University of Exeter, Business School
Corporate Law 2011/12
Part A (Sections 1-3): CREATING THE COMPANY
SECTION 3 - CORPORATE PERSONALITY
Material to accompany lectures and lecture slides
Separate Corporate Personality
S 16(2): The subscribers to the memorandum, together with such other persons as may from time to time become members of the company, are a body corporate by the name contained in the memorandum.
Salomon’s case
Salomon v A. Salomon & Co Ltd [1897] AC 22
High Court:
“[T]his business was Mr Salomon’s business and no one else’s: … he chose to employ as agent a limited company; … he is bound to indemnify that agent, the company …” (Vaughn Williams J)
Court of Appeal:
“I should rather liken the company to a trustee for him – a trustee improperly brought into existence by him to enable him to do what the statute prohibits. It is manifest that the other members of the company have practically no interest in it, and their names have merely been used by Mr. Aron Salomon to enable him to form a company, and to use its name in order to screen himself from liability.” (Lindley LJ)
“the company was a mere nominis umbra, under cover of which he carried on his business as before.” “it would be lamentable if a scheme such as this could not be defeated.” (Lopes LJ) “The statutes were intended to allow seven or more persons bona fide associated for the purpose of trade to limit their liability under certain conditions and to become a corporation. But they were not intended to legalize a pretended association for the purpose of enabling an individual to carry on his own business with limited liability in the name of a joint stock company.” (Kay LJ)
House of Lords:
“The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any share or form, except to the extent and in the manner provided by the Act.” (Lord Macnaughten)
“In a popular sense, a company may in every case be said to carry on business for and on behalf of its shareholders; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs.” (Lord Herschell)
“[I]t seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.” (Lord Halsbury)
Application of the Salomon principle
Lee v Lee’s Air Farming Ltd [1961] AC 12
“[I]t is a logical consequence of the decision in Salomon’s case that one person may function in dual capacities.” (Lord Morris)
Macaura v Northern Assurance [1925] AC 619
“[T]he corporator even if he holds all the shares is not the corporation, and … neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.” (Lord Wrenbury)
Tunstall v Steigmann [1962] 2 QB 593
“There is no escape from the fact that a company is a legal entity entirely separate from its corporators – see Salomon v A. Salomon & Co Ltd. Here the landlord and the company are entirely separate entities. This is no matter of form; it is a matter of substance and reality. Each can sue and be sued in its own right; indeed, there is nothing to prevent the one from suing the other. Even the holder of 100 per cent of the shares in a company does not by such holding become so identified with the company that he or she can be said to carry on the business of the company.” (Willmer LJ)
Attorney-General’s Reference (No. 2 of 1982) [1984] 2 All ER 216; R v Phillipou (1989) 89 Cr App R 290
Consequences of corporate personality
Macaura v Northern Assurance [1925] AC 619
Foss v Harbottle
Lee v Lee’s Air Farming Ltd [1961] AC 12
The Albazero [1977] AC 774: “[E]ach company in a group of companies is a separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group …” (Roskill LJ)
Re Southard & Co Ltd[1979] 1 WLR 1198: “A parent company may spawn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the parent company. If one of the subsidiary companies ... turns out to be the runt of the litter and declines into insolvency to the dismay of its creditors, the parent company and other subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary.” (Templeman LJ)
Re Noel Tedman Holdings Pty Ltd [1967] QdR 561
Lifting the veil of incorporation by statute
Bank voor Handel en Scheepvaart v Slatford [1953] 1 QB 248 “No doubt the legislature can forge a sledgehammer capable of cracking open the corporate shell; and it can, if it chooses, demand that the courts ignore all the conceptions and principles which are at the root of company law” (Devlin J)
Dimbleby v National Union of Journalists[1984] 1 WLR 427 “The ‘corporate veil’ … is drawn by statute and it can be pierced by some other statute is such other statute so provides; but, in view of its raison d’etre and its consistent recognition by the courts … one would expect that any parliamentary intention to pierce the corporate veil would be expressed in clear and unequivocal language.” (Lord Diplock)
Ss. 398-408; s. 1162 : taxation and accounts
S. 30(3) LTA 1954 : Landlord and Tenant Act – business of a company
Ss. 213-5 IA 1986 : fraudulent and wrongful trading
Ss 216-217 IA 1986 : misuse of a company name
Ss. 15 CDDA 1986 : acting whilst disqualified
Lifting the veil of incorporation at common law (by the courts)
Adams v Cape Industries [1990] Ch 433
“… save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v A Salomon & Co Ltd … merely because it considers that justice so requires.”
Re Polly Peck International [1996] 2 All ER 433
Trustor ABC v Smallbone [2001] 2 BCLC 436
Attribution of characteristics of members to the company
Daimler Co Ltd v Continental Tyre and Rubber Co Ltd [1916] 2 AC 307
Abbey Malvern Wells Ltd v Ministry of Local Government and Planning [1951] Ch 728
The “single economic unit” (corporate groups)
The Albazero [1977] AC 774
“[E]ach company in a group of companies is a separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group …”. (Roskill LJ)
Littlewoods Mail Order Stores Ltd v IRC [1969] 1 WLR 1241
DHN Food Distributors v Tower Hamlets LBC [1976] 1 WLR 852
“These subsidiaries are bound hand and foot to the parent company … This group is virtually the same as a partnership in which all three companies are partners. They should not be treated separately so as to be defeated on a technical point. They should not be deprived of the compensation which should justly be payable for disturbance. The three companies should, for present purposes, be treated as one, and the parent company, DHN, should be treated as that one.” (Lord Denning).
“[T]his is a case in which one is entitled to look at the realities of the situation and to pierce the corporate veil. … I am relying on the facts of this particular case. I would not … accept that in every case where one has a group of companies one is entitled to pierce the veil, but in
this case the two subsidiaries were both wholly owned; further they had no separate business operations whatsoever.” (Goff LJ).
Woolfson v Strathclyde [1978] SLT 159
Adams v Cape Industries [1990] Ch 433
“Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense 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.” (Slade LJ)
Re Polly Peck International [1996] 2 All ER 433:
“ … we are concerned not with economics but with law.” (Robert Walker J)
Beckett Investment Management Group Ltd v Hall [2007] ICR 1539
ICI Ltd v Commission [1972] ECR 619
Mere fa?ade concealing the true facts
Salomon v A.Salomon & Co Ltd [1897] AC 22:
“If there was no fraud and no agency, and if the company was a real one and not a fiction or a myth, every one of the grounds upon which it is sought to support the judgment is disposed of.” (Lord Halsbury).
Woolfson v Strathclyde [1978] SLT 159:
“special circumstances exist indicating that the company is a mere fa?ade concealing the true facts.”
Adams v Cape Industries [1990] Ch 433:
“[T]here is one well-recognised exception to the rule prohibiting the piercing of “the corporate veil” … where special circumstances exist indicating that it is a mere fa?ade concealing the true facts.” (Slade LJ)
Trustor ABC v Smallbone [2001] 2 BCLC 436
Kensington International Ltd v Republic of Congo [2006] 2 BCLC 296
Adams v Cape Industries [1990] Ch 433
Salomon v A.Salomon & Co Ltd [1897] AC 22
Re Polly Peck International [1996] 2 All ER 433
“ … neither agency nor nomineeship – nor, still less, sham or something akin to sham – is to be inferred simply because a subsidiary company has a small paid-up capital and has a board of directors all or most of whom are also directors or senior executives of its holding company.” (Robert Walker J).
Adams v Cape Industries [1990] Ch 433:
“… we do not accept … that the court is entitled to lift the corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not
this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law.”
Adams v Cape Industries [1990] Ch 433:
“where a fa?ade is alleged, the motive of the perpetrator may be highly material.”
Jones v Lipman [1962] 1 WLR 832
“the creature of the … defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition.”
Gilford Motor Co Ltd v Horne [1933] Ch 935
“ … this company was formed as a device, a stratagem, in order to mask the effective carrying on of a business of Mr Horne … under what is a cloak or a sham …”
Trustor ABC v Smallbone [2001] 2 BCLC 436
Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447
Adams v Cape Industries [1990] Ch 433
Gencor ACP Ltd v Dalby [2000] 2 BCLC 734
Agency Relationship
Salomon v A.Salomon & Co Ltd [1897] AC 22
Smith, Stone & Knight Ltd v Birmingham Corpn [1939] 4 All ER 116
Ebbw Vale UDC v South Wales Traffic Area Licensing Authority [1951] 2 KB 366: “Under the ordinary rules of law, a parent company and a subsidiary company, even a 100 per cent subsidiary company, are distinct legal entities, and in the absence of an agency contract between the two companies one cannot be said to be the agent of the other.”
Re FG Films Ltd [1953] 1 All ER 615
Adams v Cape Industries plc [1990] BCLC 479
Yukong Line Ltd v Rendsburg Investments Corp (No. 2) [1998] 1 WLR 294
Tort
C Evans and Sons Ltd v Spritebrand Ltd [1985] BCLC 105
MCA Records Inc v Charly Records Ltd[2003] 1 BCLC 93: “if all a director is doing is carrying out the duties entrusted to him as such by the company under its constitution, the circumstances in which it would be right to hold him liable as a joint tortfeasor with the company would be rare indeed.” (Chadwick LJ).
Standard Chartered Bank v Pakistan National Shipping Corp (No. 2) [2003] 1 BCLC 244 Williams v Natural Life Health Foods Ltd [1998] 1 BCLC 689