A consideration of lifting the corporate veil

Firstly, a note to the reader. This is a very long blog-post, the contents of which have been extracted from my lecture delivered in my Fraud Examination course earlier this week at Brunel University. The way to read it in short, is to ignore the pages of quotations from the various Law Lords which can be considered if you want to go into the raison d'etre, to consider in depth the logic and thinking of our most distinguished Judges.

‘Fraud unravels everything’…

Lazarus Estates Limited v Beasley [1956] 1 ALL ER 341

Denning LJ:

‘No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved it vitiates judgments, contracts, and all transactions whatsoever’.

Limited v Unlimited:

An individual in business on his own, is a sole trader. He has unlimited liability. That means that should he owe money to someone somewhere, his liability to pay is not limited by the value of his business, or what he has invested in his business. It means that the person who is owed money by this individual (‘ a creditor’) can pursue the individual to claim his money by making a claim on the individuals own goods and property.

A business with a limited liability, a limited company means that the business is limited by the value of its shares. No more and no less.

Salomon v A Salomon & Company Limited [1896] UKHL 1:

The business of Mr Salomon was incorporated into a limited company, A Salomon & Company Limited. The company made boots and shoes. The company at some stage did not do too well, and was unable to pay its debts as and when they fell due. A Liquidator was appointed to recover debt outstanding to the company to pay off its creditors. The liquidator pursued Mr Salomon personally for the debt.

This case established that a limited company was a person in its own right. It has a corporate personality of its own and was and must be treated as a separate legal entity to an individual.

A limited company is governed by two principal documents namely a Memorandum of Association and Articles of Association. They govern internally and externally the nature and the running of the business, subject to the Law of England and Wales.

Lord Mcnaghten: (pronounced Norton)

‘When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate "capable forthwith," to use the words of the enactment, "of exercising all the functions of an incorporated company." Those are strong words. The company attains maturity on its birth. There is no period of minority - no interval of incapacity. I cannot understand how a body corporate thus made "capable" by statute can lose its individuality by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not. The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. That is, I think, the declared intention of the enactment. If the view of the learned judge were sound, it would follow that no common law partnership could register as a company limited by shares without remaining subject to unlimited liability…

…Among the principal reasons which induce persons to form private companies, as is stated very clearly by Mr. Palmer in his treatise on the subject, are the desire to avoid the risk of bankruptcy, and the increased facility afforded for borrowing money. By means of a private company, as Mr. Palmer observes, a trade can be carried on with limited liability, and without exposing the persons interested in it in the event of failure to the harsh provisions of the bankruptcy law. A company, too, can raise money on debentures, which an ordinary trader cannot do. Any member of a company, acting in good faith, is as much entitled to take and hold the company's debentures as any outside creditor. Every creditor is entitled to get and to hold the best security the law allows him to take.

If, however, the declaration of the Court of Appeal means that Mr. Salomon acted fraudulently or dishonestly, I must say I can find nothing in the evidence to support such an imputation. The purpose for which Mr. Salomon and the other subscribers to the memorandum were associated was "lawful." The fact that Mr. Salomon raised £5,000 for the company on debentures that belonged to him seems to me strong evidence of his good faith and of his confidence in the company. The unsecured creditors of A. Salomon and Company, Limited, may be entitled to sympathy, but they have only themselves to blame for their misfortunes. They trusted the company, I suppose, because they had long dealt with Mr. Salomon, and he had always paid his way; but they had full notice that they were no longer dealing with an individual, and they must be taken to have been cognisant of the memorandum and of the articles of association. For such a catastrophe as has occurred in this case some would blame the law that allows the creation of a floating charge. But a floating charge is too convenient a form of security to be lightly abolished. I have long thought, and I believe some of your Lordships also think, that the ordinary trade creditors of a trading company ought to have a preferential claim on the assets in liquidation in respect of debts incurred within a certain limited time before the winding-up. But that is not the law at present. Everybody knows that when there is a winding-up debenture-holders generally step in and sweep off everything; and a great scandal it is.[7]

It has become the fashion to call companies of this class "one man companies." That is a taking nickname, but it does not help one much in the way of argument. If it is intended to convey the meaning that a company which is under the absolute control of one person is not a company legally incorporated, although the requirements of the Act of 1862 may have been complied with, it is inaccurate and misleading: if it merely means that there is a predominant partner possessing an overwhelming influence and entitled practically to the whole of the profits, there is nothing in that that I can see contrary to the true intention of the Act of 1862, or against public policy, or detrimental to the interests of creditors. If the shares are fully paid up, it cannot matter whether they are in the hands of one or many. If the shares are not fully paid, it is as easy to gauge the solvency of an individual as to estimate the financial ability of a crowd. One argument was addressed to your Lordships which ought perhaps to be noticed, although it was not the ground of decision in either of the Courts below. It was argued that the agreement for the transfer of the business to the company ought to be set aside, because there was no independent board of directors, and the property was transferred at an overvalue. There are, it seems to me, two answers to that argument. In the first place, the directors did just what they were authorized to do by the memorandum of association. There was no fraud or misrepresentation, and there was nobody deceived. In the second place, the company have put it out of their power to restore tdshe property which was transferred to them. It was said that the assets were sold by an order made in the presence of Mr. Salomon, though not with his consent, which declared that the sale was to be without prejudice to the rights claimed by the company by their counter-claim. I cannot see what difference that makes. The reservation in the order seems to me to be simply nugatory’.

What is the corporate veil?

The ‘veil’ refers to the protection of limited liability over the Directors and shareholders of a limited company. Lifting the corporate veil, means lifting or piercing the shield of limited liability status in order to pursue a Director or shareholder personally and directly.

Why have limited liability at all?

Limited liability encourages development of markets for stocks. It limits the risk to investors to the value of their shares in a company, rather than unlimited liability should things go wrong.

Is there a doctrine of lifting the corporate veil? Is there a defined pattern by which the courts are able to distinguish, when, and in what circumstances the corporate veil should be lifted?

Gilford Motor Company v Horne [1933] Ch 5

Horne was a former Director of Gilford Motor Company. In the terms of his employment with that company, he was not allowed to take their customers.

He set up a limited company with his wife as Director, and sought through that company to poach clients of Gilford Motor Company.

Gilford sought an injunction to prevent further loss of business.

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’…

[Observations: In this case, the business was set up purely for fraudulent purposes to poach clients that Horne was not permitted to take, in order to make a financial gain for himself and others. It was rotten from the start; fraud and mala fide.]

Jones v Lipman [1962] 1 WLR 832:

Lipman was to sell his house to Jones. Lipman changed his mind, and to avoid completing his contract to sell his house, Lipman set up a limited company to purchase the house instead. That limited company was entirely owned and controlled by Lipman.

Russell J held:

‘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’.

[Observations: In this case, the limited company was set up purely to frustrate the true buyer from purchase the house. It was set up to avoid purchase of the house by Jones. It was owned and controlled by Lipman. It was rotten from the start; mala fides, but not fraud. Jones was to be repaid his deposit monies. He was being cheated out of his contract to purchase the house. The objective of the company was not to trade. It was to act as a supposed third party to purchase the house in place of Jones. This established the beginnings of the façade test. It was rotten from the start. The intention was to deceive that the owner of the house was merely buying it through a limited company owned and controlled by the owner of the house]

DHN v Tower Hamlets LBC [1976] 1WLR 852

DHN Food Distributors Limited was the holding company of Bronze Investments Limited (‘Bronze’) and DHN Food Transport Limited (‘DHN Food’). All three limited companies were owned and controlled entirely by the same people. The business was engaged in groceries and a cash-and-carry. Bronze owned the land. DHN Food owned the commercial vehicles.

The local council acquired land for redevelopment purposes and was bound to pay the owner of land, statutory compensation. They argued that they only had to pay Bronze as it was a separate legal entity in its own right.

DHN argues that this was unfair. The three companies were one and the same. In other words, all three should be compensated rather than only one of the three companies. This was a case where DHN were arguing that the Courts should employ equitable discretion; that they should look at the overall business, rather than the strict legal form, because of justice of the case given the circumstances, required it.

The Court agreed in this case to overlook the limited liability aspects in view of the overriding desire for justice.

Lord Denning MR's judgment went as follows.

'This case might be called the “Three in one.” Three companies in one. Alternatively, the “One in three.” One group of three companies. For the moment I will speak of it as “the firm.”

...Compensation under the statute is to be made for the cost of the land and for any other relevant losses contingent upon the owner's losses of land: see section 5 (2) and (6) of the Land Compensation Act 1961.

If the firm and its property had all been in one ownership, it would have been entitled to compensation under those two heads: first, the value of the land, which has been assessed in excess of £360,000. Second, compensation for disturbance in having its business closed down. The figure has not yet been assessed. But the firm and its property were not in one ownership. It was owned by three companies. The business was owned by the parent company, D.H.N. Food Distributors Ltd. The land was owned at the time of acquisition by a subsidiary, called Bronze Investments Ltd. The vehicles were owned by another subsidiary, D.H.N. Food Transport Ltd. The parent company D.H.N. held all the shares both in the Bronze company and in the Transport company. The directors were the same in all three companies. As the result of the business having to be closed down, all the three companies are in liquidation.

The question is: what is the effect of the firm being in truth the three companies? The acquiring authority say that the owners of the land were Bronze Investments Ltd., and that company are entitled to the value of the land £360,000. They have actually been paid it. But the acquiring authority say that that company are not entitled to compensation for disturbance because they were not disturbed at all. The authority admit that D.H.N. (who ran the business) and the Transport subsidiary (who owned the vehicles) were greatly disturbed in their business. But the acquiring authority say that those two companies are not entitled to any compensation at all, not even for disturbance, because they had no interest in the land, legal or equitable. They say that in 1970 D.H.N. were only licensees of Bronze, the subsidiary which owned the land: and D.H.N. being licensees only, with no interest in the land, their only claim was under section 20 (1) of the Compulsory Purchase Act 1965. That section says that if a person has no greater interest than a tenant from year to year in the land, then he is only entitled to compensation for that lesser interest. Seeing that a licensee can be turned out on short notice, the compensation payable to D.H.N. would be negligible.

The strange thing about the case is this, that the acquiring authority admit that at any time from February 1970, during the local inquiry and afterwards (right up to the time in October 1970 when the council gave notice to treat) the people running these three companies could have put their house in order so as to make the claim impregnable. All they had to do was to take a very simple step. Being in control of all three companies, they could have arranged for Bronze to convey the land to D.H.N. No stamp duty would be payable because it would be exempt under section 42 of the Finance Act 1930 . And D.H.N., being the owners, could also claim compensation for disturbance. So at any time up to October 30, 1970, this group of three companies could have put themselves in an unassailable position to claim not only the value of the land but also compensation for disturbance. But that was not done. The acquiring authority say that, by failing to do it, the group have missed the boat. They are left behind on the quay because of the technical provisions of our company law whereby each of the three companies is in law a separate person. Each of its interests must be considered separately. D.H.N. had no interest in the land. It was only a licensee. So it cannot claim compensation for disturbance.

The President of the Lands Tribunal was asked to determine preliminary points of law. He held that D.H.N. had no interest in the land such as to entitle them to any compensation for disturbance beyond the amount allowed by section 20 of the Act of 1965, which is negligible. D.H.N. appeal to this court.

We were told by Mr. Eyre, who argued the case for Tower Hamlets, that a similar contention has succeeded in other cases before the Lands Tribunal. So much so that, in order to overcome the technical point, it seems that it is the regular thing for the legal advisers of a group of companies to do the necessary conveyancing before the notice to treat. But that in this case the group did not put their house in order in time. And so, he submits, there is no claim for disturbance.

Mr. Dobry, for D.H.N., took three points before us: first, that they had an equitable interest in the land; second and alternatively, that they had an irrevocable licence; third, that we should lift the corporate veil and treat D.H.N. as the owners. And that, in one or other of these three capacities, they were entitled to compensation for disturbance.

First, equitable interest. This depends on the conveyancing transactions by which the land was acquired. They were very complicated. In 1963 the vendors of the factory and warehouse agreed to sell it to the group for £115,000. The group had not the money to pay the price. So they got the help of the Palestine British Bank. This bank provided the £115,000. In 1964 the conveyance was made to Bronze Investments Ltd. which was a wholly owned subsidiary of the bank. Two years later, in 1966, D.H.N. (having borrowed money elsewhere) acquired all the shares in Bronze (so that Bronze then became a wholly owned subsidiary of D.H.N.) and D.H.N. repaid the £115,000 provided by the bank. So the legal title remained in Bronze, but D.H.N. had the benefit of the property D.H.N. occupied the premises from the time when they were first acquired in 1964 until the local authority entered under their compulsory powers.

It is said that, on those facts, in the first place Bronze held the legal title on a resulting trust for the bank (which provided the purchase money): and that afterwards, when D.H.N. repaid the purchase money to the bank D.H.N. acquired the equitable interest of the bank. That may be right but the President of the Lands Tribunal rejected it, and I am not prepared to say that he was wrong.

Second, irrevocable licence. It may be that, on those facts, the bank lent the £115,000 to Bronze with which Bronze bought the property. If so, the bank would not have acquired any equitable interest. They would only be creditors of Bronze. But when D.H.N. repaid the £115,000 to the bank, they simply stood in the shoes of the bank as creditors of Bronze. In that case Mr. Eyre submits that D.H.N. have no legal or equitable interest in the property but are only licensees.

Now I am prepared to allow that D.H.N. were licensees of Bronze. Mr. Eyre suggested that they were bare licensees, but I do not think so. Bronze was a wholly owned subsidiary of D.H.N. Both companies had common directors running the companies. It is plain to me that thereafter Bronze could not determine the licence so as to ruin D.H.N. The directors of Bronze could not turn out themselves as directors of D.H.N. They would be in breach of their duties to both companies if they did so: see Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, 366–367. In the circumstances, I think the licence was virtually an irrevocable licence. D.H.N. was the parent company holding all the share in Bronze. In those circumstances D.H.N. were in a position to carry on their business on these premises unless and until, in their own interest, D.H.N. no longer wished to continue to stay there. It was equivalent to a contract between the two companies whereby Bronze granted an irrevocable licence to D.H.N. to carry on their business on the premises In this situation Mr. Dobry cited to us Binions v Evans [1972] Ch 359, to which I would add Bannister v Bannister [1948] 2 All ER 133 and Siew Soon Wah v Yong Tong Hong [1973] AC 836 . Those cases show that a contractual licence (under which a person has the right to occupy premises indefinitely) gives rise to a constructive trust, under which th legal owner is not allowed to turn out the licensee. So, here. This irrevocable licence gave to D.H.N. a sufficient interest in the land to qualify them for compensation for disturbance.

Third, lifting the corporate veil. A further very interesting point was raised by Mr. Dobry on company law. We all know that in many respects a group of companies are treated together for the purpose of general accounts, balance sheet, and profit and loss account. They are treated as one concern. Professor Gower in Modern Company Law, 3rd ed. (1969), p. 216 says:

“there is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead at the economic entity of the whole group.”

This is especially the case when a parent company owns all the shares of the subsidiaries — so much so that it can control every movement of the subsidiaries. These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says. A striking instance is the decision of the House of Lords in Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352. So here. 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. They should not be deprived of the compensation which should justly be payable for disturbance. The three companies should, for present purposes, be treated as one, and the parent company D.H.N. should be treated as that one. So D.H.N. are entitled to claim compensation accordingly. It was not necessary for them to go through a conveyancing device to get it.

I realise that the President of the Lands Tribunal, in view of previous cases, felt it necessary to decide as he did. But now that the matter has been fully discussed in this court, we must decide differently from him. These companies as a group are entitled to compensation not only for the value of the land, but also compensation for disturbance. I would allow the appeal accordingly'.

Goff LJ concurred and read his judgment.

'The book-keeping adopted by the claimants was in many respects unhappy and in some, in my view, wholly inaccurate. The result is that this case has come to appear complicated and difficult, whereas in truth, in my view, it is simple and straightforward.

In my judgment the appeal succeeds on each of three entirely separate grounds. First, assuming, contrary to the view which I hold, that D.H.N. were licensees only, and that subject thereto the whole legal and equitable interest in the business premises was vested in Bronze, still it seems to me that one must imply, from the business association between these three companies and the fact (which is uncontroverted) that D.H.N. paid all the money that was paid, that there was an agreement that that licence should not be revoked during the continuation of the business. In my judgment, therefore, compensation for disturbance must be assessed on the basis that D.H.N. had an irrevocable or indefinite licence.

Mr. Eyre, who argued this case with great skill on behalf of the acquiring authority, relied on Horn v Sunderland Corporation [1941] 2 KB 26, and he said that compensation for disturbance is only part of the price which is being paid for the land compulsorily acquired, and you cannot acquire a licence even though it be an irrevocable one.

But it seems to me that that is answered, if not by section 5 (2) of the Compulsory Purchase Act 1965 then certainly by Binions v Evans [1972] Ch. 359 , in this court, and I cite from the judgment of Lord Denning MR, at p. 367:

“Seeing that the defendant has no legal estate or interest in the land, the question is what right has she? At any rate, she has a contractual right to reside in the house for the remainder of her life or as long as she pleases to stay. I know that in the agreement it is described as a tenancy: but that does not matter. The question is: What is it in reality? To my mind it is a licence, and no tenancy. It is a privilege which is personal to her. On all the modern cases, which are legion, it ranks as a contractual licence, and not a tenancy. What is the status of such a licence as this? There are a number of cases in the books in which a similar right has been given. They show that a right to occupy for life, arising by contract, gives to the occupier an equitable interest in the land: just as it does when it arises under a settlement: see In re Carne's Settled Estates [1899] 1 Ch 324 and in Re Boyer's Settled Estates [1916] 2 Ch 404. The courts of equity will not allow the landlord to turn the occupier out in breach of the contract: see Foster v Robinson [1951] 1 KB 149, 156; nor will they allow a purchaser to turn her out if he bought with knowledge of her right …”

Secondly, on the footing that that is not in itself sufficient, still, in my judgment, this is a case in which one is entitled to look at the realities of the situation and to pierce the corporate veil. I wish to safeguard myself by saying that so far as this ground is concerned, I am relying on the facts of this particular case. I would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil, but in this case the two subsidiaries were both wholly owned; further, they had no separate business operations whatsoever; thirdly, in my judgment, the nature of the question involved is highly relevant, namely, whether the owners of this business have been disturbed in their possession and enjoyment of it.

I find support for this view in a number of cases from which I would make a few brief citations, first from Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352, where Lord Reid said, at p. 367:

“It was argued that the subsidiary companies were separate legal entities each under the control of its own board of directors, that in law the board of the appellant company could not assign any duties to anyone in relation to the management of the subsidiary companies and that therefore the agreement cannot be construed as entitling them to assign any such duties to the respondent.

My Lords, in my judgment this is too technical an argument. This is an agreement in re mercatoria and it must be construed in light of the facts and realities of the situation. The appellant company owned the whole share capital of British Textile Manufacturing Co. Ltd. and under the agreement of 1947 the directors of this company were to be the nominees of the appellants. So, in fact, the appellants could control the internal management of their subsidiary companies, and, in the unlikely event of there being any difficulty, it was only necessary to go through formal procedure in order to make the decision of the appellants' board fully effective.”

That particular passage is, I think, especially cogent having regard to the fact that Mr. Eyre was constrained to admit that in this case, if they had thought of it soon enough, D.H.N. could, as it were, by moving the pieces on their chess board, have put themselves in a position in which the question would have been wholly unarguable.

I also refer to Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324. That was a case under section 210 of the Companies Act 1948, and Viscount Simonds said, at p. 343.

“I do not think that my own views could be stated better than in the late Lord President Cooper's words on the first hearing in this case. ‘In my view,’ he said, ‘the section warrants the court in looking at the business realities of a situation and does not confine them to a narrow legalistic view.’”

My third citation is from the judgment of Danckwerts LJ in Merchandise Transport Ltd v British Transport Commission [1962] 2 QB 173, 206–207 where he said:

“[the cases] show that where the character of a company, or the nature of the persons who control it, is a relevant feature the court will go behind the mere status of the company as a legal entity, and will consider who are the persons as shareholders or even as agents who direct and control the activities of a company which is incapable of doing anything without human assistance.”

The third ground, which I place last because it is longest, but perhaps ought to come first, is that in my judgment, in truth, D.H.N. were the equitable owners of the property. In order to resolve this matter, it will be necessary for me to refer in some detail to the facts.

When the three original companies had amalgamated by causing D.H.N. to be incorporated and assigning their businesses to that company, it was necessary to obtain outside financial assistance so that suitable new premises could be acquired. Short-term finance was arranged with the Palestine British Bank (later called the Israel British Bank), and the terms of the arrangements which were made are set out in a letter dated December 2, 1963. It was written by D.H.N.'s accountants to the managing director of the bank and confirmed by him by endorsed written note the next day. It is headed in the matter of the three original companies, but I think it is clear it must be treated as embodying an agreement between the bank and D.H.N.

It provided that the bank should buy the property and sell it to the group, meaning, as I have said, D.H.N., for £120,000, of which £20,000 was to be paid on exchange of contracts between the bank and the group. The group was to have one year after completion of the bank's purchase in which to complete the subcontract and were to pay interest on the balance of the purchase money £100,000, in the meantime at 12 per cent. There was also a provision giving the bank an option to acquire an equity interest in the group, but nothing turns on that as it was not exercised. Finally, the letter said:

“It is understood that the group will be permitted full and exclusive use and enjoyment of the said property as from the date of your own completion with the vendors.”

The premises were bought for £115,000 and transferred to Bronze, a then wholly owned and inactive subsidiary of the bank. Bronze were duly registered at Her Majesty's Land Registry on March 12, 1964, as proprietors of the freehold interest. On May 27, 1964, they entered into a contract (which I will call the resale contract) whereby they agreed to sell to D.H.N. for £120,000, and D.H.N. duly paid £20,000 as a deposit to the bank as stakeholders.

Pursuant to the original agreement, the resale contract provided for completion on January 6, 1965, being in fact one year after the transfer to Bronze. A caution to protect the resale contract was duly entered on the register, and D.H.N. were at once let into possession and began to carry on their new business, which flourished extremely well. So far, all in accordance with the letter of December 2.

It seems that D.H.N. needed more time to arrange permanent finance, and, therefore, by a further agreement of December 14, 1964, made between Bronze and D.H.N., in consideration of a further payment of £1,150 which D.H. N. made to Bronze, the date for completion of the resale contract was postponed to January 6, 1966, and interest was reduced from 12 per cent to 10 per cent.

By December 1965 D.H.N. had managed to borrow £110,000 from Credit for Industry Ltd., but at this stage, possibly taking up a suggestion which the bank itself had made on December 6, 1963, it was decided that in order to save a second lot of stamp duty on the conveyance by Bronze to D.H.N., the latter should buy the shares in Bronze from the bank.

Those proposals were set out in a letter dated December 17, 1965, from D.H.N.'s solicitors to D.H.N.'s accountants. That letter reads as follows:

“Bronze Investments Ltd. bought the property in January 1964 for the sum of £115,000. D.H.N. entered into a contract to buy the property from Bronze Investments Ltd. for £120,000. It is now intended that, in order to obviate stamp duties so far as possible, D.H.N. should buy the issued share capital of Bronze Investments Ltd. and the shareholders of Bronze Investments Ltd. are agreeable in principle.

They have suggested that since Bronze Investments Ltd. is selling for £5,000 more than it paid, the consideration for the shares of Bronze Investments Ltd. should be £5,000. They state that Bronze Investments Ltd. is indebted to Israel British Bank Ltd. for the amount of the purchase money, namely £115,000.

D.H.N. have paid a deposit of £20,000 and are, as you know, obtaining a mortgage advance of £100,000 from Credit for Industry Ltd. It is suggested, therefore, that of the £20,000 deposit now held by Israel British Bank Ltd., £5,000 should be applied towards the purchase of the shares of Bronze Investments Ltd. and the balance towards discharging the indebtedness of that company to Israel British Bank Ltd. The mortgage advance coming from Credit for Industry Ltd. would then be applied entirely towards discharging the remaining part of the moneys due from Bronze Investments Ltd.”

Then on February 8, 1966, there was a further agreement between the bank and D.H.N. under which, first, the bank agreed to sell the shares in Bronze to D.H.N., not for £5,000, but for £3,597 5s How this particular figure was arrived at I do not know, but no matter. Secondly, D.H.N. undertook that on completion, Bronze would pay £116,402 15s to the bank, making a total, with the £3,597 5s, of £120,000. The sum of £116,402 15s was, in clause 6 of the agreement, described as “being the amount loaned to the company” — that is Bronze — “by the vendor” — that is, the bank. The bank warranted and declared that on receipt of the sum, it would have no further claim against the company or the purchaser on any account whatsoever.

On the same day, February 8, 1966, D.H.N. borrowed the £110,000 from Credit for Industry Ltd., and D.H.N. and Bronze concurred to mortgage the freehold to secure repayment. It is clear from that mortgage, and is the fact, that D.H.N., not Bronze, borrowed this money, and it was utilised to pay the bank for the shares and the £116,400 odd, less credit for the £20,000, already held by the bank.

Mr. Eyre, for the acquiring authority, takes his stand on that agreement of February 8, 1966. He says it is the only, or at any rate, the most cogent, evidence of what the relevant transaction was, and he says: “There we have the bank and D.H.N. solemnly declaring and agreeing that what happened was that the bank lent the money to Bronze to enable it to purchase for its own benefit; that the relationship between the bank and Bronze was simply that of creditor and debtor; and when D.H.N. paid off the Bronze liability of £116,400 odd, that was either a voluntary payment, which gave it no rights — but that did not matter because it also bought all the shares — or was a payment which subrogated D.H.N. to the bank's rights against Bronze as a creditor.” If this was an action on that agreement, there might well be an estoppel, but it is not, and I do not see anything to prevent D.H.N. asserting, and this court accepting, if it be satisfied, that the agreement of February 8, 1966, and the letter of December 17, 1965, both misstated the position.

In my judgment, that agreement and letter are not the only, or even the most cogent, evidence of the original transaction, since we have the letter of December 2, 1963, which I have read, which is the fons et origo of the whole matter, and that clearly provided that the bank were going to be the purchasers.

Then the letter four days later is not without interest. In that letter the bank itself proposed an entirely different arrangement, namely, that D. H.N. should form a new company and mortgage the shares to the bank. That was never implemented in any shape or form, but the bank there referred to “our nominee company,” clearly Bronze, and suggested that the security should be taken in its name, plainly as nominee. That stamps the character of Bronze.

Pausing there, I would have thought the clear inference was that when the property was purchased, the bank was carrying out the original agreement of December 2/3, save only that, as it had the right to do, it caused the property to be conveyed to a nominee. If so, there was clearly a resulting trust situation and Bronze held in trust for the bank. I do not think it would be a correct inference that Bronze borrowed the money from the bank and bought the property for its own use and benefit.

Then it was argued that, if that were so, Bronze could not have entered into the resale contract because the bank would have been a necessary party, but I do not agree. There was nothing to prevent Bronze entering into that contract with the approval of its beneficiary, which it clearly had, because that was the original agreement. As in all the circumstances D.H.N. would have constructive notice of the trust, the bank would no doubt have been a necessary party to the conveyance had the contract not been rescinded; but that is purely a conveyancing matter.

Then came the admittedly important letter of December 17, and the contract of February 8, 1966, but it is to be observed that the contract is in any event inaccurate, because it did not provide what was to happen to the £20,000 which was held by the bank as stakeholders. That sum, of course, became repayable to D.H.N. when the contract was rescinded, and was no doubt used towards paying the total of £120,000 but the contract should have dealt with this.

Much more seriously, however, on Mr. Eyre's hypothesis, that contract was wrong in substance. If Bronze had borrowed the money to buy the property. It borrowed £115,000 and no more, and that was the sum which fell to be repaid, not £116,402 15s Even if the bank had chosen for some reason or other to give credit against the loan for the purchase price of the shares, the £3,597 5s would have fallen to be deducted from £115,000. not £120,000.

It is clear that what the parties were seeking to do was to give effect to the original agreement in a substituted form. The bank was to have the £120,000, which it would have got under the resale contract, in return for which, instead of conveying the property, it was to transfer the shares and release its equitable interest. The way in which the contract of February 8, 1966, was drawn was, of course, inconsistent with any original resulting trust in favour of the bank, but the substance of the transaction was entirely consistent with it. It went wrong at this stage, as I think, because the solicitors and accountants in the letter of December 17, 1965, failed to appreciate the true position.

Mr. Eyre argued that if D.H.N. had intended to get in an outstanding equitable interest, it would have been easy to say so. Of course it would, and, but for the mistake, no doubt that is what would have been done, but if Bronze borrowed the money, it borrowed £115,000. Why then did D.H.N. pay £120,000? I understand Mr. Eyre conceded that if one could go behind the letter of December 17, 1965, and the agreement of February 8, 1966, and if one found, as I do, an initial relationship between Bronze and the bank of trustee and cestui que trust, not debtor and creditor, the result would be that D.H.N. acquired the bank's equitable interest. Even if not conceded, it seems to me to follow. True, there was no writing, such as is required under section 53 of the Law of Property Act 1925 for the assignment of an equitable interest in land, but this was not a gift. D.H.N. were purchasers. On my hypothesis, they paid the £120,000 to acquire the whole of the bank's interest in the property, and the bank intended to dispose of it. Then D.H.N. would be entitled to call for a proper written assignment, and that would be enough, just as if they had been purchasers under an uncompleted contract to purchase the property itself. Even if clause 6 of the agreement of February 8, 1966, operated as a release to Bronze of the bank's equitable interest, it would not merge because the price had been paid by D.H.N., and Bronze would hold it on a resulting trust for D.H.N.

In my judgment, therefore, for those reasons, the claimants are right in saying that in truth Bronze held the premises in trust for D.H.N. In my judgment, therefore, the appeal succeeds on each of these three grounds.

Shaw LJ concurred with both judgments, and concluded with the following.

'Why then should this relationship be ignored in a situation in which to do so does not prevent abuse but would on the contrary result in what appears to be a denial of justice? If the strict legal differentiation between the two entities of parent and subsidiary must, even on the special facts of this case, be observed, the common factors in their identities must at the lowest demonstrate that the occupation of D.H.N. would and could never be determined without the consent of D.H.N. itself. If it was a licence at will, it was at the will of the licensee, D.H.N., that the licence subsisted. Accordingly, it could have gone on for an indeterminate time; that is to say, so long as the relationship of parent and subsidiary continued, which means for practical purposes for as long as D.H.N. wished to remain in the property for the purposes of its business.

The President of the Lands Tribunal took a strict legalistic view of the respective positions of the companies concerned. It appears to me that it was too strict in its application to the facts of this case, which are, as I have said, of a very special character, for it ignored the realities of the respective roles which the companies filled. I would allow the appeal'.

[Observations: Denning applied a single economic unit theory whereby the court examines the overall business operation as a single economic unit, rather than in strict legal form, because not to do so would be a denial of justice. This case is distinguished from others, save for Woolfson v Strathsclyde. There was no fraud in this case. There was a lifting of the corporate veil on the basis that all three limited companies were owned and controlled by the same people and carried out aspects of the same legitimate business (i.e. groceries/fruit and veg)]

Woolfson v Strathclyde Regional Council [1978] UKHL 5

A bridal clothing shop was compulsorily purchased by the council. The business itself was run by Campbell Limited, and ownership of the properties in which the business was run, was in five units. Solfred Holdings Limited owned two units, and Woolfson owned the remaining three units. Woolfson owned 99% of Campbell Limited, and around two-thirds of Solfred Holdings Limited.

In addition to Campbell claiming statutory compensation from the council, Woolfson and Solfred Holdings sought further compensation relying upon the single economic unit theory developed by Lord Justice Denning in DHN. This case was distinguished from DHN v Tower Hamlets because it was not all owned and controlled by one person. There were other investors involved, unlike with DHN where everything was owned and controlled by one person.

Lord Keith stated:

‘One situation where the veil could be lifted was whether there are special circumstances indicating that the company is a mere façade concealing the true facts’.

[Observations: The single economic unit theory was suppressed in favour of a façade test to lift the corporate veil. The business interests were not entirely controlled and owned by one person. No such façade appeared in this case to enable lifting the corporate veil]

Adams v Cape Industries CA [1990] Ch 433:

Cape was a UK company. It had a subsidiary company in South Africa which mined asbestos, and then supplied asbestos through NAAC to another company in Texas. Employees of NAAC became ill with asbestosis and sought to sue Cape on the basis that it was a single economic unit, and that the subsidiaries were a façade.

Here, we have a case where both principles were argued namely the façade test and the single economic unit theory.

Slade LJ: ‘save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon… merely because it considers that justice so requires.’ On the test of the ‘mere façade’, it was emphasised that the motive was relevant whenever such a sham or cloak is alleged, as in Jones v Lipman.

Slade LJ also observed that historically the ruling in Salomon had been circumvented to allow justice of the case to prevail. They were merely instances where the courts didn’t know what to do to pierce the corporate veil.

[Observations: This case further suppressed the arguments to overlook the strict legal form because justice required it. It denounced further the single economic unit theory, and possibly developed further the façade test. ‘motive was relevant’ A business set up for fraudulent purposes, or where it is established to avoid an existing obligation, are grounds to pierce the corporate veil. So a limited company set up purely to defraud or to evade or escape obligations, could have its veil pierced. The case by inference suggests that a business which was set up legitimately, but then turned to fraud, is not sufficient to pierce the corporate veil]

Trustor AB v Smallbone (No2) [2001]

Smallbone was Director of Trustor. Smallbone transferred money to a new limited company that he formed, and which he owned and controlled.

Again the observations were that the corporate veil cannot be lifted merely because justice requires it. Impropriety was also not enough, but where the limited company was used as a device or façade to conceal the true facts, the corporate veil could be lifted.

[Observations: Justice of the case cannot be a door to lift the corporate veil. The façade test being developed further, but clearly in this case, Smallbone’s new limited company was set up in male fides. The motive was that the new limited company was set up purely for deceptive purposes]

VTB Capital Plc v Nutritek International Corporation [2013] UKSC 5

The facts are complicated…Nutritek was selling dairy companies to Russagrooprom LLC. VTB advanced a loan of $225 million to Russagrooprom to buy the dairy companies based on the value of the dairies fraudulently represented by the Director of Nutritek and Nutritek. Only $40 million was recovered, and the remainder of the loan was unpaid. VTB sought to lift the corporate veil to pursue the Director personally in the UK, rather than in Russia.

All of the above cases were considered in order to confirm the doctrine of lifting the corporate veil.

 Lord Neuberger said:

120. We were referred to a number of cases where courts have either granted relief on the basis of piercing the corporate veil, or where courts have proceeded on the assumption, or concluded, that there is power to do so. The only case in that connection in the House of Lords, or Supreme Court, to which we were referred, was Woolfson v Strathclyde Regional Council 1978 SLT 159, a case where, on the facts, the House of Lords had no difficulty in rejecting an argument that the corporate veil could be pierced. At 1978 SLT 159, 161, Lord Keith suggested that the court could only take such a course "where special circumstances exist indicating that [the involvement of the company] is a mere façade concealing the true facts".

[...]

122. The starting point for the argument that the principle does not exist is the well known decision in Salomon v A Salomon & Co Ltd [1897] AC 22. There is great force in the argument that that case represented an early attempt to pierce the veil of incorporation, and it failed, pursuant to a unanimous decision of the House of Lords, not on the facts, but as a matter of principle. Thus, at 30-31, Lord Halsbury LC said that a "legally incorporated" company "must be treated like any other independent person with its rights and liabilities appropriate to itself …, whatever may have been the ideas or schemes of those who brought it into existence". He added that it was "impossible to say at the same time that there is a company and there is not."

123. The notion that there is no principled basis upon which it can be said that one can pierce the veil of incorporation receives some support from the fact that the precise nature, basis and meaning of the principle are all somewhat obscure, as are the precise nature of circumstances in which the principle can apply. Clarke J in The Tjaskemolen [1997] 2 Lloyd's Rep 465, 471 rightly said that "[t]he cases have not worked out what is meant by 'piercing the corporate veil'. It may not always mean the same thing" (and to the same effect, see Palmer's Company Law, para 2.1533). Munby J in Ben Hashem seems to have seen the principle as a remedial one, whereas Sir Andrew Morritt V-C in Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177 appears to have treated the principle as triggered by the finding of a "façade".

124. The "façade" mentioned by Lord Keith is often regarded as something of a touchstone in the cases – e.g. per Munby J in Ben Hashem, para 164, and per Sir Andrew Morritt V-C in Trustor, para 23. Words such as "façade", and other expressions found in the cases, such as "the true facts", "sham", "mask", "cloak", "device", or "puppet" may be useful metaphors. However, such pejorative expressions are often dangerous, as they risk assisting moral indignation to triumph over legal principle, and, while they may enable the court to arrive at a result which seems fair in the case in question, they can also risk causing confusion and uncertainty in the law. The difficulty which Diplock LJ expressed in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802, as to the precise meaning of "sham" in connection with contracts, may be equally applicable to an expression such as "façade".

125. Mr Lazarus argued that in all, or at least almost all, the cases where the principle was actually applied, it was either common ground that the principle existed (Gilford Motor Co Ltd v Horne [1933] Ch 935, Re H (restraint order: realisable property) [1996] 2 BCLC 500, and Trustor) and/or the result achieved by piercing the veil of incorporation could have been achieved by a less controversial route - for instance, through the law of agency (In re Darby, Ex p Brougham [1911] 1 KB 95, Gilford, and Jones v Lipman [1962] 1 WLR 832), through statutory interpretation (Daimler Company Ltd v Continental Tyre and Rubber Company (Great Britain) Ltd [1916] 2 AC 307, Merchandise Transport Ltd v British Transport Commission [1962] 2 QB 173, Wood Preservation Ltd v Prior [1969] 1 WLR 1077, and Re A Company [1985] BCLC 333), or on the basis that, as stated by Lord Goff in Goss v Chilcott [1996] AC 788, 798, money due to an individual which he directs to his company is treated as received by him (Gencor ACP Ltd v Dalby [2000] 2 BCLC 734, and Trustor).

126. In summary, therefore, the case for Mr Malofeev is that piercing the corporate veil is contrary to high authority, inconsistent with principle, and unnecessary to achieve justice.

127. I see the force of this argument, but there are points the other way. I am not convinced that all the cases where the court has pierced the veil can be explained on the basis advanced by Mr Lazarus. Further, as Mr Howard QC said, the fact is that those cases were decided on the basis of piercing the veil. More generally, it may be right for the law to permit the veil to be pierced in certain circumstances in order to defeat injustice. In addition, there are other cases, notably Adams v Cape Industries plc [1990] Ch 433, where the principle was held to exist (albeit that they include obiter observations and are anyway not binding in this court). It is also difficult to explain the first instance decision in Kensington International Ltd v Republic of the Congo [2005] EWHC 2684 (Comm), [2006] 2 BCLC 296 on any basis other than the principle (but I am not at all sure that the case was rightly decided – see Continental Transfert Technique Ltd v Federal Government of Nigeria [2009] EWHC 2898 (Comm), paras 27-29). Further, the existence of the principle is accepted by all the leading textbooks – see Palmer op. cit, Gore-Browne on Companies at paras 7[3] to 7[6], Gower and Davies on Principles of Modern Company Law (8th ed) at paras 8-5 to 8-14, and Farrar's Company Law (4th ed), pp 69-78.

[...]

129. In its recent decision in La Générale des Carrières et des Mines v F G Hemisphere Associates LLC [2012] UKPC 27, para 24, the Judicial Committee of the Privy Council, in a judgment given by Lord Mance, was prepared to assume that the appellant was right in contending that it was open to a court in this jurisdiction to pierce the corporate veil, but it is to be noted that this was not challenged by the respondent'.

[Observations: The ulterior motives behind lifting the corporate veil in this case, appear to be bringing this case within the jurisdiction of England and Wales rather than for the matter to be tried in Russia. Fraudulent misrepresentation was not the initial basis upon which this case was brought, but the argument developed that way. The company in this case was legitimate, and not created for fraudulent purposes]

Prest v Petrodel Resources Limited [2013] UKSC 34

This is a family law case. A highly significant one in which the family courts had developed their own view of treatment of family-owned limited companies, having regard to Section 25 of the Matrimonial Causes Act 1973.

In the court of first instance, Mr Justice Moylan allowed piercing of the corporate veil on the following principles:

·     Ownership and control are important but not sufficient to pierce the corporate veil.

·     Piercing the corporate veil cant be done just because it is necessary in the interests of justice.

·     The veil can only be pierced if there is impropriety.

·     Impropriety must be linked to the use of the company structure to avoid or conceal liability.

·     To pierce the veil, control and impropriety together must be demonstrated.

·     A company may be a façade even though originally it was incorporated without deceptive intent.

The Court of Appeal rejected that judgment.

The Supreme Court upheld the position of the Court of Appeal in not allowing the corporate veil to be lifted:

Lord Sumption:

Piercing the corporate veil

'16. I should first of all draw attention to the limited sense in which this issue arises at all. "Piercing the corporate veil" is an expression rather indiscriminately used to describe a number of different things. Properly speaking, it means disregarding the separate personality of the company. There is a range of situations in which the law attributes the acts or property of a company to those who control it, without disregarding its separate legal personality. The controller may be personally liable, generally in addition to the company, for something that he has done as its agent or as a joint actor. Property legally vested in a company may belong beneficially to the controller, if the arrangements in relation to the property are such as to make the company its controller's nominee or trustee for that purpose. For specific statutory purposes, a company's legal responsibility may be engaged by the acts or business of an associated company. Examples are the provisions of the Companies Acts governing group accounts or the rules governing infringements of competition law by "firms", which may include groups of companies conducting the relevant business as an economic unit. Equitable remedies, such as an injunction or specific performance may be available to compel the controller whose personal legal responsibility is engaged to exercise his control in a particular way. But when we speak of piercing the corporate veil, we are not (or should not be) speaking of any of these situations, but only of those cases which are true exceptions to the rule in Salomon v A Salomon & Co Ltd,[13] i.e. where a person who owns and controls a company is said in certain circumstances to be identified with it in law by virtue of that ownership and control.

17. Most advanced legal systems recognise corporate legal personality while acknowledging some limits to its logical implications. In civil law jurisdictions, the juridical basis of the exceptions is generally the concept of abuse of rights, to which the International Court of Justice was referring in In re Barcelona Traction, Light and Power Co Ltd[14] when it derived from municipal law a limited principle permitting the piercing of the corporate veil in cases of misuse, fraud, malfeasance or evasion of legal obligations. These examples illustrate the breadth, at least as a matter of legal theory, of the concept of abuse of rights, which extends not just to the illegal and improper invocation of a right but to its use for some purpose collateral to that for which it exists.

18. English law has no general doctrine of this kind. But it has a variety of specific principles which achieve the same result in some cases. One of these principles is that the law defines the incidents of most legal relationships between persons (natural or artificial) on the fundamental assumption that their dealings are honest. The same legal incidents will not necessarily apply if they are not. The principle was stated in its most absolute form by Denning LJ in a famous dictum in Lazarus Estates Ltd v Beasley:[15]

"No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all transactions whatsoever…"

The principle is mainly familiar in the context of contracts and other consensual arrangements, in which the effect of fraud is to vitiate consent so that the transaction becomes voidable ab initio. But it has been applied altogether more generally, in cases which can be rationalised only on grounds of public policy, for example to justify setting aside a public act such as a judgment, which is in no sense consensual, a jurisdiction which has existed since at least 1775.[16] Or to abrogate a right derived from a legal status, such as marriage.[17] Or to disapply a statutory time bar which on the face of the statute applies.[18] These decisions (and there are others) illustrate a broader principle governing cases in which the benefit of some apparently absolute legal principle has been obtained by dishonesty. The authorities show that there are limited circumstances in which the law treats the use of a company as a means of evading the law as dishonest for this purpose.

[...]

34. These considerations reflect the broader principle that the corporate veil may be pierced only to prevent the abuse of corporate legal personality. It may be an abuse of the separate legal personality of a company to use it to evade the law or to frustrate its enforcement. It is not an abuse to cause a legal liability to be incurred by the company in the first place. It is not an abuse to rely upon the fact (if it is a fact) that a liability is not the controller's because it is the company's. On the contrary, that is what incorporation is all about....

35. I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil.

[...]

52. Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. But I venture to suggest, however tentatively, that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company. In many, perhaps most cases, the occupation of the company's property as the matrimonial home of its controller will not be easily justified in the company's interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company's beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband's beneficial ownership.

Lord Neuberger emphasised that piercing the corporate veil should be the last resort. He noted that in other Commonwealth countries there was also little consensus.[19] In Australia, "there is no common, unifying principle, which underlies the occasional decision of courts to pierce the corporate veil", and that "there is no principled approach to be derived from the authorities".[20] In Canada, "[t]he law on when a court may … '[lift] the corporate veil' … follows no consistent principle".[21] In New Zealand, "'to lift the corporate veil' … is not a principle. It describes the process, but provides no guidance as to when it can be used."[22] In South Africa, "[t]he law is far from settled with regard to the circumstances in which it would be permissible to pierce the corporate veil".[23]Similar confusion was also noted in US corporate law and in academic reviews.[24] In conclusion he said the following.

83. It is only right to acknowledge that this limited doctrine may not, on analysis, be limited to piercing the corporate veil. However, there are three points to be made about that formulation. In so far as it is based on "fraud unravels everything", as discussed by Lord Sumption in para 18, the formulation simply involves the invocation of a well-established principle, which exists independently of the doctrine. In any event, the formulation is not, on analysis, a statement about piercing the corporate veil at all. Thus, it would presumably apply equally to a person who transfers assets to a spouse or civil partner, rather than to a company. Further, at least in some cases where it may be relied on, it could probably be analysed as being based on agency or trusteeship especially in the light of the words "under his control". However, if either or both those points were correct, it would not undermine Lord Sumption's characterisation of the doctrine: it would, if anything, serve to confirm the existence of the doctrine, albeit as an aspect of a more conventional principle. And if the formulation is intended to go wider than the application of "fraud unravels everything", it seems to me questionable whether it would be right for the court to take the course of arrogating to itself the right to step in and undo transactions, save where there is a well-established and principled ground for doing so. Such a course is, I would have thought, at least normally, a matter for the legislature....

Lady Hale gave a judgment concurring in the result, with which Lord Wilson agreed, though added a qualification to Lord Sumption's decision.

92. I am not sure whether it is possible to classify all of the cases in which the courts have been or should be prepared to disregard the separate legal personality of a company neatly into cases of either concealment or evasion. They may simply be examples of the principle that the individuals who operate limited companies should not be allowed to take unconscionable advantage of the people with whom they do business. But what the cases do have in common is that the separate legal personality is being disregarded in order to obtain a remedy against someone other than the company in respect of a liability which would otherwise be that of the company alone (if it existed at all). In the converse case, where it is sought to convert the personal liability of the owner or controller into a liability of the company, it is usually more appropriate to rely upon the concepts of agency and of the "directing mind".

93. What we have in this case is a desire to disregard the separate legal personality of the companies in order to impose upon the companies a liability which can only be that of the husband personally. This is not a liability under the general law, for example for breach of contract. It is a very specific statutory power to order one spouse to transfer property to which he is legally entitled to the other spouse. The argument is that that is a power which can, because the husband owns and controls these companies, be exercised against the companies themselves. I find it difficult to understand how that can be done unless the company is a mere nominee holding the property on trust for the husband, as we have found to be the case with the properties in issue here. I would be surprised if that were not often the case'.

Lord Mance emphasised that future possible situations where the veil could be pierced should not be foreclosed.

Lord Clarke concurred. He agreed that Munby J in Ben Hashem v Al Shayif[25] was correct that the veil could only be pierced where all other possibilities were exhausted. Also as he said in VTB Capital plc v Nutritek International Corp[26] it is wrong to foreclose all future possibilities of piercing the veil.

Lord Walker said he welcomed "the full discussion in the judgments of Lord Neuberger, Lady Hale, Lord Mance and Lord Sumption" and concluded with the following:

'106. ... for my part I consider that ‘piercing the corporate veil’ is not a doctrine at all... It is simply a label... to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a body corporate... These may result from a statutory provision, or from joint liability in tort, or from the law of unjust enrichment, or from principles of equity and the law of trusts'...

Conclusions:

The law is not settled in this matter, but the current thinking is that either a company is limited or it is not: The original observation in Salomon.

The law should not allow or permit a company created for the purposes of fraud or deceit, as an illegal and illegitimate business to enjoy the protection of the veil of limited liability.

A company which starts legitimately, but the Directors/shareholders then deviate and take a course into dishonesty or other fraudulent activity, is more problematic.

The courts consider that lifting the corporate veil should be an option of last resort. There are other ways of flanking the corporate veil. Why try and lift it, when you can possibly side-step the issue through tort, and other remedies available through Insolvency laws.

Other remedies available: Why pierce the corporate veil at all? Why not simply adopt a flanking manoeuvre?

Insolvency Act allows a Liquidator to pursue a Director personally for debts owed or monies taken or misdirected. In this situation, the Liquidator stands in the shoes and controls the company. There is no need to lift the corporate veil. Rather, assume control of the limited company, and pursue wrongdoing through the Insolvency Act 1986.

Section 212 misfeasance

Section 213 fraudulent trading

Section 214 wrongful trading

Tort: Lubbe v Cape Plc [2000] UKHL 41

A defendant brought a case in tort against Cape for personal injury caused by handling of asbestos.

Lord Bingham:

‘20. The issues in the present cases fall into two segments. The first segment concerns the responsibility of the defendant as a parent company for ensuring the observance of proper standards of health and safety by its overseas subsidiaries. Resolution of this issue will be likely to involve an inquiry into what part the defendant played in controlling the operations of the group, what its directors and employees knew or ought to have known, what action was taken and not taken, whether the defendant owed a duty of care to employees of group companies overseas and whether, if so, that duty was broken. Much of the evidence material to this inquiry would, in the ordinary way, be documentary and much of it would be found in the offices of the parent company, including minutes of meetings, reports by directors and employees on visits overseas and correspondence.

21. The second segment of the cases involves the personal injury issues relevant to each individual: diagnosis, prognosis, causation (including the contribution made to a plaintiff's condition by any sources of contamination for which the defendant was not responsible) and special damage. Investigation of these issues would necessarily involve the evidence and medical examination of each plaintiff and an inquiry into the conditions in which that plaintiff worked or lived and the period for which he did so. Where the claim is made on behalf of a deceased person the inquiry would be essentially the same, although probably more difficult’.

Phoenix fraud:

Section 216 Insolvency Act. If company A ceases to trade/goes into liquidation etc…and company A1 continues to trade with the same name, directors and shareholders, having been set up within 12 months of company A, it may be considered a phoenix fraud, and criminal sanctions could apply including a fine and/or imprisonment.

The reason is that if company A has creditors who have not been paid, those creditors are only owed money by company A as a separate legal entity, and their debts are consolidated within the liquidation of company A. How is it fair then, that Directors and shareholders can just dump that debt, and then start afresh with a clean sheet as company A1 a company with the same directors and shareholders and the same, or a similar name?

The above is a non-exhaustive list of other options to flank lifting the corporate veil.

Professor David Rosen is a solicitor-advocate, partner and head of litigation at Darlingtons Solicitors LLP. He has memberships with the Society of Legal Scholars, the ACFE, and RUSI amongst others. He is an honorary Professor of Law at Brunel University where he regularly lectures in counter-fraud and counter-corruption amongst other subjects.