1

COMPANY LAW:
CHAPTER 2
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THE NATURE OF LEGAL

PERSONALITY
CORPORATE PERSONALITY

• A COMPANY CAN SUE

• 3
CAN BE SUED
• LIABLE FOR ITS DEBTS
• DEBTS DON’T BELONG TO THE SHAREHOLDERS

SALOMON V SALOMON & CO.

• FACTS
• DECISION OF COA & HL

CASE LAW POST SALOMON

• MACAURA V NORTHERN ASSURANCE CO. [1925]
• BARRINGS PLC (IN LIQUIDATION) V COOPERS & LYBRAND (NO.4) [2002]
• GILES V RHIND [2003]
• SHAKER V AL-BEDRAWI [2003]
• HASHEM V SHAYIF [2008]
• LEE V LEE’S AIR FARMING [1961]
4 MACAURA V NORTHERN ASSURANCE CO. [1925]

• The owner of a timber estate sold all the timber to a company which was owned almost
solely by him. He was the company’s largest creditor. He insured the timber against fire,
but in his own name. After the timber was destroyed by fire the insurance company
refused the claim.
• The House of Lords held that in order to have an insurable interest in property a person
must have a legal or equitable interest in that property. The claim failed as “the corporator
even if he holds all the shares is not the corporation… neither he nor any creditor of the
company has any property legal or equitable in the assets of the corporation.”
5 GILES V RHIND [2003]

• The company had suffered losses after an alleged breach of confidence by a director. The
applicant sought to recover his losses as a shareholder, after the company became unable
or unwilling itself to pursue an action to recover the losses it had suffered.
• The court held that the shareholder’s action must fail. The losses he sought, including the
devaluation of his shares in the company and otherwise, were all derived from the losses
which the company had itself suffered. Where those losses might have been made good if
the company itself had pursued the case, the shareholder was not able himself to pursue
the loss
6 HASHEM V SHAYIF [2008]

• The court was asked to pierce the veil of incorporation of a company in the course of
ancillary relief proceedings. H had failed to co-operate with the court. After a
comprehensive review of all the authorities, Munby J said: ‘The common theme running
through all the cases in which the court has been willing to pierce the veil is that the
company was being used by its controller in an attempt to immunise himself from
liability for some wrongdoing which existed entirely dehors the company
7 LEE V LEE’S AIR FARMING [1961]

• Mr. Lee was the principal shareholder also the governing director of this company. The
company contracted with farmers to perform aerial topdressing. Mr. Lee worked for the
company as a pilot and received a wage for that work. In a work accident, Mr. Lee died
then his wife claimed on a workers compensation insurance policy that the company’s
solicitor had taken out naming Mr. Lee as an employee. The insurer denied liability on the
ground that Mr. Lee could not be a servant because he was a director of the company.
• The Judicial Committee of the Privy Council upheld the claims made by Mrs. Lee and
firmly rejected the insurer’s argument.
LIMITED LIABILITY

• THE8CONCEPT OF SEPARATE LEGAL PERSONALITY V LIMITED

LIABILITY
• THE COMPANY CAN HOLD ITS OWN PROPERTY AND BE
RESPONSIBLE FOR ITS OWN DEBT
• THE COMPANY AND ITS MEMBERS ARE SEPARATE ENTITY
ALTOGETHER
9 LEGISLATIVE INTERVENTION

As corporate affairs became more complex and group

structures emerged (that is, where a parent company organises
its business through a number of subsidiary companies in which it
is usually the sole shareholder) the Companies Acts began to
recognise that treating each company in a group as separate
was misleading. Over time a number of provisions were
introduced to recognise this fact.
10 FOR EXAMPLE:

s.399 CA 2006 provides that parent companies have a

duty to produce group accounts

s.409 CA 2006 also requires the parent to provide details

of the shares it holds in the subsidiaries and the
subsidiaries’ names and country of activity.
11

• However, it was the possibility of using the corporate form to commit fraud that
prompted the introduction of a number of civil and criminal provisions. These provisions
operate to negate the effect of corporate personality and limited liability in:

• s.993 CA 2006 which provides a not much used criminal offence of fraudulent trading
• ss.213–215 Insolvency Act 1986 which contain the most important statutory provisions.
12 INSOLVENCY ACT, S.213

Section 213 of the Insolvency Act 1986 was designed to deal with situations where the corporate form was used as
a vehicle for fraud. It is known as the ‘fraudulent trading’ provision.

If, in the course of the winding up of a company, it appears to the court that any business of the company has been
carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent
purpose, anyone involved in the carrying out of the business can be called upon to contribute to the debts of the
company. T

This is most likely to be shareholders or directors but can also be employees and creditors
13 RE TODD LTD [1990]

• a director was found liable to contribute over £70,000 to the debts of the company
because of his activities.
14

• There is also the possibility that criminal liability could follow, with a term of
imprisonment as the ultimate penalty (s.993 CA 2006).
• While the criminal penalty was intended to act as a strong deterrent to fraudulent
behaviour, it proved to have the unfortunate effect of neutralising the effectiveness of
s.213 as the courts set a very high standard of proof for ‘intent to defraud’ because of the
possibility of a criminal charge also arising.
15 RE PATRICK & LYON LTD [1933

• this involved proving ‘actual dishonesty, involving, according to current notions of fair
trading among commercial men, real moral blame’. This standard proved very difficult to
obtain in practice and a new provision was introduced in s.214 of the Insolvency Act
1986 which covered the lesser offence of ‘wrongful trading’.
16 INSOLVENCY ACT, S.214

Wrongful trading does not require proving an intent to defraud. Rather it simply requires that a director, at
some time before the commencement of the winding up of the company, knew or ought to have concluded
that there was no reasonable prospect that the company would avoid going into insolvent liquidation, but
continued to trade.

The section operates on the basis that at some time before the company entered insolvent liquidation there will
have been a point where the directors knew it was hopeless and the company could not trade out of the situation.

The reasonable director would not at this point continue to trade. If he does continue to trade he risks
having to contribute to the debts of the company under s.214.
17 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.
• They were therefore liable under s.214 to contribute £75,000 to the debts of the company.
18
Sections 213 and 214 differ in the way they affect the Salomon principle.

Section 213 applies 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.

Parent companies may also have their limited liability affected if they have acted as a
shadow director.
19

LIFTING THE VEIL OF

INCORPORATION
 LEGISLATIVE INTERVENTION

20• OVER THE YEARS, RUNNING A COMPANY BECOMES MORE

COMPLEX ESP WHEN THERE IS A PARENT/SUBSIDIARY
COMPANY. WHY?
• THIS IS DUE TO SEPARATE LEGAL ENTITY. THIS
CORPORATE FORM IS USED AS A PLATFORM TO COMMIT
FRAUD

INSOLVENCY ACT
• THIS ACT CAME IN TO DEAL WITH SITUATION WHERE THE
CORPORATE FORM WAS USED AS A VEHICLE OF FRAUD –
FRAUDULENT TRADING PROVISION
• S.213 V S.214
JUDICIAL VEIL LIFTING

• THE COURTS ARE NOW MORE READY TO LIFT THE CORPORATE VEIL (IN SOME CASES) AND
TAKE A MORE STRICTER APPROACH TO THE SALOMON PRINCIPLE WITH THE AIM OF

21 ACHIEVING JUSTICE IN A PARTICULAR SITUATION

• IN SOME CASES, THE VEIL IS SPARINGLY LIFTED AND THE OLD PRINCIPLE IN SALOMON IS
AFFIRMED.
• CASE LAWS (OLD):
a) GILFORD MOTOR COPANY LTD V HORNE [1933]
b) JONES V LIPMAN [1962]
c) DHN LTD V TOWER HAMLETS [1976]
d) ADAMS V CAPE INDUSTRIES PLC [1990]

• CASE LAWS (NEW):

a) GRAMSCI SHIPPING CORP V LEMBERGS [2013]
b) VTB CAPITAL PLC V NUTRITEK INTERNATIONAL CORP [2013]
c) PETRODEL RESOURCES LTD V PREST [2013]
d) CHANDLER V CAPE PLC [2012]
e) THOMPSON V RENWICK GROUP LTD [2014]
f) OKPABI V ROYAL DUTCH SHELL PLC [2018]
g) LUNGOWE V VEDANTA RESOURCES PLC [2017]
22 FRAUD OR IMPROPER CONDUCT:
1)GILFORD MOTOR COPANY LTD V HORNE [1933]

• Mr. Horne was an ex-employee of The Gilford motor company and his employment
contract provided that he could not solicit the customers of the company. In order to
defeat this, he incorporated a limited company in his wife’s name and solicited the
customers of the company. The company brought an action against him.
• The Court of appeal was of the view that “the company was formed as a device, a
stratagem, in order to mask the effective carrying on of business of Mr. Horne” in this
case it was clear that the main purpose of incorporating the new company was to
perpetrate fraud.
23 2)JONES V. LIPMAN

• Lipman contracted to sell his land and thereafter changed his mind in order to avoid an
order of specific performance he transferred his property to a company.

• Russel judge specifically referred to the judgments in Gilford v. Horne and held that the
company here was “a mask which (Mr. Lipman) holds before his face in an attempt to
avoid recognition by the eye of equity” .Therefore he awarded specific performance both
against Mr.Lipman and the company.
24 GROUP OF COMPANIES - SINGLE ECONOMIC ENTITY
1)DHN LTD V TOWER HAMLETS [1976]

• DHN was the holding company in a group of three companies. There were two subsidiaries, wholly owned
by DHN. One subsidiary owned land used by DHN, the other owned vehicles used by DHN. The land was
subject to compulsory purchase, and DHN sought compensation for disturbance of its business.

• In the Court of Appeal, Lord Denning MR said:

• “These subsidiaries are bound hand and foot to the parent company and must do just what the parent
company says… This group is virtually the same as a partnership in which all the three companies are
partners. They should not be treated separately so as to be defeated on a technical point.” (at 860)
• It was therefore held that DHN was entitled to claim. The separate corporate personality doctrine was
overridden.
25 GROUP OF COMPANIES
2)ADAMS V CAPE INDUSTRIES PLC [1990]

• Cape Industries, a company registered in England, was engaged in mining asbestos in South Africa. The
company’s products were marketed in the United States of America through a complicated network of
subsidiaries and associated companies. In a series of class actions a number of factory workers who had
contracted disease after inhaling asbestos dust managed to secured judgment in an American court against
Cape (the holding company presiding over the corporate group).

• However, the litigants were subsequently unsuccessful in enforcing the judgment against Cape in the English
Courts. The Court of Appeal held that an English trading company would only be treated as having been
present and a possible a party to an action abroad if it had established a fixed place of business there at
its own cost and either it or its representative had carried on business there for more than a minimal time.
26 GRAMSCI SHIPPING CORP V LEMBERGS [2013]

• Antonio Gramsci Shipping Corp (Gramsci) chartered a number of vessels to offshore companies that were
allegedly controlled by Aivars Lembergs (Lembergs) and others. Gramsci alleged that these charterparties were
part of a fraudulent scheme to charter the vessels at below market rates and then sub-charter them at higher rates.
The charterparties contained exclusive English jurisdiction clauses.
• Gramsci started proceedings against Lembergs in England. The question for the court was whether Lembergs,
who was not a party to the charterparties, could be regarded as having consented to English jurisdiction

• The Court of Appeal held that the controller of a shell company which had entered into a contract containing a
jurisdiction clause was not deemed to have consented to submit to that jurisdiction himself. Lembergs was under
no existing legal obligation and so the court could not pierce the veil.
27 FRAUD:
VTB CAPITAL PLC V NUTRITEK INTERNATIONAL CORP [2013]

• The claimant bank said that it had been induced to create very substantial lending facilities by
fraudulent misrepresentation by the defendants. They now appealed against findings that England
was not clearly or distinctly the appropriate forum for resolution of VTB’s tort claims, and nor that
there was a proper basis for piercing the corporate veil.
•
Held: The appeal as to piercing the corporate veil was dismissed unanimously. The limited
burden on a defendant challenging jurisdiction is to identify the issues and how they might arise. It
was wrong to approach such a decision as the equivalent to a trial. Permission to serve on a foreign
resident should be refused unless the court felt it clear that England is the appropriate forum, but an
appellate court should intervene only in the case of error.
28 PETRODEL RESOURCES LTD V PREST [2013]

• The divorcing couple, Mr and Mrs Prest, were wealthy. They owned a substantial matrimonial home in the UK and a
second home in Nevis.5 Mrs Prest contended that her husband’s wealth vastly exceeded this and argued that properties
held by several companies of which Mr Prest “wholly owned and controlled” were in reality owned by him. It should
be noted that although the matrimonial home itself was also owned by one of the companies, it was established in the
Court of Appeal that this was held on trust for Mrs Prest and did not form part of the appeal to the Supreme Court.

• Supreme Court held that Mr Prest beneficially owned the assets of the Petrodel Resources Ltd companies under a
resulting trust because he contributed to their purchase price. There was no need to pierce the corporate veil, which
could only be done in limited situations. However, because Mr Prest had been "entitled" to the assets of his companies
under a resulting trust, under the Matrimonial Causes Act 1973 section 24 the court had jurisdiction to transfer half the
value of the properties to Mrs Prest.
29 CHANDLER V CAPE PLC [2012]

• David Chandler had been employed by a wholly owned subsidiary company of Cape plc for just over 18 months,
between 1959 and 1962. In 2007, Chandler discovered that as a result of exposure to asbestos during that period
of employment, he had developed asbestosis. The subsidiary no longer existed and had no policy of insurance
covering claims for damages for asbestosis. Chandler brought a claim against Cape plc, alleging it had owed (and
breached) a duty of care to him. Cape plc denied that it owed a duty of care to the employees of its subsidiary
company.
• High court at first instance, held that Cape plc owed Mr Chandler a duty of care, applying the threefold test
(foreseeability, proximity and fairness). Cape plc had actual knowledge of the subsidiary employees' working
conditions, and the asbestos risk was obvious.
• Cape plc appealed to the Court of Appeal, but its appeal was dismissed concluded that Cape plc had assumed
responsibility to Mr Chandler and was answerable for the injury which he had suffered.
30 OKPABI V ROYAL DUTCH SHELL PLC [2018]

• The claimants, citizens of the Niger Delta, seek damages arising as a result of alleged ongoing pollution and
environmental damage caused by oil leaks from pipelines and associated infrastructure. They alleged that
Royal Dutch Shell (RDS) and its local subsidiary, Shell Petroleum Development Company of Nigeria
Limited (SPDC), are liable in negligence. The claim against RDS was brought on the basis that RDS owed
the claimants a duty of care because it controlled the operation of the pipelines and infrastructure from
which the leaks occurred, or because it had assumed a direct responsibility to protect the claimants from the
environmental damage caused by the leaks.
• Court of Appeal held that the claim should not proceed in the English courts. Simon LJ and Sir Geoffrey Vos
considered the claimants had failed to establish an arguable case that RDS controlled SPDC’s
operations, or that RDS had responsibility for the matters and procedures that allegedly caused the
relevant damage.
31 LUNGOWE V VEDANTA RESOURCES PLC [2017]

• Residents of the Zambian city of Chingola brought civil proceedings against Vedanta Resources Plc (Vedanta), a UK incorporated parent company, and
Konkola Copper Mines Plc (KCM), its Zambian subsidiary, claiming that waste discharged from the Nchanga copper mine - owned and operated by KCM
- had polluted the local waterways, causing personal injury to the local residents, as well as damage to property and loss of income . The claims are
founded in negligence, although the allegations against the subsidiary also relate to breaches of applicable Zambian environmental laws.
• Issue: whether parent companies can be liable alongside their non-UK subsidiaries
• Held:
• High court: that the claimants could bring their case in England, despite the fact that the alleged tort and harm occurred in Zambia, where both the
claimants and KCM are domiciled. The defendants appealed this decision on the grounds that:
• (a) the English courts do not have jurisdiction to hear the claims against Vedanta; and
• (b) that the appropriate place to bring the claims against KCM is Zambia.
• Court of Appeal: dismissed the defendants’ appeal and held that the claimants’ case could proceed before the English courts .
• Supreme Court: Vedanta Resources plc could be sued in England, applying Zambian law although this was agreed to share similar principles to
English tort law. There was an arguable case that Vedanta Resources plc, as the parent company, had assumed responsibility or had a duty of care towards
the claimants who were harmed by Vedanta's subsidiaries.
ACTION IN TORT

• 32
THE OTHER WAY TO AVOID THE SALOMON PRINCIPLE IS TO
MAKE THE PARTIES LIABLE PERSONALLY IN TORT.
• EX: YOUR CAR MET INTO AN ACCIDENT DRIVEN BY YOUR
FRIEND = PERSONAL LIABILITY + VICARIOUS LIABILITY
33 Q: CAN DIRECTORS OF A COMPANY BE MADE PERSONALLY
LIABLE FOR THE WRONG DECISION ON BEHALF OF THE
COMPANY?
• The position is less straightforward. One situation in which this might arise is where the
manager, acting on behalf of the company, misleads a third party.
a) Williams v Natural Life Health Foods Ltd [1998]
b) Koninklijke Philips Electronics NV v Princo Digital Disc GmbH [2004]
c) Daido Asin Japan Co Ltd v Rothen [2002]
34 WILLIAMS V NATURAL LIFE HEALTH FOODS LTD [1998]

• Mr Williams and his partner approached Natural Life Health Foods Ltd with a proposal. They wanted to
get a franchise for a health food shop in Rugby. Mr Williams was given a brochure with financial
projections. They entered the scheme. They failed, and lost money. So Mr Williams sued the company,
alleging that the advice they got was negligent. However, before the suit could be completed, Natural
Life Health Foods Ltd went into liquidation. So Mr Williams sought to hold the company's
managing director and main shareholder personally liable. This was Mr Mistlin, who in the
brochure had been held out as having a lot of expertise. Mr Mistlin had made the brochure projections,
but had not been in any of the negotiations with Mr Williams.
• The House of Lords held unanimously that Mr Williams' claim would fail. They emphasised that there
had been no separate assumption of responsibility directly to Mr Williams, and no requisite reliance
35 CAN SHAREHOLDERS BE MADE LIABLE IN TORT? WHAT IS THE
TEST?

• See
• Chandler v Cape [2012];
• Lungowe v Vedanta Resouces plc [2017];
• Thompson v Renwick Group Ltd [2014];
• Okpabi v Royal Dutch Shell plc [2018]
TUTORIALS 1
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LIMITED LIABILITY, ALLOWING PEOPLE TO ‘TRADE

WITHOUT COMMITTING THEIR PERSONAL FORTUNE TO
A VENTURE, REQUIRES A FINE LEGISLATIVE BALANCE.
THE LIMITED COMPANY IS IN DANGER OF BEING TOO
WIDE A PROTECTION FOR FREE ENTERPRISE, AND OF
PROVIDING A VEIL FOR THE UNSCRUPULOUS’
(THE TIMES, 1 NOVEMBER 1994)
UNDERTAKE A CRITICAL EVALUATION OF THE ABOVE
STATEMENT.
TUTORIALS 2
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ADRIAN WAS A DIRECTOR OF EASYCLEAN LTD. HE DIVERTED THE COMPANY’S BUSINESS
OPPORTUNITIES TO PURECLEAN LTD, WHICH IS WHOLLY OWNED AND CONTROLLED BY
HIM. ALL THE PROFITS MADE WERE PAID DIRECTLY TO PURECLEAN LTD.
ADRIAN HAD AN AGREEMENT WITH EASYCLEAN LTD THAT HE WOULD NOT COMPETE
AGAINST IT WITHIN TEN MILES OF THE STORE PREMISES. ONE WEEK AFTER HIS SERVICE
CONTRACT ENDED, ADRIAN RELOCATED PURECLEAN LTD JUST ONE MILE AWAY FROM
EASYCLEAN LTD. WHEN CHALLENGE BY THE BOARD OF EASYCLEAN LTD, ADRIAN
ARGUED THAT HE PERSONALLY DID NOT RECEIVE ANY PROFITS OR COMPETE AGAINST
THE COMPANY.

ADVICE THE BOARD OF EASYCLEAN LTD:

1. WHETHER ADRIAN WILL BE PERSONALLY LIABLE FOR THE RETURN OF THE SECRET
PROFITS WHICH HE MADE WHILE SERVING AS A DIRECTOR; AND
2. WHETHER ADRIAN WILL BE HELD LIABLE FOR BREACH OF HIS AGREEMENT WITH
EASYCLEAN LTD.
TUTORIALS 3
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“THE DOCTRINE LAID DOWN IN SALOMON V SALOMON & CO. [1897] AC 22
HAS TO BE WATCHED VERY CAREFULLY. IT HAS OFTEN BEEN SUPPOSED TO
CAST A VEIL OVER THE PERSONALITY OF A LIMITED COMPANY THROUGH
WHICH THE COURTS CANNOT SEE. BUT THAT IS NOT TRUE. THE COURTS
CAN AND OFTEN DO DRAW ASIDE THE VEIL. THEY CAN, AND OFTEN DO,
PULL OFF THE MASK. THEY LOOK TO SEE WHAT REALLY LIES BEHIND. THE
LEGISLATURE HAS SHOWN THE WAY WITH GROUP ACCOUNTS AND THE
REST. AND THE COURTS SHOULD FOLLOW SUIT.” (LORD DENNING,
LITTLEWOODS MAIL ORDER STORES V IRC [1969] 1 WLR 1241).

CRITICALLY ASSESS THE STATEMENT ABOVE AND THE EXTENT TO

WHICH IT REFLECTS THE CURRENT STATE OF THE LAW ON LIFTING OR
PIERCING THE VEIL OF INCORPORATION.
39

THANK YOU