Lifting of Corporate Veil in Tort Cases in Pursuit of Justice

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Lifting of Corporate Veil in Tort Cases in Pursuit of Justice

Introduction

Limited liability has been the prevailing rule for corporations for more than a century. It creates incentives for excessive risk-taking by allowing companies to avoid the full costs of their activities. Strict application of this rule in all cases would lead to inflexibility and injustice, particularly in tort cases. Therefore, as suggested by Stephen Griffin—“in the interests of justice and to prevent subsidiary companies being used as convenient risk takers for their parent…the [corporate] veil must not become immovable.”[1] On the other hand, basing justice as the sole ground for veil lifting would undermine commercial certainty. The facts of each case should be taken into account to strike a balance between certainty and justice. This paper, focusing on the group companies context, attempts to argue for a lower threshold in veil lifting regarding tort cases to pursue justice and to introduce general principles in which court should lift the veil to ensure sufficient certainty.

Veil Lifting in Tort Cases

The Salomon principle[2]states that a company is a legal person separate from its members. In contrast, the doctrine of veil lifting refers to the possibility of looking behind the company structure to make the shareholders personally liable. It is settled in China Ocean Shipping Co v Mitrans Shipping Co Ltd[3] that using a corporate structure to evade existing legal obligations is objectionable whereas using the same to avoid the incurring of future legal obligations in the first place is not. The court held that its power to lift veil could only be exercised in the former situation. Unfortunately, strict application of this case would lead to injustice as tort liabilities almost always arise after incorporation. As a result, tort victims could never lift the veil and defendant companies are always immune to tortious liability due to the corporate structure.

In Adams v Cape Industries plc[4], in which tortious liability is involved, the court strictly applied the principle in China Ocean[5]. It held that veil is not lifted and so the parent company is not liable for the tort committed by its wholly-owned subsidiary. The tort victims in this case were left with no compensation as the subsidiary was liquidated and veil was not lifted to make the financially healthy parent company liable. Arguments for Veil Lifting in Pursuit of Justice

If the above cases are strictly followed, the effect is to shift the consequences of high risk tortious actions from the defendant companies to the innocent tort victims, which is obviously unjust.

It is worth-noting that the Salomon case[6] was decided over a century ago. At that time, it was not widespread commercial practice for large companies to operate by means of many subsidiaries and tort law was very much undeveloped compare with its form a century later. The interaction with tort law would not have been considered at all when the case was decided. Where tort and corporate law principles are in conflict, as above mentioned, courts usually resolve the matter with reference to corporate law principles. When considered in the context of contemporary public policy, it has been criticized that the deference to the Salomon principle in relation to tort liability of corporate groups appears misconceived.[7] Therefore, the Salomon principle should sometimes be disregard and veil should be lifted in tort cases due to the following reasons.

Involuntary Victims
Very often, opponents against veil lifting argue that tort victims should not receive preferential treatment over other unsecured contractual creditors. Therefore, even in tort cases, the strict approach of the China Ocean case should be applied, as in other cases involving contractual claims. However, they may have overlooked a significant difference between tort victims and contractual creditors. Tort victims are usually involuntary...
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