You are on page 1of 4

Introduction

‘A corporation is an artificial legal person that exists independently of its individual
members.’ The law speaks of a corporation as a legal person, capable of entering
into contracts and suing and being sued in its own name separate and distinct from
its shareholders. A primary advantage of the corporate form of organization is to
achieve the doctrine of limited liability, which serves as the shield to its members,
due to separate legal entity characteristic of a corporation. Without such limited
liability, a corporation cannot raise large amount of capital by investors and get
enhanced capacity for borrowing to secure financing in order to obtain more
efficient operation. Yet there are times where the limited liability of companies can
cause hardship on creditors. Consequently the judiciary may be prepared to relax
the doctrine of SLP in certain circumstances and render shareholder personally
liable. This relaxation is more commonly known as lifting or piercing the veil.
According to the Chan & Koh on Malaysian Company Law and Practice, 2006 journal,
‘The rationale behind this is probably that the law will not allow the corporate form
to be misused or for the purpose which is set out in the statute.’
The Principle in Solomon v Solomon
Over a century ago, this fundamental principle of ‘separate legal personality’
has been established in the leading case of Salomon v Salomon and well accepted
as part of UK and Malaysian company law as well. It was decided that debts of the
corporation were not debts of Mr Salomon since they were two distinct legal
entities. As Lord Mac Naghten stated this point: “The company is at law a different
person altogether from the subscribers to the memorandum”. Through the years,
Salomon principle has taken rapid evolvement and it has been highly used. This
principle subsequently has expanded to multinational company to absorb risky
ventures. In the event subsidiary fails, the parent company may shy away from
liability. President Butler of Columbia University has described limited liability as the
greatest discovery of modern times. In a more recent case of Macaura v Northern
Assurance Co, the precedent of Salomon has been confirmed. As all principles have
both advantages and disadvantages the same happens with Salomon principle and
the doctrine of limited liability which can turn out as a double edge sword. Hence in
the quest of finding fair solutions to such problems, several exceptions to this
principle have evolved under the legal concept of "piercing the corporate veil".
Exceptions - Statutory
The Companies Act has a number of general provisions which affect the
separate legal personality of the company. Section 213 Insolvency Act 1986 states
that if, while winding up a company, the company's business is carried on with
intent to defraud the company's creditors, a court may order any person knowingly
carrying on the business to contribute to the company's assets. The main difficulty
was that there was the possibility of a criminal charge also arising and the standard
to prove is beyond reasonable doubt. As the court explained in Re Patrick and Lyon
ltd, this involved proving ‘actual dishonesty'. It is difficult to achieve this standard
and finally a new provision was introduced in s214 of the Insolvency Act 1986 to
deal with what is known as ‘wrongful trading’. Section 214 Insolvency Act 1986
states that if, while winding up a company, a director ought to have seen that there

The House of Lords stated that whether a company was an enemy in wartime depended upon those who were in control of the company. Horne" Judge Russel. therefore. The two classic cases of the fraud exception are Gilford motor company ltd v. Case law is more contradictory as to whether groups of companies will be treated as another exception to Salomon. the Companies Act 2006 states that a 'director' includes a 'shadow director'. in a limited way. specifically referred to the judgments in Gilford and held that the company here was "a mask which (Mr. in the case of Jones that shares similar facts. this contradicts an earlier case where the opposite decision was reached (Wurzel v Houghton Main Home Delivery Service Ltd) and commentators note that this argument is 'at best tenuous'. Lipman. The Court of appeal was of the view that "the company was formed as a device. However. Denning MR in the Court of Appeal held that a parent company and its subsidiaries were a 'single economic entity'. Similar analogy can be drawn in a Malaysian case Aspatra Sdn Bhd &21 Ors v. this restricts the Salomon principle where there is wrongdoing involving the company. there was no actual 'sale'. Courts have also ignored the corporate veil where they have found a trust relationship exists. lifted the veil. However in Woolfson v Strathclyde Regional Council the House of Lords disapproved . The court. The court held that in fact the UK Company was only the agent for an American company which owned the vast majority of its shares. Therefore. In Re FG Films Ltd a company sought a declaration that it had made a British film for financial reasons. and the club was simply a trustee of the liquor for its members. Therefore. Courts may also ignore the corporate veil during wartime. Even so. This undermines the Salomon principle.was no reasonable prospect of avoiding insolvency but continued to carry on business. commentators such as Sealy and Worthington has criticized that. Bank Bumiputra Malaysia Bhd & Anor. a court could infer an agency relationship merely from the act of being a shareholder. this only applies to 'directors' and not shareholders. then a court may hold them liable. In DHN Food Distributors Ltd v Tower Hamlets LBC. In the first case. Horne and Jones v. Exceptions – Common Law On the other pole. However. in order to mask the effective carrying on of business of Mr. The court held that as the members owned the liquor between themselves. In Trebanog Working Men's Club and Institutive Ltd v MacDonald an incorporated club was charged with selling liquor without a licence. However. Courts have also ignored the veil where they have found an agency relationship existed. In Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd a company was incorporated in England but the vast majority of its members were German. the courts have been more than prepared to pierce the corporate veil when it fells that fraud is or could be perpetrated behind the veil. The case of Re Produce Marketing Consortium Ltd (No 2) (1989) is a good example of the way the section operates. where the judge was ready to lift the corporate veil where fraudulent activity was present. this probably does not undermine Salomon. Lipman) holds before his face in an attempt to avoid recognition by the eye of equity".

However. The Court of Appeal held that the parent company was not liable as the subsidiary was not a façade or sham as the group had been structured that way only to minimize future liabilities. This time the Court of Appeal held the parent liable in the tort of negligence. as the victims would otherwise have been denied a remedy. where a divorced wife requested the court to lift the corporate veil and treat her ex-husband and the companies as being effectively the same. At such in my opinion the DHN case is self-contradictory.The Supreme Court in Prest was also concerned with achieving justice for the claimant and in the VTB case Lord Neuberger said: 'it may be right for the law to permit the veil to be pierced in certain circumstances in order to defeat injustice. This is important where the subsidiary no longer exists or has any assets or with asbestos claims where the disease may not show up for many years (Anon. which implies they have equal power. However. but he also says they are 'partners'. This reaffirms the Salomon principle in line with writer Dignam quotes: 'Gone are the wild and crazy days when the Court of Appeal would lift the veil to achieve justice irrespective of the legal efficacy of the corporate structure. In the recent case of Caterpillar Financial Services (UK) Limited v Saenz Corporation Ltd (2012). 'Case Comment: Chandler v Cape Plc: is there a chink in the corporate veil?'(2012)). critics note that Cape is unusual on its circumstances as supported by J Fulbrook. This is supported by the recent Supreme Court decision in Prest v Petrodel Resources Ltd. This seems fair. the court in Chandler v Cape achieved justice. On one hand Denning MR refers to the subsidiaries as being 'bound hand and foot' to the parent company. the court held that the veil could not be lifted because the setting up of the companies had nothing to do with the marriage breakdown. Another exception to Salomon involves tortious liability. it seems unlikely that DHN will be followed in future. This undermines the Salomon principle. In following Lubbe. The DHN case approach has become less popular since then. Therefore. A summary judgment was given in respect of a declaration that a company was an alter ego corporate vehicle of the defendant. In Chandler v Cape the claimant had also contracted an asbestos-related disease while working for a subsidiary of the parent company. as limited liability encourages subsidiary companies to take risks.of Denning's comments and said that the corporate veil would be upheld unless the company was a façade. In Adams v Cape an English company was sued for the actions of one of its subsidiaries abroad. This allowed a . especially given the Court of Appeal's later decision in Adams v Cape Industries plc. This suggests that the Court of Appeal is now more willing to lift the veil where there is a group of companies and it is in the interests of justice. knowing that the shareholders of the parent company in effect get double protection from creditors should anything go wrong. The court as well held that there was no general principle that all the companies in a group should always be treated as a single economic entity. which implies the parent has control.

It is less likely to be lifted where it is argued that an agency or trust relationship existed between the company and its controller.judgment obtained against the defendant to be enforced against certain of the company’s assets. even if they do not say so explicitly. where the relevant test has been satisfied. Conclusion The principle of separate corporate personality and the corporate veil recognized in Salomon v Salomon remains central to corporate law despite several challenges. the courts have shown a willingness to pierce the veil. However. Most notably these include under statute. during wartime. especially where personal injury is involved or justice demands it. Where groups are involved. This seems fair. However. and where the company is a sham. This case shows that the corporate veil exists to distinguish a company as a legal person separate from its shareholders. . courts have been more willing to lift the veil recently. Salomon remains the starting point. as otherwise shareholders enjoy double protection. However. there are certain exceptions when the veil will be lifted.