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Corporate Personality and the Doctrine of Lifting the Veil: Re-thinking

Salomon v Salomon in the light of recent UK Supreme Court Decisions

Preprint · January 2021

DOI: 10.13140/RG.2.2.19702.42560

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12 January 2021
Corporate Personality and the Doctrine of Lifting the Veil: Re-thinking Salomon v
Salomon in the light of recent UK Supreme Court Decisions
Edafe Ugbeta*
Introduction

The question of when or in what circumstances the separate legal personality of a company
can be pierced under English law is one that continues to generate considerable debate
amongst judges, legal practitioners and academics. On the one hand, the debate looks
altogether surprising as a calm reflection on the existing literature plainly shows that the
English company law, since the House of Lord’s decision in Salomon v A Salomon and Co.
Ltd,1 has developed a very vast and robust jurisprudence on the consequences and
implications of a company’s separate legal personality and the limited circumstances in which
the courts have the power to ignore the corporate veil. On the other hand, there appears to
be considerable value in the debate as a cursory review of some recent decisions (especially
those emanating from the courts exercising family jurisdiction)2 as well as academic
commentaries on the subject clearly indicates that the courts have increasingly demonstrated
a tendency to invoke their powers to lift the corporate veil in circumstances which are
apparently inappropriate and thereby generating a live concern which, to a large degree,
strikes at the fundamental principle of corporate personality under English company law.

With the above insights as background, this paper seeks to advance the debate by drawing
attention to some decisions of the UK Supreme Court, including Woolfson v Strathclyde
Regional Council,3 VTB Capital Plc v Nutritek International Corp and others4 and Prest v
Petrodel Resources Ltd and others5 which generally provide a clear and coherent path that
should be followed in determining the special or limited circumstances under English law in
which the corporate veil can be justifiably pierced by the courts. In developing the argument,
a number of foundational subjects which are closely intertwined with the overriding theme of
the paper will be thoroughly discussed.

The Principle of Corporate Personality under English Law

Although there are, broadly speaking, three main forms of business organisations (that is, the
sole trader, partnership and company) recognised in English law, the company is by far the

* Researcher and Graduate Student, University of South Wales, United Kingdom

1 [1897] AC 22
2 See for example, Nicholas v Nicholas [1984] FLR 285; Kremen v Agrest (No. 2) [2011] 2 FLR 490; Green v Green [1993]
1 FLR 326; and Mubarak v Mubarak [2001] 1 FLR 673.
3 [1978] SC 90 (HL)
4 [2013] UKSC 5

5 [2013] UKSC 34

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most attractive and, therefore, the most utilized type of business enterprise for obvious
reasons. Perhaps the peculiar feature of a company which makes it so attractive for business
purposes is that it is recognised, in law, as a separate legal person from its shareholders and
directors.6

In English law, incorporation gives the company a distinct legal personality from its members
and this is achieved by fulfilling the incorporation formalities prescribed by the Companies Act
2006. The fact that a company is a separate legal entity from its members (shareholders and
directors) is a fundamental principle of the English company law. It is worth noting that although
this principle had been in existence and was statutorily recognised under the 1862 Companies
Act,7 it only began to gain judicial recognition in 1897, in the famous decision of the House of
Lords in Salomon v Salomon & Co Ltd8 where the court unanimously held that once a company
complies with the incorporation process and is brought into existence, the company is at law
recognised as a distinct legal person altogether from its shareholders or subscribers as such
the company’s affairs is carried on by the company itself as a separate person.

The decision in Salomon9 which is widely celebrated as the first English decision that strongly
affirmed the separate legal personality of a company has been applied by the English Courts
in a number of decisions, including Short v Treasury Commissioners10 and Lee v Lee’s Air
Farming Ltd.11 Today, the principle that a company is a separate legal person and that its
members cannot be exposed to liability at a personal level for the debts and liabilities of the
company (except in the narrow circumstances discussed below) has become deeply
entrenched and remains a major foundation stone of the UK company law.

Before turning to discuss the main consequences of incorporating a company, it seems

pertinent to mention here that the legal separation that exists between the company itself and
its members, upon incorporation, is referred to, in legal parlance, as the veil of incorporation.

Legal Consequences of Incorporation of a Company

While the process of incorporating a company may be more cumbersome than the process
of registering a sole proprietorship or partnership – particularly in terms of procedure,
paperwork and expense, ultimately the consequences of incorporating a company appear so
enormous, in that the resultant company offers a variety of benefits to both the business
owners (shareholders) and its managers (directors). First, and as Salomon clearly

6 MA Pickering, ‘The Company as a Separate Legal Entity’ (1968) 31 Modern Law Review 481
7 Section 6 Companies Act 1862
8 Salomon (n 1)
9 ibid
10 [1948] 1KB 116

11 [1961] AC 12

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exemplifies, once incorporated, a company becomes a separate legal entity and as a result
becomes personally responsible for the debts and other liabilities incurred in the course of its
business. In other words, any debts and liabilities incurred by the company are required to be
settled from its assets and not from the personal assets of the owners of the business or those
of its directors.

The second and perhaps the most significant consequence of incorporating a company –
which, of course, is directly linked to the separate corporate entity principle – is that the
company’s members enjoy limited liability to the extent that they are not responsible at a
personal level for the debts, liabilities and other obligations of the company.12 Even in the
cases of limited companies with only one dominant shareholder (sometimes called a one-
man company), the courts have consistently maintained that the fact of incorporation
distances the principal shareholder from the affairs of the company and therefore cannot be
held liable for its debts or losses if the company defaults or is sued.13 Therefore, unlike the
sole trader and members of a partnership whose liabilities are unlimited, the limited liability
principle shields the company’s members from exposure for the debts and other liabilities
incurred by the company itself as long as the company is a going concern, or even during
liquidation.14 It should, however, be noted that where there are express provisions to the
contrary or where there is undertaking for personal liability towards third parties, then the
members or directors of the company, as the case may be, could be personally liable for the
actions and obligations of the company.15

Another important consequence of incorporating a business is that the resulting company

enjoys perpetual succession. The basic rule here is that, the moment the company comes
into existence upon incorporation, it becomes an artificial legal person and possess the legal
capacity to continue to exist indefinitely, independent of its shareholders and directors. By
virtue of this rule, the continued existence of the company cannot be affected by either the
death, bankruptcy or departure (whether by resignation or removal) of all or any of its
members. For the perpetual life enjoyed by a company to be effectively brought to an end,
this can only be achieved by the legal process of either winding up or liquidation.

Additionally, upon incorporation, a company is legally conferred with the right to own separate
assets and any assets it owns belongs to the company itself and not the owners of the
company.16 Again, as an artificial legal entity, a company is a juristic person and therefore has

12 S Griffin, ‘Limited Liability –A Necessary Revolution’ (2004) Company Lawyer 99 - 101

13 See Macaura v Northern Insurance Ltd [1925] AC 619; see also Lee v Lee’s Air Farming Ltd (n 11).
14 Salomon (n 1)
15 Williams v Natural Life Health Foods [1998] 1 WLR 830

16 Macaura (n 12)

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the right to sue and be sued in its own corporate name. Finally, a company enjoys the legal
capacity to enter into contracts and other legal relations with third parties. By the same token,
a company has the capacity to contract with its members, whether they are shareholders or
directors of the company.17

Piercing the Corporate Veil

In the discussion above, it has been sufficiently established that a company, being a separate
legal person, is responsible for its own debts and liabilities and that by operation of the limited
liability principle, the company’s shareholders and directors are insulated from personal liability
for the debts and liabilities incurred by the company itself. However, in recognition of the fact
that the corporate veil can be misused or abused by the company’s shareholders and directors,
the principle of lifting or piercing the corporate veil was developed as an exception to the twin
principles of separate corporate entity and the limited liability.18 Basically, the principle of
piercing the corporate veil enables the courts to overlook the company’s separate legal
personality in certain limited circumstances in order to hold the company’s members personally
liable for the acts or debts of the company.19 As Lord Neuberger aptly puts it, where special
circumstances exist the principle of piercing the veil of incorporation can be invoked and this
“would lead to the person controlling the company being held liable as if he had been a co-
contracting party with the company concerned to a contract where the company was a party
and he was not.’20

Having said that, from the existing caselaw and academic commentaries, there appears to be
a consensus amongst judges and scholars that there are two broad exceptions – judicial and
statutory exceptions – recognised by law under which the narrow circumstances which enable
the courts to pierce the corporate veil can be categorised.21 Therefore, for present purposes,
these two exceptions will be followed here in identifying and analysing those circumstances.

(a) Statutory exceptions

Under this exception, the prevailing rule is that the corporate veil will only be ignored by the
courts where the circumstances expressly contained in statutory provisions exist. 22 In Prest v
Petrodel Resources Ltd, the UK Supreme Court in arriving at the decision that the corporate

17 Lee v Lee’s Air Farming Ltd (n 11).

18 M Moore, ‘A Temple built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon’
(2006) Journal of Business Law 180 -203; S. Mohanty and V Bhandari, ‘The Evolution of the Separate Legal Personality
Doctrine and its Exceptions: a comparative analysis’ (2011) Comp. Law 32(7) 194 -205
19 Prest v Petrodel Resources Ltd (n 5) 12 -19; see also S Ottolenghi, ‘From Peeping behind the Corporate Veil to Ignoring

it Completely’ (1990) 53 Modern Law Review 338

20 VTB Capital Plc (n 4) 42
21 C Mitchell, ‘Lifting the Corporate Veil in English Courts: An Empirical Study’ (1993) 3 Company, Financial and Insolvency

Law Review 15 -28

22 See Lord Diplock in Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 WLR 427

4
 veil could not be pierced in the circumstances of the case, stated the general principle in the
following terms:

Subject to the very limited exceptions, most of which are statutory, a company
is a legal entity distinct from its shareholders. It has rights and liabilities of its
own which are distinct from those of its shareholders. In Salomon v A Salomon
& Co Ltd (1897) AC 22, the House of Lords held that these principles applied
as much to a company that was wholly owned and controlled by one man as
to any other company.23

There are a number of examples of statutory provisions in English law that provide for
circumstances in which the corporate veil can be pierced by the courts in order to prevent the
abuse of the limited liability principle. An example, perhaps the earliest, of such statutory
provisions can be found in the English Companies Act 1985.24 However, the most referenced
examples are those contained in sections 213 to 217 of the English Insolvency Act 1986 which
impose personal liability on companies’ directors for fraudulent and wrongful trading, especially
in relation to companies that have gone into liquidation.25

Another example can be found in section 399 of the Companies Act 2006 which requires the
parent company in a group of companies to own an account separate from those of the group
and its subsidiaries. This statutory exception appears to be aimed at either preventing tax
evasion or checking the tendency to avoid certain lawful obligations by the parent company or
its affiliates.26

(b) Judicial exceptions

Although the general attitude of the English courts was to refuse to pierce the corporate veil
where the circumstances of the cases presented did not fall under any of the recognised
statutory exceptions, decades of development of the English company law alongside
commercial realities have seen the courts increasingly yield to the argument that there are
justifiable circumstances, outside those provided by statutes, in which the corporate veil can be
pierced.27 Today, significant judicial inroad has been made in identifying the circumstances in
which the courts can legitimately invoke the power to pierce the corporate veil outside those
circumstances contained in statutes.28 In this regard, the decision of the Court of Appeal in

23 Prest (n 5), Lord Sumption at page 5.

24 Sections 24 and 630 of the Companies Act 1985
25 Re Patrick & Lyon Ltd [1933) Ch 786; see also Thorne v Silverleaf [1994] BCC 109
26 PL Davies (ed), Gower and Davies: Principles of Modern Company Law (8th edn Sweet & Maxwell 2008) 232; see also

CM Schmitthoff, ‘Salomon in the Shadow’ (1967) Journal of Business Law 305

27 A Dignam, Hicks & Goo’s Cases and Materials on Company Law (7th edn OUP 2011) Ch. 3
28 For detailed examination of the development of the law, please see Woolfson v Strathclyde Regional Council [1978] SC

(HL) 90; see also Prest (n 5) and VTB Capital (n.4)

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Adams v Cape Industries Plc29 appears to be a convenient starting point as it represents a
strong reaffirmation of the Salomon principle and also provides a clear guide as to the limited
circumstances in English law when the courts can disregard the corporate veil under the
following broad categories:
(i) When the court is construing a statute, contract or other document;
(ii) When the court is satisfied that the company is a ‘mere façade’ concealing the true
facts; or
(iii) When it can be established that the company is an authorised agent of its controller
or members – corporate or human.

A systematic analysis of the authorities shows that the above categorisation has not been
followed in all cases as the courts, in subsequent cases, have either adopted a broader
classification or followed different approaches to determine whether there were special
circumstances recognised within the body of English caselaw to justify the piercing of the
corporate veil.30 For example, in Ben Hashem v Al Shayif,31 Munby J recommended six principles
for determining the circumstances in which the corporate veil can be lifted by the courts. Equally,
in Trustor AB v Smallbone (No.2),32 the court identified three overlapping circumstances in which
the courts are entitled to pierce the corporate veil as follows: (i) where the company was a
“façade” or “sham”; (ii) where the company was involved in some form of impropriety; and (iii)
where it was necessary to do so in the interest of justice.

Another circumstance, though a debatable one, in which the courts have expressed the
willingness to disregard the corporate veil is in relation to group companies and their
subsidiaries. Historically, and as DHN Foods Distributors Ltd v Tower Hamlets LBC33 and Smith,
Stone & Knight v Birmingham Corporation34 clearly illustrate, the English courts have ignored
the separate legal personality principle and found that the parent company in a group of
companies was liable for the debts/actions of the subsidiary on the reasoning that both the
subsidiary (which is ordinarily a separate legal entity) and the parent company constitute, what
the courts called, a single economic unit. No doubt, these decisions have been heavily criticized
as not been founded on the established principle in Salomon and have indeed been overtaken
by subsequent decisions, including Albacruz (Cargo Owners) v Albazero (Owners),35 which

29 [1990] Ch 433
30 See for example the following cases: A v A [2007] 2 FLR 467; Gilford Motors Co Ltd v Horne [1993] Ch 935; Jones v
Lipman [1962] 1 WLR 832; and Gencor ACP Ltd v Dalby [2000] BCLC 734
31 [2009] 1 FLR 115, 159 -164
32 [2001] 1 WLR 1177
33 [1976] 1 WLR 852
34 [1939] 4 All ER 116

35 [1977] AC 774 HL

6
reaffirmed that the separate legal personality principle cannot be departed from by judicial
decisions except in certain narrow circumstances.36

However, it should be noted that while all the circumstances discussed above would generally
guide the court in determining when the corporate veil may be pierced, a review of the authorities
indicates that the facts and circumstances of each case are very significant factors that the
English courts take into consideration and carefully balance in the process of determining
whether or not the corporate veil can be pierced. As a result, in both VTB Capital and Prest, the
UK Supreme Court had no difficulty in rejecting the propositions that the corporate veil could be
pierced because, on the basis of the facts of both cases, the circumstances recognised by law
which enable/empower the courts to pierce the corporate veil did not exist.37

Conclusion
In this paper, it has been clearly established that, upon incorporation, a company becomes an
artificial legal person distinct from its shareholders and directors and with the key benefit of
limited liability, such that the company’s shareholders and directors, as Salomon illustrates, are
not ordinarily liable at a person level for its debts and liabilities. However, in recognition of the
fact that the separate corporate entity principle can be abused or used as a cover to avoid lawful
obligations by the company’s members, the doctrine of piercing the corporate veil was invented
as an exception to the general rule. In a nutshell, the doctrine enables the courts to ignore the
corporate veil in some limited circumstances – which have been identified and discussed above
– in order to hold the persons behind the company, rather than the company itself, liable for the
debts or liabilities of the company.
Overall, it is argued that, notwithstanding the exceptions now recognised by the law which
enable or permit the courts to ignore the separate legal personality rule in certain circumstances,
Salomon still reigns38 (though not supreme as originally conceived) as the twin principles of
separate corporate personality and limited liability which informed the decision of the House of
Lords still remain predominant till date as recently affirmed by the UK Supreme Court in VTB
Capital Plc v Nutritek International Corp and Prest v Petrodel Resources Ltd.

36 CM Schmithoff, ‘The Wholly Owned Subsidiary’ (1978) Journal of Business Law 218
37 R Charrot, ‘Lessons Learned from Prest v Petrodel’ (2013) 5 PCB 281; N Grier, ‘Piercing the Corporate Veil: Prest v
Petrodel Ltd’ (2014) 18(2) Edin LR 275
38
See E Lim, ‘Salomon Reigns’ (2013) 129 LQR 480

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