A company has been established as a separate legal entity in the case of Salomon[1], and courts have further elaborated on the corporation being its own right and duty-bearing unit as a person in the subsequent cases of Macaura[2] and Pharmaceutical Society[3]. A corporation is a distinct entity from its shareholders and directors to protect them from the corporation’s liabilities.[4] Limited liability allows individuals to invest in corporations without risking their personal assets, thus encouraging investment and business ventures.[5] This principle was particularly prevalent during the 19th century, a time marked by laissez-faire economic policies and a push for freedom in commerce.[6] This paper will argue for upholding the Separate Legal Entity Principle and disregarding the doctrine of piercing the corporate veil.
Protecting the corporation as a separate legal entity is a matter of policy consideration recognized by the Court in Rainham Chemical Works v Belvedere Fish, where Lord Buckmaster stated that the essence of the Companies Act is that a person may substitute their unlimited liability with the limited liability of a company so that they may encourage enterprise.[7] Furthermore, Salomon’s separate legal entity principle has encouraged contracting parties and creditors to acknowledge the risk of doing business with a corporation and arrange adequate security or guarantees to protect themselves from the company’s insolvency.[8]
The recent case of VTB Capital upheld that the veil cannot be pierced to make the controller of a company liable for the company’s contract. RAP, a Russian company, defaulted on its loan from the Russian bank VTB Capital, which RAP obtained purportedly to purchase dairy farms from Nutritek, a company with shared ownership with RAP, in a scheme to defraud VTB.[9] Despite the loan agreement having an English jurisdiction clause, VTB sought to include the controller of RAP in the English proceedings, but the amendment was rejected by the Appellate Courts, with VTB arguing that the corporate veil can never be lifted. The Supreme Court refused to pierce the veil as the main responsibility rested with the defendant company to repay the defaulted loan.[10]
Where a company operates within the function intended under the Memorandum of Association, the courts have refused to lift the veil. However, where an improper purpose corrupts the company, refusing to pierce the veil would undermine the corporation’s viability and abuse the limited liability principle.[11] The corporate veil has been lifted where a company has deliberately evaded an existing legal obligation or where there has been mala fide concealing of the identities of the actors controlling the company.[12] Both cases of Gilford Motors[13] and Jones v Lipman[14] fell under the concealment principle and allowed the courts to pierce the veil.
However, such cases are rare, and alternative remedies without piercing the veil are available. To illustrate, in Jones, specific performance was granted on the grounds that Lipman intended to escape the contract for sale of land by transferring it to a company where he owned majority of the shares. The court ordered specific performance as the company was a mere façade.[15] Furthermore, the court could have adopted the joint tortfeasor’s principle in Re Darby to hold both the directors and the company liable, maintaining their separate legal status.[16] Even when the company is allegedly a façade, the same result can be achieved without piercing the veil by imposing personal liability in tort on the controllers.[17] To exemplify, in Standard Chartered Bank v Pakistan National Shipping, a case concerning misrepresentations made by agents to third parties, Lord Hoffmann observed that the sole issue at hand was whether the director could be held accountable for deceit based on the tort’s criteria.[18]
In light of recent cases, a theme emerges where the courts are unwilling to pierce the veil and desire to find an alternative basis compatible with Salomon for holding the controller liable.[19] In Prest, a case regarding the division of matrimonial property, the Supreme Court refused to lift the corporate veil to regard the company’s property as the husband’s and even considered if the Piercing doctrine has any future.[20] While the majority recognized the existence of the doctrine, Salomon and the separate legal entity emerged stronger as piercing jurisdiction was narrowed down to deliberate evasion in the absence of an alternative remedy, hardly relevant for future application. Lord Briggs and Leggatt in Hurstwood recognized that “talk of ‘piercing the corporate veil’ is a metaphor that is liable to obscure more than it illuminates”.[21]
In conclusion, it is essential to prioritize the principle of separate legal identity over the complex doctrine of piercing the corporate veil. This approach encourages investment and commercial activity, especially where alternative remedies exist to ensure justice and prevent fraudulent activity. Convoluting the limited rights and liabilities of a corporation with the controller’s unlimited liability would create ambiguous legal precedents.
[1] Salomon v Salomon & Co. [1897] A.C 22
[2] Macaura v Northern Assurance Co. [1925] A.C 619
[3] Pharmaceutical Society v. London and Provincial Supply Association Ltd [1880] 5 A.C 857
[4] I.T Commr. V Associated Clothiers Ltd [1963] A.I.R Cal. 629
[5] Krishna Bahadur, ‘Personality of Public Corporation and Lifting the Corporate Veil’, (1972), vol. 14, Journal of the Indian Law Institute, < www.jstor.org/stable/43950130 >
[6] Tan Cheng-Han, ‘Piercing the Separate Personality of the Company: A matter of Policy?’, (1999), Singapore Journal of Legal Studies,< www.jstor.org/stable/24868123 >
[7] Rainham Chemical Works Limited v Belvedere Fish Guano Company [1921] 2 AC 465
[8] Ibid [5]
[9] VTB Capital Plc v Nutritek International Corp [2013] B.C.L.C 179
[10] Stephen Bull, ‘Piercing the Corporate Veil—in England and Singapore’, (2014), Singapore Journal of Legal Studies, www.jstor.org/stable/24872231
[11] Ibid [5]
[12] Brenda Hannigan, ‘Wedded to “Salomon”: Evasion, Concealment and Confusion regarding on Piercing the Veil of the one-man company’, (2013), vol.50, Irish Jurist, < www.jstor.org/stable/44026359 >
[13] Gilford Motor Company v Horne [1993] Ch. 935 (CA)
[14] Jones v Lipman [1962] 1 All E.R 442
[15] Ibid [13]
[16] Re Darby [1911] 1 KB 95
[17] Ibid [11]
[18] Standard Chartered Bank v Pakistan National Shipping Corp [2003] 1 B.C.L.C 244
[19] Ibid [11]
[20] Prest v Petrodel Resources Ltd [2013] UKSC 34
[21] Hurstwood Properties (A) Ltd & ors v Rossendale Borough Council [2021] UKSC 16
