can be stated to be justified base
for carrying out the act of the piercing the corporate veil9. Thus, the viewpoint that the
concealment cases are not a strong base for revealing the real doers of acts of the companies
has been upheld. Further, it was held by Lord Sumption that the rule of the disregarding the
corporate personality must be resorted to only in the absence of the other conventional legal
instruments. The principle was further recognised in the case of Ben Hashem v Al Shayif10
7 'How Can A Court Pierce The Corporate Veil? | Legalvision' (LegalVision, 2019)
<https://legalvision.com.au/how-can-a-court-pierce-the-corporate-veil/> accessed 26 July 2019.
8 Esq. Garrett Sutton, 'Piercing The Corporate Veil New York Court Case | Corporate Direct' (Corporate Direct,
2019) <https://www.corporatedirect.com/asset-protection-resources/piercing-the-corporate-veil-new-york/>
accessed 26 July 2019.
9 Alexander Schall, 'The New Law Of Piercing The Corporate Veil In The UK' (2016) 13 European Company
and Financial Law Review.
10 [2009] 1 FLR 115.

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that it is not appropriate to lift the corporate veil unless the same is necessary to be done. The
above principle of last resort was further accepted by Lord Neuberger, Lord Mance and Lord
Clarke as well11.
Thus, a contrast can be seen in the international approaches concerning the corporate veil and
the English approach. While the former owns a comprehensive framework and numerous
conditions, the latter approach is as limited as traditional law practices.
Piercing of the Corporate Veil: Approach of the English Courts
It is significant to note that the notion of the piercing the corporate veil is much more
developed in the United States as compared to the UK. The lifting of the corporate cloak has
not been a regular event in the context of the UK and only the exceptional circumstances
enable the English Courts to take the said steps. In the words of Cheng (2011), in context of
the description of the history of the English corporate veil doctrine, it has been stated that
upside down approach and lukewarm attitude of the English Courts can be seen because of
the lack of an analytical framework in this regard12. In the work of the author Cheng (2011) it
has been stated that the period post the year 1978 witnessed the decline in the said doctrine of
piercing and a downward trend can be since then. The failure of the development of the
organised approach to the cases has led to the laidback issue of the corporate veil lifting. The
absence of the specific rules as against the traditional practices have contributed to the same.
It is vital to note that the traditional decisions of the English Courts in respect of corporate
cloak have been centred around a number of reasons such as rule of agency, fraud, ‘tort’,
trusts, enemy, revenue (taxation), group enterprises, and cases established on principles of the
Companies Act and other legislations13.
One of the leading cases to be noted here is that of the Adams v Cape Industries Plc. 14
whereby the three arguments were considered and the rejection was followed to affirm the
principles in the Salomon case. The said steps were taken in the context of the American
subsidiary which was engaged in the production of the Asbestos and had resulted in harm.
The three main headings that were referred were the agency, the “fraud exception” resulting
in the Piercing of the corporate veil and the Single economic unit. It is depicted in the said
11 Alexander Schall [7].
12 Thomas K. Cheng, 'The Corporate Veil Doctrine Revisited: A Comparative Study Of The English And The
U.S. Corporate Veil Doctrines' [2011] SSRN Electronic Journal.
13 Liton Chandra Biswas, 'Approach Of The UK Court In Piercing Corporate Veil' [2011] SSRN Electronic
Journal.
14 [1990] Ch 433.

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case that the courts are not willing to lift the corporate veil even when the intention is to
prevent justice. As a result of the same, the asbestos victims in the position of the claimants
were unable to enforce the verdicts in contradiction of the English corporate parent. The said
subsidiary had already been closed by the English parent company so that the liability could
be evaded. It was held in the judgement of the court that the use of the corporate structure is
an inherent principle of corporate law. Thus, company law surpassed the role of the judiciary
of the prevention of justice. The concept of agency has been such deeply focussed by the
English Courts that the judges have been finding it unreasonable to pay attention to various
other categories. In the yet another leading case of Commissioner of Inland Revenue v.
Sansom15 the courts had yet another failed to regard the crucial taxation policy and considered
only the agency concept. As a result of which, the case was decided in the favour of the
respondent that disregarding the corporate’s separate personality would mean that the
advancement of the loan was made by the shareholders to him, which would have been
amounted to be illogical. Thus, as the claim in respect of the charge of the prevention of the
tax liability against the respondent could not sustain.
Further, reluctance can be seen by the English Courts in the piercing of the veil based on the
tort principle. The case law of Williams v Natural Life Health Foods Ltd44 (NHLF)16 can be
stated to be momentous in this context as explained follows. In the case, it was pronounced
by the courts that to fix the liability of the directors in the context of negligence, the personal
responsibility on the part of the directors must be shown. The same has been regarded as
harsh judgements by the virtue of which the corporate veil could not be lifted.
One of the yet another crucial facets of the English Courts in the judgements over the years is
that the English Courts are ardent in piercing the cloak of corporate personality in the event
of the "proving of the fraud." Fraud is one of the most imperative terms in the traditional
common law. A wider meaning has been connoted to the term Fraud under the veil-piercing
Mechanism of the US, as against in the UK. It is essential to note that while the use the term
‘misrepresentation instead of fraud has been rendered significant weight by the US Courts,
which widens the area of the judgement; the lesser flexibility or willingness of the English
Courts can be seen. This is because of the fact that while the acts of misrepresentation are
easier to prove, the fraud takes numerous hard efforts to be proven. The proof of fraud is
tough because it takes two separate principles to be established namely the mala fide
15 [1921] 2 KB 492 (CA).
16 [1998] 2All ER 577 (HL).

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intention of the defending party as well as the proof of the misrepresentation. It is a well-
established fact that in context of the veil lifting cases, the proving of the intention of the
parties is one of the most difficult idea to be established and proven and the same is very hard
to achieve.
Thus, it is a wide evident fact that rigidity can be seen in the approach of the English Courts
concerning the lifting of the corporate veil. The pronouncements stated above lead to the
observation that whenever any judge has tried to get past the traditional reluctant approach,
the said decision has either been set aside or the judge has been criticised for taking the
opposite approach to what is generally preferred. Also, no proper justification can be seen
about the adoption of the said reluctant approach.
Another popular and latest case law that highlights the approach of the English Courts is that
of VTB Capital Plc. v Nutritek International Corp17. In the stated case, the bank had extended
financial assistance to the transaction thinking the same at the arm's length terms, which was
an intragroup transfer controlled by the same person. The plaintiff bank appealed the courts
of law to disregard the separate personality of both the companies as the control was limited
to a single person Mr Malofeev, stating that the said transfer was a fraud. The appeal was
rejected not only by the Court of Appeal but the Supreme Court as well. The courts had cited
that the lifting of the corporate identity would result in the creation of a new liability which
was otherwise not in the picture. Thus, as per the pronouncement of the courts, there was no
avoidance of an existing liability by the said arrangement of the company concerned. Hence,
as evident, there is a complete disregard of the doctrine of the lifting of the corporate veil by
the courts in the said case law as well.
In addition to the above discussed, in the recent landmark judgement of Prest v Petrodel
Resources Ltd18 there has been extended a clarification by the English Supreme Court with
respect of the “nature of the doctrine of piercing the corporate veil,” and the consequences in
the form of “trusts and equitable proprietary remedies.” The said recent judgement is crucial
as numerous attempts were being made to evade the separate personality and limited liability
of companies. In the said judgement, there has been adopted a more refined approach to the
corporate cases and accordingly, the concern has been demonstrated only concerning the
heading of the “fraud exception” and the rest headings are rejected. The rejection of the
appeal for the corporate cloak piercing comprised of the restatement of crucial law in this
17 [2013] UKSC 5, [2013] 2 AC 337
18 [2013] UKSC 34, [2013] 2 AC 415.

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regard. As per the latest pronouncement of Prest, the proposed statement that the evasion
principle is the only basis triggering the piercing the veil is now not accepted as per the law.
Thus, the following points are noteworthy that constitutes the final law after the Prest case.
Firstly, the English Law is comprised of a doctrine of piercing the veil. Secondly, it is not
suitable to pierce the corporate veil unless it is necessary to do so, and therefore the doctrine
is still the remedy of the last resort. Thirdly, there is a justification of the doctrine under the
principle of evasion. Lastly to note that there is no exhaustive list to the evasion principle for
the doctrine to be applicable, however, in the context of the corporate abuse it is the only case
of the disregarding of the veil.
It is further vital to note that though the consensus was achieved among the board members in
the case of Prest, there is still a lack of clarity with respect to the applicability. The
disregarding of distinct identity cannot be restricted to merely the cases of evasion and should
extend the ambit to the cases of the corporate abuses as well. There are contradictory
decisions with respect to the case of Gilford v Horne19 and that of Prest and VTB Capital.
Further, the avoidance of the individual liabilities though beyond the scope of the general law
principle must trigger the piercing of the distinct identity veil. Hence, from the literary point
of view, the doctrine must be applied to all of the various causes of corporate abuses. The yet
another approach to maintain the theoretical consistency is the approach taken by Germany
that is the doctrine is not to apply to any of the cases of the corporate abuse.
Conclusion
The discussions conducted in the previous parts enable to conclude that the concept of
corporate personality and limited liability are fundamental to the establishment and the
management of the corporate structures across the globe. The complex business operations of
modern times cannot take place efficiently without the said concept. However, over the years,
the numerous cases of the corporate collapses have highlighted the misuse of the said
privilege for the conflicting interests as that of the other stakeholder groups of an
organisation.
The international authorities such as the US courts have already expanded their ambit over
the years to pierce the veil of the said privilege to protect the interests of the public at large.
However as highlighted in the work, the approach of the English courts is as reluctant and as
lukewarm as ever in the context of scrutinizing the real natural people behind the corporate
19 Gilford Motor Co Ltd v Horne [1933] Ch 935.

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operations in the event of limited liability being misused. The recent case laws of VTB Ltd
and Prest also failed to get past the set traditional norms and further reinstated the
conservative approach even more.
The further recommendations are proposed that it is high time that the English Courts adopt a
more radical approach to include the cases of the advancement of business objectives and
general public interest as well, apart from the fraud, evasion of legal liabilities, agency
relationship; as the basis of the lifting of the company veil. It can be concluded that the basic
aim of the formation of the companies is facilitating the interests of the stakeholders in terms
of the corporate governance while conducting the business operations with a capital of the
shareholders invested. Therefore, the said basic principle must always be considered while
pronouncing the judgements.

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Bibliography
Books/Journals
Biswas L, 'Approach Of The UK Court In Piercing Corporate Veil' [2011] SSRN Electronic
Journal
Cheng T, 'The Corporate Veil Doctrine Revisited: A Comparative Study Of The English And
The U.S. Corporate Veil Doctrines' [2011] SSRN Electronic Journal
Schall A, 'The New Law Of Piercing The Corporate Veil In The UK' (2016) 13 European
Company and Financial Law Review
Case Laws
Adams v Cape Industries Plc. [1990] Ch 433
Ayton Ltd v Popley [2005] EWHC 810 (Ch), LTL 19/9/2005
Ben Hashem v Al Shayif [2009] 1 FLR 115
Commissioner of Inland Revenue v. Sansom [1921] 2 KB 492 (CA)
Gilford Motor Co Ltd v Horne [1933] Ch 935
J J Harison (Properties) Ltd v Harrison [2001] EWCA Civ 1467, [2002] 1 BCLC 162, at
[25]
Jameel v Wall Street Journal Europe [2006] UKHL 44, [2007] 1 AC 359
Lee v Lee’s Air Farming Ltd [1961] AC 12
Macaura v Northern Assurance Co Ltd [1925] AC 619
Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
VTB Capital plc v Nutritek International Corp [2013] UKSC 5, [2013] 2 AC 337
Williams v Natural Life Health Foods Ltd44 (NHLF) [1998] 2All ER 577 (HL)
Others

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Garrett Sutton E, 'Piercing The Corporate Veil New York Court Case | Corporate Direct'
(Corporate Direct, 2019)
<https://www.corporatedirect.com/asset-protection-resources/piercing-the-corporate-veil-
new-york/> accessed 26 July 2019
'How Can A Court Pierce The Corporate Veil? | Legalvision' (LegalVision, 2019)
<https://legalvision.com.au/how-can-a-court-pierce-the-corporate-veil/> accessed 26 July
2019