Limited Liability & Piercing the Veil

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Salomon v Salomon [1897]

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original principle of separate personality in English company law

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Lord Sumption in Prest v Petrodel [2013]

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piercing the veil refers to when a company’s separate legal personality is disregarded

veil-piercing limited to two specific circumstances

a] company itself is a sham or facade (“concealment principle”)

b] sham or facade to evade existing legal obligations (“evasion principle”)

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29 Terms

1
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Salomon v Salomon [1897]

original principle of separate personality in English company law

2
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Lord Sumption in Prest v Petrodel [2013]

piercing the veil refers to when a company’s separate legal personality is disregarded

veil-piercing limited to two specific circumstances

a] company itself is a sham or facade (“concealment principle”)

b] sham or facade to evade existing legal obligations (“evasion principle”)

3
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Lonhro v Shell [1980]

piercing the veil is a fundamental principle of English company law

4
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Margaret Blair, The Four Functions of Corporate Personhood

limited liability has 4 essential functions for large-scale enterprise:
i] continuity

ii] identifiable persona

iii] asset partitioning

iv] governance structure

5
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statutory veil piercing

not actually veil piercing —>

  • group accounting CA 2006

  • fraudulent/wrongful trading in IA 1986

6
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Woolfson v Strathclyde Regional Council [1978]

established sham/facade as grounds for veil-piercing

7
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Gilford Motor Co. Ltd. v Horne [1933]

established evasion of obligation as grounds for veil-piercing

other remedy existed besides veil-piercing

8
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DHN Food Distributors v Tower Hamlets LBC [1976]

veil-piercing could occur when companies are acting as a “single economic group” —> analogy to consolidated accounting for group companies

9
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Creasey v Breachwood Motors [1993]

veil-piercing allowed in the “interests of justice” —> directors themselves blatantly ignored legal personality by transferring assets

10
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Ord v Belhaven Pubs Ltd. [1998]

rejected “interests of justice” as a basis for veil-piercing, overturned Creasey

11
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VTB Capital Plc. v Nutritek International Corporation [2013]

doubted existence of veil-piercing principle in English law —> only authority up until then was Lord Keith’s HoL obiter in Woolfson

12
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Ross Grantham, The Corporate Veil; An Ingenious Device

law adopted a clear and formalistic approach in Prest

necessity of facade being used at time of relevant transaction is an artificial distinction —> incentivizes one to “plan one’s abuses well ahead of time”

13
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Lady Hale in Prest v Petrodel [2013]

doubtful whether all veil-piercing cases came under principles of evasion and concealment —> just examples of a broader principle of law preventing people from using companies for “unconscionable conduct”

14
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Lord Mance in Prest v Petrodel [2013]

likely that exceptions exist beyond the evasion principle

15
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Akzo Nobel v Competition Commission [2013]

Prest did not rule out the possibility of future expansion of veil-piercing

16
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Anna Musk, Piercing the corporate veil: post-Prest [2022]

evasion principle is described as a last resort, but it hasn’t actually been applied that way

other remedies existed in Prest itself, as well as as Gilford Motor Home Co. v Horne [1933] + Jones v Lipman [1962] + Akhmedova v Akhmedov [2021]

17
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Lord Neuberger in Prest v Petrodel [2013]

“not a single instance in this jurisdiction where the doctrine had been invoked properly and successfully”

18
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Wood v Baker [2015]

evasion principle applied when “no legitimate freestanding business” existed —> erodes the distinction between concealment and evasion principles

other remedy existed

19
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Lord Briggs + Lord Legatt in Hurstwood Properties (A) Ltd. and ors. v Rossendale Borough Council and Another [2021]

“piercing the corporate veil” might not even be a coherent rule of law/principle at all

20
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Lord Walker in Prest v Petrodel [2013]

unlikely that veil-piercing is an actual rule of law/principle

21
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Slade LJ in Adams v Cape Industries [1990]

affirmed Woolfson v Strathclyde Regional Council [1978]

rejected Lord Denning’s analysis in DHN Food Distributors v Tower Hamlets LBC [1976] —> point of a group structure is to avoid liability

rejected idea that “interests of justice” exception exists

22
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Trustor AB v Smallbone (No. 2) [2001]

“mere impropriety” is not enough, fraud must specifically abuse the corporate structure

23
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Ben Hashem v Ali Shayif [2008]

summarized law up to that point

i] ownership and control need to exist, but not solely sufficient

ii] impropriety of a specific type —> company structure to avoid/conceal liability

iii] company must be used as a facade at time of relevant event

24
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Easterbrook & Fischel

contractarianism —> limited liability is a default rule of contract law since it is part of the ideal “hypothetical bargain” parties would agree to in order to limit agency and transaction costs

25
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Ben Pettet, Limited Liability — A Principle for the 21st Century [1995]

limited liability encourages moral hazard and externalises loss to 3rd parties who can’t contract otherwise (involuntary tort creditors)

26
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P. Halpern, M. Trebilcock & S. Turnbull, An Economic Analysis of Limited Liability in Corporation Law [1980]

informational asymmetry and externalization of cost represents a legitimate market failure, thus justifying veil-piercing (displacing default rule of limited liability)

27
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Chandler v Cape [2012] + Vedanta Lungowe [2020]

parent companies can hold tortious liability for subsidiaries on application of regular tort principles

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Antonio Gramsci Shipping Corporation v Aivars Lembergs [2012]

common law doctrine that needs a consistent, coherent principle in order to grow

29
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R v Sale [2013]

affirmed importance of Prest even though veil piercing comments were obiter