Business Entities Y2S1 Week 6: L11 Piercing the Veil & L12 Capital and Shares

Key terms and cases (Issue / Facts / Held) from my OneNote notes. 'Added' notes are from outside the notes (Grier / Macgregor).

What does 'piercing the corporate veil' mean, and what is the preferred terminology?

Separate legal personality creates a 'CORPORATE VEIL' between the company and its shareholders. PIERCING it means DISREGARDING that separation, treating the company and its controller(s) as one, in a 'TRUE EXCEPTION' to Salomon. Effects can include: • making a SHAREHOLDER or controller liable for the company's obligations; or • binding the COMPANY by an obligation of its controller. It is done for a SPECIFIC PURPOSE (to fix liability), not generally. There are many labels ('lifting', 'peeping behind', 'ignoring'), but the UKSC prefers 'PIERCING THE VEIL' (Prest v Petrodel; VTB Capital v Nutritek).

Why are the courts so reluctant to pierce the veil, and what do they do instead?

Piercing UNDERMINES the foundational principle of SEPARATE LEGAL PERSONALITY and limited liability (Salomon). It is a LAST RESORT, to be used rarely (Prest; Hurstwood Properties v Rossendale BC [2021] UKSC 16). Instead the courts use OTHER private law rules: • DELICT/TORT: a parent company may owe its OWN duty of care to those affected by its subsidiary's operations (Okpabi v Royal Dutch Shell [2021] UKSC 3); • TRUSTS (as in Prest itself); • AGENCY; • STATUTE (insolvency).

The two non-Prest grounds for disregarding separate personality

1. PUBLIC POLICY (enemy aliens): in wartime, a UK company can be treated as an 'ENEMY' under the Trading with the Enemy Act 1939 if its CONTROLLERS are enemy aliens (Daimler Co v Continental Tyre and Rubber Co 1916). This is not relevant since WW2, but it shows that it can happen.
2. STATUTE, mainly INSOLVENCY legislation, where a statute makes others liable for the company's obligations: • FRAUDULENT TRADING: Insolvency Act 1986 s.213 (liquidation) and s.246ZA (administration); • WRONGFUL TRADING: IA 1986 s.214 (liquidation) and s.246ZB (administration).

Fraudulent trading (Insolvency Act 1986 s.213): what is it?

In a liquidation (s.213) or administration (s.246ZA), the court can order anyone KNOWINGLY party to carrying on the company's business with INTENT TO DEFRAUD CREDITORS, or for any fraudulent purpose, to make a CONTRIBUTION to the company's assets. • It requires actual DISHONESTY, so it is very HARD TO PROVE. • It is also a CRIMINAL offence (CA 2006 s.993).

Wrongful trading (Insolvency Act 1986 s.214): what are its elements?

A DIRECTOR (including a SHADOW director) can be ordered to CONTRIBUTE to the company's assets in liquidation (s.214), or administration (s.246ZB), where:

1. the company has gone into INSOLVENT liquidation or administration;
2. at some point BEFORE that, the person KNEW or OUGHT TO HAVE CONCLUDED that there was NO REASONABLE PROSPECT of avoiding insolvent liquidation or administration; and
3. the person was a DIRECTOR at that time. DEFENCE: the director took EVERY STEP they ought to have taken to minimise the potential loss to creditors (s.214(3)).

Wrongful trading: how do the courts apply s.214?

• They require PRECISION as to the DATE when the director knew or ought to have known (Re Sherborne Associates Ltd 1995). • NO HINDSIGHT: the question is what was known, or ought to have been known, AT THE TIME. • There must be a CAUSAL LINK between trading on past that date and INCREASED losses to creditors (Re Continental Assurance Co of London 2001). • The aim is to COMPENSATE creditors, not punish directors (Re Purpoint Ltd 1991). • It applies a DUAL standard (as in CA 2006 s.174): the higher of the REASONABLE director's objective standard and the director's OWN actual knowledge and skill (s.214(4)). • Liability is INDIVIDUAL, not joint (Re Continental Assurance). • Directors who took every step to minimise creditors' losses are EXCUSED (Brooks v Armstrong).

How did the law on veil-piercing develop before Prest?

1. DHN Food Distributors v Tower Hamlets (1976): a group treated as a 'SINGLE ECONOMIC ENTITY' and pierced, in the group's favour.
2. Woolfson v Strathclyde RC (1978, HL Scotland): DHN DOUBTED. The veil can be pierced only where the company is a 'MERE FAÇADE concealing the true facts'.
3. Adams v Cape Industries (1990): no piercing just because justice seems to require it, and no 'single economic unit' piercing. A parent is NOT liable for its subsidiaries.
4. Trustor AB v Smallbone (No 2) (2001): wrongdoing by the company is not enough. The company STRUCTURE must be used to avoid or conceal liability.
5. VTB Capital v Nutritek (2013): obiter doubt cast on Woolfson's façade test.
6. Prest v Petrodel (2013): the façade test was replaced by the EVASION principle.

Prest v Petrodel: the concealment principle vs the evasion principle

The veil-piercing exception is narrow, based on 'FRAUD UNRAVELS ALL' and EX TURPI CAUSA. Start by identifying a RELEVANT WRONGDOING. • CONCEALMENT principle: a company is used to CONCEAL the real actors. The court looks BEHIND the façade to find the real facts (e.g. that the company is an AGENT or holds property on TRUST for the controller), but does NOT disregard the company. This is NOT true piercing. • EVASION principle: the veil can be pierced where a person is under an EXISTING legal obligation or liability, and DELIBERATELY EVADES it, or frustrates its enforcement, by interposing a company under their control (e.g. Gilford Motor v Horne). This is TRUE piercing, and it is used only where no other remedy works. Lady Hale had some doubts (para 92). The approach does not apply in criminal confiscation cases outside these principles (R v Sale 2013; R v Boyle Transport 2016).

Problem question: can the creditor or claimant reach the shareholder or parent behind the company?

Added (exam technique):

1. Start from SALOMON: the company is a separate person, with limited liability, and a parent is not liable for its subsidiary (Adams v Cape).
2. STATUTE? On INSOLVENCY: wrongful trading (s.214: knew or ought to have known, plus the every-step defence) or fraudulent trading (s.213: intent to defraud).
3. Other PRIVATE LAW routes first: AGENCY, TRUST (Prest), the parent's own duty of care in DELICT (Okpabi), or the director's personal liability (e.g. Standard Chartered v PNSC for deceit).
4. Only then PREST: • Is there an EXISTING obligation or liability of the controller? • Was a company interposed to EVADE it or frustrate its enforcement? Then pierce (EVASION, e.g. Gilford Motor v Horne). • If the company merely CONCEALS the real actor, use CONCEALMENT (look behind; no piercing).
5. Is it a last resort? (Prest; Hurstwood). Conclude.

What is a share? (Borland's Trustee v Steel Bros)

Farwell J: 'A share is the interest of a shareholder in the company MEASURED BY A SUM OF MONEY, for the purpose of LIABILITY in the first place, and of INTEREST in the second, but also consisting of a series of MUTUAL COVENANTS entered into by all the shareholders inter se…' It is: • the shareholder's STAKE in the company; • INCORPOREAL MOVEABLE property; • a source of INCOME (dividends) and CAPITAL growth (an increase in value); • a bundle of RIGHTS under the articles (the statutory contract).

Share certificates, bearer shares and CREST

• SHARE CERTIFICATE: PRIMA FACIE evidence of title to the shares, unless the contrary is shown (CA 2006 s.768). • BEARER SHARES (where whoever held the certificate owned the shares) can NO LONGER be issued (s.779(4)), because of FRAUD and money laundering risks. • CREST: the ELECTRONIC system for holding and transferring UNCERTIFICATED shares (Uncertificated Securities Regulations 2001).

Key share terminology and CA 2006 sections

• PAR (NOMINAL) VALUE (s.542): set by the company, unrelated to market value, and measures the shareholder's interest. Shares CANNOT be allotted at a DISCOUNT to par (s.552; Ooregum Gold Mining v Roper 1892). • PARTLY-PAID shares, UNCALLED capital and CALLS (s.547): the amount not yet paid, which the company can 'call' for. • VOTING and NON-VOTING shares; CLASS RIGHTS (s.629). • PREFERENCE shares: priority for dividends or capital, usually NO votes. • REDEEMABLE shares, at the company's or the holder's option (ss.684–689). • BONUS shares: issued free to existing members out of reserves. • DIVIDENDS ('distributions'): only out of profits available for the purpose (ss.829–831). • WEIGHTED voting rights are possible (Bushell v Faith 1970).

Original share acquisition: allotment, directors' authority and pre-emption

ORIGINAL acquisition means new shares are ISSUED/ALLOTTED by the company, and the money goes to the COMPANY. • The DIRECTORS allot shares, but they need AUTHORITY: – AUTOMATIC in a PRIVATE company with ONE class of shares (s.550), unless the articles prohibit it; – otherwise, SHAREHOLDER approval (an ordinary resolution or the articles), with limits on the maximum number and duration (up to 5 years) (s.551). • No allotment at a DISCOUNT to par (s.552; Ooregum). • PRE-EMPTION rights: EXISTING shareholders must first be offered new equity shares for cash in proportion to their holdings (ss.561–571), which protects against dilution.

Derivative share acquisition and registration of a transfer

DERIVATIVE acquisition means buying EXISTING shares from a shareholder, and the money goes to the SELLER. • The DIRECTORS must register the transfer. Private companies' articles often give the directors power to REFUSE registration, and some impose PRE-EMPTION on transfer. LISTED public companies cannot restrict transfers. • NEMO PLUS applies (no one can transfer more than they have). • It requires a STOCK TRANSFER FORM (CA 2006 s.770 requires a 'proper instrument of transfer'; the standard form is under the Stock Transfer Act 1963), or CREST for uncertificated shares. • The seller completes the form, and the buyer signs if the shares are partly paid (acknowledging liability). • STAMP DUTY at 0.5% where the consideration exceeds £1,000 (the form goes to HMRC; your notes say 'HMIC'). Your notes cite the Stock Transfer Act 1982 and s.785 CA 2006. I believe the stock transfer form itself comes from the 1963 Act; check against Grier.

Public offers of shares: IPOs and prospectuses

Offers of shares to the PUBLIC are regulated by FSMA 2000 Part VI and the Public Offers and Admissions to Trading Regulations 2024. • IPO (Initial Public Offering): the first listing of a company's shares on a stock exchange. • PROSPECTUS: a document inviting the public to subscribe. It must contain enough INFORMATION for investors to make an informed decision (your notes: reg 23 of the 2024 Regulations). Benefits: access to wider investment, and shares that are easier for holders to sell.

Transparency, the end of a company's life, and accounts

• TRANSPARENCY: the Register of PEOPLE WITH SIGNIFICANT CONTROL (PSC) (CA 2006 ss.790A–790ZG and Sch 1A). • END of life: DISSOLUTION (striking off: CA 2006 ss.1000 and 1003), or LIQUIDATION (winding up) under the Insolvency Act 1986. • ACCOUNTS: companies must prepare individual and GROUP accounts (CA 2006 Part 15). These consist of a PROFIT AND LOSS account and a BALANCE SHEET (assets and liabilities at a given date: current assets, fixed assets, current liabilities), which must balance.

CASE: Prest v Petrodel Resources Ltd [2013] UKSC 34

Issue: In a divorce, could the court order a husband's companies to transfer properties they owned to the wife, by piercing the corporate veil? Facts: Mr and Mrs PREST divorced. Mrs Prest sought the transfer of several London PROPERTIES held by companies (Petrodel group) that Mr Prest owned and controlled. Mr Prest argued the properties belonged to the companies, not to him, and the ownership structure was opaque. Held: The veil could NOT be pierced, because there was no EVASION of an existing obligation. BUT the properties were held on RESULTING TRUST for Mr Prest (the companies were nominees), so they were his to transfer. Trust law gave the remedy that company law denied. Lord Sumption's principles: • piercing is permitted only under the EVASION principle (deliberate evasion of an existing legal obligation by interposing a company), distinct from the CONCEALMENT principle (looking behind the company without piercing); • it is a narrow, LAST-RESORT exception; • the Woolfson 'façade' test is replaced. Separate legal personality (Salomon) was reaffirmed.

CASE: Gilford Motor Co Ltd v Horne [1933] Ch 935 (CA)

Issue: Can a former employee avoid a restrictive covenant by acting through a company he controls? Facts: HORNE was managing director of Gilford Motor Co. His contract barred him, after leaving, from SOLICITING the company's CUSTOMERS. After leaving he set up a COMPANY (added: in his wife's name) through which he solicited those customers. Held: An INJUNCTION was granted against BOTH Horne and the company. The company was a mere device to EVADE his personal obligation, so he could not escape it by trading through it. Now the classic example of the EVASION principle (Prest).

CASE: DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852 (CA)

Issue: Could a group of companies be treated as ONE economic entity to claim full compensation on compulsory purchase? Facts: A grocery business was split across companies in a group: one (a 'PROPCO') OWNED the land, and another (DHN, an 'OPCO') TRADED from it under a licence. The council COMPULSORILY PURCHASED the land. Treated separately, the land-owning company would get only the land value, while DHN, with no interest in the land, would get no compensation for the loss of its business. Held (Lord Denning MR): the group was a 'SINGLE ECONOMIC ENTITY', so the veil was pierced IN THE GROUP'S FAVOUR and compensation for disturbance of the business was payable. Status: DOUBTED in Woolfson and rejected in Adams v Cape. It is not good law on single economic entity.

CASE: Woolfson v Strathclyde Regional Council 1978 SC (HL) 90

Issue: Could the veil be pierced to award business-disturbance compensation where the business and the land were held by different persons and companies? Facts: Premises in Glasgow were compulsorily acquired. The land was owned by Woolfson and a company (Solfred), while the business was run by another company (Campbell Ltd) in which Woolfson held most shares (your notes: separate stand-alone companies with overlapping shareholders). They claimed compensation as if one entity, relying on DHN. Held (HL): NO piercing. DHN was distinguished and DOUBTED. The veil can be pierced only where 'special circumstances exist indicating that [the company] is a MERE FAÇADE concealing the true facts'. That was not the case here. Status: the façade test has now been replaced by Prest's evasion principle.

CASE: Adams v Cape Industries plc [1990] Ch 433 (CA)

Issue: Could Cape, the English parent, be treated as 'present' in the USA through its subsidiaries, by piercing the veil, so that US judgments for asbestos injuries could be enforced against it in England? Facts: CAPE, an English company, mined ASBESTOS in South Africa through subsidiaries and marketed it in the USA through a subsidiary. Workers in TEXAS who were exposed to the asbestos obtained JUDGMENTS in Texas. The subsidiaries had no assets, so the claimants sought to enforce against Cape in England. (Your notes record the facts slightly differently; this is the usual account.) Held (Slade LJ): NO piercing. A court cannot pierce merely because JUSTICE seems to require it. The group was not a 'single economic unit'. The subsidiary was not a façade or an agent of Cape. A PARENT is NOT liable for its subsidiaries. Using a group structure to limit FUTURE liability is legitimate. This shows how separate personality and limited liability can produce INJUSTICE to involuntary creditors. (Your notes cite '[1900]'; it is [1990].)

CASE: Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177

Issue: When can the veil be pierced to make a controller liable for money received by his company? Facts: Added: Smallbone, a director of Trustor, improperly transferred Trustor's money to a company (Introcom) that he controlled, which then received it. Held: Wrongdoing by the company alone is NOT enough. The veil can be pierced only where the company is used as a DEVICE or façade to CONCEAL or AVOID liability for the controller's own wrongdoing. On the facts, Introcom was such a device, so the receipts were treated as Smallbone's. (Your notes: the whole structure must be used to perpetrate the wrong.)

CASE: Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] 2 AC 307 (HL)

Issue: Can a UK-registered company be treated as an ENEMY ALIEN in wartime because of who controls it? Facts: During WW1, Continental Tyre (GB), registered in England, sued Daimler for a trade debt. Almost all its shares were held by GERMANS, and its directors lived in Germany. Daimler argued that paying would be trading with the enemy. Held: A UK company CAN acquire an ENEMY CHARACTER if the people in de facto CONTROL of its affairs are enemy aliens. This is the PUBLIC POLICY ground for looking behind separate personality (Trading with the Enemy legislation).

CASE: Okpabi v Royal Dutch Shell plc [2021] UKSC 3

Issue: Can a PARENT company owe a DUTY OF CARE to people harmed by its SUBSIDIARY'S operations? Facts: Added: Nigerian communities claimed that OIL SPILLS from pipelines operated by Shell's Nigerian subsidiary had polluted their land and water. They sued the UK parent, Royal Dutch Shell, in England. Held: There was a REAL ISSUE to be tried that the parent owed a duty of care, through its level of CONTROL or management of the subsidiary's operations, or by holding out that it did. The case could proceed. Significance: liability comes through ordinary DELICT/TORT (the parent's OWN duty), not by piercing the veil.

CASE: R v Sale [2013] EWCA Crim 1306 and R v Boyle Transport (Northern Ireland) Ltd [2016] 4 WLR 63

Issue: In criminal CONFISCATION proceedings, can a company's assets be treated as the defendant's (its controller's) by piercing the veil? Facts (Sale): a defendant convicted of corruption controlled a company, and the question was whether the company's benefit could be treated as his for confiscation. Held: Applying PREST, the veil can be pierced only if the EVASION principle (or concealment) applies on the facts. In Sale it did not, so the company's assets were not treated as the defendant's. Boyle Transport applied the same Prest approach in the criminal context. (Check the details of Boyle Transport.)

CASE: Borland's Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279

Issue: What is the legal nature of a SHARE, and can the articles validly require a shareholder to transfer shares at a fixed price? Facts: Added: the articles required a member's shares to be transferred, on bankruptcy, to particular persons at a price NOT exceeding PAR. Borland went bankrupt, and his trustee argued this was void (as a restraint, or a fraud on the bankruptcy laws). Held (Farwell J): the provision was VALID and bound the trustee. A share is 'the interest of a shareholder in the company MEASURED BY A SUM OF MONEY, for the purpose of LIABILITY… and of INTEREST… but also consisting of a series of MUTUAL COVENANTS' under the articles. It is not a sum of money but an interest made up of the rights in that contract.

CASE: Bushell v Faith [1970] AC 1099 (HL)

Issue: Can the articles give a director WEIGHTED VOTES to defeat a resolution to remove them, despite the statutory power to remove directors by ordinary resolution (now CA 2006 s.168)? Facts: Added: a small company had three shareholder-directors. The articles provided that on a resolution to remove a director, that director's shares would carry THREE votes per share. The other two tried to remove Mr Faith. Held: The WEIGHTED VOTING clause was VALID. The statute requires only an ordinary resolution, and Parliament did not restrict how votes may be attached to shares. So Faith could not be removed. (Added: for public companies, listing rules now prevent such clauses.)

CASE: Ooregum Gold Mining Co of India Ltd v Roper [1892] AC 125 (HL)

Issue: Can a company issue shares at a DISCOUNT to their nominal (par) value? Facts: Added: the company's £1 shares were trading at well below par, so to raise money it issued new £1 preference shares credited as 15s (75p) paid, so subscribers paid only 5s (25p) each. Held: The issue at a DISCOUNT was INVALID. Allowing it would reduce the company's capital, which is the creditors' protection. The holders were liable to pay the full nominal value. Now codified in CA 2006 s.5