The essence of a company lies on it having a legal personality distinct from the people who compose

it. The principle of separate corporate personality states that shareholders of a limited company are
not liable for the company’s debts beyond the nominal value of their shares. 1 Where the people
running the company are continuously changing, the company retains its identity and a change in
the members of a business does not require the business to be stopped or restarted. 2 As per the
question a discussion would be made with regards to the circumstances under which a court would
ignore the separate legal personality principle and ‘pierce the corporate veil’ as it has been seen in
previous case laws that this has not been the most consistent action done by the courts.

In the case of Salomon v A Salomon & Co Ltd3 where a sole trader Salomon converted his business
into a limited company and when the business suffered and was placed in debts, the company’s
creditors sought to impose liability on the man behind the company, Salomon himself which
succeeded in the lower courts but failed before the House of Lords and it was settled the idea that a
company is an independent legal person separate from its shareholders, that the debt of his
company is not linked to him. This separation between members and company is known as the
‘corporate veil’. Furthermore, the corporate personality does not act as a shield for individuals who
make use of the legal entity in a fraudulent and dishonest manner. The Salomon4 case firmly
established the principle of separate corporate personality with the basic principles of company law
following the rule stated by Lord Halsbury in Salomon, that once a company is legally incorporated it
must be treated like any other independent person with its rights and liabilities appropriate to itself. 5
Furthermore, in Salomon, Lord MacNaghten had mentioned that the company is at law a different
person altogether from the persons forming the company. 6 This statement was firmly intended to
establish the doctrine of separate legal personality which insulates the individuals involved in a
business from personal liability which may arise as a result of the business being conducted, and
with Salomon, it was affirmed.

Section 74(2)(d) Insolvency Act 19867 states that where a company is limited by shares, no member
is liable for any of the company’s debts other than the amount on any unpaid shares if any. These
separate legal identities towards the company’s members are protected by the veil of incorporation
which only the courts may disregard in certain situations. In cases where the corporate veil acts as a
separation between the members and the company, the claimants would want to look to the person
1
L Sealy and S Worthington, Company Law: Text, Cases and Materials (11th edition Oxford University Press,
Oxford, 2016) 48
2
J Dine and M Koutsias, ‘Company Law’ (7th edition Palgrave Macmillian, 2009) 17
3
Salomon v A Salomon & Co Ltd [1987] AC 22
4
Ibid.
5
Ibid. p 30.
6
Ibid.
7
Section 74 Insolvency Act 1986 http://www.legislation.gov.uk/ukpga/1986/45/section/74
behind the company and assert claims against those individuals which would involve ignoring the
corporate intermediary stood between the two parties, this is referred to as ‘piercing the corporate
veil’; to disregard the corporate personality and go behind to the individuals responsible for the
company.8

However, there exist several exceptions to the general rule of this principle and it is observed in
statutes as well as cases where courts lift the corporate veil, making members liable for the conducts
of the company.9 Section 213 of the Insolvency Act 1986 10 states that where in the course of winding
up a company it appears that any business of the company has been carried on with intent to
defraud creditors of a company, the court may declare any person knowingly carrying on the
business to be liable to make such contributions to the company’s assets as the court thinks proper 11
which goes against Salomon as it involves holding the company’s members responsible for its debts.
This section is not only difficult to operate in practice, the standard of intent is also set fairly high by
courts due to the possibility of a criminal charge arising. In Re Patrick and Lyon Ltd12 the courts
explained that this involved providing an evidence of dishonesty which is difficult to prove and
subsequently led to the introduction of Section 214 Insolvency Act to better deal with situations of
‘wrongful trading’ where there is no need to prove dishonesty. Section 214 states that if in the
course of winding up a company, a director ought to have seen no reasonable prospect of avoiding
insolvency but carried on with business, then may be held liable by a court. 13

Lord Cooke in his Hamlyn lectures14 claimed that in Jones v Lipman, there was no difficulty in
granting a decree of specific performance against him with courts often having companies treated as
a sham with the implication that the company’s existence is then ignored. However, the company’s
separate legal existence is not ignored as the court orders the company as well as the defendant in
place to comply with the obligations. Lord Cooke 15 further suggested that the granting of the remedy
against the company brings out that it was not a sham and as such suggested that the exception for
a court to ‘pierce the corporate veil’, being either ‘sham’ or ‘façade’ is not needed by the principle of

8
L Sealy and S Worthington, Company Law: Text, Cases and Materials (11th edition Oxford University Press,
Oxford, 2016) 35
9
L Sealy and S Worthington, Company Law: Text, Cases and Materials (11th edition Oxford University Press,
Oxford, 2016) 64
10
Section 213 Insolvency Act 1986 http://www.legislation.gov.uk/ukpga/1986/45/section/213
11
Section 213 Insolvency Act 1986 http://www.legislation.gov.uk/ukpga/1986/45/section/213
12
Re Patrick and Lyon Ltd (1933) Ch 786
13
Section 214 Insolvency Act 1986 http://www.legislation.gov.uk/ukpga/1986/45/section/214
14
Lord Cooke of Thorndon, ‘Turning Points of the Common Law’ (1996 Hamlyn Lectures,1997) p 17.
https://socialsciences.exeter.ac.uk/media/universityofexeter/schoolofhumanitiesandsocialsciences/law/pdfs/T
urning_points_of_the_Common_Law.pdf
15
Ibid.
company law set out in the case of Salomon.16 However this remains merely a suggestion and not a
rule which is binding and would change the key principles of company law as we know of.

One instance where the corporate veil is ignored and lifted is during wartime to reveal the
nationality of a company as seen in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain)
Ltd17 where the House of Lords stated that whether a company would be considered an enemy in
wartime relied on who were in control of the company which in this case was incorporated in
England but with majority German members. This went against the principle of separate corporate
personality set out by Salomon. The courts have also been seen to be willing to lift the corporate veil
in situations where a company is determined a sham designed to commit fraudulent acts or to avoid
existing contractual obligations set out. In Gilford Motor Co v Horne, the defendant who agreed to
not solicit his former employer’s customers incorporated a second company which he used to
breach the agreement and was held that this second company was simply a sham or a cloak for his
wrongdoings and the defendant was held liable for his actions. 18 Furthermore, in the case of Jones v
Lipman19 in an attempt to avoid specific performance the defendant transferred his property to a
separate company. The courts subsequently used the judgements in the aforementioned case of
Gilford and held that the separate company was merely a mask to avoid recognition by the eye of
equity and as such the defence to the claim for specific performance failed as specific performance
cannot be resisted by a vendor who has absolute control and ownership of a limited company which
is in a position to complete the contract. 20 These cases however do not go along with the principles
set out in the Salomon case which provides that it is essential for a company to be regarded as a
legal person from its members.

Another situation where the veil is often lifted is in situations involving a group of companies where
the present a parent and a subsidiary company. The principle looks into each company in a group as
a separate legal entity although the principle is not consistently applied and there have been cases
where a parent company as well as its subsidiaries were held as a single entity which undermines the
Salomon principle.21 In the case of DHN Food Distributors Ltd v Tower Hamlets London Borough
Council,22 the companies owned under DHN were treated as one entity and Lord Denning said that
‘in many respects, a group of companies are treated together for the purpose of general accounts…
they are treated as one concern when a parent company owns all the share of the subsidiaries.’ This

16
Salomon v A Salomon & Co Ltd [1987] AC 22
17
Daimler Co Ltd v Continental Tyre and Rubber Co Great Britain) Ltd [1916] 2 AC 307
18
Gilford Motor Co v Horne [1933] Ch 935
19
Jones v Lipman [1962] 1 WLR 832
20
Ibid.
21
Nicholas Bourne, ‚Bourne on Company Law’ (6th edition, Routledge, 2013) 25.
22
DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852.
however was not a very popular decision and was disapproved in Woolfson v Strathclyde Regional
Council23 where it was decided that unless the company was a façade, the corporate veil would be
upheld. The decision by Denning in DHN was not the most popular and was seen to be contradictory
and as such was not one a case that is often followed.

The courts have been seen to be likely to disregard the separate personality of a company if by
doing so, a just result will be achieved that will equally keep the veil in place where someone for
whom the court sympathises with will benefit. In Malyon v Plummer24 a husband and wife had full
control of a company and when the husband was killed, the widow was unable to keep the business
running. The court assessed the future financial situation of the widow when setting the amount of
damages payable to her and decided that the excess of her salary over the market value of her
services was a benefit lost by her husband’s death and only the market value of her services should
be considered when assessing her future position. This ignores the fact that she was employed by
the company and should have been regarded as a completely separate legal personality from both
husband and wife if going in accordance with the principles set out in Salomon, not only did the
courts not pierce the veil, it was ‘torn to shreds.’ 25

An example of a case which supported the principle of Salomon in contrast to the other cases
mentioned is the case of Adams v Cape26which concerned liability within a group of companies and
the purpose of the claim was to circumvent the separate legal personality of the subsidiary in order
to make the parent liable for the obligations of the subsidiary towards involuntary tort victims. The
court rejected arguments that the subsidiary was an agent for the parent company and sought to
make Cape liable. By rejecting the arguments and attempt to circumvent the separate legal
personality, it reaffirms and restores the supremacy of the principle set out in Salomon. Adams v
Cape furthermore also had its role in accepting the rule that the courts would not pierce the
corporate veil in situations involving a ‘mere façade concealing the true facts’ where a separate
company was used as a sham to commit fraudulent acts.

The term ‘piercing the corporate veil’ prior to the recent case of Prest v Petrodel Resources Ltd27
merely referred to the possibility for one to look behind a company’s framework to make the
members liable, removing them from the rule that they are to be shielded by the corporate shell,
the term was used to describe a wide variety of instances where claims be it successful or
unsuccessful were advanced as an attempt to make the members liable for the failures committed

23
Woolfson v Strathclyde Regional Council [1979] 38 P & CR521.
24
Malyon v Plummer [1963] 2 All ER 344
25
J Dine and M Koutsias, ‘Company Law’ (7th edition Palgrave Macmillan, 2009) 23.
26
Adams v Cape Industries Plc [1990] Ch.433
27
Prest v Petrodel Resources Ltd [2013] UKSC 34
by a company. However, since the ruling by the Supreme Court on the case, it has become a more
precise term and is now reserved for instances where the court does in fact ignore the separate legal
personality of the company at hand and looks behind the corporate veil to the members. 28 Prest v
Petrodel helps in identifying the principle and to clarify situations in which the courts are able to
pierce the corporate veil and to only do so in justifiable situations. Where a divorced wife claimed
shares of a house owned by companies which was controlled by her ex-husband, she had asked the
courts to lift the corporate veil and disregard the separate legal personality of her ex-husband and
the companies; to treat both of them the same. However, as the setting up of the companies had
nothing to do with the breakdown of their marriage the court refused to lift the veil. Lord Sumption
and Lord Neuberger in Prest held that the court can pierce the corporate veil only if it is necessary to
do so, ‘when all other, more conventional remedies have proved to be of no assistance’. 29

Furthermore, there are various number of other provisions which have identified situations or
circumstances in which the corporate veil would be lifted in order to reveal the actions of those
running the company such as The Company Directors Disqualification Act 1986, 30 which under s.15
provides that a person is personally liable for the debts of a company if at any time the person acts
in contravention of a disqualification order, allowing any creditors or liquidators of the company to
pursue him personally should the company become insolvent. 31 Furthermore Section 216 of the
Insolvency Act32 prevents any former director or shadow director of a failed company in the next five
years from having a new company set up with a name which associates itself with the old company
while Section 21733 provides for such persons to be personally liable in such situations.

In summary, a company presents as a separate entity in law and on occasion the corporate veil is
lifted and the deeds of the company are identified as those of its directors and shareholders. While
the Salomon principle is a cornerstone of corporate law, there are statutory and judicial exceptions
to it which does not look at the company as a separate entity. Furthermore, the veil is generally
28
L Sealy and S Worthington, Company Law: Text, Cases and Materials (11th edition Oxford University Press,
Oxford, 2016) 64
29
D French, Mayson, French & Ryan on Company Law (36 th edition Oxford University Press, Oxford 2019) 118.
30
Section 15 Company Directors Disqualification Act 1986
http://www.legislation.gov.uk/ukpga/1986/46/section/15
31
Wendy Steel, ‘Corporate Personality’ para 77 accessed 06/03/20
https://uk.westlaw.com/Document/I4F5E85C0B9FC11E5BF0FF96D27A59199/View/FullText.html?
listPageSource=893c812a8f0fbef449c3db3277fbac10&navigationPath=Search%2Fv1%2Fresults%2Fnavigation
%2Fi0ad73aa600000170af746d4fe1f24cce%3FNav%3DRESEARCH_COMBINED_WLUK%26fragmentIdentifier
%3DI4F5E85C0B9FC11E5BF0FF96D27A59199%26parentRank%3D0%26startIndex%3D1%26contextData%3D
%2528sc.Search%2529%26transitionType
%3DSearchItem&listSource=Search&list=RESEARCH_COMBINED_WLUK&rank=1&sessionScopeId=c4e2e7b2afa
b7a7a52b9fa91325dced0336dd0fc65aca52b492cacb9409328e4&navId=5E38797CB3EA52CAB982C0B03A11EB
8C&originationContext=Search%20Result&transitionType=SearchItem&contextData=(sc.Search)
32
Section 216 Insolvency Act http://www.legislation.gov.uk/ukpga/1986/45/section/216
33
Section 217 Insolvency Act http://www.legislation.gov.uk/ukpga/1986/45/section/217
lifted in situations to prevent fraud, as well as where it is a situation involving a group to treat
companies within the same group as part of the same entity. 34

The invention of the company as separate is vital as it allows businesses to freely develop and to be
shaped by both the people involved in its running and those regulating its existence. Furthermore,
the principle of separate corporate personality and the corporate veil which was developed in
Salomon v Salomon remains a core of company law despite some cases being seen to undermine it.
With reference to the statement of the question, it is in fact difficult to identify a consistent thread
which indicates when exactly the corporate veil will be lifted. However, there are certain situations
where an exception will be made to lift the corporate veil such as under statute, during wartime, and
where the company is a sham or a façade. The future of piercing the veil however is one which looks
to be decided in Prest v Petrodel Resources35 where even though it was seen prior to the case that
the courts have been more willing to lift the veil, it was held that the corporate veil should only be
pierced when it is absolutely necessary for it to be done as Lord Neuberger claimed that there has
not been a single instance where the doctrine has been invoked properly and successfully. 36 As such
it can be said that the doctrine of piercing the corporate veil does not look all too capable of future
development although circumstances do permit the veil of incorporation to be pierced.

2482 Words.

Bibliography

Primary Sources

34
Nicholas Bourne, ‚Bourne on Company Law’ (6th edition, Routledge, 2013) 39.
35
Prest v Petrodel Resources Ltd [2013] UKSC 34
36
Ibid.
Cases and Legislations

 Adams v Cape Industries Plc [1990] Ch 433

 Company Directors Disqualification Act 1986
 Daimler Co Ltd v Continental Tyre and Rubber Co Great Britain Ltd [1916] 2 AC 307
 DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR
852
 Gilford Motor Co v Horne [1933] Ch 935
 Insolvency Act 1986
 Jones v Lipman [1962] 1 WLR 832
 Malyon v Plummer [1963] 2 All ER 344
 Prest v Petrodel Resources Ltd [2013] UKSC 34
 Re Patrick and Lyon Ltd [1933] Ch 786
 Salomon v A Salomon Co Ltd [1987] AC 22
 Woolfson v Strathclyde Regional Council [1979] 38 P & CR521

Secondary Sources

Books

 D French, Mayson, French & Ryan on Company Law (36th Edition Oxford University
Press, Oxford 2019)
 L Sealy and S Worthington, Company Law: Text, Cases and Materials (11 th Edition
Oxford University Press, Oxford, 2016)
 N Bourne, Bourne on Company Law’ (6th Edition, Routledge, 2013)
 J Dine and M Koutsias (7th Edition, Palgrave Macmillian, 2009)

Journal

 Lord Cooke of Thorndon, ‘Turning Points of the Common Law’ (1996 Hamlyn
Lectures,1997) available at
 https://socialsciences.exeter.ac.uk/media/universityofexeter/schoolofhumanitiesandsocialsc
iences/law/pdfs/Turning_points_of_the_Common_Law.pdf

 Wendy Steel, ‘Corporate Personality’ accessed 06/03/20 available at

https://uk.westlaw.com/Document/I4F5E85C0B9FC11E5BF0FF96D27A59199/View/F
ullText.html?
listPageSource=893c812a8f0fbef449c3db3277fbac10&navigationPath=Search
%2Fv1%2Fresults%2Fnavigation%2Fi0ad73aa600000170af746d4fe1f24cce%3FNav
%3DRESEARCH_COMBINED_WLUK%26fragmentIdentifier
%3DI4F5E85C0B9FC11E5BF0FF96D27A59199%26parentRank%3D0%26startIndex
%3D1%26contextData%3D%2528sc.Search%2529%26transitionType
%3DSearchItem&listSource=Search&list=RESEARCH_COMBINED_WLUK&rank=1&ses
sionScopeId=c4e2e7b2afab7a7a52b9fa91325dced0336dd0fc65aca52b492cacb94093
28e4&navId=5E38797CB3EA52CAB982C0B03A11EB8C&originationContext=Search
%20Result&transitionType=SearchItem&contextData=(sc.Search)