Gustavo Martinez -Dissertation

Gustavo Martinez
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UNIVERSITY OF HERTFORDSHIRE
SCHOOL OF LAW
LLB DISSERTATION
EXAM NUMBER - ******
NUMBER OF WORDS – 10,425
HYPOTHESIS - THE LAW ON LIFTING THE CORPORATE VEIL IS VERY UNCERTAIN
AND NEEDS CODIFICATION
ABSTRACT- This dissertation examines the corporate veil, the circumstance which will give
rise to English law lifting the corporate veil as well as their uncertainty and its possible need
for codification. This dissertation will seek to critically analyse to what extent there is
uncertainty on the law in lifting the corporate veil and whether codification may be a solution
to such uncertainty.
This Dissertation will achieve this by introducing the history of the corporate veil and its
development. Furthermore the reluctance of the courts to pierce the corporate veil will be
considered and an explanation of the meaning of piercing the corporate veil will be provided.
Also situations where the corporate veil was pierced will be analysed and the exceptions that
gave rise to this outcomes and their uncertainty.
Finally it will be considered whether the exceptions which are permissive to the piercing of
the corporate veil should be codified to provide an unambiguous answer as to when the veil
can be pierced; and whether this would be favourable measure for courts.

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TableofContents
Introduction................................................................................................................................ 1
1. History of the Corporate Veil .................................................................................................... 3
1.2The court’s reluctance to pierce the veil ................................................................................ 7
1.3 What is meant by lifting the corporate veil?........................................................................ 12
2. The Exceptions to the Corporate Veil and Their Uncertainty .....................................................15
2.1 Judicial Provisions or Grounds for Lifting the Veil..................................................................15
2.2 Statutory Provisions for Lifting the Veil ................................................................................19
2.3 The Uncertainty within the Application of the Doctrine.........................................................24
3. The Exceptions to the Corporate Veil need Codification...........................................................31
Conclusion ..................................................................................................................................36
Bibliography................................................................................................................................39
Cases........................................................................................................................................39
Legislation................................................................................................................................40
Books .......................................................................................................................................41
Articles.....................................................................................................................................41
Other Sources...........................................................................................................................42

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1. History of the Corporate Veil
Incorporation of a company by registration was introduced in 1844 and the doctrine of limited
liability of a company followed in 1855. The principal benefit of incorporation from which all
others follow is the separate entity of the company. Subsequently in 1897 in Salomon v.
Salomon & Company1
, the House of Lords established that once a company is legally
incorporated, that company will be regarded as an autonomous legal person, capable itself
of owning property and bearing rights and obligations, and existing independently and
distinct both from its original incorporations and the controlling mind(s) who may at any time
be operating the company’s business.2
This principle is referred to as the ‘veil of
incorporation’.
This principle of a separate personality was further implemented in the House of Lords in
Woolfson3
where Sir Godfray submitted, “save in cases which turn on the wording of
particular statutes or contracts, the courts is not free to disregard the principle of Salomon v
Salomon merely because it considers that justice so requires. Our law, for better or worse,
recognises the creation of subsidiary companies, which though in one sense are the
creatures of their parent companies, will nevertheless under the general law fall to be treated
as separate legal entities with all the rights and liabilities which would normally attach to
separate legal entities”.
However the English corporate veil doctrine has had an unstable development. The attitude
of English courts toward the doctrine has oscillated from enthusiasm to outright hostility.4
The history of the English doctrine can be roughly divided into three periods. The first period
lasted from 1897, when Salomon v. Salomon was decided,5
to around the Second World
1 Salomon v A. Salomon & Co Ltd [1897] A.C. 22 HL
2 P.L. Davies,Gower and Davies’Principles of Modern Company Law, (7th ed., Sweet and Maxwell,London,
2003) 3-4
3 Woolfson v Strathclyde Regional Council (1978) SLT 159
4 Thomas Kcheng, 'The Corporate Veil Doctrine Revisited: A Comparative Study of the English and the US
Corporate Veil Doctrines' [2011] 34(2) Boston College International and Comparative Law Review 334
5 Salomon v A. Salomon & Co Ltd [1897] A.C. 22 HL, 22

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War. This period can be called the early experimentation period, during which English courts
experimented with different approaches to the doctrine.6
Given Salomon’s revered status in
English law—the 1897 House of Lords decision firmly established the primacy of separate
corporate personality and limited liability—one may be excused for forgetting that limited
liability was highly controversial at its inception.7
Limited liability was not established in Salomon itself. Rather, the British Parliament granted
limited liability to English companies in the Limited Liability Act of 1855.8
Salomon merely
affirmed its availability to so-called one-man companies.9
Even after the passage of the Act,
limited liability remained controversial, at least as applied to “one-man companies.”10
This is
evident from the appellate decision in Salomon v. Salomon, where the English Court of
Appeal unanimously imposed personal liability on Mr. Salomon for his company’s debts.11
Although the House of Lords affirmed the separate legal personality of one-man companies
in Salomon, it did not settle the issue once and for all. English courts began to pierce the veil
soon after Salomon12
. These early cases included Apthorpe v. Peter Schoenhofen Brewing13
and St. Louis Breweries v. Apthorpe14
, both of which were taxation cases involving very
similar facts. Veil piercing was not confined to single-shareholder companies. The courts
regularly pierced the veil of companies with multiple shareholders.15
6 Gilford Motor Co. v Horne, [1933] Ch. 935 A.C. 956 (piercing the veil for attempting to evade a legal
obligation); Re Darby, Brougham, [1911] 1 K.B. 95, 103 (piercing the veil because of misrepresentation)
7 Paul Halpern,Michael Trebilcock & Stuart Turnbull,An Economic Analysis of Limited Liability in Corporation
Law, 30 U. Toronto L.J. 117, 118–19 (1980)
9 Salomon v A. Salomon & Co Ltd [1897] A.C. 22 HL, 42-43
10 Paul Halpern,Michael Trebilcock & Stuart Turnbull,An Economic Analysis of Limited Liability in Corporation
Law, 30 U. Toronto L.J. 117, 119 (1980)
11 Broderip v. Salomon,[1895] 2 Ch. 323 (A.C.) 340–41
13 Apthorpe v. Peter Schoenhofen Brewing [1899] 15 T.L.R. 245 (A.C.) 245
14 St. Louis Breweries v. Apthorpe [1898] 15 T.L.R. 112 (Q.B.) 112
15 Thomas Kcheng, 'The Corporate Veil Doctrine Revisited: A ComparativeStudy of the English and the US
Corporate Veil Doctrines' [2011] 34(2) Boston College International and ComparativeLaw Review 336

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This was a period of considerable enthusiasm for the corporate veil doctrine. Successful veil
piercing cases in the first half of the twentieth century included Gilford Motor v. Horne16
, In re
Darby, Brougham,17
Trebanog Working Men’s Club and Institute, Ltd v. MacDonald,18
and
Rainham Chemical Works, Ltd. v. Belvedere Fish Guano Co.19
The lack of a well-defined
approach to the doctrine meant that English courts had to experiment with existing common
law concepts such as agency, trusteeship, and tort liability principles to resolve corporate
personality issues.20
These experiments failed to yield a generally applicable framework. But
this lack of a general framework did not prevent the courts from piercing the veil when the
circumstances so warranted.21
This is not to say that the plaintiffs were always successful.
There were instances in which the courts refused to pierce the veil.22
Nevertheless, the
corporate veil doctrine was robust in this period.
The second period began after the war; and continued that way until 1978, the year when
Woolfson v. Strathclyde Regional Council was decided.23
This period can be regarded as the
heyday of the doctrine. Much of the vitality of the doctrine during this period can be attributed
to Lord Denning, who was an enthusiastic advocate and practitioner of veil piercing and one
of the most influential English jurists of the second half of the twentieth century.24
After the Second World War, the English corporate veil doctrine entered its golden era. As
mentioned earlier, the vigour of the doctrine was in no small part due to Lord Denning. Who
took part in a string of corporate veil cases between the 1950s and 1970s, including
16 Gilford Motor v. Horne[1933] Ch. 943
17 Re Darby, Brougham [1911] 1 K.B. (100)
18 Trebanog Working Men’s Club and Institute, Ltd v. MacDonald [1940] 1 K.B. 576,[582]
19Rainham Chemical Works, Ltd. v. Belvedere Fish Guano Co [1921] 2 A.C. 465 (H.L.) 466–67
20 Murray A. Pickering, The Company as a Separate Legal Entity, 31 Mod. L. Rev. 481, 481 (1968) 482–83
(recognizingthat English courts created a tangled history regarding corporatepersonality in the pre- and post-
WWII eras)
21
RainhamChemicalWorks,Ltd. v.Belvedere Fish Guano Co [1921] 2 A.C.465 (H.L.) 493-94
23 Woolfson v Strathclyde Regional Council (1978) S.C.(H.L.) 90, 90

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S.C.W.S. v. Meyer,25
Littlewood v. IRC,26
and D.H.N. v. Tower Hamlets LBC.27
His
enthusiasm for the doctrine was best encapsulated in his judgment in Littlewoods, where he
warned against blind adherence to Salomon. Lord Denning’s call for judicial flexibility toward
corporate entities would eventually culminate in his much-criticized decision in D.H.N. as
early as 1956. In D.H.N., a unanimous English Court of Appeal allowed a parent company to
claim compensation for disturbance of business under the Land Compensation Act, even
though the business and the land on which it sat were owned by different corporate
entities.28
Lord Denning’s judgment opened with these famous words: “This case might be
called the ‘Three companies in one’, alternatively, One group of three companies.”29
Lord
Denning continued on to describe the single economic unit theory, 30
declaring that “this
group is virtually the same as a partnership in which all the three companies are partners.
They should not be treated separately so as to be defeated on a technical point”. That year
marked the height of the corporate veil doctrine. Subsequent development proved that this
optimism was misplaced and saw the English judiciary turning increasingly frosty toward the
doctrine.
Two years later, the House of Lords openly questioned the reasoning in D.H.N. In his
judgment in Woolfson v. Strathclyde Regional Council, Lord Keith of Kinkel expressed doubt
as to “whether in this respect the Court of Appeal properly applied the principle that it is
appropriate to pierce the corporate veil only where special circumstances exist indicating
that it is a mere façade concealing the true facts.”31
Woolfson signalled the beginning of the
decline of the doctrine. Woolfson marked the beginning of the third period, which has lasted
to this day and has seen the doctrine fall into disfavour.32
25 Scottish Cooperative Wholesale Society v. Meyer [1959] A.C. 324 (H.L.) 364
26 Littlewoods Mail Order Stores v. Inland Revenue Commissioners [1969] 1 W.L.R. 1241 (A.C.) 1254
27 D.H.N. Food Distributors Ltd. v. Tower Hamlets London Borough Council[1976] 1 W.L.R. 852 (A.C.) 857
28 D.H.N. Food Distributors Ltd. v. Tower Hamlets London Borough Council[1976] 1 W.L.R. 852 (A.C.) 857 -58,
860–61, 867–68
29 Ibid,857
30 Ibid,860
31 Woolfson v Strathclyde Regional Council (1978) S.C.(H.L.) 90, 96
32 Woolfson v Strathclyde Regional Council (1978) SLT 159, 96

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1.1. The courts’ reluctance to pierce the corporate veil
Since the 19th
century ruling in Salomon v Salomon [1874] AC 22 which stated companies
were legal entities and a court had no business peering beneath the veil of incorporation to
see what was happening there, the rule has been revisited and reinforced in cases such as
Adams v Cape Industries plc.33
However, the sanctity of the legal integrity and identity of
companies has been protected with vigour by the courts which have a strong disinclination
for anyone, let alone them, peering under the skirts of a company to examine its linen (dirty
or otherwise)34
.
In Adams v Cape35
the claimants argued that for the purposes of enforcing the judgment of a
US Federal Court, an English Cape holding company was in reality "present in the United
States". Cape had engaged in some corporate restructuring aimed, at least in part, at
reducing the likelihood of it being caught by US jurisdiction. The group was arguably
managed as a single economic unit. The claimants argued that the separate legal
personalities of the English company and its US subsidiary should be ignored. the Court of
Appeal expressly declined to “pierce the veil of incorporation” even when it was alleged that
the corporate structures with respect to a subsidiary had been created purely to place liability
most advantageously for the parent company. It also described the exception to the rule in
Salomon as "well-recognised," doing so on the authority of Lord Keith in Woolfson v
Strathclyde Regional Council, where his Lordship stated ‘it is appropriate to pierce the
corporate veil only where special circumstances exist indicating that it is a mere facade
concealing the true facts’.36
33 Adams v Cape Industries plc [1990] 1 Ch 443, [1991] 1 All ER 929
34 Victoria Von Wachter, 'The corporate veil' [2007] 157(7281) The New Law Journal
35 Adams v Cape Industries plc [1990] 1 Ch 443, [1991] 1 All ER 929
36 Woolfson v Strathclyde RC (1978) S.C. (H.L.) 90; [1978] S.L.T. 159 HL

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In Woolfson37
, one of the claimants argued that the "corporate veil" should be "pierced" so
as to allow him to recover compensation as a result of the compulsory acquisition of land
belonging to a company 99.9 per cent owned by him. Note that this is well outside the area
of "fraud unravels all" and that the argument has nothing to do with the separate existence of
the company being a "sham" or "façade".38
Reliance was placed on the decision of the Court
of Appeal in DHN Food Distributors v Tower Hamlets London Borough Council39
where
"piercing the corporate veil" was one of three alternative bases upon which the Court of
Appeal reached a decision favourable to the claimant in Woolfson. Referring to DHN, Lord
Keith said: "I have some doubts whether in this respect the Court of Appeal properly applied
the principle that it is appropriate to pierce the corporate veil only where special
circumstances exist indicating that it is a mere façade concealing the true facts."40
Lord Keith rejected Woolfson’s arguments and decided that the Court of Appeal was wrong,
in DHN, to have relied on "piercing the corporate veil" as one of the three bases for its
decision. But in saying what he did, he could of course also be taken to have decided that
there was such a principle as "piercing the corporate veil".41
However, as noted by Lord
Neuberger in VTB Capital in the Supreme Court, 42
this statement was obiter and the
existence of the principle was not in issue in Woolfson. The question that arises is therefore
whether there was any basis for Lord Keith’s acceptance that the principle existed.
However Cyril Kinsky43
provides some light to this question, as in his case comment he
analyses the impact on piercing the veil principle after the decision in Prest44
, examining
38 Cyril Kinsky QC, ‘Piercing the corporate veil' [2014] 1(44-45) P.C.B. 47
39 DHN Food Distributors v Tower Hamlets LBC [1976] 1 W.L.R. 852; 74 L.G.R. 506 CA (Civ Div)
40 DHN Food Distributors v Tower Hamlets LBC [1976] 1 W.L.R. 852; 74 L.G.R. 506 CA (Civ Div),96
41 Ben Hashem v Ali Shayif [2008] EWHC 2380 (Fam); [2009] 1 F.L.R. 115 Munby J. took Woolfson to be the
"starting point", with the result that his comprehensive analysis took for granted the existence of the
"principle".
42 Ibid, 121
43 Cyril Kinsky QC, ‘Piercing the corporate veil' [2014] 1(44-45)
44 Prest v Petrodel Resources Ltd 2013] UKSC 34

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cases where the argument of the principle of piercing of the veil has been rejected,45
focusing on cases such as: Cape46
and Woolfson47
to establish the recognition of the
principle of the piercing of the veil despite their rejection.
Kinsky states that “in several different contexts, in Woolfson Lord Keith mentioned only
DHN48
as the basis for the existence of the principle as a matter of law”.49
In that case the
plaintiff corporate licensee of premises was also the owner of the licensor.
In proceedings arising out of a compulsory purchase order, it argued that it should be
granted substantial compensation for disturbance even though, technically, as licensee, the
compensation to which it was entitled under the statute was very limited. It was successful
on three separate grounds, the second of which was that the "veil" between parent and
subsidiary should be "pierced" and they should be treated as one economic unit.50
In his judgment, Lord Denning referred to the fact that for some accounting and tax purposes
the law treats groups of companies as one economic entity. He thought that the fact that the
three companies in the group were separate legal entities was no more than a technicality
and that the plaintiff should not be denied compensation on that ground. Kirsky further states
that “Agreeing that the corporate veil should be pierced, Goff L.J. took a slightly more careful
approach. He referred to three cases which he thought supported his view that, on the
appropriate facts, the law should treat separate companies as being one and the same”.51
The first of the cases was Unit Construction v Bullock,52
a case which decided that where a
Kenyan company with a Kenyan based boards was in fact controlled and managed from the
UK, it was “resident in the United Kingdom” for tax, the second of them Daimler v
46 Adams v Cape Industries Plc (1990) Ch 433
52 Unit Construction v Bullock [1960] A.C. 351 HL

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Continental Tyre & Rubber53
concerned the construction of a statutory provision, and the
third was Merchandise Transport Ltd v British Transport Commission,54
a case about the
grant of goods vehicle licences and once again concerning how a statute should be
interpreted. Goff L.J. referred to the following words of Danckwerts L.J. in that case as
supporting his approach: "[the cases] show that where the character of a company, or the
nature of the persons who control it, is a relevant feature the court will go behind the mere
status of the company as a legal entity, and will consider who are the persons as
shareholders or even as agents who direct and control the activities of a company which is
incapable of doing anything without human assistance."55
In Kirsky’s words, “it can now be
seen that the basis for the assumption in the obiter cases that the doctrine exists is paper
thin”.56
In a recent Supreme Court Decision, In VTB57
, the Supreme Court affirmed the decision of
the Court of Appeal (noted in (2013) 129 L.Q.R.21) and declined to pierce the corporate veil
in order to treat the alleged principal beneficial owner and controller of a company as jointly
and severally liable for the breach of a facility agreement entered into by it, which would
have made him liable as if he were a co-contracting party even though neither he nor any
other party intended him to be such.58
Although the Court of Appeal unequivocally rejected the general proposition that the
corporate veil cannot be pierced, Lord Neuberger of Abbotsbury P.S.C. was sympathetic to
the argument that there is no principled basis on which the veil can be pierced. This is
because "the precise nature, basis and meaning of the principle are all somewhat obscure,
as are the precise nature of circumstances in which the principle can apply".59
53 Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd [1916] 2 A.C. 307 HL
54 Merchandise Transport Ltd v British Transport Commission [1962] 2 Q.B. 173
55 DHN Food Distributors v Tower Hamlets LBC [1976] 1 W.L.R. 852; 74 L.G.R. 506 CA (Civ Div), 469
57 VTB Capital Plc v Nutritek International Corp [2013] UKSC 5; [2013] 2 W.L.R. 398 (SC)
58 Ernest Lim, 'Salomon reigns ' [2013] 129(Oct), (480-485) L.Q.R. 480
59 VTB Capital Plc v Nutritek International Corp [2013] UKSC 5; [2013] 2 W.L.R. 398 (SC), 123

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Secondly, Lord Neuberger appeared to qualify Lord Keith of Kinkel’s dictum in Woolfson60
that the corporate veil can be pierced "only where special circumstances exist indicating that
it is a mere façade concealing the true facts", by stating that in addition to impropriety,
control of the company by the wrongdoer is necessary, 61
endorsing Munby J.’s dictum in Ben
Hashem.62
Finally, although the Court of Appeal interpreted Lord Keith’s dictum in Woolfson ("mere
façade concealing the true facts") as meaning that that is the only circumstance in which the
veil can be pierced, Lord Neuberger said that "more generally, it may be right for the law to
permit the veil to be pierced in certain circumstances in order to defeat injustice".63
But his
Lordship cited no authority to support this proposition, nor did he state what those
circumstances are. With respect, apart from its inherent vagueness and uncertainty, the
proposition that piercing the corporate veil is justifiable when required by justice does not sit
well with the dictum64
in Adams 65
which states that "save in cases which turn on the wording
of particular statutes or contracts, the court is not free to disregard the principle of Salomon66
merely because it considers that justice so requires."
On the facts, the Supreme Court rejected piercing the corporate veil on the ground that it
would be an extension of the circumstances in which this had been done previously: "it
would lead to the person controlling the company being held liable as if he has been a co-
contracting party with the company concerned to a contract where the company was a party
and he was not".67
Further, the facts did not involve the company being used "as a façade
60 Woolfson v Strathclyde Regional Council (1978) S.L.T. 159, 161
62 Ben Hashem v Al Shayif [2008] EWHC 2380 (Fam); [2009] 1 F.L.R. 115, 163–164
64 Ernest Lim, 'Salomon reigns ' [2013] 129(Oct), (480-485) L.Q.R. 481
65 Adams v Cape Industries [1990] Ch. 433, 536
66 Salomon v A. Salomon & Co. Ltd. [1897] A.C. 22

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concealing the true facts"68
because the situation was not one in which it was the person
behind the company, rather than the company, which was the relevant actor or recipient.
Nor did the justice of the case require piercing the veil, because the claimant bank could
seek redress from the individual if it could successfully establish that it was induced (as was
alleged by the claimant) to enter into the facility agreement by the fraudulent statements
made by that individual.69
According to Victoria Wachter “It seems that the courts will go to great lengths to avoid any
obvious penetration of the corporate veil, while still making the sort of inquiries that would be
satisfied by just such a process”.70
This theory of corporate entity is indeed the basic principle
on which the whole law of corporations is based. Instances are not few in which the Courts
have successfully resisted the temptation to break through the corporate veil.
1.2 What is meant by lifting the corporate veil?
‘Lifting the veil’ refers to situations where the judiciary or the legislature has decided that the
separation of the personality of the company and the members is not to be maintained. 71
In other words, where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate personality. In
this regards the court will break through the corporate shell and apply the principle of what is
known as “lifting or piercing through the corporate veil.” And while by fiction of law a
corporation is a distinct entity, yet in reality it is an association of persons who are in fact the
beneficial owners of all the corporate property.72
In United States V. Milwaukee Refrigerator
Co., the position was summed up as follows: “that a corporation will be looked upon as a
legal entity as a general rule, and until sufficient reason to the contrary appears; but when
68 Ibid,142
69 VTB Capital Plc v Nutritek International Corp [2013] UKSC 5; [2013] 2 W.L.R. 398 (SC), 139 and 146
70 Victoria Von Wachter, 'The corporate veil' [2007] 157(7281) The New Law Journal
71 Alan Dignam and John Lowry, Company Law (7th edn, OUP Oxford 2012) 31
72 Alan Dignam and John Lowry, Company Law (7th edn, OUP Oxford 2012) 31

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the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as an association of persons."73
In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs, Denning stated that “the
doctrine laid down in Salomon v. Salomon and Salomon Co.Ltd, has to be watched very
carefully. It has often been supposed to cast a veil over the personality of a limited liability
company through which the Courts cannot see. But, that is not true. The Courts can and
often do draw aside the veil. They can and often do, pull off the mask. They look to see what
really lies behind”.74
Furthermore, Lord Keith’s dictum in Woolfson, stated that “the court is not free to disregard
the principle of Salomon75
merely because it considers that justice so requires”76
, and that “it
is appropriate to pierce the corporate veil only when special circumstances exist indicating
that it is a mere facade concealing the true facts”.77
This means that the principle in the Salomon’s case must be used with care to balance the
need for a company to be treated as a separate entity from its members and the need for a
just running of business. Indeed, "the legislature can forge a sledgehammer capable of
cracking open the corporate shell"78
and even without statutory assistance, the courts have
often been ready to draw aside the veil and impose legal liability on members and directors
where to apply the Salomon principle strictly would lead to injustice, inconvenience or
damage to government finances.
73 United States v Milwaukee Refrigerator Transportation Co. (1905) 142 F. 247,(7th Cir.) 255
74 Littlewoods Mail Order Stores Ltd. v IRC [1969] 1 W.L.R. 1241, 1254
76 Woolfson v Strathclyde Regional Council (1978) S.L.T. 159,536
77 Woolfson v Strathclyde Regional Council (1978) S.L.T. 159,96
78 Bank voor Handel en Scheepvaart NV v Slatford [1953] 1 QB 248 (278) Per Devlin LJ

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Therefore it can be agreed that in certain cases the veil of incorporation is thus said to be
lifted. It is also described as ‘piercing’79
, ‘lifting’,80
‘penetrating’, ‘peeping’ or ‘parting’ the veil
of incorporation.
In Prest v Petrodel Resources Ltd, Lord Sumption described veil piercing as cases "where a
person who owns and controls a company is said in certain circumstances to be identified
with it in law by virtue of that ownership and control".81
It is sometimes said that when doing
this the courts look at the reality of the situation rather than the structural form. Although this
may take place, the separate personality of the company still remains intact.
The fact that the corporate veil may be pierced, it does not impose that the company ceases
to be a legal person. What in reality means, is that the resulting consequences of such
personality are disregarded within a particular context, e.g. to impose liability on a
shareholder for a particular transaction entered into by the company, or ascribing to a
company a particular character taken by reference to its shareholders or directors.82
This apparently straightforward principle, the rationale for which is seldom articulated, has,
however, sometimes been ignored, mainly in situations where there has been a possibility of
fraudulent use of a corporate structure. Typically, the courts have justified their intervention
on grounds of lifting the veil or some other metaphorical piece of apparel such as a "cloak or
sham"83
a mere device"84
, "a mere channel",85
"a mask",86
or "a façade concealing the real
facts".87
79 Alex Lobb (Garages) Ltd v Total Oil GB [1985] 1 W.L.R. 173 CA (Civ Div) at 178
80 Creasey v Breachwood Motors Ltd [1993] B.C.L.C. 480 QBD at 491
81 Prest v Petrodel Resources Ltd [2013] UKSC 34; [2013] 3 W.L.R. 1, 16; Ernest Lim, "Salomon Reigns" (2013)
129 L.Q.R. 480
82 Merchandise Transport Ltd v British Transport Commission [1962] 2 Q.B. 173 CA at 206–207
83 Gilford Motor Co Ltd v Horne [1933] 1 Ch. 935 CA at 961, 965 and 969
84 Gilford Motor Co v Horne [1933] 1 Ch. 935 at 961; Jones v Lipman [1962] 1 W.L.R. 832 Ch D at 836
85 Gilford Motor Co v Horne [1933] 1 Ch. 935 at 965
86 Jones v Lipman [1962] 1 W.L.R. 832 at 836
87 Woolfson v Strathclyde RC (1978) S.C. (H.L.) 90 HL, 96; Adams v Cape Industries Plc [1990] 2 W.L.R. 657 CA
(Civ Div), 759; Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd [1999] 2 S.L.R.(R) 24, 39

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2. The Exceptions to the Corporate Veil and Their Uncertainty
It is well established that there are a number of examples 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 known as ‘lifting the veil’ can
be found in both common law and statutory provisions.
For the purpose of establishing these exceptions to the general principle in Salomon,88
both
the judicial grounds and statutory provisions which permit the lifting or piercing of the
corporate veil will be explored and analysed.
2.1. Judicial Provisions or Grounds for Lifting the Veil
The wide scope for exploitation of the companies’ legislation resulting upon strict adherence
to Salomon has forced the courts to forge a limited range of exceptions to the principle in
Salomon to curb extreme cases of abuse. As a result the leading case of Cape89
, grounds
upon which a court will be justified in disregarding a company’s autonomous existence was
provided by Slade L.J. His lordship identified two grounds upon which a court is permitted to
“pierce the corporate veil” in any case. The first and most significant of these is known as the
“sham” or “façade” ground. This will arise in cases where an existing incorporated or
unincorporated trader uses a company as nothing more than an artificial device for the
purpose of “shielding” themselves from their pre-existing liabilities under contract, tort or
statute.90
In Gilford, 91
the defendant was formerly managing director of the claimant company and was
subject to an agreement not to approach clients of the company after his employment had
ended. After leaving the company, him and his wife together incorporated a company and
89 Adams v Cape Industries Plc [1991] 1 All E.R. 929
90 [1991] 1 All E.R. 929, per Slade L.J., at 1022-26
91 Gilford Motor Co. Ltd v Home [1933] Ch 935 (CA)

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used the company to approach the customers of his former employers. The defendant had
set up the company, not for genuine purposes but as a ‘sham’ to hide his intention to break
the agreement with his former employers. This was an abuse of corporate personality and
the court allowed for the lifting of the veil.
The decision of the Court of Appeal in Gilford was followed at first instance in a second case
based on an essentially similar set of circumstances. In this case, Jones v Lipman92
, a man
contracted to sell his land and thereafter changed his mind and in order to avoid an order of
specific performance he transferred his property to a company. Russel J. specifically
referred to the judgments in Gilford v. Horne and held that the company here was "a mask
which (Mr. Lipman) holds before his face in an attempt to avoid recognition by the eye of
equity"93
.Therefore he awarded specific performance both against Mr.Lipman and the
company.
Kinsky in his opinion provides that “in both Gilford and Jones the identification of the
individual with the company runs in the opposite direction from the cases which are
understood to be the "standard" piercing of the corporate veil cases. In Gilford and Jones, if
there was any piercing at all, it involved the companies having the individual’s obligations
imposed on them, and not the other way round.”94
The second ground identified by Slade L.J. as a basis for piercing the corporate veil is the
“agency” ground. The autonomous identity of a company will be disregarded on this basis
only in the exceptional case where a subsidiary is totally and utterly under the control of its
parent to the extent that the subsidiary cannot be said to be carrying on its own business in
distinction from its parent.95
The possible range of cases in which a plaintiff will succeed in
an action based on the agency ground is extremely narrow. In particular, as Slade L.J. was
92 Jones v Lipman [1962] 1 All E. R. 442
93 Jones v Lipman [1962] 1 All E. R. 442, 70
95 Adams v Cape Industries Plc [1991] 1 All E.R. 929, per Slade L.J., at 1026-30

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quick to emphasise in Adams, the fact that a parent company carries on the business of its
group as a de facto “single economic unit” will not be sufficient to give rise to an agency
relationship as such.96
However it is a question of fact in each case whether the company is acting as an agent for
its shareholders. There may be an express agreement to this effect or an agreement may be
implied from the circumstances of each particular case. In the case of Re FG Films
Ltd,97
The Company was incorporated in England with a capital of £100, divided into 100
shares of £1 each. It made a film ‘Monsoon’, although owned by a UK company, was
considered "made" under the Cinematograph Film Act 1948 by the Americans who financed
and worked on it. The Board of Trade refused to register it as a British film because the film
had in reality been made by a large American company.
The American company provided at least £80,000 for the making of the film. 90 out of 100
shares of the company were held by the American director, who was also the president of
the American company, and the remaining ten were held by a British director. The British
company employed no staff. It was insignificant and its participation in the undertaking was
practically negligible.
The British company, it was held, was merely the nominee or agent of the American
company, which brought it into existence for the sole purpose of enabling the film to qualify
as a British film by evading the legislation. There was, thus, clear factual evidence that the
British company was only an agent of its controlling shareholder and it was because of that
that the court held so.
It has also been the case that a company may assume an enemy character when persons in
de facto control of its affairs are residents in an enemy country. In such a case, the Court
96 Ibid, at 1016-22
97 Re FG Films Ltd [1953] 1 WLR 483

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may examine the character of persons in real control of the company, and declare the
company to be an enemy company.98
In Daimler v Continental Tyre,99
the case concerned the application of the Trading with the
Enemy Act 1914. Under that Act it was illegal to pay any sum of money to an enemy. An
enemy was defined as "any person or body of persons of whatever nationality resident or
carrying on business in the enemy country … In the case of incorporated bodies, enemy
character attaches only to those incorporated in an enemy country."100
Furthermore the House of Lords’ decision in Daimler was that, although the plaintiff company
was incorporated in England, all of its directors at the time that the proceedings were
launched were German; under the Act they had no authority to cause the English company
to do anything, let alone launch proceedings. The claim was therefore liable to be struck out
having been launched (by the company secretary) without authority.
However, a majority of the House of Lords went on to decide the question of whether or not
the nationality of the shareholders of the company would render the plaintiff company an
enemy, in spite of its place of incorporation being England. 101
As a result it was held, the
company was an alien company and the payment of debt to it would amount to trading with
the enemy, and therefore, the company was not allowed to proceed with the action.
It is also the case that sometimes in the case of a group of enterprises the Salomon principal
may not be adhered to and the Court may lift the veil in order to look at the economic
realities of the group itself. In the case of D.H.N.,102
it has been said that the Courts may
disregard Salomon's case whenever it is just and equitable to do so. Gower in his book says,
98 C Wild and S Weinstein, Smith and Keenan's company law (16 edn, Pearson Education Limited 2013), 43
99 Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307
100 Thomas Baty and John Hartman morgan, War: Its Conduct and Legal Results (The Lawbook Exchange, Ltd
1915) 508

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"There is evidence of a general tendency to ignore the separate legal group".103
However,
whether the Court will pierce the corporate veil depends on the facts of the case. The nature
of shareholding and control would be indicators as to whether the Court would pierce the
corporate veil.
Finally avoidance of welfare legislation is as common as avoidance of taxation and the
approach of the Courts in considering problems arising out of such avoidance is generally
the same as avoidance of taxation. It is the duty of the Courts in every case where ingenuity
is expended to avoid welfare legislation to get behind the smokescreen and discover the true
state of affairs.104
The Courts may also lift the veil to protect public policy and prevent
transactions contrary to public policy. The Courts will rely on this ground when lifting the veil
is the most ‘just’ result, but there are no specific grounds for lifting the veil. 105
Thus, where
there is a conflict with public policy, the Courts ignore the form and take into account the
substance.106
2.2 Statutory Provisions for Lifting the Veil
A good starting point for the discussion of such statutory provisions is Lord Diplock’s state
statement in Dimbleby v National Union of Journalists107
when he observed: ‘the corporate
veil in the case of companies incorporated under the Companies Acts is drawn by statute
and it can be pierced by some other statute if such statute so provides; but, in view of its
raison d’etre and its constant recognition by the courts since Salomon v A. Salomon &Co
103 Professor Gower in Modern Company Law (3rd ed. I969), p. 216
104 Madhu Tyagi and Arun Kumar, Company Law (Atlantic Publishers & Dist 2003) 37
105 Madhu Tyagi and Arun Kumar, Company Law (Atlantic Publishers & Dist 2003) 37
106 Connors v Connors ltd. (1940) 4 AII E.R. 174
107 Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 WLR 427

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Ltd108
, one would expect that any parliamentary intention to pierce the corporate veil be
expressed in clear and unequivocal language’.109
It will be recalled that by reason of s.761 of the Companies Act 2006, a plc cannot
commence trading or exercise borrowing powers unless and until it has received a certificate
from the registrar under s.761 CA 2006. If it enters into any transaction contrary to this
provision not only are the company and its officers in default and liable to pay fines, but if the
company fails to comply with its obligations in that connection within 21 days of being called
upon to do so, the directors of the company are jointly and severally liable to indemnify the
other party in respect of any loss or damage suffered by reason of the company's failure.110
The taxation authorities in the UK have been highly aware of the potential for group moving
assets and liabilities to avoid taxation. As a result, there are lots of examples of taxation
legislation directed at ignoring the separate entities in the group.111
The Companies Act also recognises that group structures need to be treated differently for
financial and disclosure reporting purposes in order to get a suitable overview of the group
financial position. The CA 2006, s405 therefore provides that parent companies have a duty
to produce group accounts. Section 409 also requires the parent to provide details of the
subsidiaries’ names, country of activity and the shares it holds in the subsidiary.112
This
suggests that for financial purposes the companies within a group are one.
The Employment Rights Act 1996 s218 (2) also protects employees’ statutory rights when
transferred from one company to another within a group, treating it as a continuous period of
employment as continuity is preserved if an employee is employed in a 'trade, or a business
or an undertaking' or in an identifiable part of it that is sold. The business must have been
109 C Wild and S Weinstein, Smith and Keenan's company law (16 edn, Pearson Education Limited 2013) 47
110 C Wild and S Weinstein, Smith and Keenan's company law (16 edn, Pearson Education Limited 2013) 47
111 Alan Dignam and John Lowry, Company Law (Core Texts Series) (8th edn, OUP Oxford 2014) 31

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purchased as a 'going concern' and this will usually include the goodwill, know-how, benefits
of existing contracts, etc.113
Use of the term 'part of a business' does not mean that the part
in question was previously carried on as a separate or self-contained entity. Suffice that it is
capable of being run as a business by the new owner, whether or not he (or she) chooses to
do so.114
It is wrong to look at the transactions from the point of view of the employee. The
correct test is whether the purchaser had become the owner of the business in succession to
the vendor. If it is a different business after the transfer, continuity is broken.115
The Companies Act also has a number of general provisions which affect the separate legal
personality of the company. For example s24 CA 1985 provides for member liability for the
company’s debts if the membership of the company is less than two members and carries
business for more than six months. Since the Companies (Single Member Private Limited
Companies) Regulations 1992, this provision only applies to public companies, as single-
member private companies are allowed. The provision will be obviously further affected by
the Company Law Reform Bill which advises single-member public companies.116
As many
of the situations where ‘lifting the veil’ is at issue involve corporate bankruptcy, the
Insolvency Act 1986 has some key veil lifting provisions.
The Companies Acts have long recognised that the corporate form could be used for
fraudulent purposes. The 1948 Companies Act contained both civil and criminal sanctions
for what is known as ‘fraudulent trading’. While the CA 2006 still contains a criminal offence
in s993 for fraudulent trading the civil provisions are now contained in ss 213-215 of the
Insolvency Act 1986. It is these civil sanctions that operate to lift the corporate veil.117
Section 213 states: (1) “If in the course of the winding up of a company it appears that any
business of the company has been carried on with intent to defraud creditors of the company
113 Melon v Hector Power Ltd [1981] ICR 43, HL
114 Kenmir Ltd v Frizzell [1968] ITR 159 DC
115 Woodhouse v Peter Brotherhood Ltd [1972] ICR 186,CA
116 Stephen Griffin, Company Law: Fundamental Principles (4th edn, Longman 2005) 32

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or creditors of any other person, or for any fraudulent purpose, the following has effect”;
(2)”The court, on the application of the liquidator may declare that any persons who were
knowingly parties to the carrying on of the business in the manner above-mentioned are to
be liable to make such contributions (if any) to the company’s assets as the court thinks
proper”.
This section and its predecessor in the 1948 Act consistently proved difficult to operate in
practice.118
The main difficulty was that there was the possibility of a criminal charge also
arising. The courts therefore set the standard for intent fairly high. As the court explained in
Re Patrick & Lyon ltd, this involved proving 119
‘actual dishonesty, involving, according to
current notions of fair trading among commercial men, real moral blame’. It is difficult to
achieve this standard and finally a new provision was introduced in s214 of the Insolvency
Act 1986 to deal with what is known as ‘wrongful trading’.120
Section 214 was introduced to deal with situations where negligence rather than fraud is
combined with a mistreatment of corporate personality and limited liability. In other words
there was no need to prove dishonesty. This is known as ‘wrongful trading’. Section 214
states: (1) “if in the course of the winding up of a company it appears that subsection (2) of
this section applies in relation to a person who is or has been a director of the company, the
court, on the application of the liquidator, may declare that that person is to be liable to make
such contribution (it any) to the company’s assets as the court thinks proper.”
This subsection applies in relation to a person if “the company has gone into insolvent
liquidation, or at some time the commencement of the winding up of the company, that
person knew or ought to have concluded that there was no reasonable prospect that the
118 Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214
119 Re Patrick & Lyon Ltd [1933] Ch 786 at 790, Maugham J

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company would avoid going into insolvent liquidation, and that person was a director of the
company at that time.121
The idea behind the process of the section is that at some time towards the end of the
company’s trading history there will be a point of no return. That is, things are so bad the
company can no longer trade out of the situation. The case of Re Produce Marketing
Consortium Ltd122
is a good example of the way the section operates. Over a period of
seven years the company had slowly drifted into insolvency. There was no suggestion of
wrongdoing on the part of the two directors involved; it was just that they did not put the
company into liquidation in time and thus they had to contribute £75,000 to the debts of the
company.123
While s213 covers anyone involved in the carrying on of the business, thus qualifying the
limitation of liability of members, s214 is aimed specifically at directors. In small companies
directors are often also the members of the company and so their limitation of liability is
indirectly affected. Parent companies may also have their limited liability affected if they have
acted as a shadow director. A shadow director is anyone other than a professional adviser in
accordance with whose directions or instructions the directors of the company are
accustomed to act.124
A parent company might be in this position if it was exerting direct
control over the board of its subsidiaries.125
Only directors and shadow directors are liable
under s 214, IA 1986 for wrongful trading. There is thus no danger of auditors, bankers or
other advisers who are merely mounting a rescue campaign for the company becoming
involved under s 214,IA 1986 unless they participate in management more than is necessary
to carry out their functions, when they might be regarded as shadow directors.126
Since it is
necessary to prove fraud under s213, IA 1986, which is not an east matter, whereas only
121 Companies Act 2006, Ch 3, s 214 (2) (a-c)
122 Re Produce Marketing Consortium Ltd (No 2) [1989] 5 BCC 569
123 Re Rod Gunner Organisation Ltd [2004] 2 BCLC 110
124 Companies Act 2006,s251
125Alan Dignam and John Lowry, Company Law (Core Texts Series) (8th edn, OUP Oxford 2014) 33
126
C Wild and S Weinstein, Smith and Keenan's company law (16 edn, Pearson Education Limited 2013) 444

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proof of negligence is required under s214, IA 1986, it would appear that s214, which sets
out the requirements for wrongful trading, will clearly become the main section for directors’
personal liability.127
2.3 Uncertainty within the Application of the Doctrine
The principle that the court may be justified in piercing the corporate veil if a company’s
separate legal personality is being abused for the purpose of some relevant wrongdoing is
well established in the authorities. The difficulty is to identify what is a relevant wrongdoing,
this absence of a principled approach to veil piercing has been the subject of criticism by
judged and academics.
The English courts have been very unwilling to put aside the corporate personality doctrine,
even in instances of fraud, and some of these exceptions are statutory which makes the
corporate group exceptions even more interesting. According to Ian Ramsay128
‘a court may
also pierce the corporate veil where requested to do so by the company itself or
shareholders in the company in order to afford a remedy that would otherwise be denied,
create an enforceable right, or lessen a penalty.’
If individuals can take advantage of the corporate personality so to can companies because
as legal entities, they have the right to set up, own and run subsidiary companies thus
reducing their liability on certain business ventures. Were we to strictly apply the principle in
Salomon then this particularly novel exception would not exist because the veil of
incorporation would prevent two companies being perceived as one. However the courts
have been willing in some instances where it can be shown that the groups of companies
are a single economic entity to put aside the separate legal personality. In Briggs v James
Hardie & Co Pty Ltd, Rogers AJA said: "The threshold problem arises from the fact that
there is no common, unifying principle, which underlies the occasional decision of courts to
127
C Wild and S Weinstein, Smith and Keenan's company law (16 edn, Pearson Education Limited 2013) 444
128
Ian M Ramsay and David B Noakes, 'Piercing the Corporate Veil in Australia' [2001] 19(250-271) Company
and Securities Law Journal 252

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pierce the corporate veil. Although an ad hoc explanation may be offered by a court which so
decides, there is no principled approach to be derived from the authorities."129
The courts have approached corporate groups without an apparent pattern causing
considerable confusion, in some instances they have pierced the veil of incorporation and
other instances have refused to break the principle found in Salomon. This particular
exception seems the most out of step with the principle of Salomon and though apparently
without pattern the courts have been willing to pierce the veil to protect companies. As can
be demonstrated in The Albezero,130
Lord Justice Roskill strictly applied Salomon as to be
that each separate company in a corporate group ‘the rights of one company in a group
cannot be exercised by another company in that group even though the ultimate benefit of
the exercise of those rights would ensure beneficially to the same person or corporate body.’
F.G Rixon131
points out that whilst case authority does exist that supports the strictest
application of the Salomon principle, (lifting the veil only to prevent abuse of the doctrine),
they are not clear enough to prevent its use in these instances. In Tunstall,132
Lord Justice
Ormerod calls for protection of the veil to be pierced only in instances where the company is
a ‘mere facade’ but doesn’t expand on what he means by facade. In theory the possession
and control of a subsidiary company could be seen as a facade, that they are in fact one
company, and such a principle would cause little confusion. However the approach of the
courts has been less than consistent.
Marc Moore argues that whilst the need to bar application of the Salomon principle in certain
cases is undeniable, the particular way in which the English courts have rationalised these
“exceptional” cases is both wrong and doctrinally unsustainable.133
After undertaking a
129 Briggs v James Hardie & Co Pty Ltd & Ors (1989) 16 NSWLR 549, 567
130 Albacruz (Cargo Owners) v Albazero ‘The Albazero’ [1977] A.C 774, 807 (Roskill L J)
131 F.G Rixon ‘Lifting the veil between holdingand subsidiary companies’[1986] 102 Law Quarterly Review,423
132 Tunstall v.Steigmann [1962] 2 Q.B. 593, 602 (Ormerod L J)
133Marc Moore, '"A temple builton faulty foundations": piercingthe corporate veil and the legacy of Salomon v
Salomon' [2007] 1(SAGE) Journal of Business Law 181, p2

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thoroughgoing examination of the early cases that established “sham” or “façade” as a
legitimate exception to the principle in Salomon, Marc attempts to reconceptualise the
common law test for piercing the corporate veil in accordance with what he perceive to be its
“real” doctrinal roots.134
This
test is known as the “genuine ultimate purpose” or GUP rule.
Marc further argues that the doctrine he forwards as the “real” test for piercing the corporate
veil is considerably more onerous on incorporators than the established common law test.
This GUP rule, he claims it is unlike the existence “sham” doctrine, both derivable from the
established case law and practicably workable as applied to a wide range of potential
scenarios. Not only this but, in contrast to the existing test for piercing the corporate veil, the
GUP rule is normatively defensible. In particular, Marc argues that it elides the complex
trade-off between legal certainty and moral propriety that is inherent in the “sham” exception
to Salomon as presently conceived.135
However, the test he suggests seems more
complicated than is necessary and simpler checklist based test already exists in the Single
Economic Entity.
The argument has been made that there is a growing ‘general principle that all companies in
a group of companies will be treated as a single entity,’136
However the more recent case law
suggests that this general principle is now less popular and being tightened, as Marc
Moore137
, phrased it the English courts have become ‘primarily concerned with policing the
boundaries of any established exceptions to the principle in Salomon.’
The test offered by Moore is wider and more conceptual and would possibly be inclusive of
companies, which are subsidiary business ventures like in Cape and thus weaken the
concept of limited liability. Whereas the existing Single Economic Entity test is more factual
134 Marc Moore, '"A temple built on faulty foundations": piercing the corporate veil and the legacy of Salomon
v Salomon' [2007] 1(SAGE) Journal of Business Law 181, p2
135 Ibid
136 Morse Geoffrey, Palmer's Company Law (4th edn, 2015) 2.1538
137 Marc Moore, '"A temple builton faulty foundations": piercingthe corporate veil and the legacy of Salomon
v Salomon' [2007] 1(SAGE) Journal of Business Law181, p195

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and it simply needs to be established that a parent company has exercised complete
domination and control over the affairs and activities of a subsidiary.138
Though currently the
doctrine is being steered toward a more strict legal approach, common theme of
development in the doctrines developed by Denning, it is not yet clear if the liberal approach
is being dismissed.
In this regard, the decision of the Supreme Court in Prest v Petrodel Resources Ltd139
is to
be warmly welcomed. Prest represents a significant attempt to formulate a principled
approach to veil piercing. It therefore represents a fresh start to this sometimes vexed area
of corporate law.140
Prest involved a dispute over the division of matrimonial assets. The
husband was the sole owner of a number of offshore companies which in turn had legal title
to certain properties. Pursuant to divorce proceedings commenced against the husband, the
wife sought to obtain a transfer of various properties held by the offshore companies to
herself. At first instance, the judge took the view that s.24 (1) of the Matrimonial Causes Act
1973 conferred a wider power than at common law to pierce the corporate veil. As such, he
ordered the husband to transfer or cause to be transferred to the wife six properties and an
interest in a seventh which were held in the names of two of the husband’s companies.
On appeal, it was held by the majority that it was not open to the Family Division to treat the
assets of companies substantially owned by one party to the marriage as available for
distribution under s.24 of the Matrimonial Causes Act. The Act did not confer on the courts a
wider remit to ignore the separate personality of the company than was available at common
law. As there was no justification to pierce the veil at common law, the wife’s claim could not
succeed. The wife appealed to the Supreme Court.
The Supreme Court upheld this aspect of the Court of Appeal’s decision and declined to lift
138 Hargovan Anil and Harris Jasson, 'Piercing the Corporate Veil in Canada: A Comparative Analysis' [2007]
28(2) Company Lawyer
139 Prest v Petrodel [2013] UKSC 34; [2013] 3 W.L.R. 1
140 Tan Chen-han , 'Veil Piercing - a fresh start ' [2015] 1(20-36) Journal of Business Law 21

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the corporate veil and treat the company’s property as the husband’s property for the
purposes of the statutory provisions governing the distribution of spousal assets on divorce.
However, in the circumstances of the case the Supreme Court was satisfied that the two
companies held the seven properties on trust for the husband. Consequently the wife’s
appeal was allowed.141
Prest v Petrodel explains that in civil law jurisdiction, the judicial basis of the exception to the
recognition of corporate legal personality is generally the concept of abuse of rights, to which
the International Court of Justice was referring in Re Barcelona Traction, Light and Power
Co Ltd142
, when it derived from municipal law a limited principle permitting the piercing of the
corporate veil in cases of misuse, fraud, malfeasance or evasion of legal obligations. 143
Although there is no such general doctrine of this kind in English law, there is a variety of
specific principles which achieve the same result in some cases according to Prest v
Petrodel as Lord Sumption distinguished and categorised two types of wrongdoing.144
The first is concealment, which requires no piercing of corporate veil merely because the
individual interposes a company in order to hide his identity; instead it looks behind it to
discover the facts that corporate structure is concealing.145
The second is evasion, where a court may only invoke the doctrine where a person uses a
company under his or her control deliberately to evade a legal obligation or liability or to
frustrate the enforcement of a legal restriction.146
Lord Sumption said that in both Gilford
Motor147
and Jones148
, the corporate veil was correctly pierced because the wrongdoing
entailed evasion (although concealment was also involved). Lord Sumption further stated
141Tan Chen-han , 'Veil Piercing - a fresh start' [2015] 1(20-36) Journal of Business Law 22
142Re Barcelona Traction,Light and Power Co Ltd [1970]ICJ3
143 Prest v Petrodel Resources Ltd 2013] UKSC 34, [17]
144 Ibid,[28]- [30]
145 Gencor ACP Ltd v Dalby[2000] 2 BCLC 734
146 Prest v Petrodel Resources Ltd 2013] UKSC 34, [28] –[30]
147 Gilford Motor Co Ltd v Horne [1993] Ch 935
148 Jones v Lipman [1962] 1 W.L.R. 832

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that in regards to the evasion principle, if, however, there is an alternative remedy, it would
not be appropriate to pierce the veil.149
Furthermore, Lord Neuberger accepted the existence
of the doctrine and agreed with Lord Sumption’s formulation of it in terms of ‘evasion’.150
However Lady Hale, with whom Lord Wilson agreed, pointed out a certain difficulty with Lord
Sumption’s formulation, this would be the uncertainty of whether all cases involving piercing
of the corporate veil can be placed into one of the categories of concealment or evasion.151
Furthermore Lord Mance accepted that the cases identified by Lord Sumption in which the
doctrine can be said to have been critical to the reasoning fall within the ‘evasion
principle’.152
Importantly, however, he emphasized that it was dangerous to seek to foreclose all possible
future situations which may arise and [he] would not wish to do so153
, and Lord Clarke
expressed a similar reluctance154
as he agreed on Lord Sumption’s formulation about the
distinction between evasion and concealment, but stressed that since it was not a distinction
discussed in the course of argument, it should not be definitively adopted unless and until
the court has heard detailed submissions upon it.155
Therefore it could be argued that clearly, the law in this area has not been conclusively
settled, leaving unanswered questions on whether there is a category in which the doctrine
independently exists, and if so where that in itself should justify its existence and
invocation.156
However both comments made by Lord Clarke and Lord Mance, make clear
149 Prest v Petrodel Resources Ltd 2013] UKSC 34, [35]
150 Ibid,[79]
151
ibid, [92] (Lord Hale) “They may simply be examples of the principle that the individuals who operate
limited companies should not be allowed to take unconscionable advantage of the people with whom they do
Business”
152 Ibid,[99]
153 Ibid,[100]
154 Ibid,[103]
155 Daniel Lightman and Emma Hargreaves,'Petrodel Resources Ltd v Prest: where are we now?' [2013] 19(9)
Trusts & Trustees 879
156 Ernest Lim, 'Salomon reigns ' [2013] 129(Oct) The Law Quarterly Review 484

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that there remains scope in the future to expand the circumstances in which piercing the veil
will be justified.157
Although there does not appear to be a clear ratio insofar as it relates to the doctrine of
piercing the corporate veil and consequently it remains to be seen whether, and if so how,
Lord Sumption’s new rationalization of the doctrine will be applied in sub-sequent cases158
, it
is clear that the Supreme Court in Prest had not wholly excluded the possibility that
exceptions may also be made in other unspecified but rare circumstances.
One suspects, therefore, that claimants with clever lawyers will continue seeking to expand
the doctrine where all other arguments fail159
and conclude that Prest looks highly unlikely to
be the Supreme Court’s last word on the doctrine of piercing the corporate veil. But one thing
remains certain: the doctrine can only be invoked in exceptional circumstances.160
157 Daniel Lightman and Emma Hargreaves,'Petrodel Resources Ltd v Prest: where are we now?' [2013] 19(9)
Trusts & Trustees 879
158 Daniel Lightman and Emma Hargreaves, 'Petrodel Resources Ltd v Prest: where are we now?' [2013] 19(9)
Trusts & Trustees, 887
159 I Daniel Lightman and Emma Hargreaves, 'Petrodel Resources Ltd v Prest: where are we now?' [2013] 19(9)
Trusts & Trustees, 880
160 Ernest Lim, 'Salomon reigns ' [2013] 129(Oct) The Law Quarterly Review 485

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3. The Exceptions to the Corporate Veil need Codification
The foregoing critique assumes that the externalisation of risk from the corporate group to
the involuntary creditor is wrong. It is wrong in that the poorer risk taker assumes the burden
of the risk, contrary to well understood notions of efficient risk allocation.161
That risk is
created at the hands of the group which profits from the activities giving rise to the risk. Even
where insurance may be available to the involuntary creditor this is not a credible policy
alternative to group liability as there is no certainty that involuntary creditors will have
adequate insurance or insurance at all, to cover their risks. They may indeed be unable to
gauge the extent of the risk that they undertake as they will not have the same knowledge of
the risk as the corporation that operates the enterprise and which may be in a better
situation to insure as a result.162
Accordingly a reallocation of risk from the involuntary
creditor back to the corporate group would appear correct. In this regard a number of
possible legal reforms arise, ranging from modifications of limited liability to its outright
abolition.
According to Peter Muchlinski, in his analysis of limited liability and multinational Enterprises
and their need for reform163
, “under the most conservative approach, limited liability remains
as the basic principle of law but lifting the corporate veil should occur where the interests of
justice demand it”. As noted above, current law only permits this in cases of abuse of the
corporate form. This excludes most tort cases where the parent is not directly involved in the
course of events leading to the harm but is aware of the general situation, or ought to be so
aware, and to act to prevent the harm from materialising. Extending liability to the parent
161
Mendelson,N.A.2002. A control-basedapproachtoshareholderliabilityforcorporate torts,
ColumbiaLawReview,vol.102,1217–25
162
Hansmann,H. and Kraakman,R. 1991. Towardunlimitedshareholderliabilityforcorporate
torts, Yale Law Journal,vol.100, 1888; Mendelson,N.A.2002. A control-basedapproachto
shareholderliabilityforcorporate torts, ColumbiaLaw Review,vol.102, 1225
163
Peter Muchlinski, 'Limited liability and multinational enterprises: a case for reform?' [2010]
34(915–928) Cambridge Journal of Economics

Gustavo Martinez
Page 32
company in such cases should reduce the risk of moral hazard by placing it on notice of
possible liability and thereby to encourage greater attention to reducing risk as opposed to
externalising it.164
Equally it would allow for the disregarding of the ‘jurisdictional veil’ by
permitting the court to accept the presence of the parent in the jurisdiction where the harm
occurs as a result of its relationship with the subsidiary. Furthermore, in a case such as
Adams v Cape Industries165
, it would permit the court to find that the conversion of the sales
subsidiary in that case into an independently owned but economically related sales agency
(run by the former director of the sales subsidiary) could be disregarded as a ‘sham’.166
However, veil lifting is a far from perfect solution. It involves judicial discretion and so makes
effective management planning harder. It may be difficult to anticipate ex ante (before
results) whether a particular legal form of group organisation will survive judicial scrutiny.
Equally judges have differed on such issues even in the same case, in Salomon’s Case167
the Chancery Court and the Court of Appeal refused to recognise the validity of incorporation
by a sole trader and it was only the House of Lords that did so. Similarly in the Bhopal
case168
the US courts did not accept that Union Carbide was an integrated enterprise and
that the parent was therefore properly sued before the US Courts whereas, on the same
facts, Judge Seth, in the course of interim proceedings in India, held that the corporate veil
could be lifted and the parent treated as responsible for the acts of its Indian subsidiary.169
Thus, while veil lifting may be an improvement on the present situation of complete
irresponsibility170
it may not reduce the uncertainties and costs of complex fact-specific
litigation.
164 Peter Muchlinski,'Limited liability and multinational enterprises:a casefor reform?' [2010] 34(915–928)
Cambridge Journal of Economics, 923
165 Adams v Cape Industries plc [1990] 1 Ch 443,[1991] 1 All ER 929
168Union Carbide Corporation v Union of India Etc [1990] AIR 273, 1989 SCC (2) 540
169 Peter T Muchlinski,‘Multinational Enterprises and the Law’ (2nd edn, OUP Oxford 2007) 315
170 Ireland,P. 2008.Limited liability,shareholder rights and the problem of corporate

Gustavo Martinez
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Mendelson in ‘A control-based approach to shareholder liability for corporate torts’
introduces the idea that in place of judicially controlled veil lifting it may be possible to
introduce a legal presumption of parent responsibility for the acts of the subsidiary based on
the actual or potential control exercised by the former over the latter.171
The presumption of
control gives advance notice to the parent of the risk of liability, and places the onus on the
parent to rebut the presumption with conclusive proof of the independence of the subsidiary.
In the case of a highly integrated company that presumption may be almost impossible to
rebut.
However, it may be rebutted where it can be shown that the third party has transacted with
the subsidiary in the full knowledge that the parent had expressly excluded its liability. In
such a case the third party would qualify as a voluntary creditor as they would have had the
opportunity to assess the risk of the relationship with the group enterprise. A presumption of
parent liability gives greater clarity as to possible future liability than discretionary veil
piercing and it places the burden of showing that the subsidiary is wholly independent from
the parent on the latter.172
That said, in relation to voluntary creditors, it could be easily avoided by a properly worded
express exclusion of liability for the acts of the subsidiary. On the other hand, where the third
party has reasonably relied on the parent to underwrite the subsidiary’s liability, as where the
parent has issued a legally effective guarantee of the subsidiary’s debts, then even the
strongest proof of corporate independence should not excuse the parent. The value of such
a presumption in cases involving involuntary creditors of controlled subsidiaries is that it may
be impossible to rebut as, by definition, such creditors would not have had the opportunity to
irresponsibility, CambridgeJournal of Economics,Advance Access published 28 November 2008, 9
171 Mendelson, N. A. 2002. A control-based approach to shareholder liability for corporatetorts,
Columbia Law Review, vol. 102

Gustavo Martinez
Page 34
assess risk or to contract with the parent over the allocation of risk. The fact of actual or
potential control over the subsidiary would be enough to establish parent liability. In such
cases the presumption would amount to an assertion of strict parental liability.173
In relation to jurisdictional issues such a presumption, if adopted by the home country of the
Multinational Enterprise (MNE), would provide the required connection between the acts of
the subsidiary in the host country and the parent in the home country so as to allow the
home country court to assert jurisdiction and to hear the claim. As noted above, such a
possibility was recognised by one of the English Court of Appeal decisions in the case of
Lubbe v Cape Industries174
, which was not overruled by the House of Lords.175
A presumption of parent liability based on control over the group could be introduced by
judicial development, as in the case of the doctrine of strict ‘enterprise liability’ created by the
Indian courts in response to the Bhopal accident.176
That is, at present, unlikely in Anglo-
American jurisdictions and so the alternative would be to introduce parent liability under
statute. This could be a statutory exception to the doctrine of corporate separation. The
approach is shown in the UK Corporate Responsibility Bill of 2003 where such liability may
be introduced by law. One important issue is whether parental liability should be based on a
duty of care, requiring proof of negligence on the part of the parent or whether, as in Indian
doctrine, it should be strict, arising out of the fact that the parent is the controlling entity in
the enterprise.177
174 Lubbe et al.v Cape Industries,[2000] 2 Lloyds Rep 383, [2000] 4 All ER 268
175 Muchlinski,P.T. 2001.Corporations in international litigation:problems of jurisdiction and the
United Kingdom asbestos case, International and ComparativeLawQuarterly,vol. 50, 1–25
176 Peter T Muchlinski,‘Multinational Enterprises and the Law’ (2nd edn, OUP Oxford 2007) 314-16

Gustavo Martinez
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According Peter Muchlinski the incentive to internalise risk on the part of the parent would be
greater if liability was strict. Whatever approach to liability is taken, the major issue in such
cases would be to show what the boundaries of the enterprise are for the purposes of
liability. Not only the parent but other affiliates might be relevant parties in given cases.178
This issue is well known in existing law, whether in relation to definitions of holding
companies or groups for taxation purposes or for the purposes of group accounts.179
Equally, de facto control tests such as those found in German stock corporation law could be
developed to prevent evasion of responsibility through arrangements such as those used in
Adams v Cape Industries.180
Then the parent’s only defence would be to show that the harm
was not caused by enterprise activity but by an intervening external cause to which
enterprise responsibility could not attach.
179 Peter T Muchlinski,‘Multinational Enterprises and the Law’ (2nd edn, OUP Oxford 2007) 329
180 Blumberg, P. I., Strasser,K. A., Georgakopoulos,N. L. and Gouvin, E. J. 2005.Blumberg on
Corporate Groups, 2nd edn. Vol. 1. ch. 3, New York, Aspen Publishers,para.602

Gustavo Martinez
Page 36
Conclusion
The dissertation mainly introduced the history and significance of the veil of incorporation
and has analysed the development of the doctrine which is permissive to the piercing of the
corporate veil. Furthermore it has been concluded that the act of piercing the corporate veil
until now remains one of the most controversial subjects in corporate law. There are
categories such as fraud, agency, sham or facade, unfairness and group enterprises, which
are believed to be the most peculiar basis under which the Law Courts would pierce the
corporate veil. But these categories are just guidelines and by no means far from being
exhaustive.
It has also been contended that ever since the case of Salomon, Courts of law continue to
uphold the doctrine of corporate personality i.e. that a company once formed becomes a
separate legal entity from its members which can sue and be sued in its own name, it can
contract in its own name, is liable for its own 'debts among others. Nevertheless, the
application of the doctrine has in certain, instances led to injustice and the courts have
disregarded it. It is important to note as observed here above that the legal personality of the
company may be disregarded in certain circumstances by a device known as piercing the
veil or mask of incorporation. In such cases, the law looks at the people behind the
company rather than the cloak of incorporation. This may occur for instance where the
device of incorporation is used for some illegal or improper purpose. The court may
disregard the principle that a company is an independent legal entity and lift the veil of
corporate identity so that if it proved that a person used the company he controls as a “cloak”
for an improper transaction, he may be made personally liable to a third party.181
181 Amerit Timothy, '' (“… ‘Piercingthe Corporate Veil’is not a Doctrineat all Itis merely a Label, used to
indiscriminately describethe apparent Exceptions to the Principleof the Separate Juristic Personality of a Body
Corporate …”, ) <http://timothyamerit.blogspot.co.uk/2014/09/piercing-corporate-veil-is-not-doctrine.html>
accessed 14 September 2015

Gustavo Martinez
Page 37
The approach of English Courts is matter of concern as the courts adhere to the Salomon’s
principle even when justice demands otherwise. The Courts should apply the English classic
maxim of “ubi jus ibi remedium” (where there is a right there is a remedy) to these cases and
self evaluate its approach in lifting the veil. The aggrieved parties seem to have a “right” but
no “remedy” to the “Salomon Shield” granted by the English Courts in almost all the cases.182
In this regard Prest v Petrodel Resources is a very important decision. In future, courts
considering veil piercing should keep the following in mind. First, it should no longer be
acceptable to justify veil piercing through the use of metaphors. Where courts are of the view
that the corporate separate personality should be disregarded, it behoves them to articulate
cogent reasons why this is so. Secondly, parties should also be mindful of other causes of
action that may be available against a controller of a company instead of seeking veil
piercing as a default starting point. Finally, where it is necessary to rely on veil piercing the
courts must be satisfied that there has been a relevant abuse or misuse of the corporate
form.183
In a separate analysis it is established that limited liability and corporate separation doctrines
in the context of claims made by tort victims against MNE for a specific policy purpose in the
nineteenth century, have had in such cases certain unacceptable consequences.
Alternatively, this does not mean that existing law is toothless as it is possible to find a
parent jointly liable with its subsidiary on general principles of tort law.184
However, this involves an often complex examination of the organisation of the MNE to
prove that the parent was jointly responsible for the causes of the harm to the claimant.
There are always the jurisdictional hurdles to cross, such problems could be alleviated by a
182 Lawteachernet, '' (Company is a legal person,) <http://www.lawteacher.net/free-law-essays/business-
law/company-is-a-legal-person-business-law-essay.php>accessed 14 September 2015
183 Tan Chen-han , 'Veil Piercing - a fresh start' [2015] 1(20-36) Journal of Business Law, 35

Gustavo Martinez
Page 38
statutory rule that attributes liability (preferably strict liability, though negligence based
liability would be an improvement on the current state of no-liability) to the parent for
negligent acts of the subsidiary on the basis of an enterprise liability principle coupled with a
right to sue the parent in its country of domicile or in the country where the harm occurs
based on the claimant’s choice.185
Another overarching theory expands on this in that the courts will remove the corporate veil
where the incorporator is trying to (i) avoid an obligation or (ii) achieve an unfair advantage.
While other academics seek to provide a more detailed and specific list of instances where
the courts may lift the veil: fraud/sham; Agency; Single economic entity, it is important to
remember that any such list is not exhaustive precisely because it is not known where the
boundary lies between a court removing a veil of incorporation and leaving it intact. It is no
accident that the courts have refused to provide clarification as to when the corporate veil
may be lifted. Equally, despite calls for the codification of this area of the law (in much the
same way as for Directors’ Duties), it has not taken place, and for very good reason as
uncertainty as to precisely where the boundary lies between a court removing the veil or
leaving it intact is a powerful tool in deterring any attempt at an abuse of the corporate form.

Gustavo Martinez
Page 39
Primary Sources
Cases
Adams v Cape Industries Plc [1990] 2 W.L.R. 657 CA (Civ Div)
Adams v Cape Industries Plc [1991] 1 All E.R. 929
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Prest v Petrodel [2013] 3 W.L.R. 1
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Rainham Chemical Works, Ltd. v Belvedere Fish Guano Co [1921] 2 A.C. 465

Gustavo Martinez
Page 40
Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214
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Unit Construction v Bullock [1960] A.C. 351 HL
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United States v Milwaukee Refrigerator Transportation Co. (1905) 142 F. 247,(7th Cir.)
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VTB Capital Plc v Nutritek International Corp [2013] UKSC 5
Win Line (UK) Ltd v Masterpart (Singapore) Pte Ltd [1999] 2 S.L.R.(R)
Woodhouse v Peter Brotherhood Ltd [1972] ICR 186, CA
Woolfson v Strathclyde RC (1978) S.C. (H.L.) 90 HL
Woolfson v Strathclyde Regional Council (1978) S.L.T. 159
Statute and statutory instruments
Cinematograph Film Act 1948
Companies (Single Member Private Limited Companies) Regulations 1992
Companies Act 1948
Companies Act 1985
Companies Act 2006
Corporate Responsibility Bill Act 2003
Employment Rights Act 1986

Gustavo Martinez
Page 41
Insolvency Act 1986
Limited Liability Act 1855
Matrimonial Causes Act 1973
Secondary Sources
Books
Alan Dignam and John Lowry, Company Law (7th edn, OUP Oxford 2012)
Alan Dignam and John Lowry, Company Law (Core Texts Series) (8th edn, OUP Oxford 2014)
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torts, Yale Law Journal, vol. 100

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Page 42
7. Hargovan Anil and Harris Jasson, 'Piercing the Corporate Veil in Canada: A Comparative
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21. Ramsay I, “Piercing the Corporate Veil in Australia” (2001) 19 C&SLJ 250

Gustavo Martinez
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22. Robert B Thompson, 'Piercing the Corporate Veil: An Empirical Study' [1991] 76(5) Cornell
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used to indiscriminately describe the apparent Exceptions to the Principle of the Separate
Juristic Personality of a Body Corporate …”, )
<http://timothyamerit.blogspot.co.uk/2014/09/piercing-corporate-veil-is-not-doctrine.html>
accessed 14 September 2015
2. Lawteachernet, '' (Company is a legal person, ) <http://www.lawteacher.net/free-law-
essays/business-law/company-is-a-legal-person-business-law-essay.php> accessed 14
September 2015

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