top stories

Mike Griffiths discusses lifting the corporate veil.

Any modern consideration of lifting the corporate veil must almost certainly begin with the decision of the Court of Appeal in Adams v Cape Industries [1991] 1 All ER 929.

The case saw the most detailed judicial review of this aspect of company law ever undertaken in the UK. Justice Scott, and then the Court of Appeal, refused to allow the veil to be lifted on an English parent company whose American subsidiary had been successfully sued by American litigants but which had insufficient assets to satisfy judgement.

Lord Justice Slade said: “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”. The law will not permit the lifting of the corporate veil just because the interests of justice would be better served by doing so.

This means that sometimes a director can take advantage of the corporate veil to relieve himself of a liability that he would otherwise fall under. This article will look at three recent cases where the corporate veil has been considered.

Personal responsibility
The case of Williams v Natural Life Health Foods [1998] 2 All ER 577 concerned a small limited liability company running a health food shop in Salisbury. The managing director, who was also the major shareholder, advertised for potential franchisees to run their own health food outlets. His company, the franchisor, would offer advice and assistance to the franchisee and would be paid fees for this.

Two people who decided to take advantage of this business opportunity opened a shop in Rugby. They were sent detailed financial projections for the proposed business. The managing director of the franchisor had played a prominent part in producing these projections. However, the projections proved to be negligent and over-optimistic – the Rugby shop operated at a loss for eighteen months and then ceased to trade completely.

The owners of the Rugby shop began proceedings against the franchisor but soon after proceedings had begun the Salisbury business went into liquidation. For this reason the plaintiff franchisees joined the franchisor’s former managing director in the proceedings as a second co-defendant.

The House of Lords said that a director of a limited company was only personally liable for loss suffered as a result of negligent advice given by him on behalf of the company if he had assumed personal responsibility for that advice. Such an assumption of responsibility had to be determined objectively. The absence of personal dealings points strongly against an assumption of responsibility.

Therefore it is abundantly clear that a director can avoid the risk of personal liability by trading through a limited company so long as he does nothing to show that he is accepting any personal liability for what he does. As Lord Steyn said: “In the present case there were no personal dealings between [the managing director] and the plaintiffs. There were no exchanges or conduct crossing the line which could have conveyed to the plaintiffs that [he] was willing to assume personal responsibility to them.”

Fraud
However, a director cannot hide behind the vicarious liability of his company where he is fraudulent. In Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [2002] UKHL 173 [2003] 1 All ER 173 a director knowingly and deliberately made a false statement in order to obtain payment on a letter of credit.

The House of Lords held that a director cannot escape personal liability for deceit on the grounds that he acted as he did on behalf of and for the benefit of his company. Although an agent might assume responsibility on behalf of another person without incurring personal liability in respect of a negligent misrepresentation (as had been the case in Williams), the same reasoning could not be applied where there has been fraud.

As Lord Hoffmann put it: “No one can escape liability for his fraud by saying ‘I wish to make it clear that I am committing this fraud on behalf of someone else and am not to be personally liable’”. The director in this case was being sued for his own tort rather than for his company’s tort. In other words, he was not being found liable because he was a director; his liability arose because he personally had committed a fraud.

When may the veil be lifted?
The veil of incorporation has been considered in Trustor AB v Smallbone [2001] 3 All ER 987. The significance in this case lies in the way counsel for the claimant invited the Court of Appeal to lay down rules as to when the veil of incorporation may be lifted.

Smallbone was a director of Trustor AB, a Swedish registered company. Without the consent of the other directors, he transferred large amounts of corporate funds into a company controlled by him, Introcrom Ltd. He then removed some of these funds from Introcrom Ltd’s bank account into his own name. Being aware of all the circumstances, Smallbone was found to be jointly and severally liable with Introcrom Ltd for those sums received by him from its bank account. The court then had to consider whether Smallbone was liable for sums paid from that account to other persons.

Trustor AB, the claimant company, sought to obtain the lifting of the veil of incorporation of Introcrom Ltd under three headings:

• the company was a sham with no unconnected third party involved
• the company was involved in the impropriety
• it was necessary that the veil should be lifted in the interests of justice.

The Court of Appeal was content to lift the corporate veil on the first two grounds but not the third. It was stated that there was no general power to lift the corporate veil simply because it was necessary in the interests of justice.

Again the case of Adams v Cape Industries plc was cited with approval. The veil should not be lifted merely because legal technicalities resulted in injustice.

Mike Griffiths – Principal Lecturer in Law, Kensington Business School

Back to top