Separate Legal Personality in Corporations

Introduction

In English company law, one of the established principles relates to the personality of the company being separate from the shareholders. Although the case of Salomon v Salomon Ltd, is generally associated with the principle of separate legal personality as the seminal case where the principle was laid down, the concept of separate corporate legal personality was first adopted in the Joint Stock Companies Act 1844, which noted that after incorporation, the company’s entity as a separate legal person comes into being and the personality of the company becomes separate from its members. The principle of separate legal personality of the company was first applied in Foss v Harbottle, although in this case the question was that of the company being the proper plaintiff in cases in its name while later in the Salomon case the principle of separate personality of the company even in situations where the company and its members could be seen as one and the same due to the way in which the company had been established. This was reflected in the famous words of Lord MacNaughton from the case of Salomon v Salomon Co Ltd, where his lordship noted that 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 a trustee for them.” The important points in this observation, and which are still applicable law at this time are that a company is a person that is separate from the members and that company is not an agent not a trustee for the members. The principle that company is a separate person was decisively laid down in Salomon v Salomon Co Ltd by the House of Lords. The concept of corporate personality is entrenched in the English company law. The gist of the early cases of Foss v Harbottle and Salomon v Salomon Co Ltd, is that corporate personality is an established fiction as per which the rights and liabilities of the company are its own. However, there is a possibility of abuse of the same corporate personality by members or managers of the company who may then avoid personal legal liability on the basis of separate corporate personality of the company. Indeed, how corporate personality can be used to take unfair advantages over third parties was exemplified in the case of Salomon itself. A common abuse of corporate personality by shareholders is where company is created as a way for shareholders to evade legal obligations, as happened in Gilford Motor Company v Horne Ltd, where the single shareholder established the company by an employee of the claimant for the purpose of avoiding the non solicitation agreement liability. The question for this dissertation is whether the law in the English company law adequately addresses the issue of abuse of corporate personality through the doctrine of piercing of corporate veil and whether the recent decision of the Supreme Court in Prest v Petrodel Resources Limited, would impact the scope of the doctrine of corporate veil to become narrower so that all cases of corporate abuse would not fall within it and only cases involving evasion will fall under the application of the doctrine. The research questions are framed as follows:

Does the English company law adequately address the issue of abuse of corporate personality through the doctrine of piercing of corporate veil?

What are the kinds of corporate abuse that are not addressed adequately by the law at present?

Does the Supreme Court judgment in Prest v Petrodel Resources Limited limit the scope of the doctrine of corporate veil to only cases involving evasion?

The Prest decision has sought to limit the use of doctrine of corporate veil as a remedy of the last resort so that piercing of the veil is only allowed under the evasion principle. However, evasion principle is aimed at preventing corporate fraud; therefore, a question can be raised as to whether piercing of corporate veil can be limited to evasion cases or whether there is a need to expand the doctrine from its present limits as laid down in Prest so as to encompass the non-evasion cases. Prest is not the only case that raises some questions about the scope of principle of doctrine of piercing of corporate veil and abuse of power and whether the doctrine of piercing of corporate veil has managed to adequately addressed the abuse of power. In VTB Capital plc v Nutritek International Corp, as well the Supreme Court had refused to apply the doctrine of lifting of corporate veil in a case where the control of the company by one person was not thought to be adequate ground for application of the principle to imply a contract which is in the name of the company could also lead to personal liability of the member. However, it is the case of Prest v Petrodel Resources Limited, which is more significant for the future of doctrine of lifting of corporate veil and abuse of corporate personality. In Prest, the Supreme Court clarified that the doctrine of lifting of corporate veil can only be applied in limited circumstances, when the most important factor for consideration for the court is whether misuse of corporate structure by members was for the purpose of evasion of legal obligations. More importantly, the judgments of the individual judges in Prest, also demonstrate a lack of consensus on the doctrine of lifting of corporate veil. Where Lord Walker’s judgment shows that he doubted as to the existence of the doctrine, by opining that corporate personality is merely a label and not a principle of law, while Lord Sumption and Lord Neuberger accepted that lifting of corporate veil doctrine was a principle of law but it had ‘limited’ scope. This is important because it indicates that there is some scope of further development or change in how the courts may perceive the doctrine and what that might mean for abuse of corporate personality and its control by lifting of the corporate veil. It may also be mentioned that there is a concern that there is some unpredictability in how courts apply the doctrine of lifting of corporate veil which was observed by Lord Templeman, who said that the courts sometimes derive a relationship of agency or trust between the company and members and then pierces the corporate veil, but then at other times chooses to use the Salomon principle to refuse the application of doctrine, “making the case into an ‘unyielding rock’ shipwrecking the complicated arguments”. It may be noted that courts developed the jurisprudence of doctrine of piercing of corporate veil to address the problem of abuse of corporate personality and this doctrine was applied by the courts in different situations. For instance, in Moore Stephens v Stone & Rolls Ltd, the court used this doctrine to attribute liability for fraud to the sole director. In Jones v Lipman, the court used it to declare a company as a sham when the purpose of the company was to evade contractual liability. In Thorne v. Silverleaf, the court declared a company to be a sham when it was incorporated for evading liability. In these cases, the courts used the principle of liftin of corporate veil for the purpose of attributing liability to members of the company by taking exception to the rule that company is a separate legal person.

The issue of concern, which is being addressed in this dissertation is that Prest has been decided to narrow the scope of the principle. The Supreme Court itself was forced to clarify the law on principle of lifting of corporate veil because of the growing number of cases where the principles of separate personality and limited liability of companies have been circumvented. An example of such circumvention is seen in Antonio Gramsci Shipping Corporation v Stepanovs, where the High Court decided that the corporate veil can be pierced to allow contractual claims against members/non-contracting parties where the contracting party was merely a ‘puppet’ company, with the non-contracting member being the person who was in control. This was later disapproved of in the case of VTB Capital plc v Nutritek International Corp where the court held that the doctrine of lifting of corporate veil cannot be used for allowing contractual claims to be brought against non-contracting parties. Importantly, in VTB Capital plc v Nutritek International Corp, the judges did not have consensus on the doctrine of lifting of corporate veil. In light of these events, one can appreciate the fact that the Supreme Court has attempted to clarify the position on doctrine of lifting of corporate veil. However, as noted by Schall, the Supreme Court has

“made an effort to deliver the long missing rationale for piercing the veil by spelling out the “evasion principle” as opposed to the “concealment principle”. However, this rationale is extremely narrow and leaves only two classical cases (Jones v Lipman and Gilford Motors v Horne) as good law. Moreover, Prest curtailed the scope of piercing the veil even further. By introducing a “rule of last resort”, it turned it into an exceptional remedy that is hardly ever supposed to apply in practice. Arguably, under that rule, it would not even have applied in those two very cases that are supposed to carry the principle.”

The points of significance in the above statement are that there is a need to now consider the applicability of evasion principle, the possible non applicability of concealment principle, and the rule of last resort as an exceptional remedy. These points need further discussion and critical analysis, which is done in this dissertation, particularly in the context of abuse of corporate personality and how these principles are related to this. The last point made above is also crucial because it notes that even Jones v Lipman and Gilford Motors v Horne may not be decided today as they were decided because of the way in which the Supreme Court has interpreted the doctrine of lifting of corporate veil.

Corporate personality and lifting of corporate veil

Forms of corporate abuse and how they are addressed in the English law

Corporate abuse is a wide term which includes practices such as tax evasion, extraction of value and asset stripping of the company, corporate actions that lead to environmental destruction and managerial self-interest. Maitland uses the example of National Semiconductor, an American company that manufactured and sold faulty computer chips fraudulently; the CEO stated that the liability of the wrongful actions of the company is attributable only to the company. Maitland identifies three specific ways in which corporate responsibility has been exploited: first, the shielding of the responsible individuals from the legal consequences for wrongful actions; second, use of corporate responsibility for abridgement of constitutional rights; third, use of corporate responsibility to dispossess or expropriate the shareholders of corporations. The existence of the doctrine of piercing of corporate veil does not address the problem of corporate abuse in a consistent manner and the doctrine of corporate veil is not always able to respond to the issue of corporate abuse, as noted by one commentator, “As any company lawyer will know, while the existence of a jurisdiction to lift or pierce or ignore the legal personality of the company has been more or less assumed to exist, it is a power that has steadfastly resisted all and any attempts at coherent analysis.” There are cases wherein the courts have asserted the role of the judiciary for preventing abuses of the corporate entity; for instance in Re a Company, Cumming-Bruce L.J. noted that judicial decisions show that the court will use its powers to pierce the corporate veil “if it is necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration.” Another example is re Polly Peck Int’l plc, in which Walker J. explained that lifting the corporate veil can be done when the corporate structure is used as a façade “in an unconscionable attempt to evade existing obligations or to practice some other deception.” On the other hand, in Adams, the court has held that it is not objectionable if corporate structure is used to ensure that the legal liability for particular future activities of the group falls on another member of the group instead of on the company. What this suggests is that the English courts accept the use of corporate structure to avoid future liability. What this also suggests is that the scope of what corporate abuse means may be limited by the court where the court may not consider it to be an abuse of corporate personality if the use of corporate structure goes to avoid future liability. If the cases decided by the courts in context of the evasion of liability is considered then the general principle that can be gleaned that is that if the legal obligation exists prior to incorporation, then the use of the corporate structure for evading liability is evasion justifying the piercing of the veil. Conversely, if legal obligation is created after incorporation, the use of the corporate structure can be upheld as separate corporate personality because this would be considered as avoidance. With respect to asset stripping as well, English courts have allowed this in some cases. Two notable cases in particular can be discussed: these are Adams, and Yukong v. Rendsburg Investments Corp. In Adams, the English Court of Appeal decided that the incorporation of a subsidiary was a legitimate step to limit the asbestos liability exposure of a corporate group, even though the case involved the action of the corporate parent in evasion of the default judgment against the subsidiary by transferring its operations to a newly incorporated subsidiary. There is a clear case of evasion in this situation because the parent company was allowed to insulate itself from liability by setting up a “Liechtenstein dummy corporation between itself and the new subsidiary.” Another problem is that in this case the asbestos liabilities arose when the second subsidiary was incorporated; this means that the liability was already in existence when the subsidiary was enacted. This does not accord with the judgments that suggest that the if the legal obligation exists prior to incorporation, then the use of the corporate structure for evading liability is evasion justifying the piercing of the veil by the court. In Adams, the court focussed on the first subsidiary, so that the incorporation preceded the incurrence of liabilities so that the separate corporate personality was upheld. Therefore, the reference point was the first subsidiary, but this also allowed the evasion to take place and the assets of the subsidiary to be subsumed by the parent company. It has been argued that instead the court could have shown greater flexibility in the choice of reference point by choosing the second company as the reference point. The latter company received all of the first company’s assets and hired all of its employees and therefore, it would have been appropriate to consider that it would be the reference point for assessing when the evasion has taken place.

What Adams does is that it highlights a gap in the way the issue of corporate abuse is addressed and how the concept of evasion itself is treated in a way to allow a company more flexibility to evade its legal liability by asset stripping. The same gap was also seen in Yukong, where the defendant shareholder shifted assets from the first to the second company after the creation of a legal obligation which is different from what happened in Adams. In Yukong, the second company was incorporated before the legal obligation incurred. In facts, the case presents opposing circumstances to what happened in Adams. It has been argued that in cases involving similar facts as Adams and Yukong, the American courts would have pierced the veil while the English courts refused to do so. Based on the discussion, there are two points that are made out in the literature critiquing the way the evasion rule is applied by the English courts in Adams and Yukong. The first point is that evasion rule is applied to contractual cases as well where the reference point is the time of breach of contract; applied to companies, the concern would be that the shareholders will attempt to avoid judgment after they know or have reason to know that liability will be incurred. It is argued that the concern can be addressed by choosing the time of breach as the reference point, although the problem with that approach may be that it can become over-inclusive by also including actual legitimate uses of the corporate entity. However, contract formation as the reference point can include liability resulting from any asset transfer after the contract was entered into and may lead to imposing an obligation not to transfer its assets to any affiliated company after the contract was entered into. It is also possible that the company may evade its contractual obligation by first incorporating a second company and transferring funds to it before the repudiation of the contract. It is suggested that in such cases, the company should have to rebut the presumption that the new company was created only to avoid corporate liability for contractual obligations by providing evidence that the use of the corporate structure is for a legitimate purpose. The question if corporate abuse has taken place is also central to the decision to pierce the corporate veil. In other words, there may be some disagreement on what abuse means. In Prest, Lord Sumption notes that the abuse of the separate legal personality takes place when there is use of a company to evade the law or to frustrate its enforcement. However, Lord Sumption uses a small category of cases where such abuse takes place and Lady Hale takes a broader category of cases where abuse has taken place where Gilford and Jones provide only one case of abuse but not the only case. Anything that is used to make the companies engines of fraud can be abuse according to Lady Hale. There are three points that are made out with respect to the position on corporate abuse, evasion, and the piercing of corporate veil: “(a) Evasion constitutes corporate abuse. But the trigger for the remedy of piercing the veil is the limited evasion principle, not the wider notion of corporate abuse; (b) The evasion principle is not the only case that justifies piercing the veil for corporate abuse. But after Prest, it is the only case that is spelt out and readily applicable; (c) Subject to the rule of last resort, other cases of corporate abuse may give rise to the remedy in future, too. But they will be rare and are not spelt out yet. Prest offered no test for them. The façade/sham test has been discarded, but has not been replaced.” Corporate abuse can take various forms. The two kinds of corporate abuse discussed above are avoidance of future liability and asset stripping. There are other forms of corporate abuse that are also noted in the literature; these include use of corporate responsibility for abridgement of constitutional rights and use of corporate responsibility to dispossess or expropriate the shareholders of corporations. First, to discuss use of corporate personality for abridgement of rights, one of the ways in which this is done is by using this form to deny statutory rights of the workers as noted in literature. In American literature, this problem is highlighted with reference to Supreme Court decisions which highlights that there are instances where a successor employer may not honour a predecessor's collective bargaining agreement of a newly acquired venture. In England, a case that reflects on the use of corporate personality to breach the statutory rights of another can be seen in Creasey v Breachwood Motors Ltd. In this case, the manager employed by the defendant company was wrongfully dismissed and the proprietors of the business formed another company because they wanted to avoid the potential substantial claim for damages. Although this case also involves use of corporate personality for avoiding legal liability and asset stripping because in this case the entire undertaking of Breachwood Welwyn Ltd was transferred to the newly formed company and Breachwood Welwyn was struck off from the company register. In this case, the court decided that the new company was formed specifically to get the proprietors out of their legal liability to Creasey and therefore, he could claim the damages from the new company itself. What is important in this situation is that the Court of Appeal later decided that Creasey was wrongly decided and that the piercing of veil could not be done in these circumstances. What this means is that in such circumstances there was a potential for the employee’s rights to be breached successfully by the company by forming another new company to avoid the payment of damages. In other words, if the Court of Appeal notes that Creasey was wrongly decided, then this means that it is possible that the manager in this case would have been unsuccessful in getting the court to pierce the veil when the formation of the new company was only to avoid the payment of the damages for wrongful dismissal. There are some points that can be noted here to summarise this section about corporate abuse. First, that there are different ways in which corporate personality can be used for corporate abuse. Second, there are judicial responses to corporate abuse which is primarily seen in the use of judicial evasion and concealment principles. Third, that there are some forms of corporate abuse that are not being addressed adequately by the law as it exists at this point. The cases discussed in this section have highlighted some gaps in the law with regard to the addressing of the different forms of corporate abuse. In the cases of avoidance of future liability, asset stripping, and even breach of statutory or other rights, as the cases discussed in this section indicate, there is inadequate or unsatisfactory addressing of these issues in the English law. The overarching conclusion of this section is that the courts in England do not easily apply the doctrine of piercing of corporate veil and that despite there being different ways in how corporate form may be abused, all these kinds of abuses are not addressed adequately through the doctrine of piercing of corporate veil. This can be explained on the basis of how far corporate personality principle is entrenched in the company law and how this entrenchment plays a role in judicial approach to piercing of corporate veil. This is discussed in the next section.

Corporate personality as an entrenched rule in the company law

Lord Templeman has noted that the principle of corporate personality as explained in the case of Salomon v Salomon & Co is an unyielding rock of company law. The use of the terms ‘unyielding rock’ is interesting because it suggests that the principle of corporate personality is difficult to pierce or lift or has been seen to be unyielding. This can also be seen to mean that there would be only exceptional cases where the courts would be willing to pierce the corporate veil. There are many other points that can be discussed to indicate the significance of the principle of corporate personality, but which are not relevant to the discussion at this point. For example, the significance of the principle of corporate personality can also be seen in the fact that the principle was exported to many common law countries and has been consistently applied in different jurisdictions. The principle that a company has a separate legal personality is entrenched in the company law. This section provides an overview of the corporate personality principle in the English company law with the view to setting the background for this dissertation because it can be argued that one of the principal impediments in courts piercing the corporate veil even in the cases where corporate abuse can be seen to have taken place, is the importance that is placed on the corporate personality of the company. Because the concept of corporate form is seen to be central to company law, there is a possibility that the courts are seeing this concept to be ‘unyielding’, as noted by Lord Templeman. Starting with the decision in Foss v Harbottle, the principle of corporate personality has been an important part of the company law. Subsequently, as this section will discuss, case law entrenched this principle even further in the English company law. This case law can provide further insight into how this principle has developed over time and how far is it entrenched in the English company law. This is a significant point because it is possible to juxtaposition corporate personality principle with doctrine of piercing of corporate veil. Foss v Harbottle, is the first notable case where the principle of separate personality was applied, and the court relied on the distinct personality of the company to hold that the company is the only proper plaintiff in a case involving itself. In this case, two shareholders alleged that the property of the company was being misappropriated of by the five directors of the company and that this would lead to the company suffering losses. Wigram VC, in his judgment in the case, refused to intervene in the matter and premised his reasoning in part on the reasoning taken by the courts in cases involving partnership firms and unincorporated companies where the principle of internal management had already been applied. Wigram VC also relied on the principle of distinct corporate personality of the company to say that company being a separate legal person, it can be the only proper plaintiff in a case involving itself. Importantly, the principle of separate legal personality came to be seen as a way for courts to uphold the separateness of the company from its members and it has impact on different aspects of company’s relationship with its minority shareholders and majority shareholders; while this is not central to the discussion at hand, it does reflect on the embeddedness of the principle of corporate legal personality. The more significant case for the principle of separate legal personality is the case of Salomon v Salomon & Co., which is considered to be one of the most important company law decisions in English law. It would be useful to briefly discuss the facts of the case to understand how the principle of corporate personality is applied. In this case, Salomon, his wife and five children were the shareholders of a newly formed private limited liability company, which bought Salomon’s established sole proprietorship leather business. For the purpose of buying the business, the newly formed private limited liability company borrowed money from Salomon and his family and issued debentures for the purpose. This created a charge over the company’s assets and accordingly, the shareholders of this newly formed company also became secured creditors. The anomaly was that while the shareholders became secured creditors of the company, there were other creditors of the company who were unsecured. When the company became bankrupt in a year’s time, it was ordered to be liquidated. As per the established law, the secured creditors were prioritised over the unsecured creditors, which meant that Salomon was able to recover the debt as a secured creditor by using his debentures. On the other hand, the unsecured creditors who had a total recovery of £8,000 were unpaid. In the ensuing suit, the unsecured creditor claimed that the company was a one-man company and the company was an agent of Salomon. The unsecured creditor claimed that the company was a sham which was created only as an agent of Salomon to take the advantage of the corporate structure of the company. This in effect was a demand for piercing the corporate veil of the company to see that Salomon was the principal and the company the agent. The facts of the case are important because they suggest that the company was completely controlled by Salomon and this may be seen to be a factor for arguing that the company was indeed an agent of Salomon.

The arguments made by the unsecured creditor in the Salomon case were rejected by the court and two principles of law were laid down: the first, that the members of the company had limited liability, and second, that the principle of separate corporate personality was used to hold that the company is not an agent of the shareholder and the latter is not liable for the debts of the former. The court emphasised that there was no fraud, sham or other illegality involved in the use of corporate structure by the members of the company therefore, there could not be a situation justifying the piercing of corporate veil. An argument can be made that the company was not a sham because there is nothing in the facts to show that the company was formed solely for the purpose of defrauding the unsecured creditors. When this case is compared with some other cases where the courts have pierced veil, for example, Gilford Motor Company v Horne Ltd, the above point can be substantiated because in Gilford, the company was formed to avoid legal liability. Therefore, there is no corporate abuse involved in this case; it may also be mentioned that corporate abuse is defined as a situation where the “legal structure is used for impropriety or to avoid legal responsibilities.” Can this be done in the form of agency? Courts have lifted the corporate veil to assess agency of the subsidiary company. An example can be seen in an earlier case of Smith, Stone & Knight Ltd v. Birmingham Corporation. In this case, Smith, Stone and Knight Ltd purchased a waste business and incorporated a subsidiary, Birmingham Waste Co to operate it. The City of Birmingham compulsorily acquired land owned by Smith, Stone and Knight Ltd which was occupied by Birmingham Waste Co. Under the statute which authorised the City to acquire the land, there was also a requirement to pay compensation for the compulsory acquisition. The question was whether the compensation was to be paid to the subsidiary or to Smith, Stone and Knight Ltd. The court held that the compensation was to be paid to the plaintiff and not the subsidiary because the latter was only an agent of the former. This begs the question as to how far the courts can be limited in piercing veil when the company is an agent of an individual who abuses the corporate form to commit fraud or other impropriety. For instance, if there is a case where the subsidiary is formed to do actions on behalf of the company that are of the nature that would make the company liable under the law if done by the company itself, then the court should be allowed to pierce the veil even if evasion is not involved. The principle laid down by the House of Lords in Salomon has also been applied in subsequent cases and continues to be applied, as will be discussed next in this section along with the critical appraisal of this case and its principle. Criticism of the Salomon case has been based on the argument that the principle of separate legal personality of the company can also lead to pervasive and undesirable effects. The purpose of highlighting these points of criticism is to also provide a context for understanding the reasons why there can be an argument for adopting a greater flexibility on the principle of corporate personality than what is seen at this point because as this dissertation later discusses, there are many cases where the courts have refused to pierce the corporate veil based on the idea that the corporate personality of the company is not to be easily interfered with. This principle of the law, which is seen to be central to the company law, may be argued to have become so entrenched that it is not taking account of the situations or contexts where the principle ought to be discarded for the piercing of the corporate veil. In this context, it is also argued that instead of premising the judgments that seek to enforce the specific relationships between the company and the members, the law can have a more situational and contextual approach to such relationships; for instance, Bijur J wrote: “the law in dealing with a corporation has no need of defining it as a person or entity, or even as an embodiment of functions, rights and duties, but may treat it as a name for a useful and usual collection of jural relations each one of which must in every instance be ascertained, analysed and assigned to its appropriate place according to the circumstances of the particular case, having due regard to the purposes to be achieved’. The argument that the law of the company should not have to define the company as a person or entity may not be aligned with the company law as it is today, where the principle of the company having a separate legal personality is well entrenched. The embeddedness of the principle can be seen with respect to other judgments subsequent to the Salomon case. Due to this reason, Salomon is credited for creating an enduring ratio decidendi. Different scholars have noted the significance of the Salomon case. At the same time, there are also criticisms regarding the application of the principle in the Salomon case. One of the criticisms is that the principle of corporate personality leads to the creation of an incorporated shell that is able to shield the directors and members from liability for the actions or debts of the company.

In the corporate veil cases that come before the courts, the classic case is one where shareholders or the directors of the company are being taken action against for recovering the debts of company; in such cases, the rules of limited liability and separate corporate personality are involved and are used to assess whether the shareholder or director can be held responsible or liable for the actions of the company. These classical type of cases are called as shareholder liability cases also because when there is piercing of veil, there is also a potential for the shareholder to be held liable for the debts of the corporation. Another category of the cases that come before the courts under the corporate veil doctrine is that of cases where the separate corporate personality is disregarded but there is no imposition of liability to the shareholder; this can be seen in the case where business subsidiary is overlooked and the principal corporate parent is held responsible for the actions of the subsidiary. This happened in the case of Lube v Cape Industries Plc, where the British parent company of a South African subsidiary was allowed to be sued by the employees of the subsidiary. In this case also the piercing of the corporate veil was done. Salomon principle is consistently applied in the courts. There are a number of cases that illustrate this point. In Ord v Belhaven Pubs Ltd, the Court of Appeal refused to hold a parent company accountable for its subsidiary’s debts because the subsidiary is a separate legal entity. This is not to say that the courts have not taken exception to this principle. Lord Wilberforce has observed the following in Re Westbourne Galleries Ltd: “a limited liability company is more than a legal entity with its own personality ... there instead in corporate law for the recognition that behind it or from it, there are individuals with rights, expectations and obligations as such are not necessarily overwhelmed by the corporate structure.” The final point that is made above is that the corporate structure does not always overwhelm the rights, expectations and obligations of the individuals within the companies. This means that although the doctrine is well entrenched in the company law, there are also instances where the courts do lift the veil of incorporation. Even so, the doctrine of corporate veil remains the principle that shapes even the assessment of whether the corporate veil is to be pierced. This is reflected in the observation of Lord Denning In Littlewoods Mail Order Store Ltd v IRC, who noted that the conviction of the judge to pierce corporate veil is fundamentally shaped by the principle of corporate veil. The rule in Salomon is so well entrenched that even when the court take an exception and pierce the veil, it does so (as Lord Denning pointed out) fundamentally shaped by the principle of corporate veil. This is the reason why the courts do not use the concept of abuse of legal personality frequently, and as the next sections of this dissertation will show, these cases are rare and the norm is the principle of corporate personality.

Lifting of corporate veil

It has been said that the history of the doctrine of corporate veil is roughly divided into three segments. The first phase has started in 1897 when Salomon v. Salomon was first decided. This period has been noted to be the historical phase of the evolution of corporate veil doctrine and this first phase of the development of the doctrine is the phase of early experimentation by the courts. The second phase of the development of the corporate veil is stated to be the period after the First World War, which is also called as the prime era of corporate veil principle and this phase is said to have sustained till the judgment in Woolfson v. Strathclyde. The third phase in the evolution of corporate veil doctrine is said to be ongoing and is characterised as the era of uncertainty in the nature and scope of the doctrine. Therefore, what can be said is that the doctrine of the corporate personality or corporate veil of the company is a principle that has developed over a period of time and which has also included the principle of piercing of corporate veil. The underlying point is that the doctrine is now considered to be uncertain, and as this section will discuss, this uncertainty is more related to the doctrine of piercing of corporate veil. This point is important because an argument can be made that the doctrine of piercing of corporate veil is not able to address the different forms of corporate abuse adequately. In the legal action taken by the Salomon v Saloman & Co., the Court of Appeal took an approach of piercing of the corporate veil as noted in the judgment of Lindley LJ: “the formation of the company, the agreement of August 1892, and the issue of debentures to the appellant pursuant to such agreement, were a mere scheme to enable him to carry on business in the name of the company with limited liability contrary to the true intent and meaning of the Companies Act 1862, and further to enable him to obtain a preference over other creditors of the company by procuring a first charge on the assets of the company by means of such debentures.” The approach taken by the Court of Appeal was that where the company was formed as a scheme to enable Salomon to carry on the business by taking advantage of the company law and corporate structure, therefore, the court decided to pierce the veil of the company to expose Salomon as the principal. This was reversed by the House of Lords on the ground that incorporation of the company is evidence of its corporate personality and as such, the obligations of the company to repay the debts of the company have to be fulfilled by the principles of law. Lord Macnaughton noted that “company is at law a different person altogether from the subscribers to the Memorandum [shareholders]”. However, this is not to say that the courts have not been able to pierce the corporate veil under certain circumstances. There are cases where the courts have been able to discard the principle of corporate personality in favour of piercing the corporate veil of the company. However, there are different contexts in which the doctrine of piercing of corporate veil is applied by the courts, which may present some nuance to how the doctrine of piercing of corporate veil is applied by the courts. This includes liability of parent company for the acts of the subsidiary as well as liability of a company for the acts of its directors or managers. Cases regarding the piercing of the corporate veil can also be related to not shareholder liability but also the liability of the parent company for the subsidiary company. In this sense, the doctrine of corporate personality as a separate legal entity is not just applied to assess the potential liability of the shareholder, but also in some cases the liability of the parent company for the actions of the subsidiary company where the latter is a separate legal entity as per incorporation. This is an important point in the context of business fraud and deception, and the doctrine of corporate legal personality can be used for the collapsing the business subsidiary and the parent to determine the scope of the responsibilities; this type of case is also characterised as peeping behind the veil. Thus, in MCA Records Inc v Charly Records Ltd (No 5), the court declared the director to be the joint tort-feasor in a tort committed by the company while disregarding the principle that the director and the company are not a joint legal personality. Similar reasoning is seen in Koninklijke Philips Electronics NV v Princo Digital Disc GmbH, where the court held the director liable for the actions of the company. In these kinds of cases, the court is piercing the veil in a different manner with the veil being pierced not to hold the company liable for the actions of the member or director, but to hold the director liable for the action of the company. This was also done in the case of Contex Drouzhba Ltd v. Wiseman, where the court fixed the liability of the director for the actions of the corporation. Therefore, in order to understand the doctrine of piercing of corporate veil in its present form, it is also important to see how there are also cases where the courts apply the doctrine to assess liability of the directors and decision makers of the company. Cases like Gilford Motor Company v Horne Ltd, and Daimler v Continental Tyre & Rubber Co, saw the courts pierce the veil of the corporate veil. These can be considered here. There are more recent cases where the piercing of veil has been done by the courts. For instance, in Beckett Investment Management Group v Hall, the Court of Appeal pierced the veil to implement a non-compete clause in an employment contract. This is similar to the approach taken in Gilford Motor Company v Horne Ltd, where the circumstances were similar. The judgments in Gilford and Beckett Investment Management are related to the court piercing the veil for the purpose of giving effect to contractual obligation. In Moore Stone & Rolls v Moore, the veil was pierced more to the point of preventing fraudulent action and the court used the doctrine of piercing of corporate veil to assign liability to the sole shareholder and director of the company for the fraudulent scheme that was devised and carried out in the name of the company. In this case, the court applied the principle of ex turpi causa non oritur action, and attributed the fraudulent intentions of the sole director to the company.

In Gilford Motor Company v Horne Ltd, the court was required to consider whether the piercing of the corporate veil is required to assess the company as a sham where the company was incorporated by a former employee of a company with whom he had a non-competition agreement to not solicit the customers; the court decided that the company was a sham and an agent. Similar approach was taken by the court in Beckett Investment Management Group v Hall. In Daimler v Continental Tyre & Rubber Co, the court again applied the doctrine of piercing of corporate veil to determine that the company with majority of German directors was an enemy character during the World War I; this despite the company being incorporated in England. In the Daimler case, the court clearly juxta-positioned the identity of the company (as a person incorporated in England) and the identity of the directors (as Germans) and instead of holding that the company was a British company based on its identity, the court held that the company was a German company based on the identity of its directors. In Jones v Lipman, the court held that the company was a sham because it was created for the sole purpose of transfer of the house to it. Similarly, the court applied the doctrine of piercing of corporate veil in Thorne v. Silverleaf, where it was held that the company was a sham established to escape the liability to repay debt. The judgments discussed above suggests that the courts have not taken the position that the corporate veil can never be pierced. This position was well articulated by Lord Denning in the case of Littlewoods Mail Order Store Ltd v IRC, where he noted that incorporation of a company does not have the purpose of fully casting a veil over the personality of the company through which the courts cannot see. Therefore, the position can be surmised to be that the incorporation of the company does create a separate legal personality of the company; but it does not cast a veil so tight and opaque that the courts will not be able to consider the cases where the veil can be pierced by the courts. There is therefore, a rule (corporate veil), and an exception (piercing of corporate veil). The argument may be made that the exception of piercing of corporate veil is not able to encompass all the instances of corporate abuse by the company or its directors; moreover, the scope of the doctrine itself is limited as the next part of the discussion indicates, which raises the question of whether there ought to be other mechanisms for addressing the issue of corporate abuse. Courts have used the doctrine of lifting of corporate veil as an exception to the rule of separate legal personality of the company laid down in Salomon. The law on lifting of corporate veil itself has also undergone many shifts in the past many decades. In Prest v Petrodel Resources Limited, the court held that the doctrine is applicable only where corporate structure is being abused by the members of the company. Similarly, in Ben Hashem v Ali Shayif, the court held that impropriety is essential to be shown for application of the doctrine. These decisions have sought to limit the scope of application of the doctrine so that it is a last resort remedy. It has been argued that either the scope of the doctrine should include all cases of corporate abuse or that it should be abolished. At the very least, there is a demand that the doctrine be clarified because the Prest decision is suggested to have left the law more confused and unclear than before. First, it would be useful to briefly consider the facts of Prest. In this case, Michael Prest wholly owned and controlled (including through intermediate entities), a number of companies under the umbrella of Petrodel Group. Amongst these companies, two companies, Petrodel Resources Ltd (PRL) and Vermont Petroleum Ltd (VP), were the legal owners of seven residential properties. Yasmin Prest was divorced from Michael Prest in 2011, and the seven residential properties became subject to proceedings for ancillary relief. The claim of Yasmin Prest was that Michael Prest was the beneficial owner of the properties as he was the only owner of the companies that held these properties. The question was whether the court could apply the doctrine of piercing or lifting the corporate veil for holding that the properties actually to belong to the husband and not the two companies. In this case, the Supreme Court held that the properties could be transferred to the wife because the husband was the beneficial owner of the properties; interestingly, the court did not apply the doctrine of piercing of corporate veil observing that the doctrine should be applied only as a last resort. Before Prest, the leading authority in the field of lifting of the corporate veil was the judgment in Adams v Cape Industries, where the Court of Appeal rejected three arguments related to agency, single economic unit, and fraud exception, to bypass Salomon principle and pierce the corporate veil of the American subsidiary that had caused harm by producing asbestos. In Prest, the Supreme Court has only dealt with the ‘fraud exception’ by offering a new, more refined approach to these cases in establishing the evasion principle. In doing so, Prest approved of some of the earlier cases and disapproved others; the case of Gencor ACP Ltd v Glenn Bryan Dalby can be taken here as a reference point to understand what kind of actions will not come within the scope of lifting of corporate veil in difference to the position earlier. In this case, the defendant was a director of the ACP group of companies, including Gencor ACP Ltd. He dishonestly diverted assets and opportunities from Gencor to another company, which the claimant sought to recover. The court decided that the defendant was liable to return the benefits diverted from the claimant and by using lifting of corporate veil the court held that the company to which the defendant diverted the money was directly controlled by the defendant and worked as his offshore bank account. The court in this case held that the doctrine could be applied because the defendant was in control of the company. After Prest however, the Gencor principle is no longer applicable because the court held in Prest that it is not appropriate to apply the doctrine of lifting of corporate veil to cases of concealment, which was the case in Gencor ACP Ltd v Glenn Bryan Dalby. So in effect, the court distinguished Gencor ACP Ltd v Glenn Bryan Dalby from Jones v Lipman and Gilford Motors v Horne on the basis that the former case involves the companies not being used to evade or frustrate a pre-existing liability (as was the case in Jones v Lipman and Gilford Motors v Horne), but to conceal the true recipient of a payment. The critical question for this dissertation is whether this is an appropriate distinction for assessing whether the actions of the member can be attributed to the company. For doing this, the question can be linked back to the issue of whether concealment can be linked to abuse or not. As of now, the Prest principle applies to limit the scope of use of doctrine of piercing of corporate veil to the cases of evasion. This also requires some discussion on the concepts of concealment and evasion in order to understand whether this limitation of scope of doctrine of piercing of corporate veil is based on artificial grounds and merits reconsideration. The question also hinges on the appropriateness of the Prest decision in the context of its ability to address the issue of corporate abuse.

Principles of concealment , evasion, and the rule of last resort

To first explain the concealment and evasion principles, the concealment principle is applied to not disregard the entity or separate legal personality of the company but only to look behind the façade of the incorporation to discover facts that the corporate structure is concealing. The evasion principle is where the court disregards the corporate veil in situations where the corporate structure is being abused by an individual who seeks to evade a legal obligation or frustrate the enforcement of the legal right against him. This is the difference that is also noted in the Prest decision. In other words, the evasion principle is premised on the issue of corporate abuse and the same is not said of the concealment principle. However, at the outset, a question may be raised with respect to whether concealment can also lead to fraud or abuse. Sham and façade in particular may also be related to concealment of certain facts that the corporate structure seeks to conceal. The evasion principle provides that if controlling shareholders try to evade or frustrate existing legal obligations via the separate legal personality of a company, then this is open to lifting of corporate veil as per the evasion principle. In the earlier cases, the courts have used the terms ‘sham’ and ‘facade’ to explain the actions based on which the courts would apply the principle of lifting of corporate veil. However, as noted in Prest the use of terms like sham and façade have only led to more confusion especially in the context of application of the concealment principle and the evasion principle. Prest rejects the concealment principle based on the reasoning that when concealment happens of the real actors, courts can easily identity the real actors and do not need to apply the lifting of the corporate veil. On the other hand, the evasion principle was distinguished by the court on the basis that the corporate veil may be disregarded “if there is a legal right against the person in control of it [...] and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement.” In other words, the court may have no other recourse but to lift the corporate veil in cases of evasion and for this reason, while concealment cases need no application of the doctrine of lifting of corporate veil, evasion cases do need this application. Then this can also lead to the conclusion that evasion presents cases where the only resort that the court may have is to pierce the corporate veil of the company whereas this is not so in the case of concealment. In Prest, the court introduced the rule of last resort with Lord Sumption noting that the true piercing of the corporate veil is to be applied where no other or more conventional legal instruments could be applied and this principle becomes the subsidiary remedy of last resort; this was explained as follows: “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. Like Munby J in Ben Hashem v Al Shayif [2009] 1 FLR 115], I consider that if it is not necessary to pierce the corporate veil, it is not appropriate to do so, because on that footing there is no public policy imperative which justifies that course. I therefore disagree with the Court of Appeal in VTB Capital v Nutritek [2012] 2 Lloyd's Rep 313 who suggested otherwise at para 79. For all of these reasons, the principle has been recognised far more often than it has been applied. But the recognition of a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company is, I believe, consistent with authority and with long-standing principles of legal policy.” Thus, the court considered that the doctrine should be applied only in cases where there is a public policy imperative which justifies the application of the piercing of corporate veil. The last part of the above statement from the judgment is instructive. It notes that in cases where the abuse of the corporate veil is done to evade or frustrate the law, then established principles of legal policy would demand that there should be the disregarding of the legal personality of the company. In other words, the court has linked evasion or frustration to abuse of corporate veil and in such cases justified the disregarding of the corporate personality. The question is whether abuse is done only by evasion or frustration or can at times abuse of corporate personality take other forms? Insiders may abuse the corporate personality in a number of ways, the common of which is the shielding of those who are responsible for certain illegal acts done in the name of the company, disguising abridgment of legal and constitutional rights, and dispossessing and expropriating shareholders. These are ways in which abuse of the corporate personality may take place, but the courts have not been able to address these forms of abuse adequately. Abuse of corporate personality can be defined as a phenomenon that “occurs when the legal structure is used for impropriety or to avoid legal responsibilities.” While the latter part of this definition is related to evasion of legal responsibilities, the former part refers to impropriety. There are many ways in which impropriety can be effected by the directors or insiders within a corporation. On the other hand, it has been pointed out that the way in which the scope of the doctrine of piercing of corporate veil has been narrowed down post Prest leads to a situation where the emphasis of the courts would be “primordially fixated with whether factual scenarios fall within the scope of the evasion principle rather than a focus/concern on using the doctrine to safeguard against corporate abuses and impropriety.” In other words, the courts shift from the approach that seeks to assess whether there is a case of corporate abuse and impropriety in the situation to the approach where the question is limited to whether the use of corporate form was for the purpose of evasion. The cases decided by the courts in the period after the Prest case does suggest that the doctrine of piercing of corporate veil is now limited to a monolithic principle favouring protection of the corporate structure’s separate legal personality and not the respond to cases of corporate abuse and impropriety with viable remedies. While it is admitted that prior to the Prest case, there was no consistent or clear approach to assessing whether there is a case for piercing of corporate veil, it can also be argued that the law as it exists now does not provide an adequate and effective mechanism for addressing corporate abuse. There are several reasons why it can be said that the Prest decision continues to leave the courts with limited means of addressing corporate abuse. Two of the reasons are the dichotomy of piercing and lifting corporate veil and the uncertainty of the law. The dichotomy of the piercing and lifting of corporate veil is related to the evasion and concealment cases. The discussion in the next section of the dissertation relates to the problems with the dichotomy of piercing and lifting of corporate veil by reference to cases that suggest distinguishing between evasion and concealment is not always based on clear drawn cases.

The dichotomy of piercing and lifting the corporate veil

It is also noteworthy that in Prest, there was a distinction drawn between ‘piercing’ proper and ‘lifting’ of the veil. Piercing was explained as a phenomenon that is applied in those cases that engage what evasion principle and lifting is done in cases where concealment principle is applicable. Thus, the evasion principle was recognised as being the reason for piercing the corporate veil. One of the problems with this approach may be that it leads to an unnecessary and unclear dichotomy; one of the approaches in the past has been to not consider these two terms as different and to treat piercing and lifting as synonymous. Or the approach has been to see this dichotomy as a subject that is irrelevant and unnecessary to answer. Or there has been an approach to see a semantic difference between piercing and lifting of the corporate veil that is important to answer. In Atlas Maritime Co. S.A. v Avalon Maritime Ltd, the court noted a perceptible difference between piercing and lifting: “Like all metaphors, this phrase can sometimes obscure reasoning rather than elucidate it. There are, I think, two senses in which it is used, which need to be distinguished. To pierce the corporate veil is an expression that I would reserve for treating the rights or liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, on the other hand, should mean to have regard to the shareholding in a company for some legal purpose.” In Atlas, the court has clearly distinguished between piercing and lifting. The same approach has been taken in Prest in Lord Sumption’s judgment. However, the question is whether this difference justifies the court in not lifting or piercing the corporate veil in some cases. According to Prest, the distinction between piercing and lifting also relates to the principles of evasion and concealment. Piercing is applied in cases that engage the evasion principle and lifting is done in cases where concealment principle is applicable. The problem with this approach is that there can also be cases where both evasion and concealment are involved. The case of Re Darby is illustrative of this point. In this case, Darby and Gyde were undischarged bankrupts and had prior convictions for fraud; they registered a company (LIC) that purported to register another company (WSQ) to which it sold a quarrying licence for £18,000. They floated a prospectus inviting the public to take debentures in WSQ. This second company, WSQ failed and went into liquidation, but the liquidator claimed Darby made secret profit as a promoter. Darby argued that LIC was the promoter of WSQ. The court held that WSQ was an alias for Darby and Gyde who were trying to perpetrate a fraud. It may be argued that this was a case of concealment because the court was not denying the existence of the corporation. It may also be argued that these facts engage evasion. An argument has been made that because promoters of the companies are also fiduciaries and owe a fiduciary obligation to the company they incorporate, this would have meant that Darby and Gyde decided to develop the corporate form in the form of LIC to avoid an existing legal obligation that WSQ had against LIC. In Re Bugle Press, the majority shareholders of the Bugle Press Ltd formed another company of (Jackson & Shaw Holdings Ltd). They made a share purchase offer to the shareholders in Bugle Press Ltd. which was accepted by the majority shareholders with one minority shareholder refusing. Jackson & Shaw gave the minority shareholder notice to purchase his holding compulsorily. The court held that Jackson & Shaw Holdings, was for all practical purposes entirely equivalent to the nine-tenths of the shareholders in Bugle Press Ltd and that the arrangement was a sham to deny Treby the rights as minority shareholder. While this can also relate to concealment, allowing the court to lift the corporate veil, but it can also be thought to be evasion with the majority shareholders incorporating Jackson & Shaw Holdings to evade their legal obligations as directors in Bugle Press Ltd under a fiduciary duty. The two cases discussed above suggest that it is not always simple to distinguish evasion and concealment because there can be cases where the distinction is not so clear drawn and where the facts may show that there is both concealment and evasion in such cases. Therefore, these cases can be used to illustrate the point that the use of the distinction between evasion and concealment to not pierce the corporate veil in some cases may be problematic.

Does Prest lead to further uncertainty in law?

In the previous section, the dissertation discussed the dichotomy of Piercing/Lifting of the corporate veil and how this dichotomy leads to problematic application in cases where both evasion and concealment may be engaged. In this section, the discussion extends to how this dichotomy introduces a problem of classification and therefore, lack of clarity in the field of piercing of corporate veil. Furthermore, there is a need to consider how the Prest decision is problematic in holding that corporate veil piercing ought to be construed as a remedy of last resort in light of the authorities in this field where the doctrine is not seen as a last resort method. This is discussed further in this section. In Woolfson v. Strathclyde Regional Council, Lord Keith had noted that the doctrine of corporate personality can be denied (or corporate veil can be pierced) only where “special circumstances exist indicating that [a company] is a mere façade concealing the true facts.” This refers to concealment. Therefore, while evasion is one strand of the potential abuse of corporate form, concealment may be another strand. This begs the question as to whether concealment can be excluded as a factor for deciding whether there is a case for piercing of the corporate veil. The difficulty with the Prest case is that the position with regard to the interchangeability of ‘piercing’ and ‘lifting’ is reversed and these two terms are not interchangeable and lead to different consequences. With regard to separate legal personality doctrine, the Prest decision holds that corporate veil can only be pierced for the proper disapplication of the corporate personality of the company and that too when corporate personality is used for the purposes of evading existing legal obligations, except in rare and exceptional cases, without defining what these rare and exceptional cases would be that would warrant ‘piercing’ even though the evasion principle was not applicable. It is also in the failure to explain what rare and exceptional cases would entail, that the law can be said to be uncertain at this point. Even so, Prest is not the first time that the court has noted the semantic differences between piercing and lifting. Staughton LJ had made the an observation in Atlas Maritime Co. S.A. v Avalon Maritime Ltd that had brought out this difference between piercing the corporate veil (treating the rights or liabilities or activities of a company as the rights or liabilities or activities of its shareholders) and lifting the corporate veil.

As discussed in the preceding sections of this dissertation corporate abuse can take various forms, which include avoidance of liability, asset stripping, corporate responsibility for abridgement of constitutional rights and use of corporate responsibility to dispossess or expropriate the shareholders of corporations. These are some of the predominant forms of corporate abuse. The discussion in the preceding sections centred around the judgments of the courts in corporate abuse cases that come before them. Cases like Adams and Yukong were discussed to highlight the gaps in the way the issue of corporate abuse is addressed. Of particular note was the fact that although the Prest judgment has limited the scope of doctrine of piercing of corporate veil to the case of evasion, there are cases decided by the courts that suggest that the concept of evasion itself is treated in a way to allow a company more flexibility to evade its legal liability by asset stripping. This was seen in both the Adams and Yukong judgments. These judgments indicate that the current law on piercing of corporate veil is premised on the assessment of whether evasion has taken place. Indeed, evasion constitutes corporate abuse, but evasion is not the only method of corporate abuse. Nevertheless, the law is now based on the evasion principle while concealment is specifically excepted by the Supreme Court in Prest as a factor for determining whether there is a case for piercing of corporate veil. There is some scope for courts applying doctrine of piercing of corporate veil in cases that do not involve evasion, based on the rule of last resort, but at this point it is not clear how this will be done because Prest offered no test for them. At the same time, the façade/sham test has been discarded, but has not been replaced by another test that can respond to and address such cases. It is not necessary that the courts will allow piercing of corporate veil in cases that involve avoidance of liability. Indeed, when seen in conjunction with the decision of the Court of Appeal in Ord v Belhaven Pubs Ltd, even Creasey was wrongly decided and that the piercing of veil could not be done in these circumstances. What this means is that in such circumstances there was a potential for the employee’s rights to be breached successfully by the company by forming another new company to avoid the payment of damages. In other words, if the Court of Appeal notes that Creasey was wrongly decided, then this means that it is possible that the manager in this case would have been unsuccessful in getting the court to pierce the veil when the formation of the new company was only to avoid the payment of the damages for wrongful dismissal. The conclusion that can be drawn on the basis of the discussion in the preceding sections of this dissertation is that the courts in England and Wales are reluctant to pierce the veil of the corporate entity unless there are narrow circumstances indicating some evasion on the behalf of the company. This may be based on the emphasis drawn on the separate legal personality of the company which is a principle that is entrenched in the company law. It can be argued that one of the principal impediments in courts piercing the corporate veil even in the cases where corporate abuse can be seen to have taken place, is the importance that is placed on the corporate personality of the company. Because the concept of corporate form is seen to be central to company law, there is a possibility that the courts are seeing this concept to be ‘unyielding’. In this sense, the term unyielding can also be understood to mean rigid and inflexible, to the extent that it is only in some limited cases that courts will allow the piercing of the corporate veil. It can also be concluded that Prest decision continues to leave the courts with limited means of addressing corporate abuse. Two of the reasons are the dichotomy of piercing and lifting corporate veil and the uncertainty of the law. The dichotomy of the piercing and lifting of corporate veil is related to the evasion and concealment cases, which is not helpful because distinguishing between evasion and concealment is not always based on clear drawn cases. It is not always easy to distinguish evasion and concealment because there can be cases where the distinction is not so clear drawn and where the facts may show that there is both concealment and evasion in such cases. In Prest, the court considered that there may be certain ‘rare and novel’ circumstances wherein the court may be justified in piercing the corporate veil irrespective of whether the evasion principle was engaged. There is a need to consider how this affects the situations where abuse of corporate personality may be found. On the one hand, this may be considered to be leading to further uncertainty in the law while on the other hand, this may present an opportunity to consider how the Prest decision may be used to pierce the corporate veil even when the evasion principle is not engaged. In other words, there is scope for use of doctrine of piercing of corporate veil. It may also be appropriate to consider the instances of statutory responses to abuse of corporate personality, which may also narrow the field for judicial intervention in cases involving these instances through the application of the doctrine of piercing of corporate veil. These statutory provisions can be seen as exceptions to the Salomon principle evolved through the instrument of the legislation. Not all of these provisions are active at this time, however, it would be useful to consider these briefly as they do provide narrowing of scope for judicial intervention. For instance, Section 24 of the Companies Act 1985 was not replicated in the Companies Act 2006. Section 24 of the now repealed Companies Act 1985 relates to the situation where a public company is trading below its minimum membership over a certain period of time and where a member can incur joint and several liability for company debts where a company carries on business without having at least two members for more than six months with their knowledge. As mentioned earlier, this provision is no longer applicable. However, it does provide an example of a situation where statutory provisions have been used to disregard corporate personality. Section 761 of the Companies Act 2006 allows corporate veil to be pierced and personal liability imposed if a public company commences business or exercises borrowing powers, without obtaining a certificate of compliance from the Registrar of Companies. Section 117 of the Companies Act 1985 was a similar provision and has been continued in the Companies Act 2006. This means that in the event that a company operates or transacts business in contravention of this provision, the company and its officers can both be fined for default. In the event that the company fails to comply with its obligation under the transaction within 21 days upon being called upon to do so, even the directors of the company are jointly and severally liable to indemnify the other party to the transaction for any loss suffered. Thus, the directors can be penalised for loss suffered by third parties following the company’s default. This is a protection given to the creditors in the event of the company violating share capital requirement. Section 213 of the Insolvency Act 1986 provides that a fraudulent controller cannot use the corporate form for the commission of fraud and escaping of liability in respect to the company’s debt in the event of liquidation of the company. This is called the fraudulent trading provision and it is a clear exception to the principle laid down in the decision of Salomon case. The court may require the controlling shareholder in such cases to make such contributions to the company’s assets as thought fit considering the broader circumstances of the case. Section 213 operates to lift the corporate veil and can cover anyone involved in the carrying on of the business. Section 993 of the Companies Act 2006 further provides criminal liability for fraudulent trading and allows the court to impose criminal liability of ten years, or a fine. The fraudulent trading provision protects the interests of corporate creditors. This provision is also important for indicating how fraud can be linked to corporate fraud. Carrying on a company’s business “for any fraudulent purpose” may also extend to persons other than creditors of a company as noted by Lord Denning in Re Cyona Distributors Ltd, where he noted that the words were composed deliberately in wide terms to enable the courts to bring any fraudulent persons to book. In R v Kemp, the Court of Appeal interpreted the term “for any fraudulent purpose”, as being applicable to potential creditors as well thus showing how this could be widened.

Section 214 of the Insolvency Act 1986 provides the wrongful trading provision and this provision has been stated to be an extreme departure from the rule in Salomon’s case. The provision is intended to respond to situations where directors fail to do something to protect creditors interests in the case of imminent collapse staring at the company. The provision was meant to strengthen the regime which was seen to be ineffective in the case of fraudulent trading provision which was unable to prevent the prevalence of directors preventing needless losses when the company was in financial difficulty and staring at possible collapse. Section 214 provides civil remedy to those who have suffered financial loss and compensation due to the behaviour of the directors of such companies on whom the court may also impose personal liability. It is not necessary that the directors should have acted dishonestly as even the negligence to prevent such monetary losses of the company can be actionable. The provision also seeks to minimise risks for outsiders who transact with the company in the period when the directors are acting irresponsibly. Despite these provisions in the statute, there is still a need to respond to fraud and abuse of corporate personality because these provisions have not always been successful to address this problem. For instance, the fraudulent trading provision will not help outsiders who are tort victims because the provision contemplates the kind of creditors that are contractual in nature as is clear from the words of Section 213, which provides that declaration can be made by the court for liability “against any person in any business of the company which has carried on with intent to defraud creditors of the company or creditors of any other person or for any other fraudulent purpose”. Tort victims do not transact with company under a contract that makes them capable of being defrauded.

Conclusion

To the question whether the English company law adequately addresses the issue of abuse of corporate personality through the doctrine of piercing of corporate veil, the conclusion that can be drawn here on the basis of the discussion and analysis in the preceding sections of this dissertation is that it does not adequately address corporate abuse. There are kinds of corporate abuse that are not addressed adequately by the law at present. Examples that can be taken here include asset stripping of the company, breach of statutory rights through corporate forms, and even some cases of evasion where future liability is concerned because there are cases discussed here which showed the courts adopting a flexible approach to allow evasion of future liability by companies. The decision of the Supreme Court judgment in Prest v Petrodel Resources Limited has not led to the development of further clarity in how far the doctrine of piercing of corporate veil will be useful in addressing corporate abuse because the court has adopted a confusing dichotomy between evasion and concealment and piercing and lifting of corporate veil. The judgment also leaves the future of the piercing of corporate veil in some uncertainty. The Prest decision also limits the scope of the doctrine of corporate veil to only cases involving evasion. This means that the other forms of corporate abuse, which are not related to evasion, are not addressed by the doctrine of piercing of corporate veil. There are some forms of corporate abuse that are addressed by the statutes, but this is piecemeal and does not respond to fraud such as, the fraudulent trading provision will not help outsiders who are tort victims because the provision contemplates the kind of creditors that are contractual in nature. Statutory provisions have been used to address corporate abuse even by disregarding the principle of corporate personality. Examples include Section 761 of the Companies Act 2006. This suggests that there is scope for the legislature to come up with some statutory reform to the law around corporate abuse given that the courts have so far been unable to address this issue with some satisfactory results. Statutory means would clarify the law, specify the circumstances when the corporate veil of the company can be pierced, and circumstances when the judiciary does not pierce the corporate veil. Such clarity is desirable because it leads to the certainty of the law and consistency in how cases involving corporate abuse are treated by the courts. These are missing in the law around corporate abuse at this time. Therefore, the final statement that can be made here is a recommendation to consider how statutory principles can be developed to respond to the problem of corporate abuse.

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