LIFTING THE CORPORATE VEIL

The concept of a company being a legal entity can

sometimes give undesirable results. In particular,
shareholders could use a company to obtain funds
dishonestly, and then not be liable for repayment.
When we speak of “lifting the veil” we are referring to
instances where the law goes behind the corporate
personality and attach liability to the individual
members or directors, instead of the company.

There are therefore numerous exceptions to the rules

defined by Salomon v Salomon & Co Ltd, (i.e. the rule
that the directors and other officers, being separate
and individual members of the company cannot be held
liable for defaults of the company). These exceptions
can be implemented by the courts on a case-by-case
basis, or by statute.

Since the courts rule on a case-by-case basis, it can

be difficult to classify the exceptions. The General
approach of the courts is to intervene when justice of
the particular case demands it.

Cases of fraud or where the company is a mere sham:

These occur where individuals have used the separate

legal entity to do something they are personally
forbidden from doing; hiding behind the company for
protection.

In Jones and Lipman (1962) Mr. Lipman had entered into

a contract with Mr. Jones for the sale of land. Mr.
Lipman then changed his mind and did not want to
complete the sale. He formed a company in order to
avoid the transaction and conveyed the land to it
instead. He then claimed he no longer owned the land
and could not comply with the contract. The judge found
that the company was a mere façade or front behind
which Mr. Lipman was hiding.  The judge therefore
lifted the corporate veil and granted an order for
specific performance against Mr. Lipman.

Gilford Motor Co Ltd v Horne (1933): Horne was a car

salesman, and left Gilford. His contract stated that he
wasn’t allowed to sell to G’s customers for a period
after leaving. H set up a company which then approached
his former customers; H argued that firstly his company
was approaching the customers, not him; and secondly,
if there was wrongdoing, his company was liable and not
him. The courts held that the company was sham, and
granted an injunction against his company as well as
him.