Business Associations

Corporate Personality & Limited Liability

Eva Tam 2023
 Use of
Corporate
Diagrams
(Example)
Akai Holdings case

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© Eva Tam 2023
Corporate
Personality
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Salomon v Salomon & Co. Ltd.
 The facts are set out in Lord Macnaghten’s opinion:
 Salomon had a sole proprietor business in leather boot
manufacturing
 Salomon incorporated the business
 The business did poorly shortly after
 Broderip, a secured creditor, pushed the company into
liquidation
 Unsecured creditors ended up unpaid

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Salomon v Salomon Case (2)

Salomon’s wife Aron

and children Salomon

6 shares 20,001 shares

Broderip –
secured creditor
Salomon &
Co Ltd
Unsecured
creditors
Leather boot manufacturing
business
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Salomon v Salomon Case (3)
 Arguments for making Salomon liable for the company’s
debts:
 the company is an agent for Salomon
 the company is a trustee for Salomon
 Salomon’s family members merely dummy shareholders in
order for Salomon to carry on business with limited liability

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Salomon v Salomon Case (4)
The House of Lords held:
 a registered company is a separate legal entity from its
members
 a company is neither an agent nor a trustee for its
shareholders just on the basis of shareholdings
 legislation only requires a minimum number of registered
members who need not be independent beneficial owners of
the shares
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Significance of being a
separate legal entity
 “Person” includes a company, an artificial
person (s3 Interpretation and General Clauses
Ordinance (Cap.1)) but note “natural person”
(e.g. s115 & s457 CO)
 Company’s assets and business belong to the
company and not to its shareholders
 Company can sue and be sued on its own
liabilities
 A company’s nationality and domicile is its
place of incorporation

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© Eva Tam 2023
Incorporation under
CO
 One or more persons (founder members) to sign
articles of association
 Deliver to Companies Registrar:
 incorporation form completed and signed; and
 a copy of the articles of association
s67 CO
 Certificate of incorporation issued by Companies
Registrar which is conclusive evidence of
incorporation
ss71-72 CO
© Eva Tam 2023
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Types of Companies
 Private companies (limited and unlimited)
 Public companies (limited and unlimited)
s66 CO
 Listed companies
- a public company the shares in which are
listed and traded on a recognised stock
exchange, s2 CO

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Private and Public
Companies
A private company (s11 CO):
its articles must:
- restrict a member’s right to transfer shares
- limit the number of shareholders to 50; and
- prohibit any invitation to the public to subscribe
for its shares; and
not a company limited by guarantee

A public company if it is not a private company nor

a company limited by guarantee (s12 CO)

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Limited Liability
Originates with the Limited Liability Act 1855

Means the members’ liability for the company’s debts is limited

Members’ liability can be either limited by shares or by guarantee, s7 CO

Limited by shares means a shareholder's liability for company's debts is limited

to any amounts unpaid on his shares, s8(1) CO

Limited by guarantee means a member's liability is limited to the amount the

member undertakes to contribute in the event of a winding-up, s9(1) CO
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Distinctive Features of a
Company Limited by Shares
 A separate legal entity
 A recognised business vehicle
 Perpetual life
 Issuance of shares:
 separation of shareholders’ ownership in the company from
company’s assets
 allows dealing with shareholder’s ownership rights without dealing
with company’s assets
 Limited liability of the shareholders for the companies’ liabilities
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Piercing of
Corporate Veil
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Piercing of Corporate
Veil
 What does it mean?
 UK cases before Prest where piercing of
corporate veil were considered:
 Gilford Motor Co Ltd v Horne [1933] Ch 935
(CA)
 DHN Food Distributors Ltd v Tower Hamlets
London Borough Council [1976] 1 WLR 852
 Adams v Cape Industries plc [1990] Ch 433 (CA)
 VTB Capital plc v
Nutritek International Corp [2013] UKSC 5
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Gilford Motor Co Ltd
v Horne
 Employee subject to a non-compete
restrictive covenant i.e. not to engage in
competing business in specified area

 After leaving employment, he carried on a

competing business through a company to
circumvent the restrictive covenant

© Eva Tam 2023

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DHN Food Distributors Ltd
Case
Same directors for all 3
DHN Food Distributors Ltd companies

100% 100%

DHN Food Bronze

Transport Investments
Limited
Ltd
Groceries
and Owned Owned
provisions vehicles premises
business
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DHN Food Distributors Ltd
Case (2)
Lord Denning MR - A corporate group was regarded as
a “single economic entity” so that it could be
compensated for a property compulsorily acquired by
the council

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Adams v Cape Industries plc
 Plaintiffs, who had obtained a judgment against a US subsidiary,
sought to enforce the judgment against the UK parent company
 The court held that:
 the law recognises the creation of subsidiaries which will be
treated as separate entities
 the court is not free to disregard the Salomon principle merely
in the interests of justice
 Perfectly permissible to incorporate a company to avoid future
liabilities
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VTB Capital Plc v
Nutritek International Corp
Mr M
100%
100%
Loan
facility
VTB Capital RAP Nutritek
Buy shares in
Nutritek’s
diary plants Six diary
and companies plants and
three
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companies 20
VTB Capital Plc Case

 Plaintiffs sought to make owner of company jointly liable

for the fraudulent misrepresentation made by the company

 Corporate veil cannot be pierced to make the companies’

shareholder jointly liable with the companies on contracts
which the companies (but not the shareholder) entered into

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Prest v Petrodel
Resources Ltd Case
[2013] UKSC 34
• A matrimonial case - the facts are
in Lord Sumption’s judgment

• The present UK position as to the

doctrine

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Prest case (2)
Lord Sumption’s views:
 the corporate veil is not really pierced when there is fraud or where the company is
a façade used to conceal the true facts – the looking behind the corporate veil there
only identifies the true facts (the “concealment principle”):
 Jones v Lipman (as against the controller of company transferee)
 Gencor v Dalby
 Trustor AB v Smallbone

 the true piercing of the corporate veil is a limited principle applying only where a
company is used to evade an existing obligation or liability (the “evasion principle”)
 Gilford
 Jones (as against Alamed Ltd, the company transferee)

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Prest case (3)
 Vested in companies long before marriage broke up, i.e., not evading existing
legal obligation
 The purpose of the arrangement for wealth protection and tax avoidance was
accepted by the court
 Family law does not enjoy a distinctive and separate doctrine of piercing of the
corporate veil separate from the general/company law
 Piercing of the corporate veil only available when there is no other remedy
(disagreeing with Court of Appeal in VTB Capital)
 Other justices’ criticism of the doctrine
 The court found for wife on the basis that properties were held on a resulting
trust by the companies for husband

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© Eva Tam 2023
Post-Prest: Rossendale Borough Council v
Hurstwood Properties (A) Limited [2021]
UKSC 16
 Defendants were owners of certain commercial properties on which
non-domestic rates were payable by “persons entitled to
possession” of the properties
 Defendants set up SPVs (held by single shareholder but not the
defendants) to whom leases over those properties were granted and
on whom “entitlement to possession” was conferred
 Subsequently, defendants wound up those SPVs with the rates
remaining unpaid
 Claimant went after defendants for payment of the rates by relying
on, amongst others, the evasion principle
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Pre-Prest Hong Kong cases

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Yue Tai Plywood & Timber Co Ltd
v Far East Wagner [2001] 2 HKLRD 446
 Plaintiff applied for summary judgment on dishonoured cheques
issued by 2nd defendant (D2) for goods sold and delivered to 1st
defendant (D1)
 D1 and D2 had common directors and shareholders
 D1 and D2 ran a “combined operation” – a “deliberate and
obvious blurring” of distinct legal personalities as impropriety or
wrongdoing to justify piercing of corporate veil?
 Summary judgment entered for plaintiff on appeal

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Liu Hon Ying v Hua Xin State Enterprises
(Hong Kong) Ltd [2003] 3 HKLRD 347

 Plaintiff obtained judgment which was only partially

satisfied
 Plaintiff claimed against companies to which the business
was transferred, for the remainder judgment amount
 Corporate veil lifted as transfer of business was effected to
evade an existing legal obligation

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Lee Sow Keng v Kelly McKenzie
Ltd [2004] 3 HKLRD 517
 Ex-employee Lee sued employer Linkwaters for unfair dismissal
 Linkwaters Ltd transferred business to Kelly McKenzie Ltd
 Linkwaters and Kelly McKenzie owned by the same individuals
(“the controllers”)
 Lee sued the controllers of Linkwaters and Kelly McKenzie to
recover judgment
 Corporate veil lifted because legal obligation was being evaded

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Toptrans Ltd v Delta Resources
Co Inc. [2005] 1 HKLRD 635
 Delta and Polo are companies commonly controlled by the same individual
 Plaintiff obtained judgment against Delta
 Plaintiff wanted to recover judgment amount against goods belonging to
Polo
 Two elements:
 common control
 improper motive
 Although common control made out, improper motive cannot be shown in
this case

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Winland Enterprises Group Inc
v Wex Pharmaceuticals Inc [2012] 2 HKLRD
757
 Winland sued Acro Pharm for breach of agreement
 Acro Pharm is a wholly-owned subsidiary of WEX, a Canadian
corporation
 Winland sought to fix liability on WEX on the basis of lifting
of the corporate veil
 Court denied application for leave to serve writ on WEX out
of the jurisdiction as no legal obligation was being evaded

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Companies Used for the
Purpose of Fraud/Crime
HKSAR v Leung Yat Ming [1999] 2 HKLRD 402
 Fraudulent housing allowance scheme where husband and
wife claimed housing allowance on property they owned
through a company

Secretary for Justice v Lee Chau Ping [2000] 1 HKLRD 49

 In confiscating drug trafficking proceeds, property owned by
defendant’s company is “realisable property” of the
defendant
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 33

Global Alliance Logistics

(HK) Ltd v Premiere
Logistics (HK) Ltd [2022] Impact of
HKDC 289 Prest on the
- To be discussed in doctrine
tutorial in Hong Kong
Basis for Recovery Outside the
Doctrine

the company is the company is

the agent the trustee

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