It is a general law that corporations are separate legal entities bestowed with the same rights, duties and obligations as a natural person. As such, a corporation is an artificial person directed and managed by the directors and shareholders. The legal assumption is that the acts of a corporation are not the actions of its shareholders. So, the shareholders are exempt from liability for the corporation’s action. These directors and shareholders are protected by a corporation veil which was at first thought to never be penetrated . But the court held that a corporate veil can be pierced or lifted to see the people behind it.
Once it is incorporated, its own separate legal personality distinct from that of its members is activated. It is said that there is a veil of incorporation between a corporation and the personality of its officers, shareholders and directors. In a number of circumstances, the courts are set to ‘lift the veil’ of incorporation and have regard to the identity of the membership of the corporation or to treat the rights and liabilities of the corporation as those of its members. The court may lift the veil, for instance, to prevent the company being used as a means of fraud or diversion of fund, evasion of tax or evasion of legal responsibilities .
The word ‘veil’ has been defined and coined in several similar terms such as ‘alias’, ‘agent ‘, ‘cloak’, instrumentality, alter ego, ‘sham ‘ and ‘puppet’ .
Thus, piercing of the veil is the legal act of imposing personal liability on otherwise protected officers, directors, or shareholders of a corporation for the corporation’s wrongful acts .
Thus, the focus of this Essay is whether the court will lift the veil of incorporation by pushing Salmon in the shadow or is the veil of incorporation as opaque and impassable as an iron curtain?
There are efforts by the court to push the theory of separate corporate personality into the shadow. This restraining approach has been highlighted in Supreme Court’s decisions .
Below is my opinion backed with judicial decisions and interpretations as to the statement that more accurately reflect the current law on lifting (or piercing) the corporate veil.
I am of the opinion that the veil of incorporation is as opaque and impassable as an iron curtain because artificial persons under the law and clothed with the same duties and obligations as a natural persons. They are distinct and separate and cannot be paraded or compared as one. Piercing the veil or lifting the veil started after the Salmon’s case.
It is trite in law following the decision of Salmon v. Salmon Co Ltd , that the court will lift or pierce a corporate veil to see those beneath it. The court stated that if a syndicate of joint owners of property sell the property to a company formed by them for that purpose and in which they are the sole shareholders, any profit made by them as a result of such sale is not impeachable by the company, for all the members at the timer were aware of it.
Since the decision, the courts have been keen to lift veils to impose legal responsibility on those behind it or for some reason such as attributing ‘enemy alien’ statuses .
Now, the courts only pierce the veil when justice is essential . Such instance of justice is when the corporation is a ‘mere facade’ hiding its factual information . So, for justice to be a requirement, the said act pertaining to the lifting must be provided under the statute. If not, the court is not keen on it. This instance makes the corporation ‘opaque and impassable’. The reason why the court is relying on justice is to avoid constant unveiling of an entity in search of members action. Also, the law provided that there are two persons, natural and artificial. The artificial individual which is a corporate entity is separate and distinct from the natural person. It is accorded the same rights and liabilities as a natural person. If the court keeps peeping under the veil to see who is behind the actions and directives of a corporation, it will water down its efficacy. Also, the liabilities of a corporation are not held accountable to its members. That is why; the assets and liabilities of a corporation are tied to a dispute such as fraud, tax evasion, etc. They are not tied to the assets and liabilities of its members, although the decisions resulting in such were made by the members.
The actions of the courts to ignore corporate veil is highlighted in Daimler Co Ltd v. Continental Tyre & Rubber Co (Great Britain) Ltd . Here the court stated that to discover whether a corporation during the wartime was controlled by the enemy goes against the principle of separate legal entity and as such, the veil will be pierced. This decision weakened the principle held in Salomon’s case. A corporation will enemy ties deserve to be pierced in order to find out the officers, directors and shareholders of the corporation. It is by finding them that the court will determine the purpose and motive of the corporation.
Another instance is Agency. Where there is an agency relationship between a parent company and it subsidiaries, the court will not puncture the veil. This is because the court views the acts of agency as the acts of the shareholders. Thus, it is only the shareholders or directors or officers of a corporation that can instruct its subsidiaries to act as an agent and carry out all the necessary duties and obligations on behalf of its parent corporation. In Re FG Films Ltd , the corporation wanted a declaration that it had created a British Film for financial basis. The court declared that actually the corporation in United Kingdom was just the agent for the corporation in America which possesses the huge shares majority. The corporation in United Kingdom could not specify its location of business and subsisted only so that the film could be called ‘British’. In the popular case of Smith, Stone and Knight Ltd v. Birmingham Corporation , Atkinson J. Argued that the corporate veil could be perforated to allow parent corporation to claim damages for interruption of a business operated by its subsidiary on land which was acquired by the local council. He allowed the parent corporation to request compensation for the reason that actions of the subsidiary resulted in a loss. His position for determining whether the actions of a subsidiary were that of an agency relationship is founded of six questions:
1. Were the benefits of the subsidiary treated as benefits of the parent corporation?
2. Were the officers managing the business named by the parent corporation?
3. Was the parent corporation the boss and the brain of the corporation?
4. Did the parent sanction the adventure, decided what should be done and what capital should be used to start the business in dispute?
5. Did the parent corporation make a profit for its skill and direction?
6. Was the parent in effective and constant control?
Now, if the answers to these questions are in the affirmative, then, the court has every right to pierce the veil under agency relationship in order to see those behind the mask. These questions have been applied across courts in Australia, Canada and United Kingdom.
The next instance where the court may penetrate the iron curtain is where the corporation is into fraud.
The courts have also ignored the corporate veil in which an enterprise is created to commit fraud or to avoid an existing contractual obligation. For example, in Gilford Motor Co. V. Horne , the defendant was a former director of a corporation that had signed an agreement in which he would not implore clients of his past employer. Instead, he and his wife incorporated another corporation and used it to violate the agreement. The court ruled that the corporation of the defendant and his wife was simply a joke or sham . Thus, the defendant was held responsible for all his actions.
However, the courts would not perforate the veil if the corporation was created to avoid future liabilities . Some commentators also argue that such cases do not involve the lifting of the corporate veil. Mayson, French and Ryan say that even if the corporation used to commit fraud or evade obligations was someone else instead of the separate legal entity called corporation, the result would have been the same .
Another instance that overlooks the ‘opaque and impassable’ veil of incorporation is when the corporation is owned and treated as a group. Case law is more contradictory as to whether business groups will be treated as another exception to Salomon v. Salomon . In one group, the parent corporation may own several subsidiaries and still have a separate corporate entity . Traditionally, the court asserts that this is a legitimate use of the corporate form, and that each corporation in a group is a distinct legal personality . However, at DHN Food Distributors Ltd v. Tower Hamlets LBC , Lord Denning found on appeal that a parent corporation and its subsidiaries were an ‘economic entity’ as the subsidiaries were ‘hand and feet tied to the parent corporation’, thus, the group was the same as an association. This is a detour from the principles in Salomon’s case. In Woolfson v. Strathclyde Regional Council , the House of Lords deprecated Denning’s comments and said that the corporate veil was maintained unless the corporation is a mere facade. This approach has been unpopular ever since it was laid. The reason is that commentators argued that the position of the House of Lords were self contradictory. Denning refers to subsidiaries as ‘hands and feet bound’ to the parent company, which means that the parent corporation have control, but also says they are ‘partners’ with the same powers and authority .
Another instance is in the case of a trust relationship. Here, the court ignored the corporate veil in which they found a trust relationship. In Trebanog Working Men’s Club and Institutive Ltd v. MacDonald , a club registered as a corporation, was accused of selling alcohol without a license. The court decided that, once the members owned the liquor between them, there was no real ‘sale’, and the club was simply an alcohol administrator for its members.
In conclusion, the courts are recently aligning with the thoughts of Samuel that the veil of incorporation is as opaque and impassable as an iron curtain. It can only be lifted when there are issues bothering on Agency, fraud, trusts, enemy, group enterprises, corporation legislation and tax are raised. Other than that, there is absolutely no need to pierce, puncture or lift the veil of corporation as that will be wandering and contradicting the notion that a corporation is a separate legal entity in the eyes of the law. Therefore, the principle of Salmon v. Salmon is hardly considered in the determination of recent suits. Salomon is no longer in the shadow. No court considers its shadow but on the rational of peeping or lifting the veil.