- Created by: Francesca Marks
- Created on: 09-01-17 13:06
How do companies fit in the legal system?
Corporate/legal personality- the separate legal status of a registered company which provides it with an identity which is separate from that of its members, shareholders and employees.
This allows it to own its own property etc.
The principle of separate corporate personality was acknowledged by the HoL in the landmark judgment of Salomon v Salomon 1897.
Salomon v Salomon principle- the company was a separate legal identity, completely distinct from its members. Therefore it could owe money to its members and accordingly the debenture in favour of Salomon was valid. Lord Herschell- 'it is to be observed that both courts treated the company as a legal entity distinct from Salomon and the then members who composed it, and therefore as a validly consituted corporation.
More recent application in Lee v Lees Air Farming 1961- The HoL held that, on the basis of Salomon, there was nothing to prevent the company (as a separate legal entity) from employing Lee. Therefore his estate was entitled to compensation. Viscount Simmonds- 'The company and the deceased were separate legal entities.'
However there are some exceptions. There are a number of instance where the courts are prepared to ignore the veil of incorporation and hold members personally liable for the debts of the company. Such exceptions to the general principle in Salomon are known as 'lifting the veil' and can be found in both statute and common law. there are two common features to the recognised exceptions-
- They are designed to prevent the protection of limited liability being abused to perpetrate fraud of other wrongdoing.
- They will only apply to members of the company who actually created the situation (ie directors.)
DHN Food v Tower Hamlets (OVERRULED)- Denning tried to make an exception that although there were separate companies they could be regarded as a single economic entity. This approach is no longer favoured.
Woolfson v Strathclyde 1978 (Scottish)- HoL said no economic entity exception. Will only be set aside if it is a facade or a scam.
Attempt to revive the doctrine- Adams v Cape Industries 1990-
In this case it was held that the law recognises the creation of subsidiary companies and even though they are under the control of parent companies, they will generally be treated as separate legal entities with all the rights and liabilities that normally attach to separate legal entities. Slade LJ- 'each corporate member of the Cape group had its own well defined commercial function designed to serve teh over-all commercial purpose of mining and marketing asbestos. But that does not constitute a reason why Cape, the parent company, should be treated as present and amenable to be sued in each country in which a subsidiary was present and carrying on business.' They said no economic entity principle. Would only set aside the principle for deliberate dishonesty eg to avoid existing claims.
Ord v Bellhaven Pubs 1998- company had claim against them. They restructured and the company with the claim against it was left with no assets. This was not the intended consequence of the restructure and so was not fraudulent.
Shows they will only pierce the veil in extreme cases.
The veil can be pierced in fraudlent circumstances.
Trustor AB v Smallbone (2) 2001- clear case where assets were transferred to prevent knowing reciept constructive trust. This was clearly fraudulent. Normally only used in clear cases.
Came before the SC twice in the last few years.
VTB Capital v Nutritek International Corp 2013- the company had a contract and they wanted Directors to be added into it. The SC said this couldnt happen as legal personality will never allow people to be added into a contract. Whole point of legal personality is that the directors are not parties.
Prest v Petrodel 2013- SC- husband had hidden assets in a company so he didnt have to pay them to his wife on divorce. Sumption- said there were only two situations where you'd go behind the corporate veil. 1) Concealment principle- where a company is interposed so as to conceal the true identity of the real actors, then those will still be identified as legally relevant. Simply ignores the company. 2) Evasion principle- legal right against an individual, independently of the company would defeat that right. He gave the same case as an example of both.
Sumption used Jones v Lipman 1962 to demonstrate. Facts- D agreed to sell a plot of land to C. Before completion D transferred the land to his company and claimed he couldnt complete the sale as the land now belonged to the company. Court siad they would make an order against D and the company. Against the company because it was used to conceal the right. Against D because of the evasion principle- trying to get out of liability.
Gilford Motors v Horne 1933- a defendant had set up the company, not as a geniune business, but rather as a sham or facade to hide his intention to break the covenant with his former employers. This was an abuse of corporate personality. Farwell J- 'I am quite satisfied that this company was formed as a device in order to mask the effective carrying on of business by Horne.'
Sumption's analysis was backed by Neuberger. Lord Walker thought it might be too clever. Thought the decision in Prest was easy, don't have to go behind veil, just have to apply the law of resulting trusts.
Pennyfeathers v Pennyfeathers Property 2013 used the principles.
Difference- 1) concealment- individual liable despite the company
2) Evasion- makes company liable even though action against individual. (This is just lecturers theory).
Exceptions to corporate veil are very limited. Don't use justice as an exception.
Exception? Chandler v Cape 2012- can you making holding company liable for injuries caused to employees of subsidiaries? CoA said you can, if can find duty of care on behalf of holding company. Not exception to piercing the veil. Arden- 4 things- 1) business of 2 companies must be the same 2) holding company must have superior knowledge of health and safety 3) holding company shoudl be aware that subsidiary was inadequate 4) should've forseen that the subsidiary was reliant on holding company. Then need to show breach etc.
Thomson v Renwick Group 2014- the case was thrown out as the businesses werent the same.
Judiciary are very reluctant to go behind the corporate veil.
Liability- non contractual. Vicariously liable for torts by employees.
Doctrine of alter ego- governing minds of the company, their mind could be that of the company. Called attribution.
Lennards Carrying v Asiatic 1951 HoL- L was controller/mind of the company so his acts were the acts of the company.
Tesco v Nattrass 1971- HoL- the branch manager was not the mind of the company. In a limited company a failure to exercise due dilligence on its part required the failure of a director or senior manager who was in actual control of the company's operations, and so could be identified as the 'controlling mind and will of the company.' Lord Pearson- 'being the manager of one of the company's several hundreds of shops, he could not be identified with the companys ego onor was he an alter ego of the company. He was an employee in a relatively subordinate role.
Form of primary attribution.
Problem with that- often those at the top are very divorced from day to day running.
Meridian Global Funds v SC 1995- company charged with breach of share regulation. Board weren't involved in day to day so no primary attribution. Whose acting mind is relevant? Here it was the person in charge of trading and he knew and failed to disclose. This was secondary attribution.
McNicholas v CEC 2000- site manager was at fault. Look at who is running it and their mind and acts.
Question of facts.
Problem with attribution-
Hampshire Land 1896- gives us the Hampshire Land Principle. If company is suing own directors for fraud, if say their fraud is fraud of the company, then is the company relying on its own fraud? Contrary to public policy. Courts decided this was absurd. So the Hampshire Land Principle is that if the company is suing the directors, we dont care about attribution.
Stone and Rolls v Moore Stephens 2009 (bad decision) - company suing auditors for negligence, failing to spot fraud of the directors.
3-2 said that they couldnt sue. Said Hampshire Land Principle didnt apply and attribution did. Breach caused by companys own fraud. 2 reasons- not action against directors and companys own fraud. Also directors concerned were also the only shareholders and so would have benefitted from any damages.
Bilta v Nazir 2015 SC- against directors because had been involved in VAT fraud. Revenue recovered money from company, company wanted from the directors. 7 SC judges said company allowed to sue and reaffirmed Hampshire Land Principle. Director cannot use his or her own fraud as a defence to an action against them. Breach of duty exception.
- Stone Rolls- damages may go to creditors. Doesnt matter if theres no innocent shareholders.
- All said Stone Rolls had limited applicability.
Will apply against third parties, even if no innocent shareholders.
Torts? If a company commits a tort, when can you make the director also liable?
Williams v Natural Life Health Foods 1998- sole director makes negligent statement. Company has no money but he does. HoL said that cant sue the man, he isnt liable.
Attribution doctrine- tort
He had to intend to be bound by the statement to be liable. His acts were the companys acts.
Standard Chartered Bank v Pakistan Shipping 2003- fraud. Tort of deceit. Dishonest statement. He and the company were liable.
Simply being a director will not make you a tort feasor. They must have been involved in the tort. MCA Records v Charly Records 2003.
Hannigan notes- corporate personality-
- For piercing, there must be impropriety linked with the use of the company structure to avoid or conceal liability for the impropriety.
- The jurisdiction to pierce the corporate veil- Prest v Petrodel- Sumption- 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.' Only possible if there is no other remedy availabele because if its not necessary to pierce the veil, its not appropriate becasue there is no public policy imperative to do so.
- Deliberate evasion- evasion must be of some pre-existing obligation of X owed to Y, which exists independently of the company's involvement.
- VTB Capital- fundamental objection was that piercing was being invoked to create a new liability that would not have existed before.
- The company need not be set up for the purpose of evasion, it suffices that it is being used for evasion at the time of the transaction in issue. Motive must be deliberate evasion or frustration of enforcement procedures. Focus is on the dishonest use for an evasive purpose.
- Sumption- Concealment lifts the veil, not pierces it. The court looks behind it. Evasion is where the court may disregard the corporate veil. Despite this lifting the veil is pretty much the same as piercing.
Hannigan notes- corporate personality-
- Lord Neuberger accepted can be used interchangably in VTB Capital. Lord Clarke also rejected the distinction.
- Prest must mean that resorting to piercing will hardly ever be relevant or sought in the future. It has been kept just to keep flexibility in novel situations.
Corporate group- separate entities or single unit-
- Separate legal entities- strictly use the Salomon approach. Adams v Cape contraversial as council said the veil should be pierced because the purpose of the group structure was that the English parent company could trade in the US through subsidiaries without running the risk of tortious liabilities with respect to its asbestos business.
- Creditor issues- main reason for group structure is to limit legal liability. Creditors of a group company should identify the precise subsidiary they are dealing with and appreciate Salomon will prevent claims to other parts of the group. If they want to make other parts liable they will need guarantees. Will normally only get a letter of comfort as in Kleinwort Benson v Malaysian Mining Corp. These have no binding effect.
- Directors duties- where subsidiary company is within a group of companies, the director must act in good faith (s172(1)) to promote the success of the subsidiary.
Hannigan notes- rules of attribution-
Corporate liabilities in tort-
- Agent or employee is liable personally and the company vicariously, and they are joint tortfeasors (each joint tort feasor being responsible for the whole loss caused.) The director is not automatically identified with his company for the purpose of torts.
- Personal liability for torts committed by a director- Standard Chartered Bank v Pakistan National Shipping- Rodger said that someone who has committed a tortious act is liable for their consequences, whether the company is also liable depends on the circumstances. First consideration is whether they committed a tort.
- Greater reluctance to hold a director personally liable for negligent misrepresentations of his company as in Williams v Natural Life Health Food.
- Can hold a director liable as joint tortfeasor with the company, where although he hasnt committed the act himself, the director has authorised or procured the wrongful act. MCA Records v Charly Records. Importance is that a director cannot evade liability by getting an employee to carry out his wrongful acts.
Hannigan notes- rules of attribution-
- Meridian gives the rules on directing mind and will. Changed it from looking at corporate hierarchy to looking at the purpose of the statute and furthering that. Question of construction in each case.
- In criminal context should use Tesco v Nattrass as starting point.
Breach of duty to company-
- where company director is involved in breach of duty to the company. Hampshire Land Principle as explained by Mance in Stone and Rolls- 'prevents a company being treated as a party to fraud committed by its officers on or against the company, at least in the context of claims by the company for redress for offences committed against the company.'
- Order to do in- piercing the veil, then contract issues, then tort issues.
- Remember Meridian for tort- Senior Employee allowed to be liable for the company. Need to see the purpose of the act and legislation. Policy decision.
- Prest doesnt overrule Adams as Prest is family law.
- Remember to look at Bilta.
- Should start with Adams v Cape and Prest v Petrodel.
- Could look at single economic unit, then agency agreement as in Adams, and then fraud.
- Adams v Cape says you can make a subsidiary to prevent future harm. It is only evasion if made after to avoid pre-exisiting obligations.
- Chandler- health and safety must be superior in the holding company.
- Pierce in the interests of justice? Remember if they wont do it for Adams and 20 people with lung cancer, then they wont do it for anyone.
- Bilta- says fraudulent actions cannot be attributed to the company, he cant use ex turpi causa.