Judicial Interpretation on Lifting/pirecing a Corporate veil

1. Avoidance of Contractual obligation

a. Jones v Lipman [1962] 1 WLR 832

Facts

Mr Lipman contracted to sell a house at 3 Fairlawn Avenue, Chiswick, Middlesex (now Ealing
W4) to Mr Jones for £5,250. He changed his mind and refused to complete. To try and avoid a
specific performance order, he conveyed it to a company formed for that purpose alone, which
he alone owned and controlled.

Judgment

Russell J ordered specific performance against Mr Lipman and formed company.

“ The defendant company is the creature of the first defendant, a device and a sham, a mask
which he holds before his face in an attempt to avoid recognition by the eye of equity.
 b. Gilford Motor Co Ltd v Horne [1933] Ch 935

Facts

Mr EB Horne was formerly a managing director of the Gilford Motor Co Ltd. His employment
contract stipulated (clause 9) not to solicit customers of the company if he were to leave
employment of Gilford Motor Co. Mr. Horne was fired, thereafter he set up his own business and
undercut Gilford Motor Co's prices. He received legal advice saying that he was probably acting
in breach of contract. So he set up a company, JM Horne & Co Ltd, in which his wife and a
friend called Mr Howard were the sole shareholders and directors. They took over Horne’s
business and continued it. Mr. Horne sent out fliers saying,

“Spares and service for all models of Gilford vehicles. 170 Hornsey Lane, Highgate, N. 6.
Opposite Crouch End Lane... No connection with any other firm.”

The company had no such agreement with Gilford Motor about not competing, however Gilford
Motor brought an action alleging that the company was used as an instrument of fraud to conceal
Mr Horne's illegitimate actions.

High Court - Judgment

Farwell J held that the covenant that Mr Horne would not compete was broken. ‘I cannot help
feeling quite convinced that at any rate one of the reasons for the creation of that company was
the fear of Mr Horne that he might commit breaches of the covenant in carrying on the
business…’ But because the covenant was too wide and against public policy (restraint of trade?)
he refused to enforce it. Gilford Motor appealed.

Court of Appeal - Judgement

Lord Hanworth MR granted an injunction, so that Horne was forced to stop competing through
the company.

“ I am quite satisfied that this company was formed as a device, a stratagem, in order to mask the
effect carrying on of a business of Mr EB Horne. The purpose of it was to enable him, under
what is a cloak or sham, to engage in business which, on consideration of the agreement ”

Lawrence LJ and Romer LJ concurred.

 2. Public Policy – Enemy Character

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

Facts

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 1(2) Trading with the Enemy Act 1914. Daimler brought the action to determine if
payment could be made, given that it was the First World War.

Judgment

At first instance, Scrutton J approved the decision of the master, that the contracts were valid, for
summary judgment without proceeding to trial.

Court of Appeal

Lord Reading CJ, Cozens-Hardy LJ, Phillimore LJ, Pickford LJ and Kennedy LJ, affirmed the
decision too, holding there would be no offence.[1] They held the company did not change its
character because of the outbreak of war. The say it, "remains an English company regardless of
the residence of its shareholders or directors either before or after the declaration of war." Mr
Gore-Browne argued, for Daimler Co Ltd, that the technicality should be swept aside in time of
war. But Lord Reading CJ replied that the fact of incorporation was not just a ‘technicality’. The
company, he said,

“is a living thing with a separate existence which cannot be swept aside as a technicality. It is not
a mere name or mask or cloak or device to conceal the identity of persons and it is not suggested
that the company was formed for any dishonest or fraudulent purpose. It is a legal body clothed
with the form prescribed by the legislature…”

He relied on Janson v Driefontein Consolidated Mines, where Lord Macnaghten, Lord Brampton
and Lord Lindley, holding that a foreign corporation does not become British because its means
all are.

Buckley LJ delivered a dissenting judgment, would have held that though the company is a legal
person existing apart from its corporators, that it still had enemy character.

“The artificial legal person called the corporation has no physical existence. It exists only in
contemplation of law. It has neither body, parts, nor passions. It cannot wear weapons nor serve
in the wars. It can be neither loyal nor disloyal. It cannot compass treason. It can be neither
friend nor enemy. Apart from its corporators it can have neither thoughts, wishes, nor intentions,
for it has no mind other than the minds of the corporators. These considerations seem to me
essential to bear in mind in determining the present case.”

House of Lords

The House of Lords unanimously reversed the decisions below, saying the secretary was
authorised to commence no action. It held the company was capable of acquiring enemy
character.

Lord Parker said,

“I do not think, however, that it is a necessary corollary of this reasoning [Salomon] 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.

“I think that the analogy is to be found in control, an idea which, if not very familiar in law, is of
capital importance and is very well understood in commerce and finance. The acts of a
company’s organs, its directors, managers, secretary, and so forth, functioning within the scope
of their authority, are the company’s acts and may invest it definitely with enemy character… it
must at least be prima facie relevant… Certainly I have found no authority to the contrary.”

The Earl of Halsbury LC, Lord Atkinson, Viscount Mersey, Lord Kinnear and Lord Sumner
concurred. Lord Shaw and Lord Parmoor concurred in the result but dissented on this point.

Significance

Around the start of World War II the Trading with the Enemy Act 1939 section 2(1)(c) was
implemented to state the position in Daimler, namely "so long as the body is controlled by a
person who, under this section, is an enemy". In Bermuda Cablevision Ltd v Colica Trust Co
Ltd[3] Lord Steyn made the point that, "Expressions such as ‘control’ and ‘controlling interest’
take their colour from the context in which they appear. There is no general rule as to what the
word ‘controlled’ means…. The expression must be given the meaning which the context
requires."

The concept of a company's character was also seen in the ill-fated Merchant Shipping Act 1988
said that only fishing vessels registered as ‘British’ were eligible to fish for the UK quota, and a
‘British’ company had to be 75% British owned. However, in R (Factortame) v Secretary of
State for Transport (No 3),[4] the European Court of Justice held that this was contrary to art 52
TEC, and the right to freedom of establishment.
 3. Fraud and Improper Purpose

n Re: Bugle Press Limited [1961] 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
a. Re: Bugle Press Limited [1961]

A, B, and C were the only shareholders of the company. A & 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
made an offer to acquire all the 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.

The court made the declaration sought. In circumstances where the assensting 90% majority
were unconnected with the offeror the normal burden of proof rested on the dissenting minority
to show grounds why the court should ‘order otherwise’ but that did not apply where there was a
connection between the assenting majority and the offeror, in particular, where the acquiring
company was simply the alter ego of the assenting majority.

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

the
company. A and B held 45% of the shares each and C held 10%. A and B then made
 b. Marshall (Thomas) (Exporters) Ltd v Guinle [1978] IRLR 174, HC

Mr Guinle was appointed managing director of a company for a fixed term of 10 years. The
company’s business was to purchase clothing from foreign manufacturers mainly in Eastern
Europe and the Far East, which it then imported and resold to retailers in the UK. One of its
customers was C & A. A major part of Mr Guinle’s work involved travel abroad arranging
contracts. The success of the business depended very heavily on the business contacts Mr Guinle
made abroad and, in turn, on the customers to whom he sold the merchandise. Consequently Mr
Guinle’s contract contained restrictions, the key ones being:

The managing director shall “Not at any time during the period of his appointment or after the
termination thereof disclose any confidential information relating to the affairs, customers or
trade secrets of the Group of which he shall become possessed whilst in the service of the
company.”

“During the period of his appointment the Managing Director shall not, save with the consent in
writing of the company, be directly or indirectly engaged, concerned or interested in any other
business save that of the company.”

“If the Managing Director shall cease for any reason to be Managing Director of the company or
any of its subsidiaries he shall be under no restriction in relation to any person, firm or company
who was or were customers of or suppliers to the company or any of its subsidiaries, any rule of
law to the contrary notwithstanding, provided that he does not use or disclose any confidential
information belonging to any companies in the Thomas Marshall Investments Group, nor within
five years employ any person employed by the company during the last two years of his
appointment.”

It was discovered that, with four and a half years of his contract to run, Mr Guinle had set up his
own company in the same line of business, had purchased goods for it whilst abroad ostensibly
on T Marshall business, had solicited customers of T Marshall and had employed four ex-T
Marshall employees. When invited to a meeting to discuss matters he purported to resign there
and then. The company sought an interlocutory injunction to stop further breaches of Mr
Guinle’s contract. Mr Guinle’s defence principally was that his own breaches of contract had
effectively brought the contract to an end. This being so he was free from the restrictions in it.
The Decision: High Court

Megarry VC in the High Court (Chancery Division) gave the injunction asked for. Mr Guinle’s
contract did not end automatically through his repudiation of it by breach of contract. It was up
to his employers to elect what their course of action would be, whether to accept his resignation
or refuse it and hold him to the terms of the agreement. They were completely within their rights
to decline the resignation and to enforce the restriction in the contract, by injunction if necessary.

The theory that employment contracts were an exception to the normal rule governing
repudiation of contracts was misconceived. It was not supported by any ratio decidendi in any
other case; indeed there was none involving an employee’s own repudiation where the theory
had been ventilated. To follow that theory would allow a wrongdoer to profit from his or her own
misconduct. It had been the law’s lack of remedies to enforce employment contracts that had led
to the view that no right existed. This was wrong. The right and the remedy were independent
things.
 Evading the Tax

Shree Meenakshi Mills Ltd vs. Commissioner of Income-Tax 1967 SCR (1) 392

Facts

The assessee, which is a public limited company, filed its return declaring loss to a tune of Rs. 9,
50, 09,667. The assessment year involved is 1991-92. The Assessing Officer, after completing
the assessment under Section 143(3) of the Income-tax Act, 1961, treated the upfront fee of Rs.
4.4 lakhs paid to the bank for availing of loan as capital expenditure and also treated the sales tax
and excise duty collection as trading receipts and accordingly added the same. The Assessing
Officer also disallowed the deduction claimed by the assessee under Section 43B in respect of
the interest paid to the financial institutions.

Held

The court held that the income-tax authorities were entitled to pierce the veil of corporate entity
and to look at the reality of the transaction to examine whether the corporate entity was being
used for tax evasion. In this case, a separate corporate entity was brought into existence outside
the taxable territory with the ulterior motive of evading the tax obligation by the assessee mills.

The Supreme Court observed: "It is true that from the juristic point of view, the company is a
legal personality entirely distinct from its members and the company is capable of enjoying
rights and being subjected to duties which are not the same as those enjoyed or borne by its
members.

But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay
regard to the economic realities behind the legal facade. For example, the Court has power to
disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation."

In Juggi Lal Kamalapat v. C.I.T. (AIR 1969 SC 932), the apex court reiterated that the income-
tax authorities were entitled to lift the veil of the corporate entity, for looking at the substance of
the transaction.
 Sir Dinshaw Maneckji Petit, Re AIR 1927 Bom. 79

Where the Assessee, Sir Dinshaw, who was a millionaire and earned huge dividend income,
formed four companies and transferred his investments to each of the four companies in
exchange of their shares and the dividends and interest income received by the company were
handed back to the Assessee as a pretended loan. It was held that the company was formed by
the Assessee purely and simply for avoiding the tax and was nothing more than the Assessee
himself. It did no business but was simply created as a legal entity to ostensibly receive interest
and dividends and to hand them back to Assessee as a pretended loan