Lifting the Corporate Veil: An Unpredictable Practice - Coursework Example

?Lifting the Corporate Veil: An Unpredictable Practice? The decision of Salomon1 brought important and landmark ments such as “the company is exhypothesi a distinct legal personal”.2 The dicta of Salomon brought a large amount of novel consequences. More significantly, the House of Lords enshrined the notion that the company exists as a separate entity from its members – the company therefore took on its own personality, capable of being sued and of taking legal action,3 of entering into contracts, of owning its own property, and of making profits and suffering losses. In addition, the Salomon decision entrenched the notion of advantageous benefits which are granted to shareholders in the form of limited liability. The dicta of Salomon has been endlessly restated and quoted in many cases; it appears to exist as an “unyielding rock”4; especially since it has now been incorporated into the Companies Act 20006. The courts have endlessly been faced with circumstances under which certain exceptions to the Salomon rule have been necessary and thus permitted. However, the courts have taken care to retain the power to ignore the Salomon principle in order that its flexibility be preserved and in most cases this has led to the preservation of the corporate veil. The narrow approach which is contained in the Companies Act embodies the view that the company’s rights, property and liabilities belong to the company only. The wider view claims that the company’s members are prohibited from having any effect on or being counted in relation to the legal obligations and obligations of the company.5 The existing statutory exceptions to the lifting of the veil are rather difficult to determine with a great amount of certainty;6 the concept that Salomon is a fundamental principle results in it being set aside with difficulty and even some reluctance on the part of the courts.7 As Lord Diplock claims, the statutory basis of the corporate veil is preserved, so that “any Parliamentary intention to pierce the corporate veil would be expressed in clear and unequivocal language”, however the lack of such clear language could still have the potential to allow the courts to pierce the veil in specific circumstances by way of a “purposive construction’ of Parliament’s intention”.8 However, the case of Tunstall iterates that it is important to remember that the “purposive instruction” must be evident, because it is not readily implied (542). 9 Other additional statutory provisions also provide the opportunity to lift the veil under specific circumstances, such as the taxation of group companies. It is often argued that such provisions do not lift the veil exactly; they instead impose supplementary obligations on subsidiaries and are termed ‘piercing’ the veil rather than ‘lifting’ the veil. Alleged fraud additionally grants the justification to lift the veil – this is indeed understandable. The Insolvency Act 1986 operates to allocate personal liability to directors or shareholders if it appears that the company has been formed for fraudulent activities,10 if evidence of director misconduct is evident, or if the company directors have been negligent by not winding up the company if it has little or no prospect of carrying on. Such provisions contain the potential to be defined and applied broadly, yet the danger of this is arguably small under the circumstances. The existence of such statutory provisions emphasize the major temptation and potential of company members abusing of the corporate veil, and the courts have appropriately recognised and established the need to eliminate as far as necessary this possibility, and thus temptation. In the decision of Merchandise Transport,11 the court declined to retain the corporate personality of the company separate from its members where it had been discovered that the subsidiary company had been formed as a mechanism to avoid specific formalities when acquiring a favourable licence. Additionally, a facade has been revealed where a company had been created to avoid an employment covenant.12 It is not taxing to grasp that the rationale behind the lifting of the veil in such situations is due to suspicions or assumptions that the company has been created in order to avoid some type of legal or technical obligation. One can see and understand clearly the courts’ constant attempt to strike a suitable balance between the principles established in Salomon and unnecessary abuses of those very principles. Some type of dishonesty is therefore required; simple unconscionable conduct is insufficient. Group-structure companies are usually formed as a way of evading certain taxation charges and regulations, as well as liabilities and obligations. Wholly owned subsidiaries are created by a parent company who thus is established as a shareholder with the advantages of limited liability should the subsidiary experience troubles.13 Although Lord Denning has stated that a group of companies are fundamentally a single entity and should therefore be viewed as such ,14 Lord Roskill disagreed, stating that each individual company in a group of companies is “a separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group”.15 Additionally, the House of Lords in its Woolfson v Strathclyde Regional Council [1978] decision disposed of Denning’s decision and held that the corporate veil should only be lifted if the group of companies is an obvious facade. However, Lord Denning’s decision was later reapplied by the Court of Appeal which declared that the corporate veil may be pierced or lifted “if it is necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration”.16 This approach is arguably uncertain and consequently the security which the company seeks is significantly reduced. The law now generally recognises the legitimate function of subsidiary companies. The lifting of the veil has thus been limited to individual, outstanding circumstances in which the court has been faced with the task of interpreting and applying a statutory provision, where a facade is obvious, or where an express or implied agency agreement is manifest. In situations where an agency relationship is discovered, it hence follows that the principal is held responsible for the actions of the agent within the scope of the agency. As a result, the context in which a holding company, if it is discovered to be an agent of a subsidiary company, will justifiably have its veil lifted by the courts.17 It is somewhat necessary to stress that the courts’ willingness to hold that an agency exists is not often major: it could even be described as reluctant. The agency must exist in the form of an express agreement, although the courts enhance the rationale and approach that it is a question of fact as to whether an agency will or can be inferred from the specific circumstances of a case. Once again, one can understand that Salomon operates to instil the principle that simple membership of a company will not be sufficient to render it an agent in every case. Similarly, an agency will not always be inferred as a result of its members’ executable control over it.18 It nonetheless must be stated that the usual discovery of agency for the purposes of lifting the corporate veil is rather rare due to the fact that a business is usually intended to belong to the business rather than a member’s business. The previous cases show that there is no general, all-encompassing set of principles that function and apply to determine when the corporate veil will or will not be lifted. There seem to be apparent no specific, stationary or comprehensive explanations which can be referred to predict with any great degree of certainty when the corporate veil is likely to be lifted and in which specific circumstances the courts will choose to leave it untouched.19 Despite the fact that some situations in which the veil has been lifted or pierced can be characterised by certain occurrences or principles, the courts have also refused to lift the veil in other cases which have similar circumstances. Whether the difficulty in locating such specific criteria can be determined as mere policy does little to define the topic further. It is rather more apt to recognise that the courts will lift the veil in some circumstances and in others it will not – it appears to depend on the circumstances of the case. The courts simply appear to be balancing the preservation of Salomon and the preservation of justice.20 This allows the Salomon principles to be applied appropriately yet flexibly. It is important to understand the power with which the Salomon decision penetrated the company law sphere so long ago.21 It is the closest one can arrive at a valid response to accept that exceptions to the Salomon principle are rare and decided in a controlled manner, with more frequent use as a result of statutory authority. The extremely varied nature of company law often causes a single principle to not be applicable consistently to all circumstances;22 whether this can be termed as being based on policy serves little purpose. References Journals Bainbridge, S.M. 2000, ‘Abolishing Veil Piercing’, UCLA School of Law. Accessed: 19 October 2011. http://papers.ssrn.com/paper.taf?abstract_id=236967 Harris, J. 2005, ‘Lifting The Corporate Veil on the Basis of an Implied Agency: A Re-Evaluation of Smith, Stone and Knight’, Company and Securities Law Journal, vol.23, no.5. Accessed: 18 October 2011. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=870516. Huss, R.J. 2001, ‘Revamping Veil Piercing for All Limited Liability Entities: Forcing the Common Law Doctrine into the Statutory Age’, University of Cincinnati Law Review, vol.70, no.136. Moore, M.T. 2006, ‘A Temple Built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon’, Journal of Business Law, 180, 183. Schwarcz, S.L. 2003, ‘Collapsing Corporate Structures: Resolving the Tension Between Form & Substance’, Public Law Research Paper 41. Accessed 20 October 2011. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=436642. Templeman, Lord 1990, ‘Forty Years On’, Company Law, vol.11, no.10. Books Davies, P.L. 2008, Gower and Davies: Principles of Modern Company Law, 8th edn, Sweet and Maxwell, London. Dignam, A., & Lowry, J. 2006, Company Law, 4th edn., Oxford University Press, New York. Hicks, A., & Goo, S.H. 2004, Cases & Materials on Company Law, 5th edn., Oxford University Press, New York. Hannigan, B. 2003, Company Law, Oxford University Press, New York. Wild, C. & Weinstein, S. 2009, Smith and Keenan’s Company Law, 14th edn., Pearson Education, London. Cases Salomon v Salomon & Co Ltd [1897] AC 22 HL. Dimbleby & sons Ltd v National Union of Journalists [1984] 1 WLR 427 HL. Tunstall v Steigman [1962] 1 QB 593, 542. Merchandise Transport v British Transport Commission (No.1) [1962] 2 QB 173. Creasey v Breachwood Motors Ltd [1993] BCLC 480. Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447. The Albazero [1977] AC 774. Re a Company [1985] 1 WLR 281. DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852. British Thompson-Houston Co Ltd v Sterling Accessories Ltd [1924] 2 Ch 33. Read More