Separate Corporate Personality & Piercing the Corporate Veil

• A company once registered has its own legal personality • Artificial rather than natural person • Historically recent characteristic recognised in Salomon v Salomon (1897)AC 22 HL

• Vaughan Williams. Benefit without risk.. An unfair mechanism to defeat the just claims of creditors. • Lindley, LJ Intention of parliament, 7. • A fraud, a sham, an agent

House of Lords
• Creditors have notice of Limited liability • Required adherence to statutory requirements • No fraud • Company has a distinct legal identity.

Salomon Followed in
• Lee v Lee Air Farming Ltd [1961] AC 12 • Macaura v Northern Assurance Co. [1925] AC619 • One man co. cases • Salomon principle always followed unless facts fall under a common law or statutory exception

Common law exceptions
• • • • • • • One single economic unit Façade or sham co. Agency To determine nationality Tax evasion Alter ego for criminal or tortious liability Company guarantee

Single Economic Unit
DHN Food Distributors Ltd v Tower Hamlets LBC (1976) 1 WLR 852 Firm of grocery and provision merchants. It had a warehouse, lorries and a cash and carry business. Three companiesThe business was owned by the parent company, D.H.N. Food Distributors Ltd. The land was owned by a subsidiary, Bronze Investment Ltd Vehicles were owned by D.H.N. Transport Ltd. Parent company 100% owned and controlled Bronze and transport co.

• Tower Hamlets compulsory purchase of land • Unable to relocate the 3 companies went into liquidation • The three companies sought compensation for loss of land and business under section 5 & 6 of the Land Compensation Act

Tower Hamlets Argued
• DHN Transport and DHN Food had business disturbed • They had no interest in the land that could be compensated, licencees only • Following Salomon the three companies should be treated as separate entities

Court of Appeal
“This group is virtually the same as partnership in which all three companies partners. They should not be treated separately so as to be defeated on a technical point. They should not be deprived of the compensation which should be justly payable for disturbance. The three companies should, for present purposes, be treated as one.”

Decision limited to facts of case. “I would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil.” Pierce if1. Wholly owned subsidiaries. 2. No separate business operations. 3. The owners of three businesses have been disturbed in their possession and enjoyment of it.

Woolfson v Strathclyde RC (1978 S.L.T. 159)

Compulsory purchase order of shop premises in St Georges street Glasgow by Glasgow Corporation. Business organised under 3 companies Numbers 57 and 59-61 (owned by Mr Woolfson). Numbers 53-55 (owned by Solfred Holdings Ltd): He held two thirds of the shares wife held one third. The shop (53-5) was occupied by M & L Campbell (Glasgow) Ltd. Wedding garments. Share capital in this company was 1000 shares, 999 were held by Woolfson and 1 by his wife.

• Campbell had not signed a lease agreement with Solfred Holdings • Campbell not eligible for compensation as had no property interest in shop

• Campbell and Solfred should be treated as one entity embodied in himself • He should be compensated for disturbance of Campbell’s business

For DHN to apply all three criteria had to apply. They did not as no 100% owned subsidiary Campbell had no control over the owners of the land, Solfred and Woolfson. Woolfson held only two thirds of the shares in Solfred and 999 of 1000 in Campbell Wife not a mere nominee.

Adams v Cape Industries [1990] Ch.433
• English parent company, South African subsidiary, Asbestosis victims. • LORD KEITH. • economic unit: only applicable in cases “where legal technicalities would produce injustice in cases involving members of a group of companies”

corporate veil. Court will lift Veil if a defendant utilises the corporate structure in an attempt to evade (1) limitations imposed on his conduct by law (2) such rights or relief against him as third parties already possess.

But “cannot lift the veil against a defendant company which is the member of a corporate group merely because that corporate structure has been utilised so as to ensure that the legal liability(if any) in respect of future activities of the group (and correspondingly the enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether it is desirable or not, the right to use the corporate structure in this manner is inherent in our corporate law”

Not as plaintiff’s counsel contended, “such rights of relief as third parties might in the future acquire”

Veil may be pierced in cases involving the interpretation of legal documents or statute such as……….

Revlon Inc v Cripp & Lee Ltd [1980] FSR 85
• Revlon Suisse was a subsidiary of Revlon Inc Revlon Suisse held the Revlon trademark • Question • Was this an exclusively Revlon Suisse Asset? • Was it connected in the course of trading with Revlon Inc?

Buckly LJ “Since, however, all the relevant companies are wholly owned subsidiaries of Revlon… the mark is….. an asset of Revlon…... regard Suisse as holding the mark at the disposal of Revlon and for Revlon’s benefit. The mark is an asset of the Revlon Group of companies regarded as a whole, which all belong to Revlon.” This does not constitute piercing the veil but recognises the legal and factual relationship between the companies.

Salomon principle will tend to be upheld in ‘Economic groups’
• Polly Peck International PLC [1996] 2 All ER 433 subsidiary raised funds for parent which was guaranteed by parent. Subsidiary could claim as a creditor when parent in liquidation • Dimbleby & Sons v NUJ [1984] • Lonhro Ltd v Shell Petroleum Co Ltd [1981] 3 WLR 33

• Should parent companies owe a duty of care to those adversely affected by the tortious act of its subsidiary? • Groups tend to be MNEs, with subsidiaries operating in developing countries • Cape. SA Asbestos • Thor Chemicals • Bhopal. Union Carbide. India, UCI Ltd

Liability and Organisational structure
• Move from a classical model of the MNE as a ‘pyramid’ to ‘a more flexible organisational form where subsidiaries are given more initiative over major decisions and to which significant strategic functions may be devolved’ (Company Lawyer 2002 Muchlinski p170) • shift from firms as internalised markets to ‘co-operative relationships between firms’ • Dunning, ‘Alliance Capitalism and Global Business (Routledge 1997) where firms behave ‘like a single integrated business’

• Cape was of the old model but argued from the new model of subsidiary independence (‘heterarchical’ model) which may have influenced judicial thinking. • Flexible forms more likely in new industries rather than old established oligopolies

Ngcobo et al Thor Chemicals Holdings [1995] T.L.R. 579. Lubbe v Cape Plc [2000] 1 WLR 1545
• Cape and Thor – Issues of alleged breach of the duty of Care, considered 2 questions • 1. Does the forum have jurisdiction to bring the case? • 2. Is the parent liable for the beach? • • In both cases the answer was yes to one but settled before getting the answer to 2.

• Both considered the doctrine in the Spillada case (Spillada Maritime Corp. v Cansulex Ltd [1987] AC 460. • 1. Taking account of all circumstances particularly the nature of the subject matter and the convenience of the subject matter which forum is most appropriate? • 2. Even if a forum other than England might be more appropriate will substantive justice be achieved in that forum?

House of Lords. Lubbe
• succeeded on 2. • Substantive justice could not be done in South Africa. Absence of legal aid etc. • It did it consider the issue of integrated economic interests and managerial power such as would make Cape a party to the claim.

The problem with limited liability in MNEs
• Never intended to disempower involuntary creditors (in MNEs likely to be poor and powerless in developing countries) such as victims of tort. Here limited liability ‘shifts the risk of liability onto them and away from the group’ (Muchlinski p172) • Designed to protect the outsider investor not the direct involved investors (parent) who is involved and responsible. • Insulates succeeding layers of corporate group organisation from liability not just ultimate shareholders

• In small companies members/managers usually have to personally guarantee loans. • Human rights Act- right to fair trial may be denied by the corporate veil. • Mass tort cases likely to require the assets of all members of the group. NB Walkovsky v Carlton (1966) • Public policy concerned with establishing CSR ie OECD Guidelines for Multinational Enterprises (2008) suggest minimum international standards.

Agency: Actual or Ostensible Authority binds Principal
Smith, Stone and Knight v Birmingham Corporation [1939] 4 All ER 116 Functional control Adams v Cape Industries plc [1990] Express agreement required

Smith, Stone & Knight v Birmingham Corp [1939] 4 All ER 116
• 1. Who was really carrying out the business? • 2. Were the profits treated as the profits of the company? • 3. Was the company the head and brains of the trading venture? • 4. Did the company govern the venture? • 5. Did the company make the profits by its skill and direction? • 6. Was the company in effectual and constant control? Atkinson j.

Façade: Veil Pierced
FG Films Ltd [1953] 1WLR 483 British subsidiary claimed to be maker of film- £100 investment, under capitalised. Gilford Motor Co Ltd v Horne [1933] Ch. 935 Avoidance of covenant Jones v Lipman [1962] 1 WLR 832 Avoidance of house saleremedy: Decree of specific performance binding on company

To Determine Nationality
• Daimler Co. Ltd v Continental Tyre & Rubber Co. Ltd [1916] 2 AC 307 • Rare application

Tax Evasion
• Littlewoods Mail Order Stores Ltd v IRC • [1969]1 WLR • • • • • • De Beers Consolidated Mines Ltd v Howe [1906] De Beers traded diamonds in England but registered in South Africa. Income tax payable “where it does its business” Applicable only for tax purposes

Alter Ego: Co. responsible for acts of director
• Liability if clear identification of “directing mind” • In practice applies mainly to smaller companies

• Fire caused by unseaworthiness results in loss of cargo • Co claimed immunity under s. 502 of Shipping Act as “no actual fault” • Director had knowledge and fault therefore the company at fault.

Lennard’s carrying co. Ltd v Asiatic Petroleum co. Ltd [1915] AC 705

Criminal Activity
• Re H and others (restraint order: realisable property) [1996] 2 BCLC 500 • Defendants owned 100% of shares in companies and had committed excise fraud worth £100 million • Court could treat assets of co. as their realisable property s.77 CJA 1988. Veil used to conceal criminal activities

• "Where a defendant has used the corporate structure as a device or façade to conceal his criminal activities, the court could lift the corporate veil and treat the assets as the realisable property of the defendant under the 1988 Act [the Criminal Justice Act 1988]. On the facts, there was a prima facie case that the defendants controlled the two companies, that the companies had been used for the fraudulent evasion of excise duty on a large scale…..appropriate to lift the corporate veil….”

Remains ruling authority
• Crown Prosecution Service v Compton and others COURT OF APPEAL (CIVIL DIVISION) [2002] • property obtained from drug trafficking, realisable property.

Contractual Guarantees
• Creditors who hold guarantees from other members of the group may be able to shift the liability around the group by enforcing contractual claims. • However, a document that may appear to be a guarantee may fall short of this and may be termed merely “comfort letters”.

Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1986] 1 WLR 379
Def were a plc in Malaysia that formed a wholly owned subsidiary in England Exchange. Plaintiffs were merchant bankers who made a loan to sub (MMC Metal Ltd) relying on a comfort letter from def “it is our policy to ensure that the business of the subsidiary is at all times in a position to meet its liabilities” Sub in liquidation.Def refused to pay sums outstanding letter had not been intended to impose any binding legal obligation.

On appeal def statements in letter were “ in terms and context (def had originally refused joint liability) as well as on evidence, a statement of present fact and not a promise as to future conduct: and that no promise as to future conduct could be implied: and that accordingly, the terms of the comfort letter had no contractual effect.” Moral not legal responsibility.

Statutory Exceptions: s.212 Insolvency Act 1986 (IA 1986)
• Summary remedy against delinquent directors• s.212 provides a summary procedure (requires leave of court) to make directors, (and liquidators, administrators or administrative receivers) liable to contribute to the company’s assets for misuse of company assets, breach of fiduciary duty or the duty of care and skill. • Procedural and does not add to duties • Applicants: official receiver, liquidator, or any creditor. Acting in own name but on behalf of the company • On examination of officer’s conduct the court can order person to repay all or some of funds.

In Re Continental Assurance Company of London plc CHANCERY DIVISION [2001] BPIR 733 • to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or • to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.

West Mercia Safetywear Ltd (in liq) v Dodd [1988] BCLC 250
• West Mercia Safetywear Ltd wholly owned subsidiary of AJ Dodd & Co Ltd. • Mr Dodd was a director of both companies • Companies shared bank, Dodd Ltd’s overdraft was guaranteed by Mr Dodd • • • • By May 1984 West Mercia owed Dodd Ltd £30,000, both companies in financial difficulties Accountant advised against using bank accounts But Mr Dodd transferred £4000 from Mercia’s account to Dodd Ltd’s.

• In June both companies went into liquidation. • Liquidator for West Mercier applied for a declaration that Mr Dodd was guilty of misfeasance and breach of trust and should repay £4000 to West Mercier. • On appeal. • Held: Once a company was insolvent the interests of the creditors override the interests of the shareholders. Therefore transfer was in breach of duty to WM (as assets effectively belonged to creditors in insolvency), because it was against the interests of the creditors. • Mr Dodd ordered to repay £4000 to WM with interest.

Fraudulent Trading s.213 IA 1986
• A criminal offence under CA06 s.993 • A civil offence under s 213 -when winding up. • Applicants: liquidator. • Same tests for liability • Requirement: “business of the company has been carried on with intent to defraud creditors” • Includes one transaction and one creditor.

Morphitis v Bernasconi and others [2003] 2 BCLC 53
• Although a business may be found to have been carried on with intent to defraud creditors notwithstanding that only one creditor was shown to have been defrauded, and by a single transaction, it did not necessarily follow that whenever a fraud on a creditor was perpetrated in the course of carrying on business that the business was being carried on with intent to defraud creditors. • under s 213 declare persons liable to contribute to the assets of the company in the winding up must be shown that business was undertaken thus

• Conduct must “involve actual dishonesty, involving, according to current notions of fair trading among commercial men, real moral blame” Patrick Lyon Ltd, Re [1933] Ch.786 • No real prospect of repayment William C Leitch [1932] 2 Ch 71 • Includes anyone who was party to the fraudulent transaction. Bank and Credit and Commerce International SA (no.15), Re [2005] 2 BCLC 53 • Effect: court’s discretion on personal assets.

s.213 IA (cont)
• Re L. Todd (Swanscombe)Ltd (1990) BCC 125. • Morez was a co. director of a scrap metal business. Principal customer Mayer Newman, dealt with for many years without charging VAT and did not pay VAT in respect to these transactions. • 1985 coy went into liquidation. • 1988, Commissioners of customs and Excise of VAT sought repayment of VAT from Morez under 213IA . • Held: Personally liable for VAT debts as trading, knowingly and fraudulently.

Wrongful Trading section 214 IA 1986
• S.214 application by liquidator upon winding up directors (including shadow directors) personal contribution, to the company’s assets • Appears that trading continued (before winding up) when the director knew or ought to have known that there was no reasonable prospect that the company would avoid liquidation.

Ought’- standard of competency required

• a) the general knowledge, skill and experience reasonably expected from somebody carrying out the same function as a director. • b) general knowledge and skill that a director actually has.

• Shadow directors • Does not include professional advisors • Or others involved in trading (unless shadow director) • Defined in CA s.251 as a person in accordance with whose directions or instructions the directors of the company are accustomed to act • Re Hydrodam (Corby) Ltd, Re [1994] 2 BCLC 180- useful definitions • Secretary of State for Trade and Industry v Becker [2003] 1 BCLC 565- bank as S/D

• Defense: Dir had taken every reasonable step to minimize loss. 214(3)

• Liability: Courts discretion, compensatory not penal. 214(1) Re Produce Marketing [1989] BCLC 133. • Nb. Liability for fraudulent trading understood as penal but Morphitis v Bernasconi stated it too was compensatory

When does wrongful trading begin?
• In Re Continental Assurance Company of London plc CHANCERY DIVISION [2001] BPIR 733 'the increase in net deficiency' between a hypothetical liquidation date and the actual date of liquidation • Sherbonne Associates Ltd [1995] BCC 40. Identify a date directors should have known • Re, The Rod Gunner Organisation Ltd [2004] BCLC 110. Not for period when they expected an investor to solve the problem • Courts cautious about restricting directors.

s.215 Proceedings under s.213,214
• Allows company to take compensation from moneys owed by it to director s.215(2) (a) • Court may direct that director’s creditor status shall rank in priority after all other creditors s.215(4)

Director Liability for Phoenix Companies s.216 and s.217

• To prevent the abuse of limited liability by re-using the name of an insolvent company. • Re-use of insolvent company name in contravention to s.216 IA • Criminal offence s.216 • Civil liability with new company s.217 • New company need not be insolvent • Claims brought by individual creditors • CLR noted that proceedings are rare and more likely to be pursued under s214 and 213 IA 1986 • Less successful than s.214 and 213 but more successful in criminal liability

216 Restriction on re-use of company names 216(1) [Application] This section applies to a person where a company ("the liquidating company") has gone into insolvent liquidation on or after the appointed day and he was a director or shadow director of the company at any time in the period of 12 months ending with the day before it went into liquidation. 216(2) [Prohibited name] (a) it is a name by which the liquidating company was known at any time in that period of 12 months, or (b)it is a name which is so similar to a name as to suggest an association with that company. 216(3) [Restriction] Except with leave of the court , a person to whom this section applies shall not at any time in the period of 5 years beginning with the day on which the liquidating company went into liquidation be a director of any other company that is known by a prohibited name, 216(4) [Penalty] If a person acts in contravention of this section, he is liable to imprisonment or a fine, or both.

Personal liability for debts, following contravention of s. 216 IA 1986, s. 217(1)
217(1) [Personal liability] A person is personally responsible for all the relevant debts of a company if at any time– (a)in a contravention of section 216, he is involved in the management of the company, or (b)as a person who is involved in the management of the company, he acts or is willing to act on instructions given (without the leave of the court) by a person whom he knows at that time to be in contravention in relation to the company of section 216. 217(2) [Joint and several liability]

Thorne v Silverleaf [1994] 1 BCLC 637
Mr Thorne had been the directors of three companies, each of which had had the name ‘Mike Spence’in its name. 1.Incorporated in 1968, Mike Spence (Reading) LTD. In 1990 it went into creditors voluntary liquidation. 2. Incorporated in 1986 Mike Spence (Motorsport) LTD. In 1989, it went into voluntary liquidation. 3. Mike Spence Classic Cars LTD was incorporated in 1990. Joint venture was formed between the plaintiff, Mr Silverleaf and Mr Thorne, the defendant, whereby the plaintiff would fund purchase of stock.

Company owed the plaintiff £135,000 with further debts of £200,000 for unsecured creditors. The plaintiff commenced proceedings claiming the money lent to and used by the company and that def 1 was personally liable jointly and severally with the company in respect of the sum owed by the company to the plaintiff.. Held. The name of the company was so similar to that of the two previous companies as to suggest an association with them. Accordingly it was a prohibited name under s216(2) of the ‘86 Act. The def satisfied the requirements of s217 since he was involved in the management of the company in contravention of s.216

End of lecture

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