Comp Law Veil

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Chapter 4 Lifting the veil of incorporation

Introduction 41 42 43 Legislative intervention Judicial veil lifting Veil lifting and tort Reflect and review 36 37 39 41 43

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University of London External System

As we observed in Chapter 3 the application of the Salomon principle has mostly (remember Mr Macaura) beneficial effects for shareholders. The price of this benefit is often paid by the company’s creditors. In most situations this is as is intended by the Companies Acts. Sometimes, however, the legislature and the courts have intervened where the Salomon principle had the potential to be abused or has unjust consequences. This is known as ‘lifting the veil of incorporation’. That is, the courts or the legislature have decided that in certain circumstances the company will not be treated as a separate legal entity. In this chapter we examine the situations where the legislature and the courts ‘lift the veil’.

Learning outcomes
By the end of this chapter and the relevant readings, you should be able to: u u

describe the situations where legislation will allow the veil of incorporation to be lifted explain the main categories of veil lifting applied by the courts.

Essential reading
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Dignam and Lowry, Chapter 3: ‘Lifting the veil’. Davies, Chapter 8: ‘Limited liability and lifting the veil at common law’ and Chapter 9: ‘Statutory exceptions to limited liability’.

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Gilford Motor Company Ltd v Horne [1933] Ch 935 Jones v Lipman [1962] 1 WLR 832 D.H.N. Ltd v Tower Hamlets [1976] 1 WLR 852 Woolfson v Strathclyde RC [1978] SLT 159 Re a Company [1985] 1 BCC 99421 National Dock Labour Board v Pinn & Wheeler Ltd [1989] BCLC 647 Adams v Cape Industries plc [1990] 2 WLR 657 Creasey v Breachwood Motors Ltd [1992] BCC 638 Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447 Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577 Lubbe and Others v Cape Industries plc [2000] 1 WLR 1545.

Additional cases
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Re Todd Ltd [1990] BCLC 454 Re Patrick & Lyon Ltd [1933] Ch 786 Re Produce Marketing Consortium Ltd (No 2) [1989] 5 BCC 569 Trustor AB v Smallbone [2002] BCC 795 Noel v Poland [2002] Lloyd’s Rep IR 30 Daido Asia Japan Co Ltd v Rothen [2002] BCC 589 Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2003] 1 AC 959 R v K [2005] The Times, 15 March 2005 MCA Records Inc v Charly Records Ltd (No 5) [2003] 1 BCLC 93 Koninklijke Philips Electronics NV v Princo Digital Disc GmbH [2004] 2 BCLC 50.

Company law 4 Lifting the veil of incorporation

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Legislative intervention
As corporate affairs became more complex and group structures emerged (that is, where a parent company organises its business through a number of subsidiary companies in which it is usually the sole shareholder) the Companies Acts began to recognise that treating each company in a group as separate was misleading. Over time a number of provisions were introduced to recognise this fact. For example: u u

s.399 CA 2006 provides that parent companies have a duty to produce group accounts s.409 CA 2006 also requires the parent to provide details of the shares it holds in the subsidiaries and the subsidiaries’ names and country of activity. However, it was the possibility of using the corporate form to commit fraud that prompted the introduction of a number of civil and criminal provisions. These provisions operate to negate the effect of corporate personality and limited liability in:

u u

s.993 CA 2006 which provides a not much used criminal offence of fraudulent trading ss.213–215 Insolvency Act 1986 which contain the most important statutory veil lifting provisions.

4.1.1 Insolvency Act, s.213
Section 213 of the Insolvency Act 1986 was designed to deal with situations where the corporate form was used as a vehicle for fraud. It is known as the ‘fraudulent trading’ provision. If, in the course of the winding up of a...
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