Wallace v Tulsa Yellow Cab Taxi - Essay Example

Wallace v Tulsa Yellow Cab Taxi & Baggage Co (1936) under English Law Wallace v Tulsa Yellow Cab Taxi & Baggage Co 61 P (2d) 645 (1936) is a US case that deals with the doctrine of lifting the veil of incorporation, a doctrine that constitutes an exception to the separate personality doctrine in company law. In this case, the Supreme Court of Oklahoma declared the Respondent liable for the award of damages for personal injury previously adjudicated by a district court to the Complainant against another company, viz. Yellow Cab Service Company, on the ground that the latter is a mere adjunct or instrumentality of the Respondent. To link the Respondent to the Yellow Cab Service Company, the US Court examined the relationships of the two companies. It found that the Respondent deliberately set up Yellow Cab Service Company for the purpose of easily obtaining public liability insurance; that the new company’s lone asset was its lease contract with the Respondent, which the latter can cancel at any time upon a 24-hour notice; all of the stockholders in the new company are employees of the Respondent, and; the money used by the stockholders to buy shares were provided by the majority stockholder of the Respondent, for which demand notes from each were never paid. All the foregoing facts made the Court conclude that the two companies are but just one entity and that the separate doctrine entity must therefore, be set aside. Were the Wallace case brought today before English courts, it is highly unlikely that a similar finding would be reached because present trend in company case law is veering towards reversion to the old Solomon case, which strictly respected the separated personality doctrine. The Court in the Wallace case justified its finding by stressing that the new company is a mere sham or façade company dominated and controlled by the Respondent. However, under English case law on lifting the veil cases, it is not enough that a company was created as a mere façade but it is vital to look beyond and establish the motive of the holding company. In addition, although English courts do acknowledge agency relationships as basis for lifting the veil of incorporation and setting aside the legal fiction of separate entity, they are not likely to hold a parent company, liable for the debts of its subsidiary (Miller p. 2). In the case, for example, of Adams v Cape Industries plc and Another [1990] Ch 433, the Court refused to ascribe liability to a parent company, whose subsidiary had been adjudged liable for a class action suit in a foreign jurisdiction primarily because the Court cannot find illegal motives on the part of the parent company in structuring its subsidiaries. In that case, the English company Cape Industries, which was engaged in asbestos mining and marketing, was named a respondent in a class action by individuals who suffered injuries arising from asbestos installation in a factory in Texas. Named together with Cape Industries were Capasco, its worldwide marketing subsidiary, and NAAC, its marketing subsidiary incorporated in the US. Cape Industries settled the cases brought in 1974, shut down NAAC and reorganised by forming other subsidiaries for the purpose of minimising its tax liabilities in the US. Another round of class actions was brought against it in the US in 1979 but this time Cape Industries did not settle. A judgment of default was handed down by the US court against both Cape and Capasco, but in 1979 Cape sold all its assets in the US. The Complainant Adam went to an English court to enforce the US judgment against Cape. The issue in this case was whether Cape was liable for its subsidiary, which the Court of Appeals answered in the negative. The implication of the Adams case is that the sham or façade company justification for the lifting the veil of incorporation must be underpinned by fraud or illegality, which is not present in the Wallace case. Although the Court acknowledged that Cape Industries did indeed restructure its subsidiaries to minimise its tax liabilities, the same is not proscribe by law and therefore does not justify the setting aside of the doctrine of separate personality. By parallelism, the sham or façade justification cannot be used as a justification to set aside the doctrine in the present case because the courts would then look into the motive of the Respondent as to why it created the Yellow Cab Service and determine its legality or the lack of it. There is nothing in the English law that prohibits one from transferring the conduct of its services to another entity which had better chances of obtaining public liability insurance. Using the Adams case as precedence, the English courts would most likely not find any basis that could justify lifting the veil in the Wallace case. It was reiterated in Woolfson v Strathclyde Regional Council [1978] SLT 159 that the doctrine of separate personality will be set aside by the courts if there is evidence that a sham or façade company is intentionally establish to limit, avoid or manage, in the future, the creating entity’s liabilities. Albeit the Wallace case may qualify for being a case of sham or façade company, it does not totally come within the ambit of the Woolfson doctrine case because the transfer of its services, through lease, to an entity it created, the Respondent cannot be said to anticipating the limitation, avoidance or manipulation of future liabilities. Rather the Respondent used the new company to ensure that it can operate securely and will be able to meet future liabilities by securing public liability insurance. Current trend in caselaw seems to revert more towards the holding in Solomon v Solomon & Co [1897] AC 22, where the Court rejected the allegation that the Respondent was the real owner of the boot-making business and the corporation he created was a mere sham. In upholding the doctrine of separate personality, the Court rejected the contention that creating the company, selling one’s business to it, owning most of its shares and debentures were adequate to disregard the separate doctrine and pierce the veil of incorporation. Furthermore, courts are saying that the mere presence of a façade company, inappropriateness or even fraud will not automatically warrant the lifting of the veil. The façade or sham justification was qualified in the case of Trustor AB v Smallbone (No. 1) [2001] 3 All ER 987 where the Court held that “the court is entitled to pierce the corporate veil …if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of those individuals.” Moreover, the Court said that mere impropriety or interests of justice alone cannot warrant or justify the lifting of the veil of incorporation. Likewise, in Dadourian Group Inc v Simms & Ors [2008] EWHC 1784 (CH), the Court held that the mere showing of fraudulent activity does not ipso facto compel the courts to disregard the separate personality doctrine. There is a current perceptive reluctance by English courts to set aside the separate personality doctrine and use its prerogative to lift the veil of incorporation. The implication of this is that if the Wallace case is brought today and decided before the English courts, the latter would have decided it in a contrary fashion to the Supreme Court of Oklahoma’s decision and rejected the contention that the Respondent and the Yellow Services Taxi are one and the same allowing the Complainant to enforce the judgment of damages against the latter, which has no assets, on the Respondents. As can be seen in cases like Adams, there is now a trend for courts to revert to the Solomon doctrine and implement a much stricter criteria in piercing the veil of incorporation. This means that the standard sham test set forth in the case of Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 are not anymore adequate to warrant the lifting of the veil. A more useful test perceived to be employed by courts today is the establishment of the ultimate purpose test where a lifting of the veil of incorporation necessitates the determination of whether the alleged sham or façade company was created to allow an activity, which is otherwise unlawful if done personally or by the parent company (Ohrenstein p. 34). Under such setting, the Wallace case will not pass the test for setting aside the separate personality doctrine. References: Adams v Cape Industries plc and Another [1990] Ch 433. Dadourian Group Inc v Simms & Ors [2008] EWHC 1784 (CH). Miller, T. Lifting the Veil of Incorporation. http://www.economic-truth.co.uk/cima/notes/law13.pdf. Ohrenstein, D. Lifting the Corporate Veil. http://www.radcliffechambers.com/articleDocs/374.pdf. Solomon v Solomon & Co [1897] AC 22. Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116. Trustor AB v Smallbone (No. 1) [2001] 3 All ER 987. Wallace v Tulsa Yellow Cab Taxi & Baggage Co 61 P (2d) 645 (1936). Woolfson v Strathclyde Regional Council [1978] SLT 159. Read More