Difference of Views Regarding the Concept of Piercing the Corporate Veil and Separate Legal Personality for Global Company Formation UK

13 Nov

Piercing the corporate veil is not a very common practice in England. The law of England stresses more on the separate legal personality after forming a limited UK company. However, in the rest of the Europe, there is some acceptance for piercing the corporate veil. Any global company formation UK may or may not benefit from piercing the corporate veil, depending upon the laws that it follows. In this article we will discuss certain case studies to examine how different view point exists for piercing the corporate veil and separate legal personality.

Yukong Lines Ltd

In this case, a verdict quite alike the verdict of Adams v Cape was given. The original complaint was that Mr. Ramvrias would force the defendant company, Rendsburg to transfer the funds to other companies that were owned by him. This was done so that the company would never be in a position to pay for all the loss caused, if it was demanded. The decision that had to be made by Toulson J, was that whether the principle stated in Salomon should be taken into consideration or not. For if Mr. Ramvrias who was entitled as the only member holding the shares of the company at defense, i.e. Rendsburg, was held liable in person for the loss caused by a contractual violation of chartering a ship, where the contract had been ostensibly signed by the company, the corporate veil was pierced. The following arguments were given by the claimant party that:

  • Rendsburg had signed the charter party on behalf of Mr. Ramvrias forming an agency relationship. Moreover, the documents were authenticated by the signature of Ramvrias on behalf of the company.
  • The company played the role of a façade in the matter.
  • The veil of incorporation should be pierced as a solution to the matter.

However, all these arguments were overruled by Toulson J. Regarding the transfer of the funds it was stated by Toulson J that, the transfer funds could be recovered by many other ways other than piercing the corporate veil. For instance, an action could be taken against Mr. Ramvrias as violating his duty as a director, by the liquidator of the defendant company. There was no way that the Salomon principle could be ignored by giving any remedy directly implementable on Mr. Ramvrias.

Re Polly Peck 

In this case, Re Polly Peck was a parent company that headed a large group. It had formed a subsidiary incorporation offshore named PPIF. The purpose for forming the subsidiary was to collect funds via an issue of bond. After the receipt of the funds, they were given to PPI on loan, in return PPI gave a guarantee to PPIF in the form of certain regulations upon repayment. The management of PPIF was not isolated or independent. Moreover, there were no separate bank accounts of PPIF. However, the proposal of piercing the veil of incorporation on the basis of terming PPIF as sham was rejected by the court because it believed that PPI could be treated as a party that borrowed the funds.

Likeliness of Piercing the Corporate veil for Grouped Corporations

In order to create a company in London, it must be noted that England does not wholly accept the concept of ignoring the separate legal personality of a company. Following the verdict of Adams v Cape, the cases mentioned above make it clear that it is now quite unlikely that the court lifts the veil in matters concerning the companies working in groups. It is not necessary that piercing the corporate veil is the only way to acquire the result that is desirable by the claimant. For instance, in the case of Newton-Sealy, it was held by the court that the employee was having a contractual binding with only one of the companies in the group. The personal liability of damage was not included in that contract. But as there were daily dealings with the other companies of the corporate group, a duty of care was arise. Hence, this situation allowed the employee to bring a lawsuit under tort of negligence.

Making a Parent Company Liable 

This topic has gained interest over past years but probably more in other parts of the world than the United Kingdom. It is an ambiguity that whether a holding company should be held responsible for the debts of its subsidiary that has gone into insolvency or not. The judgement given by Templeman LJ in the case of Re Southard summarises the matter quite well:

  • The law for companies in England has some qualities that may often result strangely. Any holding company may have more than one subsidiary companies that may be either under direct or indirect control of the members holding shares in the holding company. If any of the subordinate companies working under the parent company turns out to be smaller in scale than the rest of the subsidiaries and becomes insolvent dismaying the creditors, the parent company and the rest of the subsidiaries may feel relieved because none of them will have to be liable to the debts of the insolvent subsidiary. Therefore, it is not at all astonishing if the creditors of the insolvent subsidiary demand a close analysis of the relationship of the subsidiary with its parent company and other subsidiaries. So that it can be known that if there is any liability of the subsidiary towards the members of other subsidiaries. Also this helps in ensuring that, none of the assets of the subsidiary has been leaked. Another fact that is to be determined is that whether there is any indemnification or any right to take action against either any other company or any person. This will be troubling for the creditors if the assets of the insolvent subsidiary are taken over by any other member of the corporate group.

The law followed in England is derived from the principle of Salomon implemented in such scenarios as well as in the case of Multinational Gas. This depicts that, there is no development of any law that permits the piercing of the veil of incorporation. Hence, forming a limited UK company may lead to strictness of rules regarding the Salomon principle. Comparatively, in the countries other than the United Kingdom there have been rules developed relying upon the elements “under-capitalisation” and “domination”. These rules hold other companies working in a corporate group liable to the debts of the insolvent subsidiary. The Companies Act has been subjected to changes in Ireland and New Zealand by giving the court an exceptional authority to the following orders:

  • Force one company to make any contribution in the belongings of another company that is bankrupt and about to liquidate.
  • Order two companies that are to wind up to lead their liquidation together so that their assets and liabilities are handled collectively.

It was mentioned in the report prepared by the Cork Committee regarding insolvency that these rules should not be followed in the United Kingdom. However, the report also suggested that there should be more analysis done for the question. This could be made a part of the review given by the Company Law Review, yet it just mentioned that no reformation had been done in the related area. This can be implemented in England now but only via the consent given by the concerned creditors’ prescribed majorities of the statute. Also, via scheme of arrangement as stated in the subsection 895ff of Companies Act 2006 or using the power of compromise given to the liquidators as well as the court in exceptional situations as stated in Section 167(1) of Insolvency Act and Schedule 4.

In the European Union, there have been chances to give an allowance for lifting the veil of incorporation in the matters related to incorporated groups. Before the United Kingdom acquired the membership of the EU, ICI was made liable to fines when its offshore subsidiary violated the laws of competition set by EU. In the case of ICI v EC, it was held by the CJEU that for the successful implementation of the EU laws regarding competition, any subsidiary company’s action of anti-competitiveness that acts according to the the orders of its holding company outside the domain of EU, would be regarded as the action of parent company. It was held in the case of Provimi Ltd that as there is no separate legal personality of an incorporated group, the court is allowed to choose any of the member companies of the group as liable to any payments that have to be made. The Ninth Directive that was proposed in the EU, would have stated further regulations about the conduct of companies working in groups and would have held the company with dominance responsible for the liabilities of a company dependent upon it. However, the directive was not given approval by the majority.

Notes on the verdict given for VTB Capital PLC case by Lord Neuberger

Lord Neuberger in VTB case did not allow for the piercing of the corporate veil just for the purpose of holding an individual responsible in a scenario where it was claimed by the claimant that the individual’s fraud statements led the claimant to enter a contract with a company that acted as an agent to the individual. By giving such a verdict, Lord Neuberger also showed his dissent for the verdict given by Burton J in the case of Antonia Gramsci. In this case the verdict stated that against the charter parties that were sham the veil of incorporation could be pierced. Although there was no direct power, yet it was argued by the judge that the victim could be given the authority to impose a contract that was signed by an agent company against both, the company and the individual for whom the company was an agent.

Linsen International Ltd

In this case, Lord Neuberger rejected the verdict given for the case of Gramsci. He stated:

  • Piercing the corporate veil in a grouped incorporation would only be possible if the third party was involved via contract for the plans made between the first party and the claimant. This does not seem reasonable to me to hold the third party liable contractually if the assets of the first party were transferred to the third party for the reason of protecting the first party from the liability for any act of violation party done by the first party in regards to a contract that had been already signed by the first party. The claimants may be allowed to follow the belongings of the first party, however, it is a different topic.

For further arguments that are contradicting the concept of piercing the veil, the judgement of Arnold J for the case VTB must be studied (paragraphs 69 to 102). These principles are also implementable for the cases demanding restitutionary compensations. For instance the case of MacDonald v Costello, in this case the party that claimed for justice had signed a contract with the defending company to build houses on the plots whose ownership belonged to the directors and members holding shares of the defending company. However, the company was unable to fulfil its liabilities. Hence, an action was taken by the claimant against the shareholders and the directors stating that they had been involved in an unfair enrichment. The claim was overruled. The parties had been given enrichment but on fair grounds via a proper contract signed by the claimant and the defendant company. Giving an order against it would suppress the contractual law.

To create a company in London or UK, one thing must be make sure that the company is ready to work under the strictness of the principle of Salomon or not and special care be given in case of piercing the corporate veil and separate legal personality as discussed in about cases The company formation agents London may provide a better guidance for the rules under the influence of Salomon principle and other regulations given in companies ordinance.

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