Bournemouth University: Corporate Veil and Tort Claims Analysis

This report provides an in-depth analysis of the doctrine of separate legal personality and the corporate veil, focusing on its effectiveness in relation to tort claims against parent companies for the actions of their overseas subsidiaries. The report begins by explaining the concept of corporate personality, highlighting its importance in business transactions and legal proceedings. It then delves into the circumstances under which the corporate veil can be lifted, particularly in cases of fraud, misconduct, and evasion of legal obligations. The core of the report examines the application of tort law to global corporations, emphasizing the establishment of a duty of care by parent companies towards subsidiaries and the implications for liability. The report also explores the advantages of pursuing tort claims against parent companies, including preventing fraudulent activities and navigating complex international corporate structures. The analysis draws on relevant case law, such as Salomon v A Salomon & Co Ltd and Caparo Industries plc v Dickman, to illustrate key legal principles. The report concludes by evaluating the effectiveness of the corporate veil in the context of tort claims, considering legal, theoretical, and international perspectives, offering insights into the challenges and opportunities in this area of corporate law.

COMPANY lAW
THE CASE OF CORPORATE VEIL

Executive Summary
Every corporation is an artificial entity and therefore demands directors and officers to do
natural acts such as management of a business, signing of contracts and others. Nevertheless
one should not forget that the corporations are also a separate legal personality and have
distinct legal status from the managers of the business. This is the reason that they are not
likely to be held liable in persona manner for the conduct of the company. But in some
exceptional circumstances, the law gives exemption to lift the artificial veil that existed
between a corporation and directors/officers. Lifting of the corporate veil is a method to
identify the person who done misconduct.
The second part of the report has developed its focus on the liabilities of corporations under
Tort law. In the regular dealings, corporations often conduct tort to other parties that attract
civil penalties. The situation becomes crucial in the case of overseas companies that have
operations in more than one country. In such a situation, a duty of care is established on the
parent company for the torts conducted by the subsidiary company as it has a duty of care to
the employees of a subsidiary company. In other words to state that the Tort law provisions
and principles control the parent companies with respect to international transactions.

Contents
Executive Summary...................................................................................................................1
Introduction................................................................................................................................2
Separate Legal Identity: An evaluation......................................................................................3
Lifting of Corporate Veil...........................................................................................................4
Global Corporations, Tort Law and the Lifting of the Corporate Veil......................................4
Conclusion..................................................................................................................................7
Bibliography...............................................................................................................................9

Introduction
The enhanced complexities and the compliance requirements in the corporate management
and the functions have led to the affairs of the company being managed by the professional
persons or the directors that are seldom separate from the owners of the company. This gives
a corporate a separate legal identity that is distinct from the owners as well as the directors of
the company. Under the separate identity principles, the individuals who are entrusted with
the responsibility of the corporate affairs management are expected to uphold the highest
governance standards and avoidance of the conflicting interests. Though a company is
regarded as separate from its members, yet the instances of the misconducts and the corporate
failures force the uplifting of the said corporate veil to determine the real persons behind the
conduct of such affairs.
The following work is aimed at shedding light on the doctrine of separate legal personality,
corporate veil and the effectiveness of the same in the events of the claims under the tort law.
The study of the lifting of the corporate veil would mostly focus on the transnational
corporations having the global business affairs which involves the parent company and the
subsidiaries. The first segment of the work would elaborate the key elements involved in the
separate legal identity and the reasons behind the corporate cloak piercing. The latter segment
of the work is focussed on the study of the tortious claims, that is the benefits and the
elements involved in relation to the irregularities in the corporate affairs of the global
companies. The challenges are additionally provided.
Separate Legal Identity: An evaluation
The separate identity of the corporates provides a platform to the business men for the
conduct of business irrespective of the possible failures of the business owing to the external
reasons. The distinct personality principle of the company is one of the most renowned
benefit and the legal principle of the corporate conduct and was first recognised in the case
law of Salomon v A Salomon & Co Ltd1. It was pronounced in the case law by the House of
the Lords that the company and the holders of the memorandum are two different persons and
owing to the legal issues in the corporate conduct, the owners cannot be held liable. Thus, the
pronouncement led to the one of the most crucial principles of the corporate laws worldwide
1 [1896] UKHL 1, [1897] AC 22.

including the UK. A company established and registered under the Companies Act 2006,
under the separate identity principle is entitled to various benefits such as the listed follows.
The prime benefit of the distinct identity of the corporate enables a corporate to carry out the
business transactions in its own name with the third parties which includes the contract
concerning the properties and debts. The significance of the establishment of the contractual
relationship with the aid of the common seal is stated in the case of Lee v Lee’s Air Farming
Ltd2. A company validly form possess a capacity to sue the third parties and the third parties
can sue the company as well and the said significance has been stated in a number of case
laws including the Jameel v Wall Street Journal Europe3. Not only the outsiders, but the
company being distinct from its members, can also sue the members as well, and the same
mentioned in case of Macaura v Northern Assurance Co Ltd4. In the stated case law, it was
held that even after the majority shareholder of the company held the major shares of the
company, does not possesses the rights over the property of the corporation. The members of
the company are additionally not the trustee of the property of the company, as was held in
the case of the Ayton Ltd v Popley5 and J J Harison (Properties) Ltd v Harrison6. The key
advantage of the corporate personality is that the existence of the company continues even the
members of the company die. Hence, it can be stated that the separate distinctiveness of the
company is achieved when all the legal compliance requirements of the company formation
and management are done with.
Lifting of Corporate Veil
The process of the lifting of the corporate veil is yet another key topic of interest in the
corporate field because of the necessity to do so in the events of frauds and irregularities of
those who are in control of the management. The piercing of the veil involves the process of
finding out the real persons behind the business decisions to fix the responsibility on the said
persons. Thus, it would be right to state that the companies and directors can take the
advantage of the separate legal personality to the extent it is lawful and beneficial for the
management of the business, else the same distinct identity would be disregarded. There are
several instances in which the corporate veil of the company is lifted such as when the
directors indulge in the dishonest and inappropriate objectives on the cost of the trust and the
2 [1961] AC 12.
3 [2006] UKHL 44, [2007] 1 AC 359.
4 [1925] AC 619.
5 [2005] EWHC 810 (Ch), LTL 19/9/2005.
6 [2001] EWCA Civ 1467, [2002] 1 BCLC 162, at [25].

resources of the stakeholders. One of the prime grounds for the lifting of the corporate veil is
when the directors and the key managing persons of the company are engaged in fraud as was
held in the case of Jones v. Lipman7 and the Gilford Motor Company Ltd v. Horne. Thus,
when the company is formed for a purpose of the cloaking the wrongdoings for the personal
interest, the courts would take steps to lift the corporate cloak. In addition the corporate veil
is lifted when the duties of the directors of the company is breached in relation to the
compliances with the tax liability, fiduciary relationship, fraudulent transactions to enrich the
personal estate. There are numerous legal obligations to be complied by the companies which
includes the payment of taxes and other statutory dues. One of the most renowned cases of
the avoidance of the legal duties was that of Adams v. Cape8. Thus, when the legal rights are
evaded by the incorporation of the corporates, the veil would be lifted. The lifting of the
corporate veil also involves the instances when the shadow directors are appointed in the
subsidiary companies who act as the agents of the parent company as a means to control the
whole group of the corporation.
Global Corporations, Tort Law and the Lifting of the Corporate Veil
Recent few decades have witnessed a significant explosion of in the study of the social,
economic and the legal aspects of the business conduct of the global operations that have
been characterised by the cross border operations. It is essential to note that the management
of the global operations involve the addressing of the interests and concerns of the
stakeholders not only in the country of head office, but also in the various country of
operations. It is a significant fact to be noted that the phenomena of the lifting of the
corporate veil is not much popular in the UK and is regarded as the means of the last resort. It
must be significantly noted that by the virtue of the limited liability principle of the corporate
affair management, a parent company cannot be directly held liable for the acts of the
subsidiary companies. As stated above, there is a high threshold for the corporate veil to be
lifted. In contrast to this, the duty of care leads to the establishment of the circumstances
where the liabilities of the directors of the parent companies arise directly. The above contrast
leads to the cases where the focus is laid down on the conduct of the parent companies to fix
the responsibilities directly.
In context of the transnational corporations, the litigations against the corporations under the
tort law result in the civil liabilities and are mainly focussed on the negligent acts of the
7 [1962] 1 WLR 832
8 [1990] Ch. 433 (CA (Civ Div)

directors or those in in charge. As a result, the element of the duty of care is the chief focus of
such cases under the tort law. The initiation of the proceedings of such cases is done by the
parties who have directly sustained the effects of such acts and may range from the
employees of the entity to members of the local community, regulators and others. It is yet
another important thing to note that the cases against the said corporations are filed in the
respective home countries which not necessarily be the place of head office of the company.
It is essential to note that there are various advantages of the pursuance of the cases against
the parent companies on the lines of lifting the corporate veil under the tort law. The first
advantage of the same is that the parent companies are barred from fraudulent activities in the
overseas environment. The second key advantage of the tort principles is that the same is
devoid of the challenges of the regional corporate law principles which is significant in the
case of the vertically integrated corporate structures. Thus, when the divisions of the
company are scattered in the various parts of the globe, there may be number of states that are
interested in regulating the activities of the legal units within the said group. The third
advantage is in the form of the establishment of the necessary connection between the
regional territory and the tort principles.
The effectiveness of the principle of the lifting of the corporate veil has been elaborated as
follows. It is vital to note that the most of the cases pertaining to the tort liability claims are
attempted at focussing the acts and omissions of the parent companies itself. The said
allegations are based on the tort principles of the corporate law where it is assumed that the
parent company possessed certain duty of care not only to the members of the company, but
also towards the employees of the subsidiaries on the lines of safety. In context of the English
Common Law, the existence of the duty of care is identified on the basis of the Caparo test as
was developed in the case law of Caparo Industries plc v Dickman9. The three principles are
firstly there must exist a foreseeability of harm, secondly there must be an existence of a
close relationship between the parties and lastly that it must be just and equitable for the
liability to be imposed on the parties. In certain cases, the subsidiary companies are not even
named as the defendants and the cases are directly filed in the names of the parent companies,
as was held in the case of Connelly v RTZ10. In the stated case law, it was alleged by the
claimants that there was an existence of duty of care because the advices were extended by
the parent company to the subsidiary company in the policy formulation in the areas of
environment, health and safety. A similar case was initiated in the case law of Guerrero v
9 [1990] 2 A.C. 605 (HL)
10 [1998] A.C. 854 (HL)

Monterrico Metals11. In the stated case law, a Peruvian service company had engaged in the
acts of wrongful and torturous treatment of the employees. The result of the same was in the
form of the initiation of the proceedings against the parent company stating the breach of the
principles of tort of negligence where the adequate facilities were not provided for the
management of risk in the subsidiaries. The proceedings were initiated on the grounds that
the level of the control of the parent company over the management of the subsidiary was
significant and enough for the injuries to be prevented, however there was a failure to do so
on the part of the subsidiary management. Hence, it can be stated that there are different
circumstances in which the claims of the tort liability arise, but the allegations are made
against the parent companies that the overseas torts are their responsibility. One of the yet
another cases which identified the duty of care of the parent company is that of the Chandler
v Cape12. In the said case, it was held that even if the parent company does not has a
significant control on the operations of the subsidiary, yet it would be held liable for the
injuries caused to the stakeholders of the subsidiary companies. Hence, the above case laws
establish the duty of care on the whole group and leads to case law establishments in the
tortious principles.
Apart from the discussions conducted above, regarding the benefits of the tort claim in
context of the fixing the responsibility on the real persons involved in the acts of the
companies, there are some challenges that are also present in the tortious claims as described
below. One of the prime challenges of the Tort Liability Claims is the determination of the
questions of jurisdictions on the lines of the home state and the foreign states. It is to be
essentially noted that there are numerous applicable rules in relation to the establishment of
the personal jurisdiction over the defendants in the corporate sector. Generally there is a
reliance on the English Common Law rules except where the provisions of Brussels I
Regulation are specifically applicable for the cross border disputes in the regions of the
European Union. It is a vital thing to be noted that in a recent high court ruling in the case of
Lungowe v Vedanta13 it was stated with respect to the determination of the duty of care that
thought the evidences may not be available in the initial stages of the proceedings, but the
said duty is present where it is the responsibility of the parent company to develop the health
and safety measures in relation to the subject of the case. In addition the duty of care is
present when the subject matter is related to the control of the parent company over the
11 [2009] EWHC 2475 (QB)
12 [2012] EWCA Civ 525
13 [2017] EWCA Civ 1528

subsidiary company. Thus, this leads to one of the significant conclusions in the corporate
climate that the hearings related to the foreign subsidiary of a company which is originally
domiciled at UK, can be done at the English Courts. Thus, even when the facts are suggestive
of the absence of the control over the operations of the subsidiary company as per the
regional rules and legal guidelines, yet the same can be initiated.
Conclusion
This is a privilege of the formation of the corporate, however the same is being misused over
the years in the various forms and hence, the corporate veil is often lifted to review the real
persons behind the corporate conduct and fix the responsibility thereon. The study has
elaborated a number of reasons in which the corporate veil is pierced and the applicable case
laws are also highlighted. The study has enabled to conclude that the approach for the
corporate veil lifting is regarded as an option of the last resort in the English Court cases.
Further, in the latter part of the work, the conjunction of the tort law and the corporate veil
lifting is elaborated. It has been studied that it is easier to fix the responsibility under the tort
law on the parent companies, in relation to the acts of the subsidiary companies. This is
because of the element of the duty of care in relation to the stakeholders, and a three step
process of fixation of such duty has been elaborated in detail. In addition to the above the
case laws have been studied to provide the supportive evidences to the advantages and the
challenges of the tort liability claims in case of global corporates. Thus, the study of the tort
principles applicability on the corporate affairs lead to the conclusion that Tort Liability
Claims are an effective means of controlling the parent companies in the case of the global
operations, however the success of the same is dependent on the efficiency of the regional
jurisdictions.

Bibliography
Adams v Cape Industries Plc. [1990] Ch 433
Ayton Ltd v Popley [2005] EWHC 810 (Ch), LTL 19/9/2005
Caparo Industries plc v Dickman [1990] 2 A.C. 605 (HL)
Chandler v Cape [2012] EWCA Civ 525
Connelly v RTZ [1998] A.C. 854 (HL)
Gilford Motor Co Ltd v Horne [1933] Ch 935
Guerrero v Monterrico Metals [2009] EWHC 2475 (QB)
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
Jones v Lipman [1962] 1 WLR 832
Lee v Lee’s Air Farming Ltd [1961] AC 12
Lungowe v Vedanta [2017] EWCA Civ 1528
Macaura v Northern Assurance Co Ltd [1925] AC 619
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22