LIFTING THE VEIL BY COURTS

1. INTRODUCTION
2. OBJECTIVES
3. MAIN CONTENT
4. CONCLUSION
5. SUMMARY
6. TUTOR MARKED ASSIGNMENT
7. REFERENCES/FURTHER READING

INTRODUCTION

The doctrine of Corporate Personality is fundamental and by and large it is adhered to strictly and rigidly when there is no compelling reason to the contrary. There are cases when the courts and the legislature have allowed the veil to be lifted in order to determine the natural persons behind the corporate veil. This is important because just as the concept of corporate personality may and is being used to achieve lofty and great purpose; it may also be used to defeat some important value in law. It has been used for various nefarious and unwholesome reasons which are basically to evade the law or to use the concept to defraud and to avoid legal obligation. If it is impossible to lift the veil and see the very persons behind the corporate veil, then it becomes impossible to check these negative practices. The court have over the years, though reluctantly, but nevertheless devised some reasons for lifting the veil, or evading the concept of corporate personality and to ensure that it is not used as an instrument for evading the law. In this unit we shall examine the circumstances when the courts will lift the veil of incorporation, while in the next unit, we will look at occasions where the legislature has allowed that the corporate veil be lifted.

OBJECTIVES

At the end of this unit the student must be able to explain circumstances when the courts will lift the veil of incorporation of a company.

MAIN CONTENT

There is no general theory indicating when the court will ignore the rule in Salomon v Salomon and lift the veil of incorporation and ascribe liability to the directors or promoters of the company, however some broad classifications may have arisen over the years, we may note that there is no hard and fast rule as the current position is that the cases may have developed on their individual merits. We may look at this from the following perspectives.

AGENCY – the court will apply the agency rule when the corporate personality, principle is being used in order to avoid legal obligation. In the case ofSmith, Stone and Knight Ltd v Birmingham Corporation (1939) 4 All E.R. 116. The company sought to acquire certain premises compulsorily. The premises were occupied by a subsidiary of the plaintiff company. The subsidiary was wholly controlled by the plaintiff. It employs no separate staff, kept no separate books and was treated as though it were a department of the plaintiff. Under the legislation giving the corporation power to make compulsory purchase order, an occupier could not claim for compensation unless it enjoyed tenancy for a period longer than one year. The subsidiary tenancy was a yearly one. The plaintiff, the parent company argued that it was really the person in occupation. It was held that while the subsidiary was a separate legal entity, it might be acting as the agent of its shareholders in this case, the plaintiffs company. Furthermore, the occupation by the subsidiary of the premises was technical only and solely for the purpose of the parent company. The plaintiff could therefore maintain a claim for compensation.

This decision may be contrasted with Tustall v Steigman (1962) 2 Q.B. 593 where the court refused to treat a proposed occupation of premises by a company wholly owned by the plaintiff as an occupation by the plaintiff herself even though she had formed the company to carry on an existing business. The result is that an application by the defendant, a tenant of the premises for a new tenancy prevailed.

Also in the case of Re FG films Ltd (1933) 1 W.L.R. 483.The company was incorporated in England by an American based company, United States Film Company. The President of the U.S Company holds 90% of the British company, while the 10% were held by another director – a British citizen. The company intended that as the maker of a film which should therefore be registered as a British film under the Cinematograph Films Act 1938. The court refused to agree that the film was made by the British company whose participation in it was so small as to be practically negligible. The company was merely the nominee or agent of the U.S. Company which had brought the British company into existence for the sole purpose of enabling the film to qualify as a British film. The share capital of the British company and the shareholding were treated by the court as evidence that the British company had been formed with a view to evading the legislation.

Similarly, a court will not allow members of a company to evade their legal obligation or to perpetuate fraud under the cloak of Salomon v Salomon. If such happens, it will be regarded as a “sham” that is, the company is not real but formed to perpetrate fraud. In the case of Jones v Lipman (1962) 1 All E.R 442.The 1^st defendant agreed to sell freehold land with registered title to the plaintiffs pending completion of the agreement, he sold and transferred the land to the defendant company (company incorporated by himself and the cleark of his solicitors) and both of them are the shareholders and director. The court held  that in the circumstance of this case, the defendant company was a cloak for the first defendant the court accordingly ordered specific performance of the original agreement. In another case, the court refused to allow the defendant who had entered into an agreement not to compete with his employer. He later resigned and formed another company which he now used to compete with his former employer, the court lifted the veil of incorporation to discover the person behind the new company, that the company was a cloak or ‘stratagem’ to avoid the legal obligation. You may see also the case of Re Darby (1911) 1 KB 95,andRe Burgle Press (1961) Ch. 270.

Group Enterprise Theory

A large company may own a chain of other companies known as . subsidiaries, if the doctrine of Salomon v Salomon were to be applied, these other companies would be treated separately. But for economic convenience and justice both are allowed to be treated as an entity. In the case of DHN Food Distributors Ltd v Tower Hamlets (1976) 1 WLR 852 Lord Denning had argued that a group of companies was in reality a single economic entity and should be treated as one. Previously, in the case ofLittleweeds Mail Order Stores v IRC (1969) 1 WLR 1241.He stated thus,

“the doctrine laid down in Salomon case has to be watched very carefully. It has often been supposed to cast a veil over the personality of a knitted company through which the courts cannot see. But that is not true. The courts 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.

In the case of DHN Food Distributors Ltd v Tower Hamlets (1976) 1 WLR 852 Lord Denning argued that a group of companies was in reality a single economic entity and should be treated as one. However, this position will seem to avoid the doctrine laid down  inSalomon v Salomon and therefore two yeasr later the House of Lords was able to specially disapprove Lord Deming’s position and ruled in the case of Woolfson v Strathclyde RegionalCouncil (1976) SLT 159, that the veil of incorporation would be upheld in cases of group of companies structures unless the group structures was being used as a facade.

The Court of Appeal in England had the opportunity of setting the record straight and declared the position of the law in the case of Adams v Cape Industries Plc (1990)1 Ch 433. The key issue before the court was whether cape industries could be regarded as falling under the jurisdiction of a US court and therefore is subject to its jurisdiction. This could only occur if Cape was present within the US jurisdiction or had submitted to such jurisdiction. In 1979, Cape, an English company, mined and marketed asbestos. Its worldwide marketing subsidiary was another English company, named Capaso. It also had a US marketing subsidiary incorporated in Illinois, named NAAC. In 1974, some 462 people sued Cape, Capasoand NAAC in Texas for personal injuries arising from the installation of asbestos in a factory. Cape protested that the Texas court had no jurisdiction over it but in the end it settled the action. Between 1978 and 1979, further 206 similar actions were commenced and default judgments were entered against Cape and Capaso. In 1979 Cape sold its asbestos mining and marketing business and therefore had no assets in USA. The claimants thus sought to enforce the judgment in England where Cape had most of its assets. The issue therefore was to decide whether the Cape was present in the US by virtue of its subsidiaries. The only way to do this was to lift the veil of incorporation, theCape treatingthe group as a single entity, or finding the subsidiaries were mere façade or that the subsidiaries were agents of Cape. The court examined all the possibilities, and after examining all the old cases, the court held that Cape group cannot be treated as one, the court stated;

“save in cases which turm on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v Salomon & Co. Ltd (1897) All 22namely because it considers that justice so required.”

The court therefore left only three options for lifting of veil of incorporation.

1. The first is if the court is interpreting a statute or document. This exception to maintain corporate personality is qualified by the fact that there has first to be some lack of clarity about statute or document which would allow the court to treat a group as a single entity. See also Samego –Turner v J & H March & McLennan(Services)Ltd (2007) EWCA Civ. 723 where the Court of Appeal in England treated a group of companies as a single entity on the basis of their single economic interest in interpreting the application of an EU Regulation
2. Secondly, the court will lift the veil of incorporation where the corporate entity was namely formed for the purpose of avoiding legal obligations, or where “special circumstances exist indicating that it is a mere façade concealing the true facts.” Where the court finds that to maintain the veil of incorporation will lead to a form of injustice or facilitate a deliberate injustice, like the case of Jones v Lipman (supra).
3. The third exception is where the Court finds that there is an express or implied agency between the parties. In the group structures, there may not be a document indicating or pointing to this fact,, but it may be inferred from their conduct, this may be in cases where there is a very strong control exercised by the parent company over the subsidiary, where this cannot be proved, the agency option may not be easy option. In Adams case, the court has ruled that the group has every legal and legitimate right to organize its affairs according to the law, and the court cannot infer impropriety to the company as a result of this exercise of legitimate right

Clearly, the court can no longer lift the veil of incorporation merely “to achieve justice irrespective of the legal efficacy of the corporate structure.” See the case of Ord v Belhaven Pubs Ltd (1998) 2 BCLC 447.

CONCLUSION

The courts are obviously extremely very reluctant to lift the veil of incorporation or to depart from the principle laid down in Salomon v Salomon. Under the old dispensation there are 5 classifications under which the court will lift the veil of incorporation, based on the decided cases. These are: (1) Agency (2) Trust (3) Determination of residence in order to know the actual country of incorporation (4) fraud or illegality (5) public policy in time of war. However since the Cape case, the occasions for lifting the veil seems to have been limited to only three, these are

• where the court is construing a statute, contract, or other document
• when the court is satisfied that a company is a ‘mere facade’ concealing true facts
• When it can be established that the company is an authorized agent of its controllers or its members, corporate or human

SUMMARY

A company upon incorporation becomes a legally recognized person capable of exercising all the powers of a natural person. The law will no longer ‘see’ the promoters but the ‘company as a person. However, the courts will lift the veil of incorporation in certain cases. Though the court had been very reluctant in doing this, but the fact remains that the veil must be lifted to avoid the corporate nature of the company from being used to perpetrate fraud or hide the facts, in the words of Sambam J in the US case of US v MilwaukeeRefrigeration Transit Co. 142F (1906) 247 at 255,

“A corporation will be looked upon as a legal entity as a general rule, but when the notion of legal entity is used to defeat public convenience justify wrong, protect fraud, or defend crime, the law will regard the incorporation as an association of persons.”

TUTOR MARKED ASSIGNMENT

Discuss circumstances when the courts will lift the veil of incorporation of a company.

References/Further Reading

1. Gallagher and Zeigher (1990), ‘Lifting The Veil In The Pursuit Of Justice’ 1990 JBL,
2. Lowry, 1993, ‘Lifting the Veil’1993, ,JBL 180

3. Rixon, 1986, ‘Lifting the Veil of between Holding and Subsidiary Companies’ 1986, LQB