Corporate Personality and lifting the veil of incorporation:

Corporate personality may be defined as the doctrine that a company is for legal purposes an
independent person having an existence separate from that of the human beings who own,
manage and serve it. 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. Its property is its
own, and not that of its shareholders. In Salomon v Salomon and Co Ltd, the House of Lords
held that these principles applied as much to a company that was wholly owned and con-
trolled by one man as to any other company. Again this doctrine limits the liability of
shareholders as the debt belongs to the company and not to shareholders individually. Hence
in Salomon, the founder of the company was held not liable for the debts of the company.
The Supreme Court in Prest v Petrodel Resources Ltd [2013] recognized the doctrine of cor-
porate personality as the basic doctrines on the basis of which company law has operated for
centuries

Lifting the veil of incorporation: When a company has been formed it is said to be protected
by the veil of incorporation. Sometimes, however the legislature and the courts have inter-
vened where the Salomon principle had the potential to be abused or has unjust conse-
quences. This is known as the ‘lifting the veil of incorporation’ or piercing the veil of incor-
poration.

Legislative intervention: The main legislative interventions in company law are contained in
ss.213-214 of the Insolvency Act 1996.

Fraudulent trading: s.213 IA 1986: S.213 of the IA 1986 was designed to deal with situa-
tions where the corporate form was used as a vehicle of fraud. If in the course of winding up
of a company it appears to the court that any business of the company has been carried out
with the intent to defraud creditors of the company or creditors of any other person or for
any fraudulent person, those individuals can be called upon to contribute to the debs of the
company. However, most claims under s.213 failed because of the high standard of proof
for intent to defraud. Hence a new provision was introduced in s.214 of IA 1986 to deal with
the lesser offence of wrongful trading.

Wrongful trading: s.214 of IA 1986: S. 214 provides if in the course of the winding up of a
company it appears that a person who is or has been a director of the company, knew or
ought to have concluded that there was no reasonable prospect that the company would
avoid going into insolvent liquidation the court, on the application of the liquidator, may de-
clare that that person is to be liable to make such contribution (if any) to the company's as-
sets as the court thinks proper. In this section “director” includes a shadow director.
Under s.214(3) the court shall not make a declaration under this section with respect to any
person if it is satisfied that person took every step with a view to minimizing the potential
loss to the company's creditors as (assuming him to have known that there was no reason-
able prospect that the company would avoid going into insolvent liquidation) he ought to
have taken. In Re Produce Marketing Consortium Ltd (No 2) (1989) over a period of seven
years the company slowly drifted into insolvency. The two directors involved did nothing
wrong except that they did not put the company into liquidation after the point of no return
became apparent and so were liable under s.214 to contribute 75000 GBP to the debts of the
company.

More importantly s.214(4) provides the facts which a director of a company ought to know
or ascertain, the conclusions which he ought to reach and the steps which he ought to take
are those which would be known or ascertained, or reached or taken, by a reasonably dili-
gent person having both—(a) the general knowledge, skill and experience that may reason-
ably be expected of a person carrying out the same functions as are carried out by that direc-
tor in relation to the company, and (b) the general knowledge, skill and experience that that
director has.

Sections 213 and 214 differ in the way they affect the Salomon principle. Section 213 ap-
plies to anyone involved in the carrying on of the business and therefore directly qualifies
the limitation of liability of members. Section 214 does not directly affect the liability of
members as it is aimed specifically at directors. In small companies, directors are usually
also the members of the company and so their limitation of liability is indirectly affected.

Common law lifting the veil of incorporation

Fraud or façade exceptions: At common law the corporate veil may be lifted if the company
is used as a means to perpetrate fraud. In Gilford Motor Company Ltd v Horne [1933] a for-
mer employee who was bound by a covenant not to solicit customers from his former em-
ployers set up a company to do so. He argued that while he was bound by the covenant the
company was not. The court found that the company was merely a front for Mr Horne and
issued an injunction against him.

Single economic entity (Holding- Subsidiary relationship): In DHN Ltd V Tower Hamlets
(1976), Lord Denning argued that a group of companies are in reality a single economic en-
tity and the holding company should be liable for the debts of the subsidiary company. Two
years later the House of Lords in Woolfson v Strathclyde RC [1978] specifically disap-
proved of Denning’s views on group structures in finding that the veil of incorporation
would be upheld unless it was a façade.

Recently in Adams v Cape Industries plc (1990) it was stated that holding company and
subsidiary companies are separate entities and one should not be liable for torts committed
by its subsidiaries. According to the Court of Appeal the veil of incorporation can be lifted
at common law if:A) the formation of the company is a mere façade B) where the subsidiary
is an agent of the company. In Adams v Cape Industries exercise of control located in the
organ of the parent company was over the corporate financial affairs of the subsidiary. It
was found that this was ‘no more and no less than one would expect to find in a group of
companies such as the Cape group. The English approach towards group liability surrounds
around the Salomon principle and in practice does not allow the corporate veil of holding
companies to be lifted just because they control the subsidiary companies.

In Prest, Lord Sumption explains the two principles that are utilized while piercing the
veil of incorporation: the "concealment principle" and the "evasion principle". The con-
cealment principle simply describes cases where a company is used to hide the identity
of the real actors. The courts would look behind the company to discover the facts that
the corporate structure conceals. (Smallbone v Trustor AB).The evasion principle said
the corporate veil can only be pierced to prevent the abuse of the company's legal per-
sonality. It is not an abuse to cause the company to incur a legal liability in the first
place, or to identify that the liability belongs to the company, not the controller. (Gilford
Motors v Horne).In Prest, the Supreme Court declined to lift the corporate veil and treat
the company’s property as the husband’s property for the purposes of the statutory provi-
sions governing the distribution of spousal assets on divorce.

Some argue that judgment gives no indication of precisely the circumstances in which
the veil may still be pierced and thus the decision should be seen only as contributing
further to the uncertainties surrounding this area of law.
The Supreme Court in VTB Capital plc v Nutritek International Corp and others [2013]
stated that contractual liabilities of a corporation cannot be attributed to its controller by
means of "piercing the corporate veil". VTB lent huge sum to a Russian company,
“RAP”, based on misrepresentations made by Nutritek (parent of RAP) that RAP and
Nutritek were not under common control and, second, that the value of the dairy compa-
nies was much greater than was in fact the case. Where there is no, (mis)use of the com-
pany as a device or façade to conceal their wrongdoing at the time of the relevant trans-
action(s) corporate veil will not be lifted.
Tortious liability: The strictness of Adams principle is relaxing and in Chandler v Cape
plc the parent company who knew of claimant’s working condition under its now de-
funct subsidiary was held to owe a duty in tort towards the claimant personally in accor-
dance with the three stage test in Caparo Industries plc v Dickman.

Shareholders or directors personal liability in tort has been hinted since the decision of
Williams v Natural Life Health Foods Ltd [1998]. The Managing Director of Natural
Life Health Foods Ltd (NLHF) was also its majority shareholder. The claimant entered
into a franchise agreement with NLHF but the franchised shop ceased trading after los-
ing a substantial amount of money. NLHF subsequently ceased to trade and was dis-
solved. The action continued against the Managing Director and majority shareholder
alone, alleging he had assumed a personal responsibility towards the claimant. In its
judgment the House of Lords considered that a director or employee of a company could
only be personally liable for negligent misstatement if there was reasonable reliance by
the claimant on an assumption of personal responsibility by the director so as to create a
special relationship between them. Also in MCA Records Inc v Charly Records Ltd (No
5) [2003] concluded: ‘there is no reason why a person who happens to be a director or
controlling shareholder of a company should not be liable with the company as a joint
tortfeasor if he is not exercising control through the constitutional organs of the company
and the circumstances are such that he would be so liable if he were not a director or
controlling shareholder.’