The topsy-turvy fate of the corporate veil doctrine in UK company law: from Salomon v A Salomon & Co Ltd to Prest v Petrodel Ressources Ltd, 120 years of case law reversals
By Alexandre Capel, Student in Sciences Po Economic Law master,
In English company law, one of the most emblematic legal fiction or fictio juris is that of saying that a company enjoys a personality which is distinct from those of its members whether they are directors, shareholders or employees. This is a fundamental principle because once a company has complied with the provisions set out in the section 16 of Companies Act 2006, it can own property, contract, sue or be sued in its own name, just as any other human being would. An important effect of this is that directors, shareholders, employees are not responsible for anything for which the company is solely responsible, such as debts. Instead, the liability of company’s shareholders for example will be limited to an amount set out in the constitution which corresponds to the nominal value of each of their shares. This rule of law is the result of the famous case Salomon v A Salomon & Co Ltd where the House of Lords agreed to the transfers of all Aron Salomon’s business assets from his personal ownership as a sole trader to the new company, he had just set up in order to achieve a shift in the risk of business failure from him personally to the company. Thus, corporation personality is an artificial being, existing only in the contemplation of law and which is often referred to by the use of the “corporate veil” formula. However, in judicial practice it was found that such generals principles could produce harsh and unjust results. To deal with it, the “lifting the veil” doctrine was derived from usage in order to derogate from the two general principles mentioned above. In practical terms, it means that in certain circumstances the court will “pierce” or “lift” the veil to hold any human beings liable as if there had not been a company there. In Gower’s words it means that the “veil” between the members of the company and outsider is lifted when “the law goes behind corporate personality to the individual”. Nevertheless, when looking at the application of these general rules and exceptions, it is very difficult to predict what will be the potential decision ruling. This lack of predictability is pointed out by Thomas Cheng as being a “perennial challenge facing the corporate veil doctrine”. Indeed, when referring to the numerous decisions taken on this subject, which Ottolenghi rightly describes as a “jungle of judgments“, one quickly realizes that they are not consistent and sometimes even contradictory. To this date, English courts have still not adopted a systemic approach to cases by establishing, comprehensive criteria or an analytical framework as, for example, judges in the United States have done. As a result, the application of “corporate veil” and its exceptions still remains very facts-specific and quite open and thus leave a lot of room for the judge’s subjectivity. All of these elements therefore contribute to create a high degree of legal uncertainty, putting the claimant in a position where he or she cannot rely on an objective corpus of precedents or any trend in case law to determine whether or not the “veil” will be “pierced” in his or her specific case. Moreover, beyond this question of when the “veil” will be lifted it is also relevant from the claimant perspective to ask what is actually done when “lifting” or “piercing the veil”? Here again, the answer is not simple. Firstly, it has to be said that the formula has multiple and complex senses that go far beyond its strictly original meaning. On this point, Ottolenghi highlighted four different attitudes of the courts towards companies, ranging from “peeping under the veil”, “extending the veil”, “penetrating the veil” to “ignoring the veil”. Secondly, despite this systemic approach the judges’ use of metaphoric terms such as “veil”, “sham”, “puppet”, “mantle”, “lift”, “pierce” may seem very enigmatic. At least that is what U.S. Justice Cardozo seems to believe as he said once that, “metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it”. Indeed, this use of many judicial adjectives reflects one thing: that English courts find it difficult to separate the corporation as a legal entity from its member. On that point Younger L.J. come to the conclusion that “the indiscriminate use of such terms has, not infrequently, led to results which were unfortunate and unjust…“. In the light of all this, it must be therefore difficult for the claimant to unscramble the various approaches adopted by the case law especially in the absence of statutory directions. Until now, it has remained the task of jurists and academics to propose some inroads in this “jungle” to try to better understand the functioning of the “corporate veil” and its exceptions. Along with others, Thomas Cheng proposed to classify the case law decisions of English courts in order to better understand their attitudes towards the doctrine over the years. In this study, we will use the exact same classification to illustrate this.
1. 1896 – World War II: Birth of a principle and early experiments
Despite the revered status of Salomon in English law, this case did not settle the separate legal personality of one-man company’s issue once for all. Indeed, the English courts soon after experimented with different approaches to the principle not only toward one-man companies but also to companies with several shareholders. At that time, they did not hesitate to expressly disregard this “high authority and binding precedent” by “piercing the veil” in certain early cases. By doing so, they managed to emancipate themselves from this “canonical affair“. In this respect we can cite Apthrope v Peter Schoenhofen Brewing Company Ltd. and St Louis Breweries v Apthrope which involved very similar facts. In these two cases, the judges had to determine whether the profits generated by the US subsidiaries would be subject to tax in England where the parent companies were based. If we strictly stick to the “corporate veil” rule, the English company and its US subsidiaries should have been treated as separate legal entities. The fact that the operations of the US subsidiaries were directed by their English parent companies should have been irrelevant because they were different entities under the law. Despite this, the Courts of Appeal, although referring to Salomon, decided to ignore this separate legal personality rule and held that since the “heads” and “brains” of the US operations were officers of the English parent companies, they constituted a single entity. Similarly, in St Louis Breweries v Apthorpe Wills J. emphasized that one should look at the substance rather than the form and accordingly ruled against the English parent company. The head-on disregard for the “corporate veil” rule expressed in both cases developed into a distinct category of exception called the “sham” exception. Judges often call upon this latter when the “corporate veil” is used for tax evasion or to circumvent tax obligations as was the case in the two previous cases. This was fully articulated in Gramophone and Typewriter Co Ltd v Stanley.
These first two attempts paved the way for a first period of “early experimentation” characterized by a considerable enthusiasm for the “corporate veil” doctrine where judges “pierced the veil” on several occasions. This strong judicial activity has made it possible to further nourish the doctrine and to see on what grounds the judges will decide to “lift theveil”. In Gilford Motor Co Ltd v Horne, the court held that the deliberate breach of contract justified lifting the “corporate veil”. Indeed, the creation of the defendant’s company was to be regarded as a “mere façade” and a “sham” to elude his contractual obligations to the claimant to whom he had promised not to solicit his clients personally. Consequently, the “veil” between him and his company had to be lifted to enable this same claimant to proceed against him. Since then, this case has often been seen as being at the origin of the creation of a “fraud” exception to the “corporate veil” rule. In re Darby, Brougham, it was rather the misrepresentation that pushes the judges to order lifting the veil. They considered that the defendants’ company was clearly an alias, which had been set up to allow the two shysters to commit straightforward fraud. In Trebanog Working Men’s Club and Institute, Ltd v. MacDonald the courtshave also disregarded the “corporate veil” after having established the existence of a trust relationship. Despite the fact that the club did not have a licence to sell alcohol, the court held that as the members owned the alcohol among themselves, there was no actual “sale“, and that the club was actually merely a trustee of the alcohol on behalf of its members. This type of case gave birth to the “agency situation” exception. Finally, in Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd the House of Lords accepted that the imperative of protecting “national security” could justify “lifting the veil”. Along with that there are also cases during this period in which the court respected the principle of the “corporate veil”. In Macaura v Northern Assurance it was held that only the company, as a distinct person, have an insurable interest in the company’s property. The claimant could not have such an interest and consequently make claim under the insurance contract even if he was the sole human being involved in the ownership and management of this company.
What is striking with all these experiments is that English courts have confined themselves to applying traditional common law concepts and principles from contract, trust or torts law. Unlike their US counterpart, they have not been ready to fashion new doctrines such as the instrumentality doctrine and the alter ego doctrine. More importantly, and despite some attempts, they failed to establish a general framework during this period. One exception to this, however, is to be found in Smith, Stone and Knight v. Birmingham where Judge Atkinson identified six factors a court should use in its analysis about whether to pierce the “corporate veil”. As we shall see later, this solution was not fully adopted. Nevertheless, it must still be said that the “corporate veil” doctrine was “robust” at that time. Although the reasoning of the courts might still seem unclear, poorly conceived and random at some points, there was nevertheless a great deal of vitality surrounding the doctrine.
2. World War II – 1978: The heyday of the doctrine
This was enhanced just after the second world war as the courts didn’t stop piercing the veil, and sometimes even went further by developing new reasoning. Nor is it to be believed that the English courts did not reaffirm during this period the principle that a company is a legal person distinct from its members. This is evidenced in particular by the case Lee v Lee’s Air Farming Ltd. where it was held that Lee was a separate person from its company, Lee’s Air Farming Ltd, and therefore there was no prohibition on claiming compensation from the company under the legislation as “worker” distinct from the employer company. Along with that, notable “veil” piercing includes re FG (Films) Ltd. which reasserted the “agency” exception. In this case a US company financed the production of a film in India on behalf of a British based company and wanted to register the same film as a British film. The British Board of Trade refused to do so, thereby refusing to treat the companies as two separate entities as would dictate the principle of “corporate veil”. The decision was motivated by the fact that the British company merely acted as a representative of the American company. In Jones v. Lipman the court adopted the same reasoning as in Gilford Motor Co Ltd v Horne. Indeed, the creation of the defendant’s company to which he transferred the land was to be regarded as a “mere façade” and a “sham” to elude his contractual obligations to the claimant to whom he had promised to sell his personal land. Given the very similar facts, judge Russel reaffirmed the “fraud” exception and held that the company was “a mask which [Mr. Lipman] holds before his face in an attempt to avoid recognition by the eye of equity”.
During this same period many of other cases such as Scottish Cooperative and Wholesale Society v Meyer, Wallersteiner v Moir involved some “veil lifting”. What they all have in common is that Lord Denning took part to the decision ruling. If this may seem anecdotal, on the contrary, this is a matter of great importance as he acted as “an enthusiastic advocate and practitioner of veil piercing” during that time. His attitude toward the “corporate veil” doctrine has surely been best encapsulated in Littlewood Mail Order Stores v Inland where he states that: “The doctrine laid down in Salomon v. Salomon & Co, 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”. However, his most notable contribution is to be found in DHN Food Distributors Ltd v London Borough of Tower Hamlets. In this case the Court of Appeal unanimously allowed the parent company DHN to claim compensation for disturbance owing the expropriation of land under the Land Compensation Act 1961, even though it did not directly own the land on which the London Borough Council of Tower Hamlets had houses built. Indeed, the latter was rather owned by its subsidiary company Bronze, which was a different corporate entity under the law, managing DHN’s assets, i.e., the premises. To get to this point Lord Denning considerably extended the “veil” in order to embraces the two subsidiaries companies, i.e., Bronze and DHN Food Transport Ltd. Instead of referring to each one separately he considers that as they were conducting a common activity and have the same shareholders, they can all be regarded as a single entity, a “group of three companies” under one extended “corporate veil”. Therefore, the court examined the overall business operation as an economic unit, rather than its strict legal form. This is exactly the situation he describes when he states that “When a parent company owns all the shares of the subsidiaries (…) these subsidiaries are bound hand and foot to the parent company and must do just what the parent company says (…) The three companies should, for present purposes, be treated as one”. Taking this into account he goes on to describe what is known as the single economic unit theory in the following terms: “this group is virtually identical to a partnership in which the three companies are partners. They should not be treated separately so as to be defeated on a technical point“. The same year Schmitthoff in an article entitled Salomon in the shadow seems to have genuinely captured the state of the doctrine at that time: “Modern English company law has abandoned the exaggerated view of Salomon’s case (…) English law is now prepared to admit qualifications of, and exceptions to, this principle, by lifting the veil of corporateness“.
3. 1978 – Now: The current fall into disfavor of the doctrine
Nevertheless, two years later, the House of Lord in Woolfson v Strathclyde Regional Council openly questioned the reasoning in DHN. In this one Lord Keith expressed doubt as to whether or not the Court of Appeal properly applied the principle that is appropriate to pierce the “corporate veil” where there are special circumstances indicating that the company is “a mere façade concealing the true facts”. Even if he stopped short of overruling the DHN case, subsequent cases have confirmed the adoption by English courts of a very narrow view of the “corporate veil” doctrine compared to the two previous periods. On that regard, Lord Goff distance himself from the single economic unit theory in Bank of Tokyo v Karoon by stating expressly in very clear terms that “we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be abridged”. In Adams v Cape Industries Plc, the Court of Appeal after having reviewed the various grounds for veil piercing, including the “fraud”, “sham”, “agency” and “national security” exceptions and the single economic unit theory go even further by rejecting them all. It goes so far as to say that the use of the corporate structure to limit future liabilities is an inherent feature of English company law. Thus, in light of all these elements, it would seem that English courts reasserted an orthodox approach, closer to that stated in Salomon. Indeed, “even where the case for applying the doctrine may seem strong (…) the courts are unlikely to do so”.
More recently courts’ attitudes towards the doctrine has been reviewed in the case Prest v Petrodel Resources Ltd. In this divorce case, Lord Sumption sought to clarify the doctrine in its obiter dicta. This latter distinguished two underpinning principles namely the “evasion principle” – when a company is interposed for the purpose of defeating or frustrating a legal right – and the “concealment principle” – when the court will look behind a company to see who the real actors are. He considers that only the first one is a valid ground on which a court may rely to “pierce the veil”. The “concealment principle“ being “legally banal” in the sense that it “does not involve piercing the veil at all“. As a result, the number of cases involving “piercing the corporate veil” has been automatically very limited and is now seen as an exceptional remedy. This view is supported by Paul Davies who stated that “veil piercing” has become a rarity under English Law. Despite some recent cases suggesting potential changes, it would appear that the Prest case ultimately curtains the scope of the “lifting the veil” doctrine even further.
It appears therefore, that the idea that a company enjoys a separate legal personality has not only a number of advantages in terms of efficiency but is also deeply rooted in UK commercial life. The recent hostility of English courts toward “piercing the veil” is a testimony to this. The only exceptions admitted by the courts are in fact justified when it is proven that the person acted unconscionably. On this basis, some suggest for the “corporate veil” doctrine’s future that, on the one hand, the Salomon‘s rule is recognized by the common law, while on the other hand, it is the equity that should assess in concreto whether or not this strict common law rule allowed the defendant to take an unconscionable advantage of the claimant in a particular circumstance. By way of illustration, some of the cases we have seen did not necessarily involve taking advantage of the claimant, while for others this was the case.
 Anthony O Nwafor, “Piercing the corporate veil: an incursion into the judicial conundrum”, (2015) 11 Corporate Board: Role, Duties and Compositions
 Alastair Hudson, Understanding Company Law (2nd edition, Alastair Hudson 2011)
  UKHL 1
 Lynn Gallagher and Peter Ziegler, “Lifting the corporate veil in the pursuit of justice”, (1990) 292 Journal of Business Law
 Thomas Cheng, “The corporate veil doctrine revisited: a comparative study of the English and U.S. corporate veil doctrine”,  34 Boston College International & Comparative Law Review
 Laurence Gower, Principles of Modern Company Law (Sweet & Maxwell 2008)
 Lauretta Ottolenghi, “From peeping behind the corporate veil, to ignoring it completely”, (1990) 53 The Modern Law Review
 Berkey v Third Avenue Railway Co. 244 N.Y. (1926)
 Ernest Lim, “Of “Landmark” or “Leading” Cases: Salomon’s Challenge”, (2014) 41 Journal of Law and Society
 Inland Revenue Commissioners v Sansom  2 KB 492
 Brenda Hannigan, “Wedded to “Salomon”: Evasion, concealment and confusion on piercing the veil of the one-man company”, (2013) 50 Irish Jurist
 (1899) 4 T.C. 41
 (1898) 4 T.C. 111
  2 KB 89
  Ch 935
 Jennifer Payne, “Lifting the corporate veil: a reassessment of the fraud exceptions”, (1997) 56 The Cambridge Law Journal
  1 KB 95
  1 KB 576
  2 AC 307
  AC 619
 David H. Barber, “Piercing the Corporate Veil”, (1980) 371 Willamette Law Review
  4 All E.R. 116
  UKPC 33
  1 WLR 483 (EWHC)
  1 WLR 832
 Muzaffer Eroglu, Multinational enterprises and torts liabilities: An interdisciplinary and comparative examination (Edward Elgar Pub 2008)
  A.C. 324 HL
  1 WLR 991 AC
  1 WLR 1241
  1 WLR 852
 David Powles, “The “see-through” corporate veil”, (1977) 40 The Modern Law Review
 Clive M. Schmitthoff, “Salomon on the shadow” (1976) Journal of Business Law
  UKHL 5
  AC 45
  Ch 433
 Paul L. Davies, Gower & Davies’ principles of modern company law (Sweet & Maxwell 2012)
  UKSC 34
 Beckett Investment Management Group v Hall  EWCA and Stone & Rolls v Moore Stephens  UKHL 39
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