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Lifting the corporate veil

Lifting The Corporate Veil

In English Law, why do limited companies exist? Why have limited liability at all?

Limited liability encourages development of public markets for stock. It limits the risk of investors by the value of their shares in a company rather than unlimited liability and personal exposure.

Salomon v Salomon & Company Limited [1896] UKHL 1 As per Lord McNaghten (pronounced Norton):

‘…Among the principal reasons which induce persons to form private companies…are the desire to avoid the risk of bankruptcy, and increased facility afforded for borrowing money. By means of a private company…a trade can be carried on with limited liability, and without exposing the persons interested in it in the event of failure to the harsh provisions of the bankruptcy law.’

A limited company is a company limited by the value of its shares; no more, and no less.
Whereas an individual/sole trader has unlimited liability. If he/she owed money to someone, that creditor could pursue them personally.

The case of Salomon v Salomon [1896] HL established that a limited company was a person in its own right. It has a corporate personality of its own and was and must be treated as a separate legal entity. As per Lord McNaghten in Salomon:

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

This means that if a company is placed into liquidation or otherwise ceases to trade, no personal liability arises against a shareholder or other owner of such a limited company other than up to and including the value of its shares in the company.

Beyond Black and White: The Nuances of Lifting the Corporate Veil.

Phrases such a ‘lifting the corporate veil’, or ‘piercing the corporate veil’, relate to attempts to lift or pierce the limited liability status for someone to pursue a director or shareholder directly and personally.

There is opportunity for limited liability to be abused, to the disadvantage of creditors being left bereft and chagrined, by an apparent attempt to hide behind limited liability, where there is wrongdoing. Limited liability is a barrier, a veil, a curtain, behind which an individual legitimately avoids personal liability.

A question as to whether or not there exists a doctrine of lifting the corporate veil appears to have been settled in the case of VTB v Nutritek International Corporation [2013] UKSC 5, that the doctrine is a fallacy.

What about those who seek to evade personal liability?

Lazarus Estates Limited v Beasley [1956] 1 ALL ER 341 As per Denning LJ:
‘No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved it vitiates judgments, contracts, and all transactions whatsoever’.

‘Fraud’ is at the end of the spectrum of reasons to lift the corporate veil, and there are broadly speaking, two camps of thought as to why the corporate veil should be lifted namely:
This is the currently held stance, in respect of lifting the corporate veil, established by Lord Sumption in Prest v Petrodel Resources Limited & Ors [2013] UKSC 34

The concealment principle is simply that the court will look behind a company to see who the real actors are. The evasion principle is where a company interposed for the purpose of defeating or frustrating a legal right.

As per Lord Sumption in Prest v Petrodel:

“…there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality. “

What if the limited company has no money, but a creditor has been wronged by a director?

This matter has been mooted for over a hundred years in the English Courts, and whilst it was considered by the law student at least, that there was a pattern of cases whereby it was just to lift the corporate veil, it was established in VTB v Nutritek International Corporation [2013] UKSC 5 that no such doctrine exists.

Veiled Justice: When Corporations Shield Themselves, What's Left for Creditors?

If you cannot establish ‘concealment’ or ‘evasion’ to lift the corporate veil, what can be done to provide a remedy for creditors?

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

Section 212 misfeasance
Section 213 fraudulent trading
Section 214 wrongful trading

Finally, it is worth mentioning the term ‘phoenix fraud’. Let’s say, company ‘A’ ceases to trade/goes into liquidation, and company ‘A1’ continues to trade with the same name, directors and shareholders having been set up within 12 months of company ‘A’, it may be considered a phoenix fraud, and criminal sanctions could apply including a fine and/or imprisonment.

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

Generally speaking, the law does not allow a proverbial phoenix to rise from the ashes and start again, shrugging off indebtedness of its previous existence. Section 216 Insolvency Act 1986 governs the circumstances in which a phoenix may or may not be legal. If found to be illegal, it is an offence which is within the remit of the criminal courts, not the civil courts.

The courts have at their disposal a range of punishments available including disqualification as a director and imprisonment. The above, is a non-exhaustive list of other options to flank lifting the corporate veil.

Professor Rosen is a solicitor-advocate in practice and principal of David Rosen & Co. He specialises in family law, divorce and financial settlements. David is a member of Resolution, and the Society of Legal Scholars amongst others. He is a full academic Professor of Professional Practice at Brunel University Law School where he lectures one day each week.

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29 Lincoln’s Inn Fields, London, WC2A 3EE

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