Company Law Piercing the Corporate Veil

1. Piercing the Corporate Veil
Company Law

2. Separate Legal Personality.
 The seminal case which established the concept of
the registered company being a separate legal
personality is Salomon v Salomon & Company
(1897).
 Disregarding separate legal personality is called
‘lifting the corporate veil’
 There are four situations in which court will look
behind corporate form.
 Statutory exceptions.
 Misuse of corporate form.
 Agency.
 Single economic entity.

3. Salomon v Salomon & Company
 Mr Salomon ran a successful leather business as a sole trader.
Set up a company and company law was observed at all times.
 Issue- whether his secured debt of £10,000 should take
precedent over unsecured creditors.
 Three Courts – 1.Court of first instance accepted the creditors
view notion was company was his nominee or agent. 2. Court of
Appeal held the creditors should be paid by Mr Salomon ‘abused
privileges of incorporation should only be enjoyed by bona fide
shareholders who had a mind and will of their own and were not
mere puppets’ 3. House of Lords This view was unanimously
rejected as company was validly incorporated the debts are the
debts of the company McNaughton L.J –’The company is at law
a different person altogether from the subscribers. Same as it
was before, and the same persons are managers, same hands
receive the profits.

4. Statutory Exceptions to Separate
Legal Personality
 Not exhaustive – See Courtney 255 - 265
 Failure to correctly state the company’s name
 Section 114(4) of the 1963 Act provides that where the
correct and full registered name of the company does
not appear on a cheque or order for money or goods,
the signatory will be personally liable to pay. –
Remember how important the name on the cheque was
in Quigley Meats!
 Failure to keep proper records
 Section 202 of CA 1990 requires every company to keep
proper books of account – if they don’t and the failure
contributes to companies inability to pay debts, creates
uncertainty as to assets and liabilities of company or
impedes orderly winding up – officers of the company
can be held liable personally for debts.

5. Case Law
 Farrar v Farrar’s Limited (1888) “A sale by a
person to a corporation of which he is a member
is not either in form or substance a sale by a
person to himself”
 Macaura v Northern Assurance Company 1925
–Timber owned by Plaintiff he sold it to a
company in exchange for all the share capital.
BUT timber was insured in his personal name not
in the company’s name. OOPS!!! Destroyed by
fire and the court found in favour of the defendant
the insurance co and followed Salomon

6. Case Law
 O’ Neill v Ryan (1993) – Plaintiff alleged that
breaches in competition law by the 4 defs caused
drop in share price in Ryanair Ltd. Supreme Court
held this did not cause a personal loss to the
plaintiff as a shareholder BUT it was held that
such a loss is merely a reflection of the loss
suffered by the company –shareholder does not
suffer any personal loss
 Prudential Assurance company Ltd. v
Newman Industries Ltd 1982 “Plaintiff shares
are merely a right of participation in the company
on the terms of the articles of association’

7. Case Law
 Roundabout Limited v Beirne 1959 –Principle
has been used to avoid obligations. Staff joined a
trade union –controllers of company unwilling to
employ unionised staff. Company closed the pub
and dismissed all of the staff. Staff picketed –
controllers of the pub formed a new company
leased the public house from the first company to
it. Had no employees-new company could not be
classed as an employer would not be subject to
trade dispute. New company sought and were
granted an injunction restraining the strikers

8. Statutory Exceptions to Separate
Legal Personality
 Fraudulent or reckless trading
 Section 297 A of CA 1963 as inserted by s138 of CA 1990,
provides that if , during the course of examinership or winding
up, a person is found guilty of fraudulent or reckless trading
then the court can declare that person responsible for some
or all of company’s debts
 Tax Legislation
 Tax law often includes provisions that attempt to prevent
people from using companies to conceal tax liabilities.
 Criminal Responsibility
 Many regulatory statutes include provisions making officers of
companies personally criminally liable where the company is
shown to have committed an offence – eg Safety, Health and
Welfare at Work Act 1995 and Competition Act 2002

9. Misuse of Corporate Form.
 The courts will not allow the corporate form to be used to avoid legal
obligations.
 Jones v Lipman [1962] 1ALLER 442 The defendant who had contracted
to sell his house to the plaintiff tried to avoid a claim for specific
performance by conveying the house to a company that he controlled.
Russell J rejected a defence based on the company being a separate
entity, describing the company as:
 ‘the creature of the defendant, a device a sham, a mask which he
holds before his face in an attempt to avoid recognition by the eye
of equity.’
 Gilford Motor Company v Horne [1933] Ch 939 The defendant’s
contract of employment with the plaintiff provided that he would not
compete with the plaintiff should his contract be terminated. Upon
termination the defendant set up a company with his son in direct
competition with plaintiff and although he was neither the director of nor
a shareholder in the company – everyone called him ‘boss’. The court
set aside the separate legal personality of the company. (Griffith College
FE1 Manual 2013-2014)

10. Agency or Alter Ego Principle
 Subsidiaries are frequently found to be the agent
of the parent company. Best example is Smith,
Stone and Knight v Birmingham Corporation
1939. The test is based on the control over the
day-to-day operations. Six factors to be
considered:

11. Agency
 Smith, Stone & Knight v Birmingham Corporation
[1939] 4 ALL ER 116.
 A subsidiary of the plaintiff company took over a
waste business carried out by the plaintiff. The
subsidiary was beneficially owned by the plaintiff
company, and was treated in day to day running as a
department of the plaintiff’s business. All of the profits
from the subsidiary went to the plaintiff. When lands
owned by the plaintiff were compulsorily acquired by
Birmingham corporation, the plaintiff successfully
claimed compensation for disturbance to the
subsidiary’s business.
 Court held that the subsidiary was carrying on the
business as agent of the plaintiff.

12. Agency
 Six Factors
 Were the profits of the subsidiary treated as the profits of
the holding company?
 Were the persons who were conducting the business of
the subsidiary appointed by the holding company?
 Was the holding company the ‘head and brains’ of the
subsidiary?
 Did the holding company govern the venture?
 Were the profits made by the subsidiary company made
by the skill and direction of the holding company?
 Was the holding company in effective and constant
control of the subsidiary?
 Atkinson J felt that all 6 questions could be answered
in the plaintiff’s favour.

13. Agency
 Most of Atkinson’s criteria focus on the question of
control.
 If they were applied to every case in which the day-
to-day affairs of a company are controlled by a
member, then most companies would be regarded
as agents of their members
 Separate legal personality would become the
exception rather than the rule.
 However the courts tend to apply the agency
exception only to situations in which the company is
controlled by another company, not when it is
controlled by a natural person.

14. Agency
 Fyffes plc v DCC plc [2009] 2 IR 417 the
 The court reviewed the law and held that one company
could be regarded as the agent of another ‘if to do
otherwise would lead to an injustice. Whether it should
be, depends on whether the inference is factually
justified’
 The court also held that two companies could be treated
as a single economic entity ‘ for the purpose of
preventing the avoidance’ of statutory provisions.
 In this case the companies involved were found neither
to be the agents of one and other or to be a single
economic entity BUT
 Laffoy J held that this was a possibility.

15. Agency and Tax
 An inference of agency between related companies tends to be
readily drawn where there is a possibility of tax evasion
 Firestone Tyre v Llewlelin [1957]
 An American company formed a wholly-owned subsidiary in
England for the purpose of manufacturing tyres and supplying
them to the European market. The English company received
payment for the tyres and after deducting a sum representing 5%
of the payment, transferred the balance to the American
company.
 When the American company was assessed for English tax on
the profits of its business, it sought to avoid liability by claiming
that it was a separate legal person from its subsidiary.
Nevertheless the House of Lords held the English company to be
an agent of the American company on the basis of the actual
manner in which the companies arranged their affairs.

16. Mrs J. Laffoy
 Reviewed the law whereby a company might be
deemed the agent of another. As a matter of law
Lotus Green may be regarded as having acted as
the agent of DCC in relation to the holding and
disposal of the shares in Fyffes, if to do otherwise
would lead to an injustice. She adopted the
proviso that a subsidiary would only be
deemed an agent of its parents where such an
inference was factually justified
 On the facts of the case she did not find that
Lotus Green was an agent of DCC.

17. Single Economic Entity.
 Controversial exception to the Salomon principle
 In 1970s and 1980s courts put forward a justification for
the disregarding of the separate legal personality of related
companies based on ‘the requirements of justice.’
 They regarded related companies as a ‘single economic
entity’
 This is different to the agency exception because it
regards a number of related companies as one legal entity.
The agency exception recognises the existence of two
legal persons.
 Has been employed by Irish courts, received approval in
general terms from the Supreme Court – scope severely
restricted by the English Court of Appeal and more recently
by the Irish Supreme Court.

18. Single Economic Entity
 First accepted by Lord Denning in DHN Food Distributors Limited
v Tower Hamlet London Borough Council [1976] 3 ALL ER 462.
 A holding company conducted business on land owned by one of
its wholly owned subsidiaries. When the Council compulsorily
acquired the land, the holding company entered a claim for
compensation in respect of the disturbance caused to it. The
Court of appeal upheld the claim with Denning holding that the
court could look to the economic entity of the whole group and
treat the business as being carried on by that group.
 [t]his 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.

19. Single Economic Entity
 Lord Denning’s views were adopted in Ireland by Costello J in
Power Supermarkets Ltd v Crumlin Investments Limited &
Dunnes Stores (Crumlin) Limited (UR High Court 1981).
 The issue in this case was whether the first defendant could
avoid liability to the plaintiff on a covenant in a lease of a unit in a
shopping centre to the plaintiff which restricted the use of a part
of the shopping centre. The first defendant sought to avoid
liability by conveying the freehold of a different part of the
shopping centre to the second defendant which was, like the
first defendant controlled by the Dunne family.
 Costello J held that ‘if the justice of the case required’ the court
could treat two or more related companies as a single entity so
that the business carried on by one will be regarded as the
business of the group, or another member of the group.

20. Single Economic Entity
 Allied Irish Coal Supplies v Powell Duffryn
International Fuels Ltd [1998]
 The correct defendant had been sued by the plaintiff but
they later discovered that it had no money and so tried to
add a different, related but less financially challenged
company, as defendant.
 Supreme Court held that were a court to allow such an
application – making the assets of one company within a
group liable for the debts of another – creditors and the
defendant itself would be severely prejudiced.
 Power Supermarkets was distinguished on the basis that
the relevant holding company was a shell – no meetings of
the board or shareholders were ever held and commercial
decisions were not ratified in the normal way.

21. Single Economic Entity
 Adams v Cape Industries PLC [1990] CH 433
 Court of appeal - the defendant was part of a group of
companies and attempted to take advantage of its corporate
structure to reduce the risk that any member of the group
would be subject to US law and thus liable for injury caused by
asbestos.
 The plaintiff argued that it should not be permitted to do this
but should be treated as a single economic entity.
 Court of appeal rejected this argument and approved the
statement of Robert Goff LJ in Bank of Tokyo Ltd Karoon
[1987] AC 45
 ‘Counsel suggested beguilingly that it would be technical for us to
distinguish between parent and subsidiary company in this context;
economically, he said, they were one. But we are concerned not with
economics but with law. The distinction between the two is, in law,
fundamental and cannot here be bridged.

22. Single Economic Entity
 Adams v Cape Industries PLC [1990] CH 433
 The court of appeal held that the restructuring of the
group had not been done to deprive anyone of their
existing rights and there was no actual or potential
illegality.
 Carrying out changes in the corporate structure in order
to deprive third parties of future relief was permissible
and would not result in the corporate veil being lifted.
 Counsel for the plaintiffs urged on us that the purpose of the
operation was in substance that Cape would have the practical
benefit of the group’s asbestos trade in the United States,
without the risk of tortious liability. This may be so. However, in
our judgment, Cape was in law entitled to organise the group’s
affairs in that manner and ...to expect that the court would
apply the principle of Salomon in the ordinary way.

23. Single economic entity?
 So what is the position of the single economic entity
exception to Salomon?
 Power Supermarkets allowed it ‘justice of the case’
 Allied Irish Coal Suppliers rejected it – Costello J-
subsidiaries ‘whether wholly or partially owned or
controlled by the parent are a well established feature of
our company law’
 Adams v Cape Industries – English decision – rejected it
 Court will not pierce the veil because of who owns or
controls the company.
 Cannot pierce the veil ‘in the interests of justice’
 Court may pierce the veil if there is some evidence of
impropriety