PAPUA NEW GUINEA UNIVERSITY OF TECHNOLOGY

DEPARTMENT OF BUSINESS STUDIES

AC414 - COMPANY LAW LECTURE NOTES

UNIT THREE
NATURE OF LEGAL PERSONALITY & LIFTING THE VEIL
OF INCORPORATION
UNIT CONTENT
Study Unit Title Learning Page
Outcomes
3 THE NATURE OF LEGAL PERSONALITY
& LIFTING THE VEIL OF NCORPORATION
3.1 Nature of Legal Personality 2
3.1.1 What is Legal Personality? KCA 2
3.1.2 Who needs legal personality & Who can apply KCA 2
to attain legal personality status?
3.1.3 When does a company attain legal personality? KCA 2-3
3.1.4 Why is it important that a company attains legal KCA 3
personhood?
3.1.5 What are the consequences of incorporation? KCA 3-4
3.1.5.1 Separate Legal Personality KCA 4-5
3.1.5.2 Veil of Incorporation KCA 10
3.1.5.3 Piercing the Corporate Veil KCA 10
(a) Statute/Legislation KCA 10-11
(b) Common Law KCA 11
(i) Fraud, Façade or Sham KCA 11-12
(ii) Agency KCA 12-13
(iii) Single Economic Unit KCA 13-14
(iv) State of Hostility KCA 14-15
(v) Justice and Equality KCA 15-16

Unit Objectives
By the end of this Unit, students will be able to understand the nature of Legal Personality.
What it is, when it comes into being, the consequences of its existence. They will also be able
to describe what ‘lifting of the corporate veil’ means and the circumstances that give rise to the
corporate veil being lifted.

Learning Outcome

INITIALS WORDS PARTICULARS

A Application Draw, Design, Apply, evaluate, Synthesise

etc.

C Comprehension Explain, Discuss, Differentiate etc.

K Knowledge Define, Identify, List etc.

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DEPARTMENT OF BUSINESS STUDIES

3.1 NATURE OF LEGAL PERSONALITY

3.1.1 What is Legal Personality?

Legal Personality means possessing the capacity to be recognized by the laws within a
country as having legal rights and duties.

With people (natural persons) legal personality is acquired when they are born.
However, with companies (judicial persons), their legal personality is acquired when
they have been incorporated.

Note that a person or thing (legal entity) having legal personality is referred to as a
legal person; and can do most things that a human person is able to do in law such as
owning property, entering into contract, suing and being sued in court and so forth.

3.1.2 Who needs legal personality & Who can apply to attain legal personality
status?

Obviously, natural persons do not need to apply to attain legal personality. With
exceptions, they have most of the rights and duties upon birth and the remainder upon
coming of age.

It is only judicial persons such as companies who must apply pursuant to the relevant
laws in order to attain legal personality.

In PNG, for companies to be recognised as legal persons, they must be incorporated

pursuant to the Companies Act 1997.

Obviously, a company cannot incorporate itself. As such, in order for it to attain legal
personality, a natural person(s); usually the owner(s), member(s) etc must register it in
accordance with the companies Act 1997.

Section 12 explicitly states that ‘any person may, either alone or together with another
person, apply for registration of a company’1.

3.1.3 When does a company attain legal personality?

In Papua New Guinea (PNG) a company acquires legal personality upon being
incorporated in accordance with the Companies Act 1997.

Therefore ‘as soon as the Registrar receives a properly completed application for
registration of a company, he is to register the application; and issue a certificate of
incorporation.’2

The certificate of incorporation being issued is conclusive evidence that all the
requirements of registration have been complied with; thus, on and from the date of
incorporation stated in the certificate, the company is incorporated.3
1 Companies Act 1997
2 Companies Act 1997, section 14
3 Companies Act 1997, section 15

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At that point it is seen as a legal entity in its own right, separate from its shareholders
and continues in existence until it is removed from the register.4 In other words, it
attains a separate legal personality upon incorporation which continues until
deregistration.

3.1.4 Why is it important that a company attains legal personhood?

To adequately address this question, we have to first identify the reasons why
companies are incorporated.

There are various reasons, but the primary reason people incorporate companies is to
‘protect themselves personally from incurring liabilities’.

Upon incorporation, a company becomes a person in law. It has a separate legal

existence, distinct from its owners/shareholders, managers/directors, employees and
all and any other persons involved in the company in some other ways.

Only in limited circumstances can the ‘directors’ of a company be held liable for any
debts the company incurs.

3.1.5 What are the consequences of incorporation?

Once a certificate of incorporation is issued the company acquires its own separate
legal personality. The separate legal personality of a company means that:

(a). Shareholders have limited liability;

(b). Property and assets of a company belong to the company;

(c). Profits belong to the company;

(d). Debts and liabilities of the company belong to the company;

(e). Shareholders have no right to manage the business or enter into Transactions
on behalf of the company

(f). A company may enter into contracts with its shareholders because it’s a person
separate from its shareholders;

(g). A company may sue or be sued in its own name;

(h). A company enjoys perpetual succession...etc…

Basically, a company, because it is a corporation, is a person in law separate from any

and all of the individuals involved in the company whether those individuals are its
owners/shareholders, its managers/directors or are involved in some other way.

In general terms a company has the capacity to both;

4 Companies Act 1997, section 16

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(i) enjoy (by virtue of its existence), or acquire, enforceable legal rights or
property; and

(ii) be (by virtue of its existence), or become subject to, enforceable legal
obligations and liabilities.

In specific terms, like a natural person, a company;

(a) can own property;
(b) can be a party to a contract;
(c) can act tortiously;
(d) can be a victim of tortious behaviour;
(e) can be a trustee;
(f) can be a beneficiary of a trust;
(g) can commit a crime;
(h) can be the victim of a crime;
(i) can sue and be sued;
(j) has a nationality;
(k) has a domicile;
(l) has human rights;
(m) has human rights responsibilities…etc...

But unlike a natural person, a company;

(a) has perpetual existence until dissolved;
(b) has owners;
(c) has no physical body or brain with which to act or think.

3.1.5.1 Separate Legal Personality

Incorporation transforms a company into a separate legal person. It is a separate

person in law from its members/owners/shareholders, and managers/directors. This
fact is fundamental to the whole structure of company law.

The cases of Salmon-vs-A Salmon & Co Ltd5 and Lee-vs-Lee’s Air Farming Ltd6;
illustrate a company’s separate legal personality.

5 Salmon v. Salmon [1897] AC 22 has clearly established the principle that once a company has been validly
constituted under the Companies Act, it becomes a legal person distinct from its members and for this purpose it is
immaterial whether any member holds a large or small proportion of the shares, and whether he holds those
shares as beneficially or as a mere trustee.
In the case, Salomon had, for some years, carried on a prosperous business as a leather merchant and boot
manufacturer. He formed a limited company consisting of himself, his wife, his daughter and his four sons as the
shareholders, all of whom subscribed to 1 share each so that the actual cash paid as capital was £7. Salomon
sold his business (which was perfectly solvent at that time), to the Company formed by him for the sum of
£38,782. The company’s nominal capital was £40,000 in £1 shares. In part payment of the purchase money for
the business sold to the company, debentures of the amount of £10,000 secured by a floating charge on the
company’s assets were issued to Salomon, who also applied for and received an allotment of 20,000 £ 1 fully paid

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As seen, a company’s separate legal personality comes with many rights and
obligations. Below are several important considerations for a legal person. These are;

(a) Company is liable for its own debts

The shareholders are not liable for the debts and liabilities of the company and cannot
be sued by the company’s creditors. A shareholder can be a debtor or creditor of the
company and can sue and be sued by the company.

The companies act 1997 stipulates that a “…shareholder is not liable for an obligation
of the company by reason only of being a shareholder.” 7

However, ‘where the constitution of a company provides that the liability of the
shareholders of the company is unlimited, the liability of a shareholder to the
company is limited to any liability expressly provided for in the companies act 1997
or in the constitution of the company.’8

Note also that a shareholder is liable to a company if he entered into a contract with
it, including a contract for the issue of shares, or for any tort that he may have
committed, or for breach of a fiduciary duty, or other actionable wrong.9

shares. The remaining amount of £8,782 was paid to Salomon in cash. Salomon was the managing director and
two of his sons were other directors.
The company soon ran into difficulties and the debenture holders appointed a receiver and the company went into
liquidation. The total assets of the company amounted to £6050, its liabilities were £10,000 secured by
debentures, £8,000 owing to unsecured trade creditors, who claimed the whole of the company’s assets, viz.,
£6,050, on the ground that, as the company was a mere ‘alias’ or agent for Salomon, they were entitled to
payment of their debts in priority to debentures. They further pleaded that Salomon, as a principal beneficiary, was
ultimately responsible for the debts incurred by his agent or trustee on his behalf.
Their Lordships of the House of Lords observed:
“…the company is a different person altogether from the subscribers of the memorandum; and though it may be
that after incorporation the business is precisely the same as before, the same persons are managers, and the
same hands receive the profits, the company is not, in law, their agent or trustee. The statute enacts nothing as to
the extent or degree of interest, which may, be held by each of the seven or as to the proportion of interest, or
influence possessed by one or majority of the shareholders over others. There is nothing in the Act requiring that
the subscribers to the memorandum should be independent or unconnected, or that they or any of them
should take a substantial interest in the undertakings, or that they should have a mind or will of their own, or that
there should be anything like a balance of power in the constitution of company.”
6Lee v Lee's Air Farming Ltd [1961] AC 12 In this case, a company was formed for the purpose of aerial top-
dressing. Lee, a qualified pilot, held all but one of the shares in the company. He voted himself the managing
director and got himself appointed by the articles as chief pilot at a salary. He was killed in an air crash while
working for the company. His widow claimed compensation for the death of her husband in the course of his
employment. The company opposed the claim on the ground that Lee was not a worker as the same person could
not be the employer and the employee. The Privy Council held that Lee and his company were distinct legal
persons which had entered into contractual relationships under which he became the chief pilot, a servant of the
company. In his capacity of managing director, he could, on behalf of the company, give himself orders in his other
capacity of pilot, and the relationship between himself, as pilot and the company, was that of servant and master.
Lee was a separate person from the company he formed and his widow was held entitled to get the
compensation. In effect the magic of corporate personality enabled him (Lee) to be the master and servant at the
same time and enjoy the advantages of both.
7 Companies Act 1997, section 79(1).
8 Companies Act 1997, section 79(2).
9 Companies Act 1997, section 79(3).

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The companies act 1997 particularizes circumstances where the shareholder is

liable.10

(b) Limited Liability

The fact that the company is a separate person from its shareholders makes limited
liability possible.

Generally, Limited liability means that the liability of a business owner is limited to
the amount that the owner has invested in the company.

A common misunderstanding is the assumption that limited liability means that

business owners are not liable for anything that happens in the business—but this is
not true. "Limited liability" does not mean "no liability" and business owners can be
held liable in some circumstances.

Remember that the company’s liability is always unlimited. It is the members’

liability that is limited and that liability is to the company, not to the individual
creditors.

Losing the protection of limited liability is sometimes called "piercing the corporate
veil." In other words, the loss of liability opens up the owner to full liability for their
actions in the business. The owner of a business can loose limited liability protection
in several different circumstances. This includes Misuse of Funds11, Conflict of
Interest12, Fraud and Other Criminal Acts13, Personal Guarantees14 and so forth.

(c) Company property

10 Companies Act 1997, Division 2, sections 79, 80, 81, 82, 83, 84 and 85.
11 If a business owner uses business funds for personal expenses or if the owner commingles funds for their own
gain, they can expose themselves to full liability. For example, if the owner has mixed both business and personal
funds in a personal checking account and doesn't clearly separate the two types of funds, this may result in liability
for debts of the business.
12 A conflict of interest occurs when a person in a fiduciary position has competing personal and business
responsibilities or loyalties. If the person lets personal interest come before the fiduciary position, that's a conflict
of interest. An example of a conflict of interest would be if a board member of Company A has a personal
construction business and the construction business gets the bid to build a development, even if that deal wouldn't
be best for Company A.
13Criminal acts are punishable by law and they bring liability to the person committing those acts. Fraud, for
example, is knowingly misrepresenting something for material gain. Fraud is a breach of duties and
responsibilities, and it's both a civil and criminal wrong. For example, if a business owner conceals the defects in a
product or commits insurance fraud by overvaluing assets, the liability protection of the company won't protect the
owner. Employers may also be held liable for the criminal acts of their employees. Plaintiffs in lawsuits sometimes
hold both an employer and employee responsible if the employee assaults a customer or another employee.
14 In some circumstances, a business owner must personally guarantee a business contract; in this case, the
personal liability of the owner to fulfil the contract overrides the "limited liability" circumstances. The best example
of this situation is when a business owner must personally guarantee a loan to the business with personal assets.
If the business cannot make the loan payments, the business owner is personally responsible for these payments
and must pledge personal assets to pay off the loan. To avoid personal liability for contracts, make sure you sign
based on your position with the company. For example, sign as "Jim Sam, President." The business is party to the
contract, not the individual.

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A company owns its own property. Consequently, the shareholders have no direct
right to this or any share of it. Thus, an aggrieved party cannot sue a shareholder for
the actions of a company, nor can a shareholder claim damages for injury to the
company’s property.

A shareholder who no longer wishes to be a member is only entitled to whatever price

he can get for his shares. He has no legal interest in the company’s property and
cannot insure it against theft, damage etc. The caselaw on point is Macaura-vs-
Northern Assurance Co15.

Note also that in the PNG case of Kuli-vs-Tande16 a shareholder of Rama Enterprises
Pty Ltd sued a third party for trespass and negligence for loss of “service-station”,
“convenient shop” and its “goods”. Upon perusal of the evidence, the court
discovered that the “service-station”, “convenient shop” and its “goods” were not
owned by the shareholder. Instead, the Company owned them. The shareholder was
merely a shareholder of the company. Hence, the trial judge dismissed the entire
proceedings.

(d) Contractual Capacity& Liability under Tort

A company has full contractual capacity and only it can enforce its contracts. Only it
can enforce its contracts or be compelled to meet its contractual obligations.

For instance, XYZ Limited enters into a contract with Jack to purchase his property.
Jack is paid the agreed amount but has already sold it to another buyer for a higher fee
and returns XYZ Limited’s money. Only XYZ Limited has the right to sue Jack for
breach of contract, not its shareholders. Likewise, if XYZ Limited breaches the
contract with Jack by making part payment, occupying the property and refusing to
complete payment; Jack can only sue XYZ Limited and not its shareholders for
breach of contract.

Companies may also be liable in negligence. For instance; if a Papindo dumps

harmful chemical wastes into a river which is used by villagers downstream to fish,
drink, bath, wash etc.; obviously the river will be polluted, fish and humans who
consume them will also be poisoned as a result of Papindo’s negligent behavior. The
aggrieved villagers can sue Papindo for the damages they have suffered because of its
Negligence.

Note that a shareholder cannot be made liable for the negligence of the company,
unless he was also personally negligent.

(e) Crimes

15Macaura v. Northern Assurance Co Ltd [1925] AC 619,.. After selling his property (timber) to a company in
return for shares, Macaura, the sole shareholder of Irish Canadian Sawmills Ltd, insured the timber against fire in
his own name. The timber was destroyed by fire and Macaura claimed on the insurance policy. Held: The property
belonged to the company, not to the shareholder. Even though the timber had been destroyed by an insured
event, Macaura had no insurable interest in the timber as ‘he stood in no “legal or equitable relation” to it’ and so
could not recover under the insurance policy’…Consequence of this case is that companies can hold property and
members have no property interest in company property…. However, this may not apply to someone who is a
secured debenture holder.
16 Kuli v Tande [2021] PGSC 17; SC2099

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Companies are capable and do in fact commit ‘crime’17.Corporate Crime is generally

any act or behavior committed by corporates which is either prohibited or restricted
under law. It can result into any form of physical, economical, mental, social or moral
harm to the victim.18

Crime(s) committed by companies / corporate crime(s) “refer to the misdeed or wrong

committed by either a corporation or by individuals that can be identified with a
corporation or other business entity”19. A company can be convicted of a crime,
regardless of whether its directors are also convicted.

In PNG companies can be held liable for offences under Companies Act 1997,
Proceeds of Crime Act 2005, Environmental Act 2000, Public Health Act 1973,
National Water Supply and Sewerage Act 1986, Industrial Safety, Health and Welfare
Act 1961, PNG’s Tax laws and various other legislations.

However, unlike human persons, although companies are criminally liable for some
offences, they are not criminally liable for others.

Obvious limitations which remove companies from criminal liability include the
following;

* a company cannot be convicted of a crime which requires the physical act of

driving a vehicle.

* a company cannot be convicted of any crime for which the only available
sentence is imprisonment.

See the case of Richmond on Thames Borough Council-vs-Pinn & Wheeler20.

* Furthermore, there are particular problems with crimes which require mens
rea (a guilty mind). Most common law crimes require mens rea, while many
statutory offences involve strict criminal liability.

In order to convict companies of common law crimes, courts may regard the mens rea
of those individuals who control the company to be the mens rea of the company.

However, the courts are very restrictive in their use of this approach. Below are some
caselaw on point.

Tesco Supermarkets Ltd-vs-Nattrass21, R-vs-P&O European Ferries (Dover) Ltd22, R-

vs-Kite and OLL Ltd23 and Transco plc-vs-HM Advocate24

17The Oxford Dictionary defines Crime as “An act punishable by law, as being forbidden by statute or injurious to
the public welfare…An evil or injurious act; an offence, sin; especially of a grave character.”
18 Asha Joshi, Corporate Crimes: An Introduction, Article in SSRN Electronic Journal - September 2012
19 Asha B Joshi, Freelancer, can be reached at ashajoshi24@gmail.com
20Richmond -vs- London Borough Council -vs- Pinn and Wheeler Ltd… where the court held that where a criminal
act requires corporal punishment the court will not embark on a fruitless journey of instituting an action against a
company bearing in mind that even where the company is found guilty, no substantial implementation can be
made of the punishment. It will rather institute the action against the natural offender who can be detained or
murdered for his crime.

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Crimes can also be committed against the company. A company can be the victim of a
crime. There are numerous cases dealing with crimes committed against companies.

For instance, it is theft to steal from a company, even if those accused of the theft are
also the company’s shareholders. Case on point is R-vs-Philippou25.

(f) Perpetual Succession

21 Tesco Supermarkets Ltd-vs-Nattrass [1971] UKHL 1…. Tesco was offering a discount on washing powder which
was advertised on posters displayed in stores. Once they ran out of the lower priced product, the stores began to
replace it with the regularly priced stock. The manager failed to take the signs down and a customer was charged
at a higher price. Tesco was charged under the Trade Descriptions Act 1968 for falsely advertising the price of
washing powder. In its defense Tesco argued that the company had taken all reasonable precautions and all due
diligence, and that the conduct of the manager could not attach liability to the corporation. The House of Lords
accepted the defense and found that the manager was not a part of the “Directing Mind” of the corporation and
therefore his conduct was not attributable to the corporation. The corporation had done all it could to enforce the
rules regarding advertisement. Lord Reid held that, in order for liability to attach to the actions of a person, it must
be the case that “the person who acts is not speaking or acting for the company. He is acting as the company and
his mind which directs his acts is the mind of the company. If it is a guilty mind then that guilt is the guilt of the
company “In the House of Lords Tesco was successful with their defense showing that;
* a store manager was classed as ‘another person’, and
* a system of delegating responsibility to that person was performance of due diligence, not avoidance of it
The store manage was not the directing mind and the will of the company-the company had done all it could to
avoid committing an offence and the offence was the fault of another person (an employee). The company was
acquitted.
22R -vs- P & O Ferries [1991] 93CAR 72…. The company allowed a problem to occur with their ship which led to
deaths. Lord Bingham said; “Manslaughter is the killing of one person by another, while a person acting as the
embodiment of the corporation, and for the purposes of the corporation, is doing the act or omission that leads to
death, the corporation is held liable for manslaughter as well as the person. The prosecution argued that that the
judge was in breach of precedent, citing Withers -vs- DPP, where Lord Simon said that it was not open to courts to
create new offences or modify existing ones so as to criminalize a new type of behavior. Lord Bingham argues
that he is merely extending who is culpable, not changing the nature of the crime itself. Bingham said in an earlier
case that a company can be vicariously liable for the acts and omissions of its employees, and that this may
extend to manslaughter.
23R-vs- Kite and OLL Ltd [1996] … The managing director of the company sent a group of students into the harsh
sea and due to unforeseen errors, the canoes capsized, resulting in four drowned and others badly injured. The
company OLL Ltd was prosecuted for corporate manslaughter. And uncommonly, the conviction held and Peter
(Managing Director) and his company were each convicted of four counts of manslaughter charges. From here we
can conclude that business operations that have been successfully prosecuted for corporate manslaughter are
normally those small “one man” companies where the responsible “controlling mind” was easily identified.
24 Transco Plc -vs- HMA (N0.1) [2004] S.L.T 41… a public gas transporter was charged with breaking the Health
and Safety at Work etc. Act 1974, section3 and section 33 (1) in respect to a gas explosion, which resulted in the
death of four people on 22nd December 1999 in Larkhall. It was held that Transco had “shown a complete and
utter disregard for the public,”. The court ruled that it was possible to prosecute for culpable homicide; However, it
is possible to convict of culpable homicide only if the court could identify an individual or group of individuals being
a DIRECTING MIND in the company; therefore, the charges of culpable homicide were irrelevant and
subsequently dismissed. The company was later prosecuted on the charge of health and safety and fined 15
million pounds. This case along with others of this type paved the way for major legislative changes. This area is
now governed by the Corporate Manslaughter and Corporate Homicide Act 2007.
25 R -vs- Philippou (1989) 89 CR App R 290…two sole directors of a company drew on the company’s funds to
buy property for their own use. The court of appeal held their conviction of theft; their act was clearly adverse to
the rights of the company and so was an appropriation notwithstanding the ‘authority’ they had given themselves.
The fact that they constituted the ‘mind of the company’ was irrelevant – unless they really believed that they had
a right to do as they did, there was a dishonest appropriation.

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Separate personality means that the existence of a company does not depend on the
existence of its members. Membership may change or members may die. The
company continues in existence until it is wound up.

In the case of K/9 Meat Supplies (Guildford) Ltd, Re,26 ; all the members of a private
company were killed by a bomb while in a general meeting, However the company
survived and continued to exist despite the death of all its members.

3.1.5.2 Veil of Incorporation

Separate personality of a company operates as a shield. The courts will not normally
look beyond the façade of the company to the shareholders and directors who
compromise it.

The screen separating the company from its individual shareholders and directors is
commonly referred to as “the veil of incorporation”.

In simple terms, the corporate veil is a shield that protects the members from the
action of the company. If a company violates any law or incurs any liability, then the
members cannot be held liable. Thus, shareholders enjoy protection from the acts of
the company.27

3.1.5.3 Piercing the Corporate Veil

The expression ‘Piercing the Corporate Veil’ refers to a situation in which courts put
aside limited liability and hold a corporation’s shareholders or directors personally
liable for the corporation’s actions or debts.28

Sometimes the law is prepared to examine the reality which lies behind the company
façade. This is described as “lifting” or “piercing” the corporate veil.

In PNG, the courts can lift the veil of incorporation if the company or its members
breaches statutory provisions or the rules and principles of common law.

(a) Statute/Legislation

The legislature (Parliament) in PNG has passed various laws which have provisions
that allow for ‘piercing of the corporate veil’ by the courts. These Acts of parliament
include the various Taxation Laws of PNG, Companies Act 1997, Insolvency Act
1951, Proceeds of Crime Act 2005 and so forth.

Companies Act 1997

In the companies act 1997 there is a list of instances where the courts can lift the
corporate veil in order to do justice following an offence that has been committed.

The penalties stipulated include fines or imprisonment or both.

26 K/9 Meat Supplies (Guildford) Ltd, Re, 1966 (3) All E.R.320
27 Doctrine of Corporate Veil and Lifting of Corporate Veil – TaxGuru, https://taxguru.in-company-law
28 Limited Liability Companies and Piercing the Corporate Veil, https://hallellis.co.uk-limited-liability

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These provisions of the companies act 1997 that allow courts in PNG to remove the
corporate veil are listed under Schedule 13 of the companies act 1997.

Note that other legislations (Acts of Parliament) including the companies act 1997 and
those listed above; also have provisions or sections which allow for the lifting of the
corporate veil.

(b) Common Law

The principles of common law which is a source of PNG’s underlying law are also
used by courts to ‘pierce/lift the corporate veil’29.

Below are some instances where courts are willing to lift the corporate veil.

(i) Fraud, Façade or Sham

Courts will examine the reality behind the company where the company was set up
purely to evade a legal obligation, or to allow someone to do something he would not
be allowed to do as an individual.

Gilford Motor Co v Horne [1933] Ch 935

Horne had been employed by Gilford Motor Company under a contract in which he
undertook not to compete with the company. He tried to evade this agreement by
getting his wife to set up a company. All the shares in the company were held by
Horne's wife and an employee. The new company then carried on business in
competition with Horne's employer.

The court was prepared to look behind the corporate identity and issued an injunction
to prevent the company trading in competition with Gilford Motor Co.

Lord Hanworth said: "I am quite satisfied that this company was formed as a device, a
stratagem order to mask the effective carrying on of a business by Mr E B Horne”

Jones v Lipman [1962] 1 WLR 832

This case shows the principal reason why the veil will be lifted. That is, when a
company is used as a "mere facade" concealing the "true facts", which essentially
means it is formed to avoid a pre-existing obligation.

In this case, Mr Lipman contracted to sell a house to Mr Jones for £5,250. He changed
his mind and refused to complete the sale. To try to avoid a specific performance
order, he conveyed it to a company formed for that purpose alone, which he alone
owned and controlled.

Russell J ordered specific performance against Mr Lipman and formed company and
noted that the defendant company is the creature of Mr Lipman; a device and a sham,
a mask which he holds before his face in an attempt to avoid recognition by the eye of
equity.

29Note that some of these common law principles have been legislated or included into legislations such as
companies act 1997, insolvency act 1951 etc.

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Re Bugle Press Limited [1961] ChD

In this case, A, B, and C were the only shareholders of the company. A and B held
45% of the shares each and C held 10%.

A and B then made an offer to purchase C’s shares but he refused. A and B then
formed a company which made an offer to acquire all the shares of the first company
which A and B accepted.

The new company purported to acquire C’s shares compulsorily pursuant to Section
210 of the Act. C applied to the Court to disallow the takeover bid. The Court lifted
the veil of the new company and disallowed the bid.

In the words of Harman J: “The new company was nothing but a small hut
buildt round the majority shareholders and the whole scheme was nothing but a
hollow sham. All the minority shareholders had to do was shout and the walls of
Jericho came tumbling down”.

(ii) Agency

Court may lift the veil on the basis that one company is merely carrying on business
as the agent of another so that transactions entered into by the subsidiary can be
regarded as transactions of the holding company.

Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116

Birmingham Corporation sought to compulsorily acquire property owned by Smith,

Stone & Knight (SSK).

The premises were used for a waste control business. That business was ostensibly
conducted by the Birmingham Waste Co. Ltd whose name appeared on the premises,
notepaper and invoices. The Birmingham Waste Co. Ltd was a wholly-owned
subsidiary of SSK. SSK sought compensation for the disturbance of Birmingham
Waste Co’s business.

The court agreed that SSK was entitled to compensation because Birmingham Waste
Co. conducted its business as an ‘agent’ for SSK.30

Firestone Tyre & Rubber Co. v Llewellin (1957) [1957] 31 ITR 338 Bom

An American company, Akron, formed a wholly-owned subsidiary in Brentford,

London for the purpose of manufacturing tyres and distributing them to their
European customers. This subsidiary was wholly controlled by Akron, as they were
responsible for obtaining the orders.

30 In considering whether a subsidiary is carrying on its business as the parent

company’s business or as the subsidiary’s own business, six questions were proposed:
1. Were profits of the business treated as profits of the parent?
2. Did the parent appoint persons to carry on the business?
3. Was the parent the ‘head and brain’ of the trading venture?
4. Did the parent govern the adventure?
5. Did the parent make profits via that direction?
6. Was the parent in effectual and constant control? (Atkinson J)

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Clause 4 of the agreement between the parent and the subsidiary provided that the
subsidiary having received its costs plus a 5% commission would transfer the balance
of the selling price/profit back to Akron.

When Akron was assessed for UK tax on its profits, it claimed that it was a separate
entity from the UK subsidiary company.

The Court in lifting the corporate veil held that the UK subsidiary had acted as an
agent of Akron, and therefore Akron was liable for to pay tax on all UK profits.

As per Evershed L.J. the rationale for this conclusion was that the London subsidiary:

“... though a separate entity, is in fact wholly controlled by Akron, and in the making
of what may be described as Akron proprietory branded articles it acts under the close
direction of Akron in all respects, and in selling those articles to Akron's customers it
does so on terms fixed by Akron so that after allowing Brentford its costs and a
percentage thereon the whole of the profits on the transactions go to Akron.”

(iii) Single Economic Unit

In the past, courts have been willing to lift the veil on the basis that a group of
companies was not a group of separate persons but a single economic unit.

DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1
WLR 852

DHN imported groceries and provision and had a cash-and-carry grocery business. Its
premises were owned by its subsidiary which was called Bronze. It had a warehouse
in Malmesbury Road, in Bow, the East End of London. Bronze’s directors were
DHN’s. Bronze had no business and the only asset were the premises, of which DHN
was the licensee. Another wholly owned subsidiary, called DHN Food Transport Ltd,
owned the vehicles.

In 1970 Tower Hamlets London Borough Council compulsorily acquired the premises
to build houses.

As a result, DHN had to close down. Compensation was already paid to Bronze, one
and a half times the land value. DHN could only get compensation too if it had more
than a license interest.

The Lands Tribunal held no further compensation was payable.

The court recognized the parent and subsidiary companies as a single economic
entity. It stands as a liberal example of when UK courts may lift the veil of
incorporation of a company.

However latter cases have doubted this principle. The decision was, doubted in
Woolfson v Strathclyde Regional Council and qualified in Adams v Cape Industries
plc.

Woolfson-vs-Strathclyde Regional Council [1978] UKHL 5

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A bridal clothing shop was compulsorily purchased by the Glasgow Corporation. The
business in the shop was run by a company called Campbell Ltd. But the shop itself,
though all on one floor, was composed of different units of property. Mr Solomon
Woolfson owned three units and another company, Solfred Holdings Ltd owned the
other two.

Mr Woolfson had 999 shares in Campbell Ltd and his wife the other.

They had twenty and ten shares respectively in Solfred Ltd.

Mr Woolfson and Solfred Ltd claimed compensation together for loss of business
after the compulsory purchase, arguing that this situation was analogous to the case of
DHN Food Distributors Ltd v Tower Hamlets London Borough Council.

The Land Tribunal denied it on the basis that Campbell Ltd was the sole occupier.

Adams v Cape Industries plc [1990] Ch 433

The defendant was an English company and head of a group engaged in mining
asbestos in South Africa. A wholly owned English subsidiary was the worldwide
marketing body, which protested the jurisdiction of the United States Federal District
Court in Texas in a suit by victims of asbestos. The defendant took no part in the
United States proceedings and default judgments were entered. Actions on the
judgment in England failed.

The court declined to pierce the veil of incorporation. It was a legitimate use of
the corporate form to use a subsidiary to insulate the remainder of the group from
tort liability. There was no evidence to justify a finding of agency or facade.

There is an exception to the general rule, that steps which would not have been
regarded by the domestic law of the foreign court as a submission to the jurisdiction
ought not to be so regarded here, notwithstanding that if they had been steps taken in
an English Court they might have constituted a submission to jurisdiction.

(iv) State of Hostility

In times of war, courts may regard a company operating within its borders as an
enemy alien if the company is controlled by nationals of an enemy country.

Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2
AC 307

All except one of Continental Tyre and Rubber Co Ltd's shares were held by German
residents and all directors were German residents. The secretary was English.

Continental Tyre and Rubber Co Ltd supplied tyres to Daimler, but Daimler was
concerned that making payment might contravene a common law offence of trading
with the enemy as well as a proclamation issued under s 3 (1) Trading with the Enemy
Act 1914.

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Daimler brought the action to determine if payment could be made, given that it was
the First World War.

The House of Lords held the company was capable of acquiring enemy character.
Lord Parker said,

“I do not think, however, that it is a necessary …… to say that the character of its
corporators must be irrelevant to the character of the company; and this is crucial, for
the rule against trading with the enemy depends upon enemy character. Just like a
natural person can have enemy character though born in the UK, so can a legal
person.”

(v) Justice and Equality

Courts have sometimes been prepared to pierce the corporate veil where they feel this
is in the interest of justice.

Creasey v Breachwood Motors Ltd [1993] BCLC 480

Mr Creasey was dismissed from his post of general manager at Breachwood Welwyn
Ltd. He claimed that this constituted wrongful dismissal, in breach of his employment
contract. However, before he could claim, Breachwood Welwyn Ltd ceased trading,
and all assets were moved to Breachwood Motors Ltd, which continued the business.
Other creditors were paid off, but no money was left for Mr Creasey's claim, which
was not defended and held successful in an order for £53,835 against Breachwood
Welwyn Ltd. Mr Creasey applied for enforcement of the judgment against
Breachwood Motors Ltd and was successful. Breachwood Motors Ltd appealed.

The Court lifted the corporate veil to enforce Mr Creasey's wrongful dismissal claim.
He held that the directors of Breachwood Motors Ltd, who had also been directors of
Breachwood Welwyn Ltd, had themselves deliberately ignored the separate legal
personality of the companies by transferring assets between the companies without
regard to their duties as directors and shareholders.

Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447

Mr and Mrs Ord ran the Fox Inn in Stamford, Lincolnshire. They were in an ongoing
dispute with the freehold owner, Belhaven Pubs Ltd, for misrepresentation about the
level of profitability of the pub. However, Belhaven Pubs Ltd was part of a company
group structure that had been reorganised, and had no assets left. Mr and Mrs Ord
requested that a company with money, Ascott Holdings Ltd, be substituted for
Belhaven Pubs Ltd to enforce the judgment. At first instance the judge granted this
order. Belhaven Pubs Ltd appealed.

The Court of Appeal overturned the judgement and held that the reorganisation was a
legitimate one, and not done to avoid an existing obligation. Hobhouse LJ argued that
the reorganisation, even though it resulted in Belhaven Pubs Ltd having no further
assets, was done as part of a response to the group's financial crisis. There was no
ulterior motive.

Hobhouse LJ also held, specifically, that the earlier case of Creasey v Breachwood
Motors Ltd was wrong.

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