Authored By: Soliyana Yirgalem Abera
Soliyana Yirgalem Abera
Introduction
After Salomon v A Salomon & Co Ltd established the doctrine of separate legal personality, the corporate veil remains one of the most debated concepts in company law.[1] The principle that a company exists as a legal entity distinct from its shareholders has been fundamental to encouraging investment, promoting entrepreneurship, and ensuring commercial certainty.[2] Yet the doctrine that underpins modern commerce can also be exploited to facilitate fraud, avoid legal obligations, and shield individuals from accountability.[3] This tension raises a difficult question for courts: when should the corporate veil be pierced?
The state provided ‘micro’ aspects of corporations, such as separate legal personality, limited liability, and perpetual succession, for public benefits rather than private gains.[4] However, there may be circumstances in which courts pierce the corporate veil, even though they have struggled to establish clear and consistent principles governing when separate legal personality should be disregarded.[5]
This article argues that piercing the corporate veil is more than just academic scrutiny and vague standards. Although the corporate law doctrine of limited liability has been much written about, veil piercing as such has received far less academic review.[6] This article first examines the legal framework governing separate legal personality and limited liability. It then analyses the circumstances under which English courts pierced the corporate veil, highlighting the uncertainty surrounding them, which caused inconsistent judicial decisions, commercial uncertainty, and corporate abuse.[7] Finally, it evaluates whether the current judicial approach provides an appropriate threshold for intervention while preserving the principle of separate legal personality.
The Legal Framework
The Foundation of Separate Legal Personality
The scope of English law remains narrow regarding the principle of corporate veil piercing.[8] This principle was established in Salomon v A Salomon & Co Ltd. Mr. Salomon had a business of leather boots and shoes, which then converted into Salomon and Company Ltd. Salomon, his wife, and five of his children held one share each in the company to fulfill the requirements of the Companies Act at that time that there should be seven shareholders. The newly incorporated company purchased the sole trading leather business. Salomon had borrowed funds from creditors to invest in the business. Things did not go well for the leather business, and within a year, Salomon had to sell his debenture to save the business. This did not have the desired effect, and the company was placed in insolvent liquidation.
The liquidator, on behalf of the unsecured creditors, alleged that the company was an agent for Salomon, and that Salomon was therefore personally liable for the debt of the company. The Court of Appeal held that the whole transaction was contrary to the true intent of the Companies Act and the company was a mere sham and added that Salomon remained the real proprietor of the business. As such, Salomon was liable to indemnify the company against its trading debts. On appeal, the House of Lords did not agree with the judgment of the Court of Appeal. It found that a company was formed in compliance with the regulations of the Companies Act and therefore, it is a separate person, not the agent of its controller.[9]
The significance of the decision in Salomon can be said to have two aspects. The first is the principle of “separate corporate personality”, which is that a company is distinct from its shareholders and is to be treated as any other independent person with its own rights and liabilities.[10] The decision in Salomon has also been, in its initial days, a judicial pronouncement legitimising the concept of the one-person or private company. The second principle which simultaneously emerges from Salomon is that it guarantees the limited liability of shareholders.[11] These two doctrines are recognized as the twin pillars of the modern corporation.[12] It is important to make a note that before the decision in Salomon, the separate legal entity concept had not yet been fully recognized or developed, and that therefore, until Salomon was decided in 1897, it remained unclear in what circumstances a company was thought to be legally separate from its shareholders.[13]
The Corporate Veil Theory
Corporate veil: this term refers to a legal concept whereby the company is identified as distinct from its members. This theory describes the concept that members of a company are generally shielded from liability arising from the company’s actions.[14] If the company incurs any debts by entering into any contract or contravenes or disobeys any law in force, the corporate veil concept comes in here.[15] This concept states that members of the company should not be held liable for those errors made by the company. This can also be stated as the members of the company enjoy corporate insulation. Therefore, the shareholders are protected from the actions of the company.[16] It was held in ratio decidendi that a company was a separate legal entity which is distinct from its members, i.e., shareholders and directors. Therefore, the liability of the shareholders is limited from the company’s debts.[17]
III. Circumstances for Piercing the Corporate Veil Under English Law
There are certain exceptions for piercing the corporate veil in cases where the purpose was intentionally for wrongdoing or involvement in fraudulent actions by the proprietor or the owner of the company.[18] In such cases, the corporate veil can be lifted or pierced. Where the members who have been involved in such unethical activities will be personally liable for the debts arise out of such actions.[19] Thus, holders will be held responsible.
There are some main circumstances regarding piercing the corporate veil:
Fraud and Improper Conduct
This is when a company exists only to disguise the nefarious actions or liability of its shareholders.[20] While recent case law on the topic has generated confusion about the precise application of this exception, the Court of Appeal (as endorsed by the Supreme Court) has now clarified the limitations of this exception.[21] In Antonio Gramsci Shipping Corp and others v Stepanovs, Burton J held that there was a good arguable case that where a company had been used by its ultimate beneficial owner as a device to commit fraud against the claimant through a series of contracts, the corporate veil should be pierced and the claimant permitted to enforce those contracts against the beneficial owner.[22] It was considered desirable that a victim should be able to enforce agreements against both a puppet company and the puppeteer owner pulling the strings. In VTB Capital plc v Nutritek International Corp, Arnold J criticised this decision. VTB claimed it had been defrauded by the defendant into entering a loan facility with a Russian company, RAP. The loan facility was subject to the non-exclusive jurisdiction of the English courts. The claimant sought to pierce RAP’s corporate veil, thus holding the defendant liable under the contract between VTB and RAP.[23] Therefore, the Court provided guidance summarising the principles by which a court may pierce the corporate veil[24]:
- ownership and control of a company are insufficient to justify piercing the veil
- a court cannot pierce the veil merely because to do so would be in the interests of justice
- the corporate veil can only be pierced when there is impropriety
- impropriety “must be linked to use of the company structure to avoid or conceal liability”
- it is necessary to show both control of the company by the wrongdoer and impropriety
- a company can be a façade even though it was not incorporated for that purpose – the question is whether it is being used as a façade at the time of the relevant transaction(s)[25]
This decision was confirmed by the Supreme Court on appeal. The Court of Appeal in Antonio Gramsci followed suit.
It is now a clear principle of English law that there is no basis on which a party can pierce the corporate veil to make a company’s controller a party to a contract entered into by that company.[26] While the ruling clarifies what was otherwise an uncertain area of law, it undoubtedly restricts the English courts’ ability to exercise jurisdiction over foreign parties in cases of fraud.[27] Therefore, corporate piercing helps in determining whether the company is a trading co-enemy or friend. It enhances the capability of understanding the details of the company in the public interest.
Sham or Façade Companies
An argument that a company is a “sham” or “façade” is used to pierce the corporate veil on the ground that the corporate form was incorporated or used as a “mask” to hide the real purpose of the corporate controller.[28] A façade is “used as a category of illusory reference to express the court’s disapproval of the use of the corporate form to evade obligations, although the courts have failed to identify a clear test based on pragmatic considerations such as undercapitalisation or domination.[29] It has been argued that the courts have gone too far in piercing the veil of companies deemed to be “shams”, on the grounds of the “inutility” of the proposal that a properly incorporated company could be anything other than “real”.[30] Neither is it necessary for the sham company to have been incorporated for the purpose of perpetrating the fraud, as “[a] fraud is no less of a fraud because a preexisting company is used and an intention is no more of an intention because a wholly new company did not need to be set up for the purpose.”[31]
The doctrine of lifting the corporate veil is applicable in these situations where a company is employed as a means to avoid or evade legal responsibilities, thereby shielding itself from liability for its actions.[32]
Agency and Corporate Groups
The Full Federal Court, in Balmedie Pty Ltd n Nicola Russo, noted that: “It is trite law that a company is a separate entity, and distinct legal person, from its shareholders and does not become an agent for its shareholders simply because of the fact that they are shareholders.”[33]However, the “agency” ground has been used to argue that the shareholder of a company (whether it be a parent company or human shareholder) has such a degree of effective control that the company is held to be an agent of the shareholder, and the acts of the company are deemed to be the acts of the shareholder.[34] Agency has also been used interchangeably by the courts with the phrase “alter ego”.[35] The requirement in tort law of a relationship of proximity is also closely linked to the doctrine of piercing the corporate veil. Rowland J, in Barrow v CSR Ltd, in finding a parent company responsible for the actions of a subsidiary in relation to an employee of the subsidiary that had contracted asbestosis, stated that: “Now, whether one defines all of the above in terms of agency, and in my view it is, or control, or whether one says that there was a proximity between CSR and the employees of ABA, or whether one talks in terms of lifting the corporate veil, the effect is, in my respectful submission, the same.”[36] This doctrine of lifting the corporate veil is applied in circumstances where a subsidiary company is formed to act as a mere agent or conduit of the parent company or holding company. Such subsidiary is only used to carry out the activities of the parent company, thereby rendering the corporate separation between those two legal entities ineffective.[37]
Group Enterprises
An argument of “group enterprises” is that in certain circumstances a corporate group is operating in such a manner as to make each individual entity indistinguishable, and therefore it is proper to pierce the corporate veil to treat the parent company as liable for the acts of the subsidiary.[38] Piercing the corporate veil is one way to ensure that a corporate group, which seeks the advantages of limited liability, must also accept the corresponding responsibilities.[39] It may also be argued where there are overlapping directors, officers, and employees, or where there is a “partnership between companies in a group.”[40] A court may pierce the corporate veil on the ground of “group enterprises” where there exists a sufficient degree of common ownership and common enterprise.[41] Courts appear reluctant to become involved in cases where parties have clearly reached a contractual bargain in relation to which piercing the corporate veil would produce a different result.[42] The absence of any evidence that the subsidiary company had the purpose of avoiding a legal obligation was also relevant to Young J’s decision.[43] In the case of corporate groups, courts will typically not pierce the veil on the ground of control alone. The mere exercise of control over a subsidiary by a parent company is an insufficient reason to pierce the corporate veil in the group situation.[44] Rogers AJA, in Briggs v James Hardie & Co Pt & Co Pty Ltd, examined a “group enterprises” argument that the plaintiff (a former employee of a subsidiary company who had contracted asbestosis) was entitled to pierce the corporate veil to sue the parent company, because it had the capacity to exercise complete dominion and control over its subsidiary and had in fact exercised that capacity.[45] Comments such as those of Rogers CJ, and a general concern resulting from holding companies walking away from insolvent subsidiaries leaving creditors of the subsidiaries unpaid, led to the Australian Commonwealth Parliament amending the Corporations Law in 1993 to introduce section 588V.[46] This section imposes liability on the holding company of a subsidiary where the subsidiary trades while it is insolvent and certain other conditions are satisfied.[47]
Judicial Uncertainty and the Modern Approach
Early Judicial Approaches to Veil Piercing
Courts have developed contrary approaches for applying this doctrine, often depending on the intent behind the corporate misuse. In the case of Daimler Company Ltd. v. Continental Tyre and Rubber Company (1916), the court scrutinised the nationality of the shareholders and directors to determine if the company possessed an “enemy character” during wartime.[48] In such a way, the court used it to ascertain the true character of the company, especially regarding national interest or statutory compliance. Also, it focuses on making the controllers directly responsible for the actions carried out in the corporate name, so that the court can hold individuals personally accountable for statutory non-compliance or malfeasance.[49] In DHN Food Distributors Ltd. v. London Borough of Tower Hamlets (1976), the principle was applied in a complex group structure, facilitate the treating of a parent company and its subsidiary as a unified entity.[50] The court reasoned that, the subsidiary was wholly owned and controlled by the parent company; where the subsidiaries had no independent business existence apart from DHN and; the corporate structure was essentially a technical facade, and in reality, DHN was the true owner and operator of the business. Therefore, the court lifted the corporate veil and allowed DHN Ltd. to recover compensation for the disturbance caused by the compulsory acquisition.[51]
In the classic precedent of Gilford Motor Co. Ltd. v. Horne (1933), where a company was established solely to defeat an existing non-compete clause, the court held was a mere facade.[52] This was the strongest application of the principle, where it entirely disregarded the corporate personality principle when the entity is used for deliberate misuse.[53]
The Modern Approach
The UK Supreme Court decision of Prest v. Petrodel Resources Ltd. (2013) (one of the landmark judgements) significantly refined the doctrine; where Lord Sumption distinguished between two foundational principles.[54] In the judgments of the Supreme Court, it was unanimously agreed that piercing the corporate veil is a legal concept that must be retained.[55] However, to what extent, and in what circumstances, is where the Court was less consistent. For example, Lord Clarke rejected the distinction of evasion and concealment principle and Baroness (then, Lady) Hale questioned whether these two principles alone were sufficient to account for all cases.[56]
Conclusion
The doctrine of separate legal personality established in Salomon v A Salomon & Co Ltd remains a fundamental principle of English company law, providing certainty and protecting the legitimate use of the corporate form.[57] However, the corporate veil is not absolute. English courts have recognised that intervention may be justified where the company structure is deliberately misused to conceal wrongdoing, evade existing legal obligations, or operate as a façade for improper conduct.[58]
The development of cases such as Gilford Motor Co Ltd v Horne, Adams v Cape Industries plc, and Prest v Petrodel Resources Ltd demonstrates that courts have moved towards a narrow and cautious approach to veil piercing.[59] While earlier decisions occasionally adopted broader reasoning based on justice, control, or corporate groups, the modern approach limits piercing primarily to cases involving the evasion principle.[60]
Therefore, courts should pierce the corporate veil only in exceptional circumstances where the corporate structure is being used as a device to avoid liability or defeat existing legal obligations. This approach preserves the essential benefits of separate legal personality while ensuring that incorporation is not exploited as a means of injustice.
Reference(S):
Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
Paul L Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (11th edn, Sweet & Maxwell 2021) ch 6.
Prest v Petrodel Resources Ltd [2013] UKSC 34, [16]–[35].
Reinier Kraakman and others, The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, Oxford University Press 2017) 5–18.
Prest v Petrodel Resources Ltd [2013] UKSC 34, [35]; Adams v Cape Industries plc [1990] Ch 433 (CA).
Stephen M Bainbridge, ‘Abolishing Veil Piercing’ (2001) 26 Journal of Corporation Law 479.
Ottolenghi S, ‘From Peeping Behind the Corporate Veil, to Ignoring It Completely’ (1990) 53 Modern Law Review 338.
Prest v Petrodel Resources Ltd [2013] UKSC 34, [35].
Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
Davies and Worthington (n 2) ch 6.
Reinier Kraakman and others, The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, Oxford University Press 2017) 5–18.
Davies and Worthington (n 2) ch 6.
Davies and Worthington (n 2) ch 6.
Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
Salomon (n 14).
Davies and Worthington (n 2) ch 6.
Kraakman and others (n 4) 5–18.
Salomon (n 14).
Prest v Petrodel Resources Ltd [2013] UKSC 34, [35].
Prest (n 19) [35].
Prest (n 19) [28]–[35].
Antonio Gramsci Shipping Corp v Stepanovs [2011] EWHC 333 (Comm), [26]–[31].
VTB Capital plc v Nutritek International Corp [2013] UKSC 5, [122]–[129].
VTB (n 23) [122]–[129].
Prest (n 19) [35].
Prest (n 19) [35].
VTB (n 23) [122]–[129].
Gilford Motor Co Ltd v Horne [1933] Ch 935 (CA); Jones v Lipman [1962] 1 WLR 832 (Ch).
Prest v Petrodel Resources Ltd [2013] UKSC 34, [28]–[35].
Stephen M Bainbridge, ‘Abolishing Veil Piercing’ (2001) 26 Journal of Corporation Law 479, 500–503.
Prest (n 29) [35]; Jones v Lipman [1962] 1 WLR 832 (Ch).
Prest (n 29) [35].
Balmedie Pty Ltd v Nicola Russo [2010] FCAFC 26.
Davies and Worthington (n 2) ch 6.
Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 (KB).
Barrow v CSR Ltd (1988) 12 NSWLR 295.
Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 (KB); Adams v Cape Industries plc [1990] Ch 433 (CA).
DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 (CA).
Kraakman and others (n 4) 31–34.
Adams v Cape Industries plc [1990] Ch 433 (CA).
DHN Food Distributors Ltd (n 38).
Adams (n 40) 536–539.
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549.
Adams (n 40) 536–539; Prest v Petrodel Resources Ltd [2013] UKSC 34, [35].
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549.
Corporations Act 2001 (Cth) s 588V.
ibid.
Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307 (HL).
Davies and Worthington (n 2) ch 6.
DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 (CA).
DHN (n 50).
Gilford Motor Co Ltd v Horne [1933] Ch 935 (CA).
Gilford Motor (n 52).
Prest v Petrodel Resources Ltd [2013] UKSC 34, [27]–[35].
Prest (n 54) [35].
Prest (n 54) [81], [101].
Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
Prest (n 54) [35].
Adams v Cape Industries plc [1990] Ch 433 (CA); Prest (n 54).
Prest (n 54) [35].
[1] Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
[2] Paul L Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (11th edn, Sweet & Maxwell 2021) ch 6.
[3] Prest v Petrodel Resources Ltd [2013] UKSC 34, [16]–[35].
[4] Reinier Kraakman and others, The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, OUP 2017) 5–18.
[5] Prest v Petrodel Resources Ltd [2013] UKSC 34, [35]; Adams v Cape Industries plc [1990] Ch 433 (CA).
[6] Stephen M Bainbridge, ‘Abolishing Veil Piercing’ (2001) 26 Journal of Corporation Law 479.
[7] Ottolenghi S, ‘From Peeping Behind the Corporate Veil, to Ignoring It Completely’ (1990) 53 Modern Law Review 338.
[8] Prest v Petrodel Resources Ltd [2013] UKSC 34, [35].
[9] Salomon (n 1).
[10] Paul L Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (11th edn, Sweet & Maxwell 2021) ch 6.
[11] Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
[12] Reinier Kraakman and others, The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, OUP 2017) 5–18
[13] Davies and Worthington (n 11) ch 6.
[14] Paul L Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (11th edn, Sweet & Maxwell 2021) ch 6.
[15] Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
[16] Reinier Kraakman and others, The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, OUP 2017) 5–18.
[17] Salomon (n 15).
[18] Prest v Petrodel Resources Ltd [2013] UKSC 34, [35].
[19] Gilford Motor Co Ltd v Horne [1933] Ch 935 (CA); Jones v Lipman [1962] 1 WLR 832 (Ch).
[20] Prest v Petrodel Resources Ltd [2013] UKSC 34, [35].
[21] Prest (n 20) [28]–[35].
[22] Antonio Gramsci Shipping Corp v Stepanovs [2011] EWHC 333 (Comm), [26]–[31].
[23] VTB Capital plc v Nutritek International Corp [2013] UKSC 5, [122]–[129].
[24] VTB (n 23) [122]–[129].
[25] Prest (n 20) [35]
[26] VTB (n 23) [122]-[129]
[27] Paul L Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (11th edn, Sweet & Maxwell 2021) ch 6.
[28] Gilford Motor Co Ltd v Horne [1933] Ch 935 (CA); Jones v Lipman [1962] 1 WLR 832 (Ch).
[29] Prest v Petrodel Resources Ltd [2013] UKSC 34, [28]–[35].
[30] Stephen M Bainbridge, ‘Abolishing Veil Piercing’ (2001) 26 Journal of Corporation Law 479, 500–503.
[31] Prest (n 29) [35]; Jones (n 28) 836.
[32] Prest (n 29) [35].
[33] Balmedie Pty Ltd v Nicola Russo [2010] FCAFC 26.
[34] Paul L Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (11th edn, Sweet & Maxwell 2021) ch 6.
[35] Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 (KB).
[36] Barrow v CSR Ltd (1988) 12 NSWLR 295.
[37] Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 (KB); Adams v Cape Industries plc [1990] Ch 433 (CA).
[38] DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 (CA).
[39] Reinier Kraakman and others, The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, OUP 2017) 31–34.
[40] Adams v Cape Industries plc [1990] Ch 433 (CA).
[41] DHN Food Distributors Ltd (n 38).
[42] Adams (n 40) 536–539.
[43] Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549.
[44] Adams (n 40) 536–539; Prest v Petrodel Resources Ltd [2013] UKSC 34, [35].
[45] Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549.
[46] Corporations Act 2001 (Cth) s 588V.
[47] ibid.
[48] Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307 (HL).
[49] Paul L Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (11th edn, Sweet & Maxwell 2021) ch 6.
[50] DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 (CA).
[51] DHN Food Distributors Ltd (n 50).
[52] Gilford Motor Co Ltd v Horne [1933] Ch 935 (CA).
[53] Gilford Motor (n 52).
[54] Prest v Petrodel Resources Ltd [2013] UKSC 34, [27]–[35].
[55] Prest (n 54) [35].
[56] Prest (n 54) [81], [101].
[57] Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
[58] Prest (n 54) [35].
[59] Adams v Cape Industries plc [1990] Ch 433 (CA); Prest (n 54).
[60] Prest (n 54) [35].
