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Corporate personality- piercing corporate veil
Company Law (LAW3010)
Newcastle University
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Case notes Case + citation Facts Outcome/judgement/significance Adams v Cape Industries [1990] Ch 433 Cape was the parent company of a multinational group of asbestos companies- Claimants were seeking to enforce judgement against cape in negligence for illness that they had been awarded in texas -Would only be possible if cape had been legally 'present' in Texas-Cape had a subsidiary in Texas Claimants argued courts should use their special power to pierce NAAC’s veil as cape was using NAAC to evade potential liabilities + the companies formed a single economic entity Courts DID NOT apply the special power, it did not apply as: 1/ Cape had not sought to evade any pre-existing liability or obligation that it owed the claimants 2/An intention to avoid the risk of incurring future liabilities was not sufficient Carlton & Granada v Football league [2002] EWHC 1650 D was a joint venture company- C&G were D’s controlling shareholders D entered into a contract woth the FL for broadcasting rights- C&G indicated they would ensure D could honour its obligations to FL -D became subsequently insolvent and could not pay FL -Held that C&G HAD NO liability as shareholders There was no formal guarantee executed and their indications did not amount to a binding guarantee Okpabi v Royal Dutch Shell [2021] UKSC 3 Petrodel v Prest [2013] UKSC 34 regulates identification of the assets of the spouse when talking about a divorce settlement; ms prest was looking for ways to Court held that the statute (Matrimonial causes act) did not include a clear and unequivocal provision permitting them to treat these assets as ms Prests
access her husband’s assets- he was siphoned them off into different companies for which he had access to -court interpreted the MCA 1973 to go around the ‘shielding’ of assets; found that assets were held in resulting trust for the husband, therefore wife could access the assets Salomon v salomon [1897] AC 22
- s was a sole trader + sold his business to a company he had formed (S & Co) -S had complete control of company- other 6 members held their shares -Company became insolvent + went into liquidation -Companies liquidator argued it was a sham and that S was personally liable for S + Co’s liabilities -S & Co had been properly formed; the fact that S was its sole controller was irrelevant -S’s motive for formed S & Co and its significance for creditors was also irrelevant -S&Co was a separate legal person; therefore liable for its own debts and liabilities and its creditors faced the same risk as with a normal company
- recognised that shareholders can shield themselves behind companies- and recognises validity of one person companies Thompson v Renwick group [2014] EWCA CIV 525 R was the ‘holding company’ of a conglomerate- had acquired subsid ‘DH’ involved in asbestos R was appointed DH’s director in charge of health & safety; C was an employee of DH and suffered asbestos illness -DH unable to meet its liability to the claimant -CA held R had NOT assumed responsibility for C’s health and safety Merely appointing R as director of health and safety was not sufficient -R was not involved in the relevant business -R was not better placed than DH to protect DH’s employees -It was not fair and reasonable to deduce that DH would rely on R to protect its employees [shows the importance of establishing a direct duty of care in accordance with established tort law principles] Vendanta v Lungowe [2019] UKSC 20 V has a subsid (KCM) operating a copper mine in Zambia- KCM employees and neighbours have sued V FI:(In accordance with chandler); the claimants have an arguable claim against V and therefore the case could proceed CA: upheld FI findings
with P personally -P executed the lease in the name of a company he had formed, S executed the lease + P’s company defaulted (didn’t comply with terms) on the lease -PC on appeal applied Salomon and held P was not personally liable [it was found irrelevant that P’s intention in using a company had been to avoid personal liability + that P did not make it clear to S in their negotiations that the lessee of the premises would be his company and not him personally VTB Capital v Nutritek [2013] UKSC 5 Russian company VTB gave $225M loan to RAP to allow them to buy businesses from NIC -NIC businesses were hugely over valued + RAP defaulted the loan The same person was in control of RAP and NIC VTB asked the court to pierce the veil, arguing the companies were merely puppets and that mr M should be personally liable for the RAP + NIC’s BOC Court found they COULD NOT exercise their special power in this circumstance M had not used the companies to evade any pre-existing or independent obligation that he owed to VTB (notes VTB could still sue in tort- but had to be heard in Russia as all the relevant actions occurred there
Q1/ What do you understand by the doctrine of separate corporate personality? What are its legal implications? This essentially means that a properly set up corporation- is its own legal person. And liable for its own debts and liabilities. The person(s) with whom set up the company is not liable for the actions of the company. In this sense they are separate. A company can be party to contracts in its own right- even where there is just one real person involved; with persons inside and outside the company (lee v lee air farming) -members are not usually personally liable for its debts and liabilities [salomon established this for one person companies- adams set this up for parent companies] -assets of the company belong to the legal person (company) NOT shareholder or controlling person (macura) -a company’s members cannot be treated as legally present in a foreign jurisdiction simply because the company is legally present there (adams) Q2/ Mega plc is the UK-based parent of a group of companies involved in a range of businesses relating to food and agriculture In 2013, Mega plc formed Fallguy Ltd, a UK company, as a wholly owned subsidiary to enter the fertiliser business and to operate a new fertilised processing plant at Tynechester. Fallguy has a share capital of £100,000, divided into 10,000 shares at £10, which are all held by mega. Mega has paid up 20p on each share. Mega plc has appointed most of fallguy’s directors, including its “Director of Health and safety”. In 2019, Mega plc required its subsidiaries to follow a group of practice on “Health, safety and Environmental Protection”. In 2019, Fallguy Ltd negotiated a contract with Greenergy Ltd to purchase electricity from it for the next five years. During the negotations, Greenergy’s representatives asked Mega’s representatives about Fallguy’s finances. Mega’s representatives told Greenergy’s representatives that Mega’s intention was to make sure that Fallguy had sufficient finance to enable it to meet all its liabilities, including its obligations under the proposed contract. Greenergy then made the contract with Fallguy. In early 2020, there was a leak of toxic fumes at Fallguy Ltd’s plant in Tynechester. This affected many of Fallguy’s employees and has given some of them serious health problems that are likely to be long-term. Evidence has shown that the leak was due to the failure by Fallguy’s management to follow satisfactory procedures concerning matters of health and safety and environmental protection. Fallguy Ltd has now ceased trading and is likely to go into insolvent liquidation. The arguments a/ Mega plc argues that it has no liability whatsoever to pay anything towards meeting Fallguy Ltd’s debts and liability Mega is the parent/holding company of the subsidiary company fallguy ltd. Prima facie both these companies are their own legal persons and have separate corporate personality.
Ebbw vale v South Wales traffic [1951] , cohen LJ at p370: under the ordinary rules of law, a parent company and a subsidiary company, even a 100% subsidiary company, are distinct legal entities, and in the absence of an agency contract between the two companies one cannot be said to be the agent of the other. Therefore, vicarious liability arising out of agency can only occur if mega had formally appointed Fallguy to act as its agent in conducting this business. The CA followed Salomon in Adams v Cape and ruled that for there to be an agency there would need to be either a formal agency agreement or circumstances that are sufficiently unusual as to imply that the parent company is using the subsidiary as its agent- as was found to be the case in Smith, Stone & Knight v Birmingham (1939). The CA indicated that such cases are very rare. e/Greenergy argues that Mega and Fallguy form a single economic entity and that the courts should therefore treat them like this and hold Mega liable under their contract. Not really spoken about as Dennings mention of single economic entity was found incorrect In DHN -single economic entity was a short lived doctrine that Denning invoked in DHN foods. It has since been indicated as being incorrect (Adams) -courts may be proactive in trying to provide remedies without piercing the veil, but still holding parties accountable f/One of Fallguy’s employees argues that the courts should use their special power to pierce Fallguy’s corporate veil and hold Mega liable for Fallguy’s liabilities to its employees. They argue that the courts should do this because Mega plc formed Fallguy to conduct the fertiliser business at Tynechester with the deliberate intention of evading any liabilities that might arise from the conduct of this business whilst still being able to take the profits from the business as Fallguy’s sole shareholder. Veil wont be pieced by statutory provision; therefore we look for an alternate legal ground Most likely here- piercing the veil as Mega will have liablility for Fallguys torts OR the courts exercising a special power Companies’ separate legal personality granted by s16(2) of the CA 2006 is open to abuse as members may set it up to shield themselves behind it. Company’s separate legal personality can be pierced by statute or courts to disregard it. As a result, company’s assets, rights or obligations are treated as the member/s’ assets, rights or obligations. In this scenario, key case if adams should be drawn from. The CA drew a distinction between attempts by parent companies to evade an independent and pre-existing obligation or liability and attempts to avoid incurring an obligation or being subject to a liability that might arise in the future (as in cape v adams). The courts are only likely to exercise their power in the former situation. Lord Sumption referred to this as the “evasion principle” in his judgement in Prest v Petrodel where an individual interposing a company so as to evade, or frustrate the enforcement of, an existing legal obligation, liability or restriction. As well as Adams, examples of the latter situation include Salomon, Persad, + VTB capital.
g/One of fallguy’s employees argues that mega owed the employees a direct duty of care to protect fallguy’s liabilities This argument concerns the circumstances in which the courts may find that a parent company owed a direct DOC to the employees of a subsidiary and/or other parties who may be affected by the subsidiaries operations. Being a parent company to a subsid. company does not automatically make the parent company vicariously liable even if it is a controlling shareholder. A parent company may owe a direct DOC to subsids. employees or to others affected by the subsid. To give rise to a DOC by parent company, certain requirements must be satisfied and mere reliance on group identity isn’t enough Firstly, need to consider chandler v cape (2012) – where a duty of care was found; and Thompson (2014) where DOC was not found. The situation with Mega is more analogous to Thompson. There is nothing to suggest that Mega is better placed to protect fallguy’s employees from this risk or that Mega has been in the habit of intervening in Fallguy’s affairs and the fact that Mega has appointed Fallguy’s directors is not enough. Cases have only provided guidance because they have only to decide whether it is an arguable case that a parent owed a direct duty. So far this has been found to be the case in both Verdanta and Okpabi v RDS The SC judgement in Verdanta and okpabi indicated that having a group code of practice on health & safety etc. could mean that a parent company owes a direct DOC. There are three conditions and each of these may be relevant to Mega: 1/Was mega’s group code of practice defective? Did the leak occur because fallguy was following this code? 2/Did Mega take active steps to ensure that its subsidiaries implemented the code of practice? 3/Did Mega publicise the fact that it had a group code of practice and indicate that It would be ensuring compliance with it? extra seminar notes: -mega is a parent company to fallguy as a subsid -mega appointed all of the directors and staff -mega owns all of the shares -mega promise to greenergy about having ‘sufficient funds’ -fallguy became soon insolvent -£98,000 in unpaid shares
Corporate personality- piercing corporate veil
Module: Company Law (LAW3010)
University: Newcastle University
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