Corporate veil in the United Kingdom
Encyclopedia
The corporate veil in the United Kingdom is a metaphorical reference used in UK company law for the concept that the rights and duties of a corporation are, as a general principle, the responsibility of that company alone. Just as a natural person cannot be held legally accountable for the conduct or obligations of another person, unless they have expressly or implicitly assumed responsibility, guaranteed or indemnified the other person, as a general principle shareholders, directors and employees cannot be bound by the rights and duties of a corporation. This concept has traditionally been likened to a "veil
" of separation between the legal entity of a corporation and the real people who invest their money and labour into a company's operations.
The corporate veil in the UK is, however, capable of being "lifted", so that the people who run the company are treated as being liable for its debts, or can benefit from its rights, in a limited number of circumstances defined by the courts. This matters mostly when a company has gone insolvent, because unpaid creditors will wish to recover their money from anyone who was involved in the company that has it.
English law recognised long ago that a corporation would have "legal personality". Legal personality simply means the entity is the subject of legal rights and duties. It can sue and be sued. Historically, municipal councils (such as the Corporation of London
) or charitable establishments would be the primary examples of corporations. Without a body to be kicked or a soul to be damned, a corporation does not itself suffer penalties administered by courts, but those who stand to lose their investments will. A company will, as a separate person, be the first liable entity for any obligations its directors and employees create on its behalf. If a company does not have enough assets to pay its debts as they fall due, it will be insolvent - bankrupt. Unless an administrator (someone like an auditing firm partner, usually appointed by creditors on a company's insolvency) is able to rescue the business, shareholders will lose their money, employees will lose their jobs
and a liquidator
will be appointed to sell off any remaining assets to distribute as much as possible to unpaid creditors. Yet if business remains successful, a company can persist forever
, even as the natural people who invest in it and carry out its business change or pass away.
for their members, seen in the suffix of "Ltd
" or "plc
". This means that if a company does go insolvent, unpaid creditor
s cannot (generally) seek contributions from the company's shareholders and employees, even if shareholders and employees profited handsomely before a company's fortunes declined or would bear primary responsibility for the losses under ordinary civil law principles. The liability of a company itself is unlimited (companies have to pay all they owe with the assets they have), but the liability of those who invest their capital in a company is (generally) limited to their shares, and those who invest their labour can only lose their jobs. However, limited liability acts merely as a default position. It can be "contracted around", provided creditors have the opportunity and the bargaining power
to do so. A bank, for instance, may not lend to a small company unless the company's director gives her own house as security
for the loan (e.g., by mortgage
). Just as it is possible for two contracting parties to stipulate in an agreement that one's liability will be limited in the event of contractual breach
, the default position for companies can be switched back so that shareholders or directors do agree to pay off all debts. If a company's investors do not do this, so their limited liability is not "contracted around", their assets will (generally) be protected from claims of creditors. The assets are beyond reach behind the metaphorical "veil of incorporation".
If a company goes insolvent, there are certain situations where the courts lift the veil of incorporation on a limited company, and make shareholders or directors contribute to paying off outstanding debts to creditors. However, in UK law the range of circumstances is heavily limited. This is usually said to derive from the "principle" in Salomon v A Salomon & Co Ltd. In this leading case, a Whitechapel
cobbler incorporated his business under the Companies Act 1862
. At that time, seven people were required to register a company, possibly because the legislature had viewed the appropriate business vehicle for fewer people to be a partnership. Mr Salomon met this requirement by getting six family members to subscribe for one share each. Then, in return for money he lent the company, he made the company issue a debenture
, which would secure his debt in priority to other creditors in the event of insolvency. The company did go insolvent, and the company liquidator, acting on behalf of unpaid creditors attempted to sue Mr Salomon personally. Although the Court of Appeal held that Mr Salomon had defeated Parliament's purpose in registering dummy shareholders, and would have made him indemnify the company, the House of Lords held that so long as the simple formal requirements of registration were followed, the shareholders' assets must be treated as separate from the separate legal person that is a company. There could not, in general, be any lifting of the veil.
, section 214 stipulates that company directors must contribute to payment of company debts in winding up if they kept the business running up more debt when they ought to have known there was no reasonable prospect of avoiding insolvency.
, the Trading with the Enemy Act 1914
said that trading with any person of "enemy character" would be an offence. So even though the Continental Tyre Co Ltd was a "legal person" incorporated in the UK (and therefore British) its directors and shareholders were German (and therefore enemies, while the First World War was being fought).
. A group of employees suffered asbestos
diseases after working for the American wholly owned subsidiary of Cape Industries plc
. They were suing in New York to make Cape Industries plc pay for the debts of the subsidiary. Under conflict of laws
principles, this could only be done if Cape Industries plc was treated as "present" in America through its US subsidiary (ie ignoring the separate legal personality of the two companies). Rejecting the claim, and following the reasoning in Jones v Lipman
, the Court of Appeal emphasised that the US subsidiary had been set up for a lawful purpose of creating a group structure overseas, and had not aimed to circumvent liability in the event of asbestos litigation.
victims, who are unable to contract around limited liability and may be left only with a worthless claim against a bankrupt entity, has been ameliorated in cases where a duty of care in negligence may be deemed to be owed directly across the veil of incorporation.
" as single economic entities exist in many continental European jurisdictions. This is done for tax and accounting purposes in English law, however for general civil liability the rule still followed is that in Adams v Cape Industries plc
. It is very rare for English courts to lift the veil. The liability of the company is generally attributed to the company alone.
Veil
A veil is an article of clothing, worn almost exclusively by women, that is intended to cover some part of the head or face.One view is that as a religious item, it is intended to show honor to an object or space...
" of separation between the legal entity of a corporation and the real people who invest their money and labour into a company's operations.
The corporate veil in the UK is, however, capable of being "lifted", so that the people who run the company are treated as being liable for its debts, or can benefit from its rights, in a limited number of circumstances defined by the courts. This matters mostly when a company has gone insolvent, because unpaid creditors will wish to recover their money from anyone who was involved in the company that has it.
Separate legal personality
Corporation of London
The City of London Corporation is the municipal governing body of the City of London. It exercises control only over the City , and not over Greater London...
) or charitable establishments would be the primary examples of corporations. Without a body to be kicked or a soul to be damned, a corporation does not itself suffer penalties administered by courts, but those who stand to lose their investments will. A company will, as a separate person, be the first liable entity for any obligations its directors and employees create on its behalf. If a company does not have enough assets to pay its debts as they fall due, it will be insolvent - bankrupt. Unless an administrator (someone like an auditing firm partner, usually appointed by creditors on a company's insolvency) is able to rescue the business, shareholders will lose their money, employees will lose their jobs
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...
and a liquidator
Liquidator (law)
In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution....
will be appointed to sell off any remaining assets to distribute as much as possible to unpaid creditors. Yet if business remains successful, a company can persist forever
Eternity
While in the popular mind, eternity often simply means existence for a limitless amount of time, many have used it to refer to a timeless existence altogether outside time. By contrast, infinite temporal existence is then called sempiternity. Something eternal exists outside time; by contrast,...
, even as the natural people who invest in it and carry out its business change or pass away.
Limited liability
Most companies adopt limited liabilityLimited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
for their members, seen in the suffix of "Ltd
Limited company
A limited company is a company in which the liability of the members or subscribers of the company is limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. And the former of these, a limited company limited by shares, may be...
" or "plc
Public limited company
A public limited company is a limited liability company that sells shares to the public in United Kingdom company law, in the Republic of Ireland and Commonwealth jurisdictions....
". This means that if a company does go insolvent, unpaid creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s cannot (generally) seek contributions from the company's shareholders and employees, even if shareholders and employees profited handsomely before a company's fortunes declined or would bear primary responsibility for the losses under ordinary civil law principles. The liability of a company itself is unlimited (companies have to pay all they owe with the assets they have), but the liability of those who invest their capital in a company is (generally) limited to their shares, and those who invest their labour can only lose their jobs. However, limited liability acts merely as a default position. It can be "contracted around", provided creditors have the opportunity and the bargaining power
Bargaining power
Bargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched...
to do so. A bank, for instance, may not lend to a small company unless the company's director gives her own house as security
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
for the loan (e.g., by mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
). Just as it is possible for two contracting parties to stipulate in an agreement that one's liability will be limited in the event of contractual breach
Breach of contract
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....
, the default position for companies can be switched back so that shareholders or directors do agree to pay off all debts. If a company's investors do not do this, so their limited liability is not "contracted around", their assets will (generally) be protected from claims of creditors. The assets are beyond reach behind the metaphorical "veil of incorporation".
Assumption of responsibility
- Williams v Natural Life Health Foods LtdWilliams v Natural Life Health Foods LtdWilliams v Natural Life Health Foods Ltd [1998] is an important English tort law, company law and contract law case. It held that for there to be an effective assumption of responsibility, there must be some direct or indirect conveyance that a director had done so, and that a claimant had relied...
[1998] 1 WLR 830
Lifting the veil
Whitechapel
Whitechapel is a built-up inner city district in the London Borough of Tower Hamlets, London, England. It is located east of Charing Cross and roughly bounded by the Bishopsgate thoroughfare on the west, Fashion Street on the north, Brady Street and Cavell Street on the east and The Highway on the...
cobbler incorporated his business under the Companies Act 1862
Companies Act 1862
The Companies Act 1862 was an Act of the Parliament of the United Kingdom regulating UK company law, whose descendant is the Companies Act 2006.-Provisions:...
. At that time, seven people were required to register a company, possibly because the legislature had viewed the appropriate business vehicle for fewer people to be a partnership. Mr Salomon met this requirement by getting six family members to subscribe for one share each. Then, in return for money he lent the company, he made the company issue a debenture
Debenture
A debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note...
, which would secure his debt in priority to other creditors in the event of insolvency. The company did go insolvent, and the company liquidator, acting on behalf of unpaid creditors attempted to sue Mr Salomon personally. Although the Court of Appeal held that Mr Salomon had defeated Parliament's purpose in registering dummy shareholders, and would have made him indemnify the company, the House of Lords held that so long as the simple formal requirements of registration were followed, the shareholders' assets must be treated as separate from the separate legal person that is a company. There could not, in general, be any lifting of the veil.
Wrongful trading
The principle in Salomon's case is open to a series of qualifications. Most significantly, statute may require directly or indirectly that the company not be treated as a separate entity. Under the Insolvency Act 1986Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
, section 214 stipulates that company directors must contribute to payment of company debts in winding up if they kept the business running up more debt when they ought to have known there was no reasonable prospect of avoiding insolvency.
Statutory purpose
A number of other cases demonstrate that in construing the meaning of a statute unrelated to company law, the purpose of the legislation should be fulfilled regardless of the existence of a corporate form. For example, in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) LtdDaimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd
Daimler Co Ltd v Continental Tyre and Rubber Co Ltd [1916] 2 AC 307 is a UK company law case, concerning the concept of "control" and enemy character of a company...
, the Trading with the Enemy Act 1914
Trading with the Enemy Act 1914
The Trading with the Enemy Act 1914 was an Act of the Parliament of the United Kingdom that prescribed an offence of conducting business with any person of "enemy character". It was enacted soon after the United Kingdom became involved in World War I....
said that trading with any person of "enemy character" would be an offence. So even though the Continental Tyre Co Ltd was a "legal person" incorporated in the UK (and therefore British) its directors and shareholders were German (and therefore enemies, while the First World War was being fought).
Avoiding a pre-existing duty
There are also case based exceptions to the Salomon principle, though their restrictive scope is not wholly stable. The present rule under English law is that only where a company was set up to commission fraud, or to avoid a pre-existing obligation can its separate identity be ignored. This follows from the leading case, Adams v Cape Industries plcAdams v Cape Industries plc
Adams v Cape Industries plc [1990] Ch 433 is the leading UK company law case on separate legal personality and limited liability of shareholders...
. A group of employees suffered asbestos
Asbestos
Asbestos is a set of six naturally occurring silicate minerals used commercially for their desirable physical properties. They all have in common their eponymous, asbestiform habit: long, thin fibrous crystals...
diseases after working for the American wholly owned subsidiary of Cape Industries plc
Cape plc
Cape plc is a United Kingdom energy services company based in Uxbridge, West London. It is a constituent of the FTSE 250 Index.- History :The company was founded in 1893 as the Cape Asbestos Company with the objective of mining asbestos in the Orange Free State and importing it into European...
. They were suing in New York to make Cape Industries plc pay for the debts of the subsidiary. Under conflict of laws
Conflict of laws
Conflict of laws is a set of procedural rules that determines which legal system and which jurisdiction's applies to a given dispute...
principles, this could only be done if Cape Industries plc was treated as "present" in America through its US subsidiary (ie ignoring the separate legal personality of the two companies). Rejecting the claim, and following the reasoning in Jones v Lipman
Jones v Lipman
Jones v Lipman [1962] 1 WLR 832 is a UK company law case concerning piercing the corporate veil. It exemplifies the principal case in which the veil will be lifted, that is, when a company is used as a "mere facade" concealing the "true facts", which essentially means it is formed to avoid a...
, the Court of Appeal emphasised that the US subsidiary had been set up for a lawful purpose of creating a group structure overseas, and had not aimed to circumvent liability in the event of asbestos litigation.
Tort victims
The harsh effect on tortTort
A tort, in common law jurisdictions, is a wrong that involves a breach of a civil duty owed to someone else. It is differentiated from a crime, which involves a breach of a duty owed to society in general...
victims, who are unable to contract around limited liability and may be left only with a worthless claim against a bankrupt entity, has been ameliorated in cases where a duty of care in negligence may be deemed to be owed directly across the veil of incorporation.
- Lee v Lee’s Air Farming Ltd [1961] AC 12, a statutory compensation system in part operated because the veil was not lifted, and a director was treated as a worker of the company
- Connelly v RTZ Corp Plc [1998] AC 854
- Lubbe v Cape PlcLubbe v Cape PlcLubbe v Cape Plc [2000] is a conflict of laws case, which is also highly significant for the question of lifting the corporate veil in relation to tort victims...
[2000] 1 WLR 1545 - Chandler v Cape plcChandler v Cape plcChandler v Cape plc [2011] EWHC 951 is a UK company law and English tort law case concerning the availability of damages for a tort victim from a parent company, when the victim is harmed by the operations of a subsidiary company.-Facts:...
[2011] EWHC 951 (QB) held that a parent company (Cape plc) owed a duty of care to one of the employees of a subsidiary company
Company groups
Even if tort victims might be protected, the restrictive position remains subject to criticism where a company group is involved, since it is not clear that companies and actual people ought to get the protection of limited liability in identical ways. An influential decision, although subsequently doubted strongly by the House of Lords, was passed by Lord Denning MR in DHN Ltd v Tower Hamlets BC. Here Lord Denning MR held that a group of companies, two subsidiaries wholly owned by a parent, constituted a single economic unit. Because the companies' shareholders and controlling minds were identical, their rights were to be treated as the same. This allowed the parent company to claim compensation from the council for compulsory purchase of its business, which it could not have done without showing an address on the premises that its subsidiary possessed. Similar approaches to treating corporate "groups" or a "concernConcern (business)
A concern is a German type of business group. It results from the merger of several legally independent companies an economic entity under unified management. These associated companies called "Group" companies....
" as single economic entities exist in many continental European jurisdictions. This is done for tax and accounting purposes in English law, however for general civil liability the rule still followed is that in Adams v Cape Industries plc
Adams v Cape Industries plc
Adams v Cape Industries plc [1990] Ch 433 is the leading UK company law case on separate legal personality and limited liability of shareholders...
. It is very rare for English courts to lift the veil. The liability of the company is generally attributed to the company alone.
- Creasey v Breachwood Motors LtdCreasey v Breachwood Motors LtdCreasey v Breachwood Motors Ltd [1993] BCLC 480 is a UK company law case concerning piercing the corporate veil.-Facts:Mr Creasey was dismissed from his post of general manager at Breachwood Welwyn Ltd. He claimed that this constituted wrongful dismissal, in breach of his employment contract...
[1992] B.C.C. 638, now overruled, enforcing a claim for wrongful dismissal by a director of an insolvent subsidiary against a parent - Ord v Belhaven Pubs LtdOrd v Belhaven Pubs LtdOrd v Belhaven Pubs Ltd [1998] 2 BCLC 447 is a UK company law case concerning piercing the corporate veil.-Facts:Mr and Mrs Ord ran the Fox Inn in Stamford, Lincs. They were in an ongoing dispute with the freehold owner, Belhaven Pubs Ltd, for misrepresentation about the level profitability of the...
[1998] 2 BCLC 447, Court of Appeal overturns High Court that treats a company group as a single economic unit
- Farstad Supply A/S v Enviroco Ltd [2011] UKSC, held that where the shares in a company had been pledged, that company ceased to be a subsidiary company CA 1985 s 736, now CA 2006 s 1159 and Sch 6, because the company which pledged the shares ceased to be a member.
- Duport Steels Ltd v Sirs [1980] ICR 161, strike action against a parent company
- UK tax law
- EU Seventh Company Law Directive 83/349, on group accounts
- Concern (business)Concern (business)A concern is a German type of business group. It results from the merger of several legally independent companies an economic entity under unified management. These associated companies called "Group" companies....
- EU Draft Ninth Company Law Directive, on corporate groups
United States
- Berkey v. Third Avenue RailwayBerkey v. Third Avenue RailwayBerkey v. Third Avenue Railway Co 244 N.Y. 602 is a classic veil piercing case by Judge Benjamin N. Cardozo in corporation law.-Facts:...
, Cardozo J decides there was no right to pierce the veil for a personal injury victim - Walkovszky v. CarltonWalkovszky v. CarltonWalkovszky v. Carlton, 223 N.E.2d 6 , is a leading decision on the conditions under which Courts may pierce the corporate veil. A cab company had shielded themselves from liability by incorporating each cab as its own corporation...
223 N.E.2d 6 (NY 1966) where the New York Court of Appeals refused to pierce the veil merely because a subsidiary was undercapitalised. A corporation was set up for every taxi cab in that was in fact being run by Mr Carlton's company, each with $10,000 of insurance. One of the cab's hit a pedestrian and damages were more than the insurance, but by a majority the court held the veil could not be lifted. - Minton v. Cavaney, 56 Cal. 2.d 576 (1961) Justice Roger Traynor pierced a veil so a girl who drowned in a swimming pool would be compensated, saying parent companies or shareholders would be treated as liable "when they provide inadequate capitalization and actively participate in the conduct of corporate affairs."
- Kinney Shoe Corp. v. PolanKinney Shoe Corp. v. PolanKinney Shoe Corp. v. Polan 939 F.2d 209 is a US corporate law case, concerning piercing the corporate veil.-Facts:Kinney Shoe Corp sued Mr Lincoln M Polan to pay money outstanding on a sub-lease by the "Industrial Realty Company"...
939 F.2d 209 (4th Cir. 1991) the veil was pierced where its enforcement would not have matched the purpose of limited liability. Here a corporation was undercapitalised and was only used to shield a shareholder's other company from debts. - Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc.Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc.Perpetual Real Estate Services, Inc. v. Michaelson Properties, Inc. 974 F.2d 545 is a US corporate law case, concerning piercing the corporate veil.-Facts:...
974 F.2d 545 (4th Cir. 1992) holding that no piercing could take place merely to prevent "unfairness" or "injustice", where a corporation in a real estate building partnership could not pay its share of a lawsuit bill
- Fletcher v. Atex, Inc 8 F.3d 1451 (2d Cir. 1995)
- Taylor v. Standard Gas Co. 306 U.S. 307 (1939), insiders who become creditors of a company are subordinated to other creditors when the company goes insolvent. This will happen where it is "equitable", and is known as the "Deep Rock doctrine".
- Sindell v. Abott Laboratories, 607P 2d 924 (Cal), 449 US 912 (1980), California Supreme Court holds drug manufacturers liable to injured victims according to their portion of market share