Company Law - Alan Dignam John Lowry - Chapt 2 3

2 Corporate personality and
limited liability
SUMM ARY
Introduction
Corporate personality
Salomon and the logic of limited liability
Some other good examples of the consequence of separate personality
Members, shareholders and the ownership of the corporation
Introduction
2.1 In this chapter we explore the concept of separate corporate personality and the
related issue of limited liability. These concepts are at the core of company law.
A good understanding of them is essential to understanding what company law
is about. Unfortunately, the metaphysical nature of corporate personality in par-
ticular often caused difficulties for students. Our advice here is to read the first
section on corporate personality. If you feel you have grasped the concept then
move on to the rest of the chapter and the rest of the book. If you have read the
corporate personality section and don’t understand it, relax, breathe deeply, take
some time to think about it but when you feel able—read the section again. Don’t
worry if you have lots of questions about corporate personality—many of the
questions will be answered in the following section on limited liability—all you
need at this stage is an understanding that the company really exists as a legal
personality.
Corporate personality
2.2 Human beings are generally legal persons—that is, they are subject to the legal
system in which they find themselves. While that legal system imposes obligations
16 Corporate personality and limited liability
on the legal person it also confers rights. When dealing with humans who are
legal persons we have little difficulty with the concept, generally viewing them as
one and the same. This is however incorrect and is often at the root of students’
misunderstanding of corporate personality. Children for example, while they are
human beings, are commonly excluded from having full legal personality until
they cease being children. It is important for now if you are to understand legal
personality to keep the human and the legal person separate. In essence human-
ity is a state of nature and legal personality is an artificial construct which may or
may not be conferred (see, this is where the flexibility of mind comes in).
2.3 So, if humanity is not necessary for legal personality it follows that it is possible
for legal personality to be conferred on non-humans. Some societies for example
attribute legal personality to religious icons. The icon itself is therefore treated as
having rights and obligations within the legal system. A logical extension of this
separation of humanity from legal personality is that groups of humans who are
engaged in a common activity could attempt to simplify their joint activity by
gaining legal personality for the venture. This is the origin of the corporation.
2.4 The most successful groups to attain legal personality were religious orders. Their
motive was relatively simple. If a religious order could obtain legal personality
the complications that regularly arose when an Abbot died, over the passing of
the order’s land to the new Abbot, would fall away. The conferring of legal per-
sonality would mean that the religious order as a legal personality would hold
the land in its own name and as it was not human and therefore not subject
to weaknesses of the flesh, such as death, the death of an individual head of the
order had no effect on the life or land of the legal personality of the order. As
the main beneficiary of these land disputes with religious orders was the Crown
(through death taxes levied on what the Crown deemed to be the Abbot’s lands),
the conferring of legal personality was necessarily tied directly to a concession
from the Crown, in the form of a charter or grant, incorporating (from the Latin
‘corpus’ meaning body, so literally meaning to ‘create a body’) the order.
2.5 Over time the process of corporatisation through charters extended to local
authorities and crucially commercial organisations such as Guilds of Merchants.
The changing nature of the power relationship between Parliament and the
Crown was also reflected in the way a charter was obtained. As Parliament
became more powerful the grants had to be first confirmed by Parliament and
eventually a charter could only be granted by an Act of Parliament. By the start
of the 18th century there was an active market in the trading of shares in these
companies. However a period of irrational speculation in these markets led to a
stock market crash known as the South Sea Bubble (after the South Sea Company
formed in 1711 and which became most associated with the speculative behav-
iour). Clumsy attempts by the Government to intervene to check the speculative
Corporate personality 17
mood caused panic and led to the crash in which many investors were ruined.
The Bubble had an enormous effect on the granting of charters over the follow-
ing century because officials were very wary of granting them and when they did
they often placed restrictive conditions in the grant.
2.6 This forced businesses to take things into their own hands and so the use of the
trust as an instrument to confer many of the privileges of incorporation became
commonplace. Over time these unincorporated ‘deed of settlement’ compa-
nies became instruments through which fraud was easily committed and the
Government was forced to intervene. After a number of ineffectual attempts
at statutory intervention Parliament passed a series of statutes that to this day
still form the framework of company law in the UK. The Joint Stock Companies
Act 1844 provided for incorporation by simple registration, provided safeguards
against fraud by insisting on full publicity and provided a Registrar of Companies
to hold the public documents provided by the companies.
2.7 One problem remained—the Act of 1844, while it conferred corporate status,
still held members liable for the company’s debts. (You will encounter the terms
‘member’ and ‘shareholder’ throughout this and other texts as well as the case law
and the Companies Acts. It is important to note that shareholders are also mem-
bers and members are shareholders of the company. The use of the word ‘mem-
ber’ emphasises that not only do members provide capital to the company, they
also have rights and obligations to the company and to each other over the life of
the company, just as ‘members’ of a swimming club or football club have rights
and obligations to the club and its other members, see further below, para 2.33).
This remained a problem as charter companies and deed of settlement companies
had achieved limitations on members’ liability. In the case of charter companies
this was through the Act that granted them and in the case of deed of settlement
companies it was through its legal complexity.
2.8 The logical follow-on from the creation of a separate legal personality is that it is
just that, a separate legal personality capable potentially of suing and being sued
in its own name, of holding property in its own name, and logically, therefore, of
making profits and losses that are its own and not those of its members (share-
holders). This issue which should be framed as the ‘no liability’ issue was framed
rather in terms of ‘limited liability’ (shareholders’ liability would be limited to
the unpaid amount of their shares) because that was the mechanism already used
for charter companies under previous Acts of Parliament.
2.9 Note here that we need to be careful with these concepts, separate legal person-
ality and limited liability are not the same thing—limited liability is the logical
consequence of the existence of a separate personality. However, just as humans
can have restrictions imposed on their legal personality (for example, children,
the mentally ill or foreign nationals) a company can have legal personality with-
out limited liability if the statute confers it in that way (this is still possible today
by forming a registered unlimited company (CA 2006, s 3(4)).
2.10 It was not until the Limited Liability Act 1855 (the provisions of which were almost
immediately subsumed into the Joint Stock Companies Act 1856) that limited
liability was provided, as well as a simplification of the registration requirements
for incorporation. Thus whenever anyone deals with a limited company in the
UK they are met with the warning; ‘Ltd’ in the case of a private company or ‘PLC’
for a public company attached to the company’s name to signify that the mem-
bers of this company have limited liability. In other words they are not liable for
the debts of the company—so be careful.
2.11 Note here that the ‘Ltd’ or ‘PLC’ refers only to the members’ liability and not that
of the company. The company itself is liable for its debts but once its assets are
exhausted the creditors cannot go after the members’ assets. Remember that the
legal personality of the members and the company are separate. The corporate
assets belong to the company and the members’ assets are their own.
2.12 Until the Joint Stock Companies Act 1856 the corporation had been the privi-
lege of large-scale business ventures and those with influence in Parliament or at
the Royal Court. From this point onward the company somewhat unexpectedly
became a viable form of business organisation for all types and size of business
venture. As a result company law emerged as a distinct and important area of law
because despite humanity not being an essential requirement for legal personal-
ity most law is designed for application to humans. Companies are not human,
they need to act through humans and so accommodations had to be made to
agency principles, fiduciary and statutory obligations and rights. Occasionally
where no accommodation could be made, specific statutory intervention aimed
at regulating the corporation was necessary. Thus, for the past 160 years or so as
the company has grown in economic importance, so too has the body of law we
call company law.
Salomon and the logic of limited liability
2.13 The ease with which business ventures could get access to corporate status cre-
ated an unexpected problem. Small businesses began to avail themselves of the
corporate form. These small businesses were far from the large-scale ventures
envisaged by the framers of the 19th-century companies legislation and so a
question as to their legitimacy remained. It was only a matter of time before the
courts would be called to decide on their legitimacy.
Salomon and the logic of limited liability 19
Salomon v Salomon & Co (1897)
2.14 Mr Salomon carried on a business as a leather merchant. In 1892 he formed the

company Salomon & Co Ltd, Mr Salomon, his wife and five of his children hold-
ing one share each in the company. The members of the family did not intend
taking an active role in the business but rather only held the shares because
the Companies Acts required at that time that there be seven shareholders.
Mr Salomon was also the managing director. If we freeze things at this point it
is important to note that Mr Salomon had two businesses. One is the original
sole trading shoe business. The other is the newly registered company which has
seven shareholders and Mr Salomon as managing director. What Mr Salomon
did next is crucial to our understanding of the implications of corporate person-
ality and limited liability. The newly incorporated company purchased the sole
trading leather business.
2.15 Note that the reality of this transaction was that Mr Salomon the sole trader nego-
tiated a purchase price with Mr Salomon the managing director of Salomon and
Co Ltd. As a result the price Mr Salomon the managing director paid for the shoe
business was a little on the high side. The business was valued by Mr Salomon
at £39,000; this was not an attempt at a real valuation but what Mr Salomon
seemed to think it was worth. This was however a fantastical amount for a shoe
and boot business in the east end of London—the equivalent in today prices of
£2,913,996.61 using the retail price index to calculate back to 1892. After all,
who was Mr Salomon, managing director, to argue? However, the real genius
of Mr Salomon was in the way he structured the transaction. The price was paid
in £10,000 worth of debentures giving a charge over all the company’s assets,
£20,000 in £1 shares and £9,000 cash. Mr Salomon also at this point paid off all
the creditors of the sole trading business in full. Mr Salomon thus was the vast
majority shareholder with 20,001 shares and his family holding the six remaining
shares. Additionally, because of the debenture, he was a secured creditor which is
also very important.
2.16 A debenture is simply a document creating or evidencing a debt (see further,

Chapter 6). In company law however the agreements tend to be fairly complex. If
a company needs a loan but a bank or other lender has some concern about the
company’s ability to repay they can create a debenture which secures the debt in
two possible ways. First, a fi xed charge could be created conferring an interest in
or over an asset of the company. If the company breaches the terms of the deben-
ture then the lender can take the asset and sell it to pay off the debt owed. A nor-
mal house mortgage is an example of a common fi xed charge. The bank agrees
to lend a prospective buyer the money to buy a house only if the buyer agrees to
pay the money back over a certain period of time plus a certain interest rate. The
buyer also agrees to restrictions on their power to sell the house and that if they
fail to pay the money back as agreed the bank can take the house and sell it to pay
off the debt. Similarly, if a company has fi xed assets like property or machinery
then it can do the same. In general the debenture holder has contractual rights
against the company but if the transaction is secured it also creates rights in the
corporate property. Note this is something that shareholders do not have (see
para 2.30 onwards below).
2.17 Certain companies however may not have fi xed assets (or they may already have
fi xed charges in place but need to borrow more) but because of the nature of
their business they have valuable moveable assets. Any retail business will have
moveable assets (its stock, for example) that are valuable. This brings us to our
second type of secured lending—the floating charge. Over time lenders met the
needs of these businesses with valuable stock by accepting a charge over a class of
assets. So a retail outlet could get a loan from a bank secured by a charge over all
its stock. This type of charge is necessarily more flexible as the company needs to
be able to sell the stock and replace it as needs be. This is after all the core of its
business. Thus there can be nothing in the debenture restricting sale of the assets.
This is why it is described as secured over a class of assets; it can’t be secured
over a specific asset as they are constantly changing. If the company does breach
the debenture agreement the charge is said to ‘crystallise’ and it fi xes upon the
specific assets in the stockroom. At this point the company cannot sell any of the
assets. A floating charge is a less secure type of lending because the lender has no
way of knowing whether the assets left in the stockroom when the charge ‘crys-
tallises’ will cover the debt owed. The lender will compensate for this additional
risk by charging a higher rate of interest (see further Chapter 6).
2.18 Returning now to Mr Salomon. While on the ground almost nothing about the
shoe trading business had changed except the sign outside containing the word
‘Ltd’, legally everything had changed. Before the change in legal status the cus-
tomers and suppliers contracted with Mr Salomon the sole trader, who was liable
for all the debts of the company. After incorporation and the sale of the business
to Salomon and Co Ltd the customers and suppliers contracted with the com-
pany through its managing director, Mr Salomon (same face, different personal-
ity). Mr Salomon’s personal liability for the debts of the business had changed
completely from unlimited liability as a sole trader to limited liability as a share-
holder in the company. Not only was Mr Salomon not liable for the debts of the
company but as managing director of the company he had also granted himself a
secured charge over all the company’s assets. Thus, if the company failed not only
would Mr Salomon have no liability for the debts of the company but whatever
assets were left would be claimed by him in satisfaction of his debt.
2.19 You may sense already, given that more than 100 years later he is featuring in
a company law text, that things did not go to plan for Mr Salomon. Almost
Salomon and the logic of limited liability 21
immediately after the change in the legal status of the business the company had
trading difficulties and Mr Salomon had to sell his debenture to raise money
for the business. This just delayed the inevitable and after only a year trading as
Salomon and Co Ltd the debenture holder enforced the security over the assets
of the company and the company was placed into insolvent liquidation. However
there were not enough assets left to pay off the debenture holder and so the
debenture holder, Mr Broderip, sought to challenge the validity of the transac-
tion to convert the legal status of the business into a company and sought to make
Mr Salomon personally liable for the debts of the company.
2.20 Mr Broderip alleged that the company was but a sham and a mere ‘alias’ or
agent for Mr Salomon. The Court of Appeal upheld this claim and in doing
so they looked at the motives of the promoters (Mr Salomon) and the mem-
bers (Mr Salomon and his family) of the company. The focus of the Court of
Appeal’s concern was that the six family members never intended to take a part
in the business and only held the shares to fulfi l a technicality required by the
Companies Acts. Kay LJ considered that:
[t]he statutes were intended to allow seven or more persons, bona fide associ-
ated for the purpose of trade, to limit their liability under certain conditions and
to become a corporation. But they were not intended to legalise a pretended as-
sociation for the purpose of enabling an individual to carry on his own business
with limited liability in the name of a joint stock company.
2.21 Mr Salomon was thus liable to indemnify the company against its trading debts.
Mr Salomon appealed to the House of Lords and at this point the liquidator of
Salomon and Co Ltd (an official appointed by the court to carry out the statutory
liquidation process, in effect to see what assets are left and divide it up among the
creditors. This may also involve taking or defending legal actions—see Chapter
17) took over the litigation from Mr Broderip on behalf of the general body of
creditors. The House of Lords unanimously reversed that decision. It held that
the company was validly formed according to the Joint Stock Companies Act
1844, which only required that there be seven members, holding one share each.
There was nothing in the Act about bona fides. The motives of the shareholders
were irrelevant unless there was fraud involved. The business thus belonged to
the company and not to Salomon. Salomon was an agent of the company, not
the company his agent. In giving his reasons for overturning the decision of the
Court of Appeal, Lord Macnaghten stated:
[t]he company is at law a different person altogether from the subscribers . . . ;

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 shape or
form, except to the extent and in the manner provided by the Act.
2.22 The importance of the case lies in the consequences which flow from the deci-
sion. First, the fact that some of the shareholders are only holding shares as a
technicality is irrelevant, the machinery of the Companies Acts may be used by
an individual to carry on what is in economic reality his business. This also had
the less obvious effect of facilitating investment in large companies where share-
holders could purchase shares for speculative purposes safe in the knowledge that
participation in the company was not a prerequisite for limited liability. Second, a
company formed in compliance with the regulations of the Companies Acts is a
separate person and not per se the agent or trustee of its controller. Third, the use
of debentures instead of shares can further protect investors.
2.23 It is worthwhile reading both the Court of Appeal and the House of Lords’ deci-
sions. The contrast in their positions is stark. The Court of Appeal took a more
moralistic approach to the case before it and was clearly disturbed at the individ-
ual avoidance of responsibility for one’s debts. This is odd given that there was no
doubt that large businesses could have limited liability or even seven persons who
formed to ‘bona fide’ associate and run a business. They seem however uncom-
fortable with this position in the context of an effective one-person company.
While they do not use the word ‘fraud’, they use the words ‘defeated’, ‘pretended’,
‘mischief’, ‘perverting’ and ‘cheating’ to describe Mr Salomon’s activities. They
place the emphasis on what they see as the combined bad faith of the nomi-
nee members and the overvaluation and are of the view that if Parliament had
intended one-person nominee companies it would have said so and not specified
seven members. The House of Lords on the other hand restricted itself to asking if
the Act was complied with. The Act required seven members—the company had
seven members—therefore the company was validly formed and the protections
of the Companies Acts would apply. They also seemed to have a more favourable
view of Mr Salomon. It is also worth noting that neither the Court of Appeal nor
the House of Lords could refer to the Parliamentary reports (Hansard) to see
what Parliament intended, as the courts were forbidden from doing this until
Pepper v Hart (1993). Had they been able to do so they would have found that in
fact the seven member requirement had been chosen to avoid its use by very small
businesses. In other words the Court of Appeal was right in its assumption.
2.24 Clearly Mr Salomon had been clever in understanding the implication of the
registration requirements of the Companies Acts but it is the nominal family
shareholding and the transaction to sell the sole trading concern that cause
the disquiet. This concern has little to do with the formation procedures of the
Companies Acts but rather the fact that Mr Salomon owned and controlled both
businesses. It is his exercise of control combined with his claim to limited liability
Some other good examples of the consequence of separate personality 23
that is at the heart of the case. If it were a large company in which he was a small
shareholder there would be no problem. It is his ownership and control of the
business that causes the challenge to the validity of the formation of the company
and the Court of Appeal to find Mr Salomon liable.
2.25 In a way, although the two decisions are starkly different the outcomes may be
attributable both to what part of Mr Salomon’s behaviour is emphasised and the
court’s view of its role. On the one hand, the overvaluation of the business seems
outrageous, but on the other Mr Salomon used the cash part of the transaction
to pay off the sole trading concern’s existing creditors. Thus the creditors at the
time of the liquidation had only ever dealt with the business as a company and
were not in any way victims of some unseen switch. Mr Salomon had also sold
his debenture in order to keep the business going. In the end the House of Lords
tended to view the overvaluation in a less harsh light than the Court of Appeal,
Lord Macnaghten describing it as ‘a sum which represented the sanguine expec-
tations of a fond owner rather than anything that can be called a businesslike or
reasonable estimate of value’. Had Mr Salomon not paid off his creditors and put
his own money into the company in a futile attempt to keep it going, the House of
Lords’ view of Mr Salomon’s behaviour might have been very different, as would
the subsequent history of company law. Additionally the Court of Appeal and
the House of Lords seem to be engaged in very different analytical pursuits. The
Court of Appeal is partly attempting to work out what Parliament intended with
its seven member requirement while the House of Lords takes the view that it is
simply to obey the will of Parliament, i.e. seven means seven.
2.26 From this point on the separateness of the corporate personality from its mem-
bers became firmly embedded as a principle of English company law. In particu-
lar it had time to become embedded because until the House of Lords changed
the rules under which it operated in 1966 it was not possible for the House of
Lords to overrule itself. Therefore any attempts to strike at the principle were
tangential and exceptional. After that time however, as we shall see in Chapter 3,
the guarantee of separateness became less assured.
Some other good examples of the

consequence of separate personality
Lee v Lee’s Air Farming (1961)
2.27 Mr Lee incorporated a company, Lee’s Air Farming Limited, in August 1954. The
nominal capital of the company was £3,000 divided into three thousand shares
of £1 each. Mr Lee held 2,999 shares, the final share being held by a solicitor
for Mr Lee because the New Zealand Companies Act required two shareholders.
Mr Lee was also the sole ‘governing director’ for life. Thus, as with Mr Salomon,
he was in essence a sole trader who now operated through a corporation. Mr Lee
was also specifically appointed as an employee in the company’s articles of asso-
ciation which stated:
33. The company shall employ the said Geoffrey Woodhouse Lee as the chief
pilot of the company at a salary of £1,500 per annum from the date of incor-
poration of the company and in respect of such employment the rules of law
applicable to the relationship of master and servant shall apply as between the
company and the said Geoffrey Woodhouse Lee.
2.28 Mr Lee therefore wore three hats as far as the company was concerned. He was
the vast majority shareholder, he was the sole governing director for life and he
was an employee of the company. In March 1956, while Mr Lee was working,
the company plane he was flying, stalled and crashed. Mr Lee was killed in the
crash leaving a widow and four infant children who were totally dependent on
him.
2.29 The company as part of its statutory obligations had been paying an insurance
policy to cover claims brought under the Workers’ Compensation Act 1922. The
widow claimed she was entitled to compensation under the Act as the widow of a
‘worker’. The issue went first to the New Zealand Court of Appeal who found that
he was not a ‘worker’ within the meaning of the Act and so no compensation was
payable. The case was appealed to the Privy Council in London. They emphasised
that the company and Mr Lee were distinct legal entities and therefore capable
of entering into legal relations with one another. As such they had entered into a
contractual relationship for him to be employed as the chief pilot of the company.
They found that he could in his role of governing director give himself orders
as chief pilot. It was therefore a master and servant relationship and so he fit-
ted the definition of ‘worker’ under the Act. The widow was therefore entitled to
compensation.
Macaura v Northern Assurance Co (1925)
2.30 Mr Macaura was the owner of the Killymoon estate in County Tyrone. In
December 1919 he agreed to sell to the Irish Canadian Saw Mills Ltd all the tim-
ber, both felled and standing, on the estate in return for the entire issued share
capital of the company, to be held by himself and his nominees. He also granted
the company a licence to enter the estate, fell the remaining trees and use the
sawmill. By August 1921, the company had cut down the remaining trees and
passed the timber through the mill.
Members, shareholders and the ownership of the corporation 25
2.31 The timber, which represented almost the entire assets of the company, was then
stored on the estate. On 6 February 1922 a policy insuring the timber was taken
out in the name of Mr Macaura. On 22 February a fire destroyed the timber on
the estate. Mr Macaura then sought to claim under the policy he had taken out.
The insurance company contended that he had no insurable interest in the tim-
ber as the timber belonged to the company and not Mr Macaura. The case passed
through the Northern Ireland court system, during which time allegations of
fraud were made against Mr Macaura but never proven. Eventually in 1925 the
issue arrived before the House of Lords who, agreeing with the insurance com-
pany, found that the timber belonged to the company and that Mr Macaura even
though he owned all the shares in the company had no insurable interest in the
property of the company. Lord Wrenbury, agreeing with the insurance compa-
ny’s contention, stated that a member:
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.
Just as corporate personality facilitates limited liability by having the debts belong
to the corporation and not the members it also means that the company’s assets
belong to it and not the shareholders. Thus corporate personality can be a double-
edged sword.
Members, shareholders and the ownership

of the corporation
2.32 You may at this point, having read the synopsis of the Macaura decision, be some-
what confused about what exactly a share in a company is. Didn’t Mr Macaura
effectively just swap the timber for the shares? Aren’t the shares just a paper rep-
resentation of the timber given that they are worth the same amount? So, if he
sold 10 per cent of the shares wouldn’t they be worth 10 per cent of the value of
the timber? These are all good questions the answers to which we will explore in
the following section.
2.33 As we briefly discussed in the first section of this chapter, the words ‘member’ and
‘shareholder’ are used interchangeably in company law. The word shareholder in
particular can be misleading because it seems to imply that a shareholder owns a
share of the company. Additionally, newspapers often refer unhelpfully to share-
holders as the ‘owners’ of the company. In one sense this is correct as a share-
holder does own a share of the participation rights in the company (right to vote,
attend meetings, participate in a dividend, etc.) but shareholders do not own a
share of the company’s property. It may be better for your own understanding at
this point therefore to use the term ‘member’ rather than shareholder because it
conveys a better sense of their rights and obligations.
2.34 Let us take the example of a swimming club of which you are a member. You have
certain rights to participate in the club. An obvious right would be the use of the
swimming pool but you may also have voting rights to elect members of the com-
mittee to run the club. If another member breaks the rules of the club you can
complain to the management committee who will enforce the rules and may even
punish the other member. You do not, however, as a member of the swimming
club own a part of the club’s property. You may swim in lane number 4 twice a
day every day but in no way do you own all or part of lane number 4. This is the
case even if you work out that your expensive membership fee is exactly equiva-
lent to the value of one lane in the swimming pool.
2.35 The same is roughly true where you are a member of a company. As a member
you have shares in the company which entitle you to participate in the company
as a member. As such you have such entitlements as are conferred on members
by the Companies Acts and the articles of association. Broadly these are rights to
information, attendance at meetings, voting and dividends if there are any.
Dispersed shareholdings
2.36 A further complication for our understanding of membership of a company

occurs where the shares become easily transferable. If there is a ready market for
shares (for example where a company is listed on the stock exchange) then a value
can easily be attributed to the rights attached to a share in a company. When this is
done there is a connection (it is not a legal one) between the assets of the company
and a share in the company. The following example will hopefully illustrate this.
2.37 M plc is a listed company, that is, its shares are traded on the stock exchange (see
Chapter 5). It has 10 million shares in circulation with a nominal value of £1 each.
The shares trade today on the stock exchange at £2 each. How can there be such
a difference between the nominal value of the shares and the market value? Note
that the nominal or par value of the shares refers only to the value attributed to
them to achieve a convenient subdivision of the share capital. That price repre-
sents only the minimum price they can be issued for and may or may not be the
price they actually were issued for (see Chapter 7 and Chapter 8). For the follow-
ing example however let us assume that the nominal value and the issue price are
the same. As we will see there is no necessary connection between the assets of
the company and the value of the shares but for our purposes here let us say that
on the day the company issued the shares the assets of the company were equal
to £10 million. That is, the only asset of the company was the capital contributed
by the shareholders. The following is a short hypothetical trading history of the
company.
Year one
1 May: M plc issues 10 million shares at a nominal value of £1 each and the direc-
tors issue a statement that the capital is to be used to fund an organic farming ven-
ture. The company’s assets = £10 million.
2 May: M plc shareholders begin to sell shares on the stock exchange at £1.10. The
shares rise as the market likes the idea of investing in organic farming. Nominal
value of shares £1. The company’s assets = £10 million. Economic value of shares if
all sold today at market price = £11 million.
Year two
The shares have traded in the range of £1.10–£1.20 all the previous year.
2 January: A new managing director is appointed to M plc who announces that

the company will sell its organic business and invest the proceeds in a high-tech
venture to develop fuel cells for cars. The shares’ price shoots up to £2 as the market
likes the dynamic new managing director and his ideas. Nominal value of shares
£1. The company’s assets = £11 million after the sale of the organic farm. Economic
value of shares if all sold today at market price = £20 million.
3 June: A similar company developing fuel cells announces that its first test of its
prototype fuel cell has failed. M plc shares crash to £1.50. Nominal value of shares
£1. The company’s assets after initial investment in fuel cells = £9 million. Economic
value of shares if all sold today at market price = £15 million.
Year three
The shares have slowly floated down to trade at 80p as no news emerges as to
progress on fuel cells.
5 April: Managing Director’s new enormous salary is announced causing outraged

shareholders to sell their shares. The market price goes to 75p. Nominal value of
shares £1. The company’s assets after more investment in fuel cells = £5 million.
Economic value of shares if all sold today at market price = £7.5 million.
6 July: Government announces that it will provide funding for companies to develop
solar power initiatives and not fuel cells. The market price of M plc crashes to 25p.
Nominal value of shares £1. The company’s assets decline with expenditure to = £4.5
million. Economic value of shares if all sold today at market price = £2.5 million.
10 September: A rumour goes around that Z Ltd has spotted that the economic
value of the shares of M plc is less than its asset value and intends to buy up all the
shares in the company and sell off all the assets. Market price goes to 30p. Nominal
value of shares £1. The company’s assets = £4.3 million. Economic value of shares if
all sold today at market price = £3 million.
20 September: No bid emerges and the share price goes back to 25p. The com-
pany’s assets = £4.2 million. Economic value of shares if all sold today at market
price = £2.5 million.
2.38 As we can see from the above the asset value of the company is just a small part
of the equation that determines market price. Many factors affect the price others
will pay, including managerial skill, similar companies’ share price fluctuations,
rumours, general economic conditions, government intervention, etc. What is
being traded is not a paper representation of a percentage of the assets of the
company owned by the shareholders. Shareholders do not own any of the com-
pany’s property. When they trade shares they are trading a bundle of rights that
someone else thinks may grow in value or provide them with income (through
dividend payments from the company) or both.
2.39 The vast majority of companies in the UK are private companies. Private compa-
nies as we noted in Chapter 1 commonly restrict the right of members to transfer
shares. As a result the right to sell your shares is not even a common feature of
the bundle of rights that attaches to a share.
2.40 It is important to note that one of the rights that is part of the bundle that a share
represents is the right to participate in a dividend. Dividends are normally paid
at the discretion of the board of directors. If in any year the board decide that not
only have they enough money to finance their plans for the future but they have
some left over they may distribute it to the shareholders as dividends. This is a
payment made of, say, 10p per share.
2.41 Note here that the value attached to the share in the marketplace has no effect on
the bundle of rights itself. The fact the rights are worth more now than a year ago
does not mean the rights have grown or altered in any way. For example suppose
that two years ago I bought 10 shares in a company at £1 a share and a year later
I bought 10 more at £5 a share. The company then declared a dividend of 10p a
share. I have 20 shares and so will receive £2 as dividends. The fact I paid five times
as much for half my shares does not affect the rights I paid for. So I don’t get paid
five times the dividend of the £1 shares or get five times the votes. It is the same
with most appreciating assets. One example is if you bought a house for £100,000
two years ago and it is now worth £120,000. The rights you enjoy over the property
have not increased by 20 per cent. Your enjoyment of living in the house has not
increased by 20 per cent (OK maybe you enjoy it 10 per cent more because you just
made £20,000 in two years). The point is that the rights attached to the property
have not increased at all even though the market value of those rights has.
Close companies
2.42 Small one or two-person companies can also cause confusion here. As with
Mr Macaura, if there is only one shareholder then he owns all the control rights
in the company and therefore entirely controls the assets of the company. If he
entirely controls the assets of the company does he not own the company and its
assets? Aren’t the shareholders generally considered the owners of the company?
2.43 Here we have to rely on your understanding of corporate personality. The sepa-
rate personality that is the company is controlled by its constitutional organs,
the board or general meeting and not by individual board or individual gen-
eral meeting members. While the board has the day-to-day control function, the
organ that elects the board is the general meeting. The general meeting however
acts collectively, so even though there is only one shareholder he or she makes
decisions to elect the board through the general meeting. Thus Mr X the sole
shareholder in X Ltd exercises his votes at a general meeting of the company in
favour of his chosen directors. It is not however Mr X who appoints the directors,
it is deemed that they were appointed by the general meeting.
2.44 Throughout company law you will find an emphasis on the exercise of collec-
tive shareholders’ rights and a reluctance (it does sometimes recognise that the
shareholder collective needs tempering) to acknowledge anything other than the
shareholder collective. For example the board owe a duty to promote the success
of the company (CA 2006, s 172), meaning broadly the members in general meet-
ing. They do not owe the duty to the majority shareholder but rather to the share-
holders as a whole (see Chapter 14). This focus on the company acting through its
constitutional organs can, as we explained in Chapter 1, have detrimental effects
for minority shareholders. Another example you may remember from your study
of Tort is the decision in Caparo v Dickman (1990) that individual shareholders
who rely on the audited accounts to buy more shares in the company cannot
recover for loss based on this reliance if the accounts turn out to be incorrect
(these are the audited accounts that are sent to every shareholder). Only the com-
pany can get damages from the auditor for such a negligent act. In traditional
company law theory the focus of the company’s activities is the shareholders as a
collective (see Chapter 15 for an overview of corporate theory).
2.45 While there are advantages to the primacy of the shareholder collective such as
encouraging risk capital, clarity of focus and authority, increasingly other groups
have begun to make strong claims to inclusion. Dissenting minority shareholders

often have legitimate claims to ease oppression. Additionally employees, credi-
tors and the environment can be drastically affected by decisions of the company.
These claims to inclusion in the focus of company law have over the past decade
become part of what is know as the ‘stakeholder’ debate (see Grantham (1998) on
the tensions between the traditional doctrinal position and stakeholder theory).
While we deal with this development in detail in Chapters 15 and 16, for now
you should be aware that stakeholder theory has increasingly gained legitimacy
in company law reform circles, culminating in some ‘stakeholder lite’ provi-
sions being included in the CLRSG’s Final Report (see Annex C: Statement of
Director’s Duties) and the Company Law Reform Bill, Part 10, Chapter 2. These
changes to the formulation of directors’ duties have now been introduced into
the Companies Act 2006 by way of s 172. This section maintains the focus of
directors’ duties firmly on the shareholders but allows ‘enlightened’ boards of
directors to consider other ‘stakeholder’ concerns if they wish. The importance of
this new provision lies more in legitimising ‘stakeholder’ theory generally in the
business world than in any concrete effects the provision will have on displacing
shareholders as the main focus of corporate activity (see further Chapter 16).
FURTHER RE ADING
This Chapter links with the materials in Chapter 3 of Hicks and Goo’s Cases and
Materials on Company Law, (2011, Oxford University Press, xl +649p).
Freedman and Finch, ‘Limited Liability Partnerships: Have Accountants Sewn up the
“Deep Pockets” Debate?’ [1997] JBL 387.
Grantham, ‘The Doctrinal Basis of the Rights of Company Shareholders’ [1998]

CLJ 554.
Ireland et al, ‘The Conceptual Foundations of Modern Company Law’ [1987] JLS 149.
Pettit ‘Limited Liability—A principle for the 21st century’ [1995] CLP 124.
SELF-TE S T QUE S TIONS

1 Explain how the separate personality of the company facilitates limited liability.
2 Why is Salomon an important case?
3 Was justice done in the Macaura case?
4 Do shareholders own the company?
5 What determines the market price of a share?
3 Lifting the veil
SUMM ARY
Introduction
Statutory examples
Veil lifting by the courts
Classical veil lifting, 1897–1966
The interventionist years, 1966–1989
Back to basics, 1989–present
Tortious liability
Parent company personal injury tortious liability
Commercial tort
The costs/benefits of limited liability
Introduction
3.1 You may not unnaturally wonder at this point what the phrase ‘lift ing the veil’
is about. It refers to the situations where the judiciary or the legislature have
decided that the separation of the personality of the company and the members
is not to be maintained. The veil of incorporation is thus said to be lifted. The
judiciary in particular seem to love using unhelpful metaphors to describe this
process. In the course of reading cases in this area you will find the process vari-
ously described as ‘lifting’, ‘peeping’, ‘penetrating’, ‘piercing’ or ‘parting’ the veil
of incorporation. In a nutshell, having spent the whole of the last chapter empha-
sising the separateness of corporate personality, we now turn to those situations
where for various reasons that separateness is not maintained.
3.2 While some of the examples of veil lifting involve straightforward shareholder
limitation of liability issues many of the examples involve corporate group struc-
tures. As businesses became more adept at using the corporate form, group struc-
tures began to emerge. For example Z Ltd (the parent or holding company) owns
32 Lifting the veil
all the issued share capital in three other companies—A Ltd, B Ltd and C Ltd.
These companies are known as wholly owned subsidiaries (see CA 2006, s 1159(2)).
Z Ltd controls all three subsidiaries. In economic reality there is just one business
but it is organised through four separate legal personalities. In effect this structure
allows the legal personality of the parent company to avail itself of the advantages
of limited liability. Thus if the parent conducts its more risky or liability-prone
activities through A Ltd and things go wrong the assets of Z Ltd, because it is a
shareholder of A Ltd with limited liability, in theory cannot be touched. In certain
situations the legislature and the courts will not allow this to happen.
Statutory examples
3.3 The taxation authorities in the UK have been acutely aware of the potential for
group structures to avoid taxation by moving assets and liabilities around the
group. Thus, there are numerous examples of taxation legislation directed at
ignoring the separate entities in the group. The Companies Act also recognises
that group structures need to be treated differently for disclosure and financial
reporting purposes in order to get a proper overview of the group fi nancial posi-
tion. The CA 2006, s 399 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.
3.4 The Employment Rights Act 1996 also protects employees’ statutory rights when
transferred from one company to another within a group, treating it as a con-
tinuous period of employment. Additionally, many of the situations where ‘lift-
ing the veil’ is at issue involve corporate insolvency, the Insolvency Act 1986 has
some key veil lifting provisions. While we deal with these provisions in detail in
Chapter 17, we briefly consider them here.
3.5 The Companies Acts have long recognised that the corporate form could be
used for fraudulent purposes. Indeed, one of the reactions of Parliament to the
Salomon decision was to introduce an offence of ‘fraudulent trading’. This offence
was continued in the 1948 Companies Act which contained both civil and crimi-
nal sanctions for fraudulent trading. While the CA 2006 still contains a criminal
offence in s 993 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. 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
Statutory examples 33
creditors of the company 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 abovementioned are to be liable to make such contributions
(if any) to the company’s assets as the court thinks proper.
3.6 This section and its predecessor in the 1948 Act consistently proved difficult to
operate in practice. 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 and Lyon Ltd (1933), this involved
proving ‘actual dishonesty, involving, according to current notions of fair trad-
ing among commercial men, real moral blame’. Reaching this standard was dif-
ficult and eventually a new provision was introduced in s 214 of the Insolvency
Act 1986 to deal with what is known as ‘wrongful trading’.
3.7 Section 214 was introduced to deal with situations where negligence rather than
fraud is combined with a misuse 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 (if any) to the company’s assets as the court thinks proper.
(2) This subsection applies in relation to a person if—

(a) the company has gone into insolvent liquidation,
(b) at some time before 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 company would avoid going
into insolvent liquidation, and
(c) that person was a director of the company at that time.
3.8 The idea behind the operation 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. A rea-
sonable director would stop trading at this point. If a director continues to trade
after this point he will risk having to contribute to the debts of the company. The
case of Re Produce Marketing Consortium Ltd (No 2) (1989) 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
34 Lifting the veil
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.
3.9 While s 213 covers anyone involved in the carrying on of the business, thus
qualifying the limitation of liability of members, s 214 is aimed specifically at
directors. In small companies directors are often also the members of the com-
pany 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 (CA 2006, s 251, see Chapter 13). A parent company
might be in this position if it was exerting direct control over the board of its
subsidiaries.
Veil lifting by the courts
3.10 Since the Salomon decision the courts have often been called upon to apply
the principle of separate legal personality in what might be called difficult
situations. In some cases they have upheld the principle and in others they
did not. Over this time various attempts have been made at providing expla-
nations for when the courts will lift the veil of incorporation; none however
are really satisfactory. Some texts attempt to explain veil lift ing by categories:
where the company is an agent of another, where there is fraud, or tax issues,
or employment issues or a group of companies exists the courts will lift the
veil. While it is possible to fi nd examples of veil lift ing in all these categories
it is also possible to fi nd examples of the courts upholding the separateness of
companies in these categories. Others have attempted to categorise veil lift ing
by analysing the ways the judiciary have lifted the veil. Thus Ottolenghi (1990)
offers categorisations such as: ‘peeping’, where the veil is lifted to get member
information; ‘penetrating’, where the veil is disregarded and liability is attrib-
uted to the members; ‘extending’, where a group of companies is treated as one
legal entity and; ‘ignoring’, where the company is not recognised at all. While
these categorisations are interesting and useful for understanding how veil
lift ing has sometimes operated in the past they in no way offer a guide to how
the courts will behave in a given situation in the future. The most accurate
statement about this that can be made is that sometimes the courts lift the veil
and sometimes they refuse to. It may be frustrating and unsatisfactory but
that is the reality. Having said that, there have been periods where the courts
were more inclined to uphold the veil of incorporation than not. By way of
The interventionist years, 1966–1989 35
our own explanation we offer the following timeline which is intended as a

general guide.
Classical veil lifting, 1897–1966
3.11 During this period the House of Lords decision in Salomon dominated. As we
explained in Chapter 2, the House of Lords could not overrule itself during this
period and this operated as a significant restraint on veil lifting. However, veil
lifting did occur in exceptional circumstances during this period. The court for
example in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd
(1916) lifted the veil to determine whether the company was an ‘enemy’ during
the First World War. As the shareholders were German, the court determined
that the company was indeed an ‘enemy’.
3.12 In Gilford Motor Co Ltd v Horne (1933) a former employee who was bound by a
covenant not to solicit customers from his former employers set up a company
to do so. The court found that the company was but a front for Mr Horne and
issued an injunction. In Jones v Lipman (1962) Mr Lipman had entered into a
contract with Mr Jones for the sale of land. Mr Lipman then changed his mind
and did not want to complete the sale. He formed a company in order to avoid
the transaction and conveyed the land to it instead. He then claimed he no longer
owned the land and could not comply with the contract. The judge again found
the company was but a façade and granted an order for specific performance. In
Re Bugle Press (1961) majority shareholders in a company set up a second com-
pany in order to force a compulsory purchase of a minority shareholder’s shares.
The second company then made an offer for the shares in the first company and
the majority shareholders accepted. As this meant that over 90 per cent of the
shareholders had accepted, it therefore triggered a compulsory purchase of the
minority shareholder’s shares under the Companies Acts (see Chapter 5). The
minority shareholder objected and the court prevented the transaction again as
the second company was but a mere façade for the majority shareholders.
The interventionist years, 1966–1989
3.13 By the 1960s the courts were increasingly demonstrating a tendency to free them-
selves from old precedence they saw as increasingly unjust. In 1966 this tendency
led the House of Lords to change the rules under which it had operated and allow
it to change its mind and overrule itself. By 1969 Lord Denning seemed to be on
36 Lifting the veil
a crusade to encourage veil lifting. In Littlewoods Mail Order Stores v IRC (1969)
he stated:
[t]he doctrine laid down in Salomon’s case has to be watched very carefully. It
has often been supposed to cast a veil over the personality of a limited com-
pany through which the courts cannot see. But that is not true. The courts can,
and often do, pull off the mask. They look to see what really lies behind. The
legislature has shown the way with group accounts and the rest. And the courts
should follow suit.
3.14 In DHN Food Distributors Ltd v Tower Hamlets (1976) Denning argued that
a group of companies was in reality a single economic entity and should be
treated as one. Two years later the House of Lords in Woolfson v Strathclyde
Regional Council (1978) specifically disapproved of Denning’s views on group
structures in fi nding that the veil of incorporation would be upheld unless it
was a façade. However, Denning’s views on the lift ing of the corporate veil still
had considerable effect. In Re a Company (1985) the Court of Appeal stated:
[i]n our view the cases before and after Wallersteiner v Moir [1974] 1 WLR 991
[another Lord Denning case] show that the court will use its power to pierce the
corporate veil if it is necessary to achieve justice irrespective of the legal efficacy
of the corporate structure under consideration.
This represented probably the high point of the interventionist period where the
courts seemed to treat the separate personality of the company as an initial negoti-
ating position which could be overturned in the interests of justice.
3.15 There was however a growing disquiet about the uncertainty this brought
to the concept of corporate personality and limited liability. As Lowry (1993)
concluded:
[t]he problem that can naturally arise from this approach is the uncertainty
which it casts over the safety of incorporation. The use of the policy to erode
established legal principle is not necessarily to be welcomed.
Similarly Gallagher and Ziegler (1990) in an examination of when the courts will
lift the veil of incorporation at common law concluded that the lifting of the veil
can have negative impacts on other aspects of the law such as directors’ duty to the
company as a whole, individual taxation principles and the rule in Foss v Harbottle
(1843). However, by the late 1980s the Court of Appeal in National Dock Labour
Board v Pinn and Wheeler Ltd (1989) had moved firmly against a more inter-
ventionist approach at least where group structures were concerned. This was a
foretaste of what was to come in the following decade.
Back to basics, 1989–present 37
Back to basics, 1989–present
3.16 In Adams v Cape Industries Plc (1990) the Court of Appeal took the oppor-
tunity to examine at great length the way the courts have lifted the veil of
incorporation in the past and narrowed significantly the way in which the
courts could do so in the future. The facts of the case were extremely com-
plex and what follows is but a very simple version. The case concerned the
enforcement of a foreign judgment in England. The key issue for the Court
was whether Cape Industries could be regarded as falling under the jurisdic-
tion of a US court and therefore be subject to its judgment. This could only
occur if Cape was present within the US jurisdiction or had submitted to such
jurisdiction.
3.17 Until 1979, Cape, an English company, mined and marketed asbestos. Its world-
wide marketing subsidiary was another English company, named Capasco. It
also had a US marketing subsidiary incorporated in Illinois, named NAAC.
In 1974, some 462 people sued Cape, Capasco, NAAC and others in Texas, for
personal injuries arising from the installation of asbestos in a factory. Cape
protested at the time that the Texas court had no jurisdiction over it but in
the end it settled the action. In 1978, NAAC was closed down by Cape and
other subsidiaries were formed with the express purpose of reorganising the
business in the USA to minimise Cape’s presence there for taxation and other
liability issues.
3.18 Between 1978 and 1979, a further 206 similar actions were commenced and
default judgments were entered against Cape and Capasco (who again denied
they were subject to the jurisdiction of the court but this time did not settle).
In 1979 Cape sold its asbestos mining and marketing business and therefore
had no assets in the USA. The claimants thus sought to enforce the judgments
in England where Cape had most of its assets. At issue in the case was whether
Cape was present in the US jurisdiction by virtue of its US subsidiaries. The only
way that could be the case in the court’s view was if it lifted the veil of incorpora-
tion, either treating the Cape group as one single entity, or finding the subsidiar-
ies were a mere façade or that the subsidiaries were agents for Cape. The court
exhaustively examined each possibility.
3.19 The court first examined the major ‘single economic unit’ cases where group
structures were treated as being a single entity. It found that the cases all involved
the interpretation of a statute or a document. They reached this conclusion
even though the Denning judgment (which the Court of Appeal examined) in
DHN Food Distributors Ltd v Tower Hamlets (1976) is clearly not based upon
38 Lifting the veil
interpreting a statute or document. The court therefore rejected the argument

that the Cape group should be treated as one, stating:
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
[1897] AC 22 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 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.
3.20 The court then turned to what they termed the ‘corporate veil’ point. This cat-
egory of veil lifting is exemplified by the case of Jones v Lipman (1962, above)
and was, in the court’s view, a well-recognised veil lifting category. The Court of
Appeal quoted with approval the words of Lord Keith in Woolfson v Strathclyde
Regional Council (1978) where he described this exception as ‘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’. In these spe-
cial circumstances the motives of those behind the alleged façade could be very
important. The court looked at the motives of Cape in structuring its US business
through its various subsidiaries. It found that although Cape’s motive was to try
to minimise its presence in the USA for tax and other liabilities there was nothing
wrong with this. The court concluded:
[w]hether or not such a course deserves moral approval, there was nothing ille-
gal as such in Cape arranging its affairs (whether by the use of subsidiaries or
otherwise) so as to attract the minimum publicity to its involvement in the sale
of Cape asbestos in the United States of America . . . we do not accept as a matter
of law 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 cor-
porate 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.
3.21 The court then considered the ‘agency’ argument. This was a straightforward
application of agency principle. If it could be established that the subsidiary was
Cape’s agent and acting within its actual or apparent authority then the actions
of the subsidiary would bind the parent. However, if there is no express agency
agreement between the subsidiary and the parent, establishing such an agency
from their conduct is very hard to achieve. The court found that the subsidiaries
were independent businesses free from the day-to-day control of the parent with
no general power to bind the parent. Thus as none of the three veil-lifting catego-
ries applied Cape was not present in the USA through its subsidiaries.
3.22 The judgment of the Court of Appeal in Adams leaves only three circumstances
in which the veil of incorporation can be lifted. The first is if the court is inter-
preting a statute or document. This exception to maintaining corporate person-
ality is qualified by the fact that there has first to be some lack of clarity about
a statute or document which would allow the court to treat a group as a single
entity. Some judges will be more enthusiastic about finding such lack of clar-
ity than others. Although the Court is somewhat vague in Adams on what they
mean by this exception, the Court of Appeal in Samengo-Turner v J&H Marsh
& McLennan (Services) Ltd (2008) treated a group of companies as a single legal
entity on the basis of their single economic interest in interpreting the applica-
tion of an EU Regulation. Similarly in Beckett Investment Management Group
Ltd v Hall (2007) in interpreting a clause in an employment contract in the con-
text of a group of companies that formed a single economic entity the Court of
Appeal considered that it was inappropriate to be inhibited by considerations of
corporate personality.
3.23 Second, where ‘special circumstances exist indicating that it is a mere façade con-
cealing the true facts’ the courts may lift the veil of incorporation. In general, one
can describe these cases as the ‘you know it when you see it’ cases. These are deci-
sions where there is some injustice involved in maintaining the veil of incorpora-
tion, which was placed there deliberately to facilitate the injustice complained of.
Jones v Lipman (1962) is the classic example. There Mr Lipman’s sole motive in
creating the company was to avoid the transaction. We all know it would be mor-
ally wrong to maintain the separate personality of Mr Lipman and the company.
The judiciary have thus constructed the exception as ‘a mere façade concealing
the true facts’. In determining that exception the motives of those behind the
alleged façade may be relevant. Cape however is confusing in the way the court
applied this exception. The court, although giving the example of Jones v Lipman
(1962) when examining Cape’s motives, seems to recognise the moral culpability
of Cape’s motive in creating the subsidiaries to minimise its liability in the USA
when they state, ‘[w]hether or not such a course deserves moral approval, there
was nothing illegal as such in Cape arranging its affairs’. This seems a strange and
confusing point for the court to make as Mr Lipman also did nothing illegal yet
the exception applied there. Unfortunately the Court of Appeal offered no other
guidance as to when this exception might apply.
3.24 The third exception is not really an exception to the Salomon principle but rather
a straightforward application of agency principle. Therefore the question is just
40 Lifting the veil
the same as it would be for two human beings—‘have they entered into an express
agency agreement or could an agency be implied from their conduct?’ Parent
companies and their subsidiaries are unlikely to have express agency agreements.
They are even less likely to have express agreements if avoidance of liability was
the reason for setting the subsidiary up in the first place, as it was in Adams.
Proving an implied agency will also be very difficult as Adams sets the bar very
high. An implied agency would need evidence that day-to-day control was being
exercised over the subsidiary by the parent. Again, this is unlikely to be the case
where liability limitation was one of the motives for forming the subsidiary. (For
an interesting example of where a high level of control did attribute liability to a
parent company see Millam v The Print Factory (London) 1991 Ltd (2008).)
3.25 As you can see from the above, Adams significantly narrowed the ability of the
courts to lift the veil of incorporation. Gone are the wild and crazy days when the
Court of Appeal would lift the veil ‘to achieve justice irrespective of the legal effi-
cacy of the corporate structure’ as it did in Re a Company (1985). The rest of the
1990s was largely dominated by the restrictive approach of Adams (for example
see Yukong Lines Ltd of Korea v Rensburg Investments Corpn of Liberia (1998))
apart from one interesting aberration which we now turn to examine.
Creasey v Breachwood Motors Ltd (1993)
3.26 The case concerned two companies Breachwood Welwyn Ltd and Breachwood
Motors Ltd. The two companies had directors and shareholders in common.
Mr Creasy had been dismissed from his post of general manager by Breachwood
Welwyn Ltd and had issued a writ against Welwyn alleging wrongful dismissal.
Shortly after this happened Welwyn ceased trading and its assets were trans-
ferred to Breachwood Motors Ltd. Breachwood Motors Ltd then took over and
carried on the business of Breachwood Welwyn Ltd. In doing this they paid off
Breachwood Welwyn Ltd’s creditors but did not maintain or return assets to
Breachwood Welwyn Ltd to enable it to meet its judgment debt to Mr Creasy.
The wrongful dismissal action was not defended by Breachwood Welwyn Ltd
and judgment was entered in default in favour of Mr Creasy and an order for
£53,835 made against Breachwood Welwyn Ltd. A year later the company was
struck off the companies register and dissolved. Mr Creasy successfully applied
to have Breachwood Motors Ltd substituted as the defendant in order to enforce
the judgment. Breachwood Motors Ltd appealed.
3.27 The judge in the case, Mr Richard Southwell QC, ignored the restrictive approach
in Adams in finding that the central issue was that, with the benefit of solici-
tors’ advice, the directors of Breachwood Motors Ltd (who were also directors
of Welwyn) had deliberately ignored the separate legal personalities of the two
companies. They had transferred Breachwood Welwyn Ltd’s assets and busi-
ness to Breachwood Motors Ltd without regard to their duties as directors and
shareholders. The court was justified therefore in lift ing the corporate veil and
treating Breachwood Motors Ltd as liable for Breachwood Welwyn Ltd’s liability
to Mr Creasy.
3.28 The case has caused considerable comment because of its maverick status and the
confused nature of the rationale. The judge seems to suggest that when determin-
ing the façade exception it is not only the motives of those behind the alleged
façade that may be relevant but also whether they have breached their duties as
directors. Indeed, from the judgment it seems that the motives of the directors
were irrelevant and that just the fact of a breach of duty was sufficient to justify
lifting the veil. However, the Court of Appeal soon took the opportunity to over-
rule it.
Ord v Belhaven Pubs Ltd (1998)
3.29 Ord and Belhaven Pubs Ltd were engaged in a legal action about a lease. During
the course of the action the group structure of which Belhaven Pubs Ltd was a
part was reorganised because of a financial crisis within the group. As a result of
the reorganisation Belhaven Pubs Ltd had no assets or liabilities and would there-
fore have nothing with which to pay any judgment against it. As the litigation
regarding the lease was still continuing Ord applied to have the parent company
of Belhaven Pubs Ltd substituted. The High Court judge who first heard the case
allowed the substitution. The Court of Appeal however took the view that the
reorganisation of the group was legitimate and not merely a façade to conceal the
true facts. The assets were transferred at full value and the motive appeared to be
the group’s financial crisis rather than any ulterior motive. The court also took
the opportunity to specifically overrule the judgment in Creasey v Breachwood
Motors Ltd (1993).
3.30 Both the Creasey and Ord cases are illustrations of a classic veil-lift ing issue,
that of whether the reorganisation of the company was a legitimate business
transaction or the motive was to avoid liability. If the motive was to avoid liabil-
ity then according to the façade exception there was the possibility of lift ing
the veil. If the court takes the view that the veil should be lifted (and this is
by no means certain as Adams takes a very strict view of the types of motives
needed) then liability can flow to the parent company. Indeed, in Kensington
International Ltd v Congo (2006) the court did hold that a dishonest trans-
action involving transfers between related companies was designed to avoid
existing liabilities and was therefore a sham. The court then went on to lift the
veil of incorporation.
42 Lifting the veil
Trustor AB v Smallbone (No 2) (2001)
3.31 During Smallbone’s period as Trustor’s managing director various sums of

money had been transferred in breach of fiduciary duty from Trustor to another
company owned and controlled by Smallbone. Trustor applied to the court to
pierce the corporate veil so as to treat receipt by the second company as receipt by
Smallbone on the grounds that: the company had been a sham created to facili-
tate the transfer of the money in breach of duty; the company had been involved
in the improper acts; and the interests of justice demanded such a result.
3.32 The court in an interesting judgment recognised the tension between some of the
earlier cases and the Adams judgment but concluded that Adams was the greater
authority. In deciding to lift the veil on the basis of the façade exception the Vice-
Chancellor concluded:
[c]ompanies are often involved in improprieties. Indeed there was some sugges-
tion to that effect in Salomon v Salomon & Co Ltd [1897] AC 22. But it would
make undue inroads into the principle of Salomon v Salomon & Co Ltd if an
impropriety not linked to the use of the company structure to avoid or conceal
liability for that impropriety was enough. In my judgment the court is entitled
to ‘pierce the corporate veil’ and recognise the receipt of the company as that of
the individual(s) in control of it if the company was used as a device or facade
to conceal the true facts thereby avoiding or concealing any liability of those
individual(s).
Here the Vice-Chancellor was façed with a clear case of an improper motive but
in deciding to lift the veil he emphasises the connection between the impropriety
and the use of the corporate structure. Just as in Jones v Lipman (1962) the corpora-
tion must be the ‘device’ through which the impropriety is conducted, impropriety
alone will not suffice. (See R v K (2006). The type of action and remedy sought
may also make difference as to the court’s willingness to lift the veil (see Re Instant
Access Properties Ltd; Secretary of State for Business, Innovation and Skills v Gifford
(2011)).
3.33 Png (1999) makes the point that these cases offer the judiciary the possibility of
an interesting development in the façade exception. While Jones v Lipman (1962)
makes it clear that forming a company as a mere façade will engage a lifting of
the veil, there may also be the possibility that a company which was formed for
legitimate purposes initially, but which subsequently becomes a façade, will also
engage a lifting of the veil. In Raja v Van Hoogstraten (2006) the court, faced with
a façade claim to lift the veil, emphasised that the dishonest construction of a
group of companies to conceal ownership of assets and minimise liability could
Tortious liability 43
give rise to a lifting of the corporate veil. Interestingly, the court in Raja explicitly
moves away from what it calls a ‘narrow’ reading of Adams to adopt an expan-
sive approach which partly encompasses Png’s point in finding that the dishonest
construction of a group of companies might give rise to a the court lifting the veil
of incorporation even in relation to liabilities not envisioned by the creator of the
sham companies.
3.34 In a number of cases in recent years the courts have begun to tentatively suggest
that a more ‘realistic’ view of group liability, akin to Lord Denning’s original
concept of single economic entity, may be appropriate rather than the Court of
Appeal’s view in Adams. In Beckett Investment Management Group Ltd v Hall
(2007), for example, Maurice Kay LJ rejected what he called a ‘purist’ interpreta-
tion of corporate personality and went on to support Lord Denning’s view of a
single economic entity. As we will observe below developments in the area of
group tortuous liability are also moving in a Denning-esque direction with the
decision in Chandler v Cape Plc (2011) to attribute tortious liability to a parent
company. As usual in this area things are rarely straightforward and so while
the Beckett and Chandler cases indicate the beginnings of change from the strict
propositions of the Adams era, we have also observed cases on similar issues
emphasizing the ‘purist’ approach. For example in Millam v The Print Factory
(2008) control by a parent company did not justify veil lifting. Similarly in both
Ben Hashem v Ali Shayif (2008) and Linsen International Ltd v Humpuss Sea
Transport Pte Ltd (2011) the court specifically attacked the very idea of a sin-
gle economic unit attributing liability. We seem to have moved back to uncer-
tainty dominating this important area (see also Re Instant Access Properties Ltd;
Secretary of State for Business, Innovation and Skills v Gifford (2011)).
Tortious liability
3.35 Many of the recent developments in veil lift ing have involved claims of tortious
liability. Indeed, tortious liability is one of the fault lines created by limited liabil-
ity. Normal trade creditors when dealing with a limited liability company have
the opportunity to assess the risk of doing business. They can then opt to secure
their lending, charge a premium for that risk or do both. However, employees
or members of the public (involuntary creditors) who may be at risk of the com-
pany causing them personal injury have no way of effectively mitigating that risk.
Therefore, limited liability in cases where tortious liability for personal injury
is at issue can allow parent companies to avoid liability without providing any
compensation.
44 Lifting the veil
3.36 This particular problem was recognised by the CLRSG in its preliminary delib-
erations (Modern Company Law for a Competitive Economy: Completing the
Structure, ch 10). In that chapter the CLRSG took a very cautious and conserva-
tive view of the problem and concluded that because of the Adams case the
UK judiciary would be unwilling to lift the veil for involuntary creditors. They
concluded no reforms were needed. The matter of parent liability for personal
injury torts of its subsidiaries was then dropped and does not appear anywhere
in the CLRSG’s Final Report. Given that over the course of the CLRSG review
of UK company law a number of very high-profile (see below) examples of this
problem passed through the UK courts, the omission is all the more bemusing.
As Muchlinski (2002) concluded after reviewing the work of the CLRSG, ‘the
Steering Group does not appear to have been strongly influenced by concerns
such as those of involuntary creditors who have suffered personal injuries at the
hands of the overseas subsidiaries of United Kingdom-based Multi-National
Enterprises [a corporate group with subsidiaries abroad]. Rather, it was oriented
towards the traditional, shareholder-based, model of company law and towards a
cost-effective, pro-business approach to regulation.’
Parent company personal injury tortious liability
3.37 In Connelly v RTZ Corporation Plc (1998) Mr Connelly had been a uranium
miner working in Namibia for a subsidiary of RTZ. He subsequently developed
cancer and attempted to sue the parent company in London alleging that RTZ
had played a part in the health and safety procedures employed by the subsidiary
and that RTZ owed a duty of care to him. RTZ applied to have the action struck
out in London arguing that Connelly should sue the subsidiary in Namibia.
The issue went to the House of Lords who found that the matter could not be
heard in Namibia because of the complexity of the case and the cost. London
was therefore the appropriate forum. The decision was not unanimous; Lord
Hoff mann dissented on the basis of the implications for the Salomon principle,
concluding:
[t]he defendant is a multinational company, present almost everywhere and

certainly present and ready to be sued in Namibia. I would therefore regard the
presence of the defendants in the jurisdiction as a neutral factor. If the presence
of the defendants, as parent company and local subsidiary of a multinational,
can enable them to be sued here, any multinational with its parent company
in England will be liable to be sued here in respect of its activities anywhere in
the world.
Parent company personal injury tortious liability 45
3.38 The case went back to the High Court and the tortious issue was tried. RTZ
argued that the subsidiary was Connelly’s employer. Therefore any duty of care
was owed by the Namibian subsidiary. RTZ also argued that the claim was time
barred under the Limitation Act 1980. The court refused to strike out the action
on the duty of care point finding that it was arguable that the parent company
had responsibility for health and safety at the mine and this would have been
such as to create a duty of care to Mr Connelly. However, the claim was time
barred under the Limitation Act. Mr Connelly could have brought the case in
1989 but chose not to.
3.39 The case opened up the possibility that actions could be brought against a par-
ent company based in London for the actions of its subsidiary based abroad and
that, at least in theory, and depending on the amount of control exerted over
the subsidiary, a parent company could owe a duty of care to the workers of the
subsidiary.
3.40 The case of Lubbe v Cape Industries Plc (2000) continued the pattern of lift ing
the veil where tortious liability for personal injuries is at issue. The case con-
cerned litigation brought by over 3,000 employees and nearby residents of Cape
Industry’s wholly owned asbestos-mining subsidiary in South Africa claiming
damages from the parent company in London for death and personal injury
caused by exposure to asbestos at or near the mining operation in South Africa.
The issues were the same as in the Connelly case. The House of Lords found that
South Africa was the more appropriate place to sue but that the lack of legal rep-
resentation and the expert evidence required to substantiate the claims in South
Africa would amount to a denial of justice. The action could therefore proceed
against the parent in London. The case went back to the High Court for trial and
in January 2002 Cape settled the action for £21 million.
3.41 In Chandler v Cape Plc (2011) the claimant was the employee of a wholly owned
subsidiary of Cape who suffered asbestos related injuries in the course of his
employment. The subsidiary no longer existed nor was any insurance in place to
cover injuries such as the claimant’s. The claimant therefore sought to attribute
tortious liability to the parent company because of its control over the subsidi-
ary’s health and safety policy. The central question was therefore: was the fact of
the parent company’s control over health and safety policy, despite the subsidiary
being largely independent of the parent, sufficient to confer liability for a breach
of duty of care? In reaching his decision Wyn Williams J found that the assump-
tion of responsibility by the parent company over health and safety policy at the
subsidiary created a special relationship between the employee and the parent
company which gave rise to a duty of care. On the facts of the case this duty had
been breached by the parent company and damages were payable.
46 Lifting the veil
Commercial tort
3.42 The difference in the treatment of tortious actions for personal injury and other
more commercial torts such as negligent misstatement that involve, at least
tangentially, veil lifting is striking. In Williams v Natural Life Health Foods Ltd
(1998) the House of Lords emphasised the Salomon principle in the context of
a negligent misstatement claim. The managing director of Natural Life Health
Foods Ltd (NLHF) was also its majority shareholder. The company’s business
was selling franchises to run retail health food shops. One such franchise had
been sold to the claimant on the basis of a brochure which including detailed
financial projections. The managing director had provided much of the informa-
tion for the brochure. The claimant had not dealt with the managing director but
only with an employee of NLHF. The claimant entered into a franchise agree-
ment with NLHF but the franchised shop ceased trading after losing a substantial
amount of money. He subsequently brought an action against NLHF for losses
suffered as a result of its negligent information contained in the brochure. NLHF
subsequently ceased to trade and was dissolved. The claimant then continued the
action against the managing director and majority shareholder alone, alleging he
had assumed a personal responsibility towards the claimant.
3.43 The reality of this claim was to try to nullify the protection offered by limited
liability and as Lowry and Edmunds (1998) have pointed out the House of Lords
was particularly aware of this in reaching its decision. The House of Lords con-
sidered that a director or employee of a company could only be personally liable
for negligent misstatement if there was reasonable reliance by the claimant on
an assumption of personal responsibility by the director so as to create a special
relationship (as was present in the Chandler case above) between them. There was
no evidence in the present case that there had been any personal dealings which
could have conveyed to the claimant that the managing director was prepared
to assume personal liability for the franchise agreement. However, if the tort is
deceit rather than negligence the courts will allow personal liability to flow to a
director or employee (see Daido Asia Japan Co Ltd v Rothen (2001) and Standard
Chartered Bank v Pakistan National Shipping Corpn (Nos 2 and 4) (2002) and
Barclay Pharmaceuticals Ltd v Waypharm LP (2012). An officer of the company
may also be personally liable for costs if they pursued an action unreasonably or
for an ulterior motive (see Gemma Ltd v Gimson (2005)).
3.44 The Williams case has subsequently been influential where commercial torts are at
issue. For example the High Court in Noel v Poland (2001) dismissed a negligent
misstatement/deceit action against the chairman and a director of a liquidated
insurance company for inducing Noel to become a Lloyds name (a contractual
Commercial tort 47
arrangement where an individual agrees (for a fee) to cover certain insurance

losses made by the Lloyds insurance market). The court found that the chairman
and director were acting on behalf of the company and that there had not been any
assumption of personal responsibility.
3.45 The difficult issue of directors’ tortious liability, however, has proved an endur-
ing one. In MCA Records Inc v Charly Records Ltd (No 5) (2003) a director had
authorised a number of infringing acts under the Copyright Designs and Patent
Act 1988. The Court of Appeal in a very detailed consideration of the issue of
directors’ liability in tort, including the Williams case, took a more relaxed
approach to the possibility of liability. The Court concluded:
if all that 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 . . . [however] there is no reason why a person who happens to be
a director or controlling shareholder of a company should not be liable with
the company as a joint tortfeasor if he is not exercising control through the
constitutional organs of the company and the circumstances are such that he
would be so liable if he were not a director or controlling shareholder. In other
words, if, in relation to the wrongful acts which are the subject of complaint,
the liability of the individual as a joint tortfeasor with the company arises from
his participation or involvement in ways which go beyond the exercise of con-
stitutional control, then there is no reason why the individual should escape
liability because he could have procured those same acts through the exercise
of constitutional control.
On the facts of this case the Court found that the director was liable as a joint
tortfeasor. (See also Koninklijke Philips Electronics NV v Princo Digital Disc GmbH
(2004) where a company director was also held personally liable.)
3.46 The difference in treatment of personal injury torts and more commercial torts
such as negligent misstatement is somewhat consistent with the voluntary/invol-
untary nature of their transactions with the company. We say somewhat consist-
ent, as there is an obvious inconsistency. The contrast between the outcomes in
the cases of Adams v Cape Industries Plc (1990) and Lubbe v Cape Industries Plc
(2000) or more significantly Chandler v Cape Plc (2011) is striking. Both these
cases concern the same underlying claim for personal injury for asbestos con-
tamination from the same company. In Adams the claimants were successful
in the US courts and sought to enforce the action against the parent in London.
The Court of Appeal did not lift the veil in that case. In Lubbe the same claim for
personal injury was made against the same company but because there was an
48 Lifting the veil
underdeveloped court system where the subsidiary was operating the House of
Lords lifted the veil and allowed the parent to be sued in the UK for the action of
the subsidiary. The basis of the decision was that not to do so would amount to a
denial of justice. In Chandler the facts are very similar to Adams save for the basis
of the action and the court’s interpretation of control.
3.47 It is difficult to see how the decision in the Adams case, where the subsidiary was
operating in a jurisdiction with a developed court system and where the claim-
ants successfully used that system but needed to enforce it against the parent in
London, achieved any measure of justice. Thus a personal injury caused by a UK
subsidiary operating in the USA or any developed country will not give rise to
any liability on the part of the parent but a personal injury caused by the sub-
sidiary of a UK company in an underdeveloped jurisdiction will. The Chandler
decision should now starkly illustrate the inconsistency of the range of Cape deci-
sions based around similar injuries. The fact that the CLRSG declined to consider
any reform of this area is even stranger given this inconsistency. The CLRSG’s
predictions that the UK judiciary would not lift the veil for involuntary creditors
proved mistaken. The CLRSG sadly adopted a much more conservative approach
to the issue than the judiciary did, which is a terrible thing to conclude about a
law reform body.
The costs/benefits of limited liability
3.48 Limited liability has certain advantages. It obviously encourages investment as

the members’ risk is minimised. It also encourages risk taking on the part of
management who can take risks sure in the knowledge that the members will not
lose everything. Limited liability is also said to facilitate a public share market.
If liability were unlimited then the value of shares would depend on the wealth
of the individual holder. Shares would be worth less to a wealthy shareholder as
that shareholder would be more likely to be sued in a liquidation than a poor one.
This would hinder the development of a liquid share market as the value of the
shares could not be assessed until a buyer was found and his personal assets also
assessed.
3.49 For example, if we look in the Financial Times at the quoted share price of a
company, that price is based, as we discussed in Chapter 2, on the market’s per-
ception of all the publicly available information that affects that limited liability
company. It is the price at which anyone can buy the shares. If we moved to a
situation where liability was unlimited then the price of a share would not be
a standard price: it would vary depending on the wealth of the buyer. In other
The costs/benefits of limited liability 49
words, only the combination of the public information on the company plus the
private information on the potential shareholder’s wealth could determine the
price of the share. This would not help the development of a liquid market in a
company’s shares.
3.50 Another advantage of limited liability was identified by Hansmann and

Kraakman (2000) who noted that not only does limited liability protect the
shareholders from the company’s creditors but it can also serve to put the busi-
ness assets of an individual out of reach of that individual’s personal creditors.
For example in family law the partitioning effect can remove the assets from a
marriage (see Hashem v Shayif & Anor (2008)). Thus, by forming a company
and placing his business assets in the company in return for shares in the com-
pany the individual no longer has any legal interest in the assets. This serves to
partition the personal assets of the shareholder from his business assets. If the
shareholder is insolvent the personal creditors can take the shares but cannot get
at the assets of the company.
3.51 Oddly, given that limited liability seems to move the risk of doing business away
from the shareholders and on to the creditors, large powerful creditors have
also benefited from limited liability. As a result of the movement of risk to the
creditors, creditors have been forced to monitor and protect against risk more
effectively. Secured lending in the form of fi xed and floating charges, risk premi-
ums in terms of interest charged and board representation have all improved the
creditors’ monitoring mechanisms.
3.52 These are all undoubted advantages but limited liability does have disadvantages.
Risk is moved to the creditors, not all of whom can mitigate their risk. Small
trade creditors and involuntary creditors cannot secure their transaction, charge
a risk premium or engage in board-level monitoring. As a result in an insolvent
liquidation they have little protection. Indeed, the actions of powerful secured
creditors are often detrimental to the most vulnerable creditors as they often have
priority in a liquidation. This is still the case with employees as even though they
have been given priority above floating charges (see Insolvency Act 1986, s 175
and s 386 and Chapter 17) fi xed charges, (over the most valuable assets) still have
priority. Involuntary creditors have little or no protection if limited liability is
upheld.
3.53 Perhaps the most disturbing use of limited liability occurs within group struc-
tures. In group structures limited liability’s facilitation of asset partitioning
allows a very effective double limitation of liability for parent companies and
their members. Investors in a parent company can achieve limitation of liabil-
ity not only for themselves but also for the parent company by structuring its
50 Lifting the veil
business through a number of subsidiaries. For example Fred, Nancy, Dougal

and Mat are the shareholders in M Ltd, the parent company of wholly owned
subsidiaries N Ltd, Y Ltd and X Ltd. M Ltd has divided its business into three
between the subsidiaries. Y Ltd independently buys wine for storage and invest-
ment, N Ltd stores the wine Y Ltd buys and X Ltd markets the sale of the wine
once it has been stored for a few years. All the profits of the subsidiaries flow
back to M Ltd. Y Ltd entered into a number of complex agreements to buy
French wine at a guaranteed price. The French wine harvest was a disaster and
the harvest in the rest of the world was excellent. As a result of the poor quality
of French wine and a glut of excellent wine from everywhere else Y Ltd ended
up with liability running into millions of pounds. It could not meet its obli-
gations to its creditors and was eventually placed into insolvent liquidation.
Some months later M Ltd forms another wholly owned subsidiary J Ltd to carry
out the wine-buying function. The question remains as to whether the parent
company could be liable for the debts of the failed subsidiary. The answer is—
probably not.
3.54 It is important to note here that we are not discussing Fred, Nancy, Dougal and
Mat being personally liable for the debts of Y Ltd or M Ltd. The group application
of the Salomon doctrine means we are just discussing whether the assets of the
parent company can be attacked by the claimants in virtue of it being the sole
shareholder in Y Ltd. The personal assets of Fred, Nancy, Dougal and Mat are safe
no matter what. The question is whether the parent company gets limited liability
as well. Thus just as Hansmann and Kraakman (2000) suggest that asset parti-
tioning allows individuals to put their assets beyond their personal creditors, its
most important and far-reaching consequence is that it allows a company also to
put its assets beyond the reach of its creditors. The word Ltd or Plc after a parent
company name now effectively means the company itself has achieved limited
liability.
3.55 Despite the fact that this represents an enormous extension of the Salomon
principle to cover corporate members, the judiciary have treated it as a straight-
forward application of the Salomon doctrine without questioning whether this
is appropriate. Thus the starting point in group structure veil-lift ing cases has
always been that Salomon applies unless there are other reasons for lift ing
the veil, rather than recognising that allowing asset partitioning to operate
for parent companies is a radical and far-reaching extension of the Salomon
principle and taking the starting point in group veil-lift ing cases as asking (as
the courts do for example in Germany) whether Salomon is an appropriate
principle to apply to group structures at all. However, sometimes the separate-
ness of a subsidiary can be disadvantageous to a parent company. For example
Further reading 51
in Barings Plc (in liquidation) v Coopers & Lybrand (No 4) (2002) a loss suffered
by a parent company as a result of a loss at its subsidiary was not actionable
by the parent—the subsidiary was the only proper claimant. (See also Shaker v
Al-Bedrawi (2003).)
FURTHER RE ADING
This Chapter links with the materials in Chapters 3 and 14 of Hicks and Goo’s Cases
and Materials on Company Law, (2011, Oxford University Press, xl +649p).
Davies (2008) Gower and Davies’ Principles of Modern Company Law, 8th edn (London:
Sweet & Maxwell), Chs 8 and 9.
Gallagher and Ziegler ‘Lifting the Corporate Veil in the Pursuit of Justice’ [1990] JBL
292.*
Hansmann and Kraakman ‘The Essential Role of Organisational Law’ [2000] Yale LJ
387.
Lowry and Edmunds ‘Holding the Tension between Salomon and the Personal Liability
of Directors’ [1998] Can Bar Rev 467.
Lowry ‘Lifting the Corporate Veil’ [1993] JBL 41.
Mitchell, ‘Lifting the Corporate Veil in the English Courts: An Empirical Study’ [1999] 3
Company Financial and Insolvency Law Review 15.
Moore ‘A Temple Built on Faulty Foundations’ [2006] JBL 180.
Muchlinski ‘Holding Multinationals to Account: recent developments in English litiga-
tion and the Company Law Review’ [2002] Co Law 168.
Ottolenghi ‘From Peeping Behind the Corporate Veil to Ignoring it Completely’ [1990]
MLR 338.*
Png ‘Lifting The Veil of Incorporation: Creasey v Breachwood Motors: A Right Decision
with the Wrong Reasons’ [1999] Co Law 122.
Ramsay and Noakes ‘Piercing the Corporate Veil in Australia’ (2002). Available at SSRN:
http://ssrn.com/abstract=299488.
Rixon ‘Lifting the Veil between Holding and Subsidiary Companies’ [1986] LQR 415.
Thompson ‘Piercing the Corporate Veil: An Empirical Study’ [1991] 76 Cornell Law
Review 1036.
*Note that the articles above that are marked with an asterisk were written prior to the
Court to Appeal decision in Adams v Cape Industries Plc (1990).
52 Lifting the veil
SELF-TE S T QUE S TIONS

1 What is the difference between separate legal personality and limited liability?
2 Why has the legislature introduced statutory veil-lifting provisions?
3 When will the courts lift the veil of incorporation?
4 Ned, Orin, Dan and Matilda are the shareholders and directors of Q Ltd, the parent
company of wholly owned subsidiaries W Ltd, R Ltd and X Ltd. Q Ltd has divided
its business into three between the subsidiaries specifically to minimise its liability
for tax and tortious actions. W Ltd buys and mixes chemicals for the paint industry,
R Ltd transports the chemicals and X Ltd markets the mixed chemicals. All the prof-
its of the subsidiaries flow back to Q Ltd. An accident occurs while R Ltd is trans-
porting hazardous chemicals along the motorway. Fifteen people are badly burned
and noxious fumes are released into the air near a town. Additionally, chemicals
leak into a major river contaminating the water downstream for hundreds of miles.
The projected damages and fines payable by R Ltd come to millions of pounds.
R Ltd is capitalised only to the extent it needed to transport chemicals in the two
trucks it owns. It has some liability insurance but only to the amount of £1 million.
After a few months R Ltd is in insolvent liquidation. In the meantime Q Ltd has
set up another wholly owned subsidiary to carry out the group’s transport needs.
Discuss whether the parent company and/or its members could be liable for the
actions of R Ltd. When you have done that critically evaluate the legal outcome.
5 Formulate a single rule (bearing in mind the advantages and disadvantages of
limited liability) that would provide the courts with guidance as to when to lift the
veil of incorporation.

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Company Law - Alan Dignam John Lowry - Chapt 2 3

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2 Corporate personality and

Salomon and the logic of limited liability

Salomon v Salomon & Co (1897)

2.14 Mr Salomon carried on a business as a leather merchant. In 1892 he formed the

2.16 A debenture is simply a document creating or evidencing a debt (see further,

[t]he company is at law a different person altogether from the subscribers . . . ;

Some other good examples of the

Lee v Lee’s Air Farming (1961)

Macaura v Northern Assurance Co (1925)

Members, shareholders and the ownership

2.36 A further complication for our understanding of membership of a company

2 January: A new managing director is appointed to M plc who announces that

5 April: Managing Director’s new enormous salary is announced causing outraged

have begun to make strong claims to inclusion. Dissenting minority shareholders

Grantham, ‘The Doctrinal Basis of the Rights of Company Shareholders’ [1998]

SELF-TE S T QUE S TIONS

(1) If in the course of the winding up of a company it appears that any

creditors of the company or creditors of any other person, or for any

(1) . . . if in the course of the winding up of a company it appears that

(2) This subsection applies in relation to a person if—

Veil lifting by the courts

our own explanation we offer the following timeline which is intended as a

Classical veil lifting, 1897–1966

The interventionist years, 1966–1989

Back to basics, 1989–present

interpreting a statute or document. The court therefore rejected the argument

Creasey v Breachwood Motors Ltd (1993)

Ord v Belhaven Pubs Ltd (1998)

Trustor AB v Smallbone (No 2) (2001)

3.31 During Smallbone’s period as Trustor’s managing director various sums of

Parent company personal injury tortious liability

[t]he defendant is a multinational company, present almost everywhere and

arrangement where an individual agrees (for a fee) to cover certain insurance

The costs/beneﬁts of limited liability

3.48 Limited liability has certain advantages. It obviously encourages investment as

3.50 Another advantage of limited liability was identified by Hansmann and

business through a number of subsidiaries. For example Fred, Nancy, Dougal

SELF-TE S T QUE S TIONS

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