WEEK 2 Separate legal personality (piercing the corporate veil)

The basics of separate legal entity

• Companies are entities in their own right meaning that they are capable of owning their own property and entering their own legal relationship 

• Shareholders collectively own the company but their liability for the company’s debts is limited.

Salomon v Salomon & Co Ltd [1897] AC 22 (shows ability to trade through a company in order to enjoy limited liability)

Facts:

• Mr Salomon made leather boots, initially as a sole trader.

• He created a new limited company (Aron Salomon and Company Limited) in which he, his wife, his daughter and four sons held one share each.

• He then sold his business to the company, in exchange for which he received another 20,000 shares and a floating charge (floating charge = doesn’t fix on a single asset it floats on all of the assets a company has) securing the rest of the purchase price (i.e. a secured debt due to Mr Salomon from the company). 

• The business then fell on hard times and became insolvent.

• When it came to distributing the company’s assets in liquidation, Mr Salomon sought to enforce his security for the balance of the purchase price due to him (from the initial sale of his business to the company).

• This would exhaust the company’s assets, leaving the other unsecured creditors with nothing. They sued, complaining that the whole arrangement was wrong and amounted to fraud.

Held: 

• There was nothing wrong with what Mr Salomon had done. Company law (then the Companies Act 1862) permitted all of this.

• The company was validly created, had validly purchased Mr Salomon’s business and had validly granted him security for the unpaid balance of the purchase price.

• Subsequent creditors of the company dealt with the company, which had its own separate legal personality distinct from Mr Salomon. They took the risk that the company might not be able to repay its debts.

• Lord Hapsburg LC at 30 said “it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are”

Conclusion:

• The case is famous for establishing that there is nothing wrong with trading through a company in order to enjoy limited liability.

• Once a company is validly brought into existence, it has its own legal personality separate and distinct from its shareholders.

• The liability of its shareholders is limited (to the typically nominal amount to be paid up in respect of their shares) – hence it is called a ‘limited liability company’.

Is the increasing amount of new companies good or bad for the economy?

Positives

• The availability of limited liability companies has facilitated entrepreneurial behaviour and innovation on an unprecedented scale.

• Companies can procure investment through listing their shares on public markets (e.g. the London Stock Exchange), and society can participate in their success as shareholders.

• Corporate activity fuels economic growth, yielding jobs, global interconnectivity and new approaches to international relations (e.g.economic sanctions).

Negatives

• Some corporations have grown to become extremely powerful, generating profits in excess of the GDP of some countries

• Corporations lobby governments and influence policy in favour of their own profitability, (arguably) at the expense of wider societal benefits.

• Increased economic interconnectivity also brings increased exposure to economic shocks and the effects of ‘bad actors’.

• Explosive corporate growth has facilitated rampant consumerism and consumption of natural resources.

• Separate legal personality enables the company to be used as a shield,

  insulating the shareholder from the company’s liabilities

  but also insulating the company from the shareholder’s liabilities

Can you use a company to hide your identity? 

• Private companies do not have to list all of their shareholders 

• All private limited companies do have to maintain a Register of People with Significant Control (the PSC Register) (this stems from the Register of People with Significant Control Regulations 2016 (SI 2016/339)

• If an individual holds (directly or indirectly) more than 25% of the shares or voting rights in a company, then they must be identified in the PSC Register. 

• Currently, each company has to maintain its own PSC register. But from 18 November 2025 all PSC information will be filed with the registrar and held on the public register at Companies House making it easier to check who has significant control over companies and PSCs will have to have their identity verified as a result of the Economic Crime and Corporate Transparency Act 2023. 

Prest v Petrodel Resources Ltd [2013] UKSC 34 (relying on separate legal personality when assets belong to a company not to a individual - divorce case)

Facts:

• Yasmin Prest divorced her oil tycoon husband, Michael Prest.

• Mr Prest owned and controlled five companies, known collectively as the ‘PetrodelGroup’.

• Two of these companies owned seven very valuable properties.

• Mr Prest relied upon ‘separate legal personality’, arguing that the properties belonged to the company and not to him (even though he ultimately owned the companies).

• Mrs Prest argued that the court should ‘pierce the corporate veil’ and treat the assets of the companies as being the assets of Mr Prest.

Held

• Lord Sumption JSC at 8 “The separate personality and property of a company is sometimes described as a fiction, and in a sense it is. But the fiction is the whole foundation of English company and insolvency law”

• Lord Sumption JSC at 16 “Piercing the corporate veil is an expression rather indiscriminately used to describe a number of different things. Properly speaking, it means disregarding the separate personality of the company”

• Lord Sumption JSC at 27 “In my view, the principle that the court may be justified in piercing the corporate veil if a company’s separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities”

• Lord Sumption JSC at 28 “The evasion principle is different [in comparison to the concealment principle]. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement” (whereas the concealment principle does not involve piercing the corporate veil) 

• Lord Sumption JSC at 35 “when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control”

Conclusion

• The court did not pierce the veil of the Petrodel Group as the reason Mr Prest put the properties in the companies was for wealth protection and the avoidance of tax and this did not enable the court to pierce the veil (it was not sufficient wrongdoing in the eyes of the court). The companies had not been used to frustrate any legal obligation or liability existing at the time that the properties were transferred into them. Having said this equity enabled the 7 properties to be included in the divorce settlement. 

• You can only pierce the corporate veil when a company is deliberately used to frustrate or evade an existing legal obligation or liability.

• Piercing the corporate veil enables the court to disregard separate legal personality and treat the assets of the company as the assets of its shareholder but it can only happen where the company is deliberately used to frustrate or evade an existing legal obligation.

Rossendale BC v Hurstwood Properties [2021] UKSC 16; [2022] AC 690 (illustrates that while the corporate veil may exceptionally be pierced to impose a company's liability on its controller, it is highly doubtful that the reverse (imposing a company's liability on its shareholder) can be justified)

Facts: 

• Commercial properties pay business rates (the equivalent of council tax on residential properties) 

• If a commercial property is leased to a tenant, the tenant is liable to pay the business rates (not the landlord) 

• Hurstwood owned some empty commercial properties but used a scheme to avoid liability for business rates. 

• The scheme involved setting ip a new shell company with no assets or liabilities (a special purpose vehicle or SPV) 

• Hurstwood then grants a lease of the property to the newly incorporated SPV, making the SPV the tenant liable for business rates 

• The SPV is then immediately put into liquidation (dissolved). The effect of this is to transfer the lease and any liability to pay business rates to the Crown (bona vacantia)

Issues: 

The local authority (to whom business rates are owed) sued, arguing that: 

• The relevant tax legislation should be interpreted in such a way as to make Hurstwood liable because SPV’s were never the real owners of the properties anyway

• Alteratively, the corporate veil of each SPV should be pierced so as to make Hurstwood ultimately liable for the business rates owed by the SPV’s 

Held: 

• Hurstwood were liable to pay 

• The argument that the corporate veil should be pierced ailed. The Supreme Court held that this would not be an appropriate case for piercing the corporate veil on the dicta in Prest v Petrodel. 

• Lord Briggs and Leggatt JJSC at 68 said “it is not clear to us that the evasion principle could ever enable the liability of a company to be extended to its shareholder or to some other person who controls it”

• Lord Briggs and Leggatt JJSC at 72-23 “we are not ourselves convinced that there is any real scope for applying such a principle in the opposite direction so as hold a person who owns or controls a company liable for breach of an obligation which has only ever been undertaken by the company itself”

Summary 

• Piercing the veil can, exceptionally, render the company liable for a liability that would otherwise only attach to its shareholder/controller

• But it is doubtful that it can work the other way, rendering a shareholder liable for a liability that would otherwise only attach to the company. 

• These are obiter remarks (because the case was decided on a different point), but they are weighty statements from two leading Supreme Court judges. 

R v Anderson [2022] EWCA Crim 1465; [2023] 1 Cr App R (S) 32 (shows that piercing the corporate veil is only permitted to prevent misuse of the company to evade legal obligations, and likely cannot be used to make shareholders liable for company debts)

Facts:

• Mr Anderson was the director of a company which had breached its environmental permit but improperly storing over 12,000 tonnes of waste

• He pleaded guilty to criminal charged of contravening an environmental permit condition and operating a regulated facility in breach of that permit (contrary to the Environmental Permitting (England & Wales) Regulations 2016)

• He was sentenced to 15 months imprisonment, suspended for 18 months, and 250 hours of unpaid work. He was also disqualified from being a director for 15 years.

• He appealed

The issue:

• Mr Anderson’s appeal made an interesting argument about piercing the corporate veil

• When the judge set his sentence, she had regard to the financial gain of the company by improperly storing its waste (the cost of cleaning up the sites was about £2.6ml)

• Mr Anderson argued that this involved impermissibly piercing the corporate veil by having regard to the company’s profits from the breach, rather than merely Mr Anderson’s profits from the breach

Held:

• The CA disagreed

• Piercing the corporate veil concerns “disregarding the company’s separate legal personality in order to obtain a remedy against someone other than the company in respect of a liability which would otherwise be that of the company alone” (Sir Adrian Fulford at 61)

• But that doens’t stop a judge from having regard to facts which are relevant to Mr Anderson’s own independent liability, even if those facts concern the company of which he was director (at 63)

Summary

• There is a principle known as ‘piercing the corporate veil’

• It enables the court to disregard separate legal personality and treat a company liable for the breach of an obligation owed by its shareholder.

• But it can only happen where the company is deliberately used to frustrate or evade an existing legal obligation: Prest v Petrodel.

• It is doubtful that it can operate in reverse, making a shareholder liable for an independent obligation owed by the company: Rossendale v Hurstwood.