After establish company in UK the next task is to make it grow rapidly. One of the way, this can be done is by working in association with other companies. This article deals with the scenarios where corporate veil may be lifted and the rules of treating associated companies as a single corporate body.
Limited Liabilities and Lifting the Corporate Veil
Companies that have limited liabilities either in the form of limited shares or in the form of limited guarantee do not hold their members completely liable for all the debts of a company. As in case of a company limited by share, the members have to pay an amount to the creditor that is equivalent to the amount left on the shares of that member. In case of limited guarantee, the members have to contribute a certain amount in the assets at the time of windup of a company. These rulings are given by the 2nd clause of the 1st Section of Companies Act 1985. Hence, this shows the separate legal nature of a company. There may be situations when this separate legal personality of the company has to be neglected and the corporate veil has to be pierced by holding the legal persons of a company responsible to make a contribution greater than as prescribed by the memorandum.
Scenarios where Corporate Veil can be Pierced
A corporate veil may be possibly pierced in the following scenarios:
Group of Companies Treated as One
Companies may work in groups such as in case of global company formation UK joining different companies. Although this collaboration gives benefits to all the companies that are in group but special benefits are received by small companies as they can achieve fast company formation UK target and increase their capital and share. The possibility of ignoring the separate legal personality of a company may arise in the situation where it becomes mandatory to give permission to a certain group of companies working in association to act as a single corporate body. The article focuses particularly on the DHN Food Distributors Ltd. case.
DHN Food Distributors Ltd.
DHN was the complete owner of its subsidiary company named Bronze. A whole sale business of cash and carry grocery used to be carried out by DHN at a site owned by Bronze. The directors of DHN and Bronze were the same. Moreover, there was no actual business run by Bronze. It just owned some property that was freehold and was taken over by DHN because it was a licensee. There was another solely owned subordinate company that owned a number of vehicles. These vehicles were in use of DHN. This subsidiary company, like the first one, ran no business of its own. It so happened that the council of 1970 seized the site owned by Bronze. As a consequence to the seizure, DHN had to shut down its business from that site. The price of the land was paid to Bronze. Additionally, DHN was given the offer that it could have an additional amount over the site for compensation of disturbance created for DHN if it owned an interest on the site greater than the interest of a simple licensee. A provision of Lands Tribunal was reversed by the Court of Appeal and it was held by the court that if any companies work together in a group they should be treated as a single body. Hence, any disturbance created by the purchase of the site should be compensated for DHN via payment. It is interesting to note that DHN was given such a treatment as would have been given to it if it actually owned the site.
Shaw LJ held:
Hence, the appeal was allowed by Shaw LJ. Lord Denning MR and Goff LJ gave similar verdicts.
Lord Denning Held:
Both the multinational companies as a global company formation UK and the domestic companies of UK make collaboration in the form of group enterprises. They may be observed in cases like Gramophone and Typewriter Co limited, Re FG, Lonrho limited, Smith, Stone & Knight limited etc. Companies working in association may have different forms. This may include a parent subsidiary or sub-subsidiary relation. Also it may include different companies working together but having same directors or shareholders.
Statutory Provisions for Companies Working in Groups
Various provisions of the statute determine the conduct of grouped companies. For instance, subsection 399ff of Companies Act 2006 states about the laws of a companies that include rules that require the centralised account’s publication. The rulings regarding matters like asset transferring procedure between the members are given by tax laws such as in subsection 402ff of Income and Corporation Taxes Act 1988. Similarly, laws for employment also deal with the grouped companies.
Case Laws and Group Enterprises
The interpretation of piercing corporate veil by considering the grouped companies as one given by case laws is quite confusing. As this question has been raised many time in the courts. The Court of Appeal in DHN case was quite willing to consider all the companies as one where as in the Lonrho case, the court implemented the Salomon principle. The House of Lords in the case of Woolfson supported the decision given by the court of Scotland that refused to follow the decision taken by Court of Appeal in DHN case, although the facts of both the cases were quite similar.
There have been cases where the restrictions of one company have been guaranteed by another. For instance, Charterbridge Corpn limited and Rolled Steel Products. There have been cases where one company has paid the debts of another, as in, Armour Hick and cases where one company has paid the pensions of the employees of another company, for instance, Re W. The verdict given for DHN case is not a common trend at present.
In the Albazero case, it has been stated as basic rule of England that each of the companies in a group have a legal identity that is isolated and has the possession of rights and responsibilities that are isolated from the legal persons. Hence the rights of one company cannot be brought into practice by any other company.
According to Robert Goff LJ in the case of Bank of Tokyo,
Any industrial action towards a company in association belonging to the same group as the employer of the employees who order the action is to not be considered as secondary picketing under the laws of Canada. As in the case of Canada Safeway. However, the same rule has been ignored by the House of Lords in the case of Dimbleby & Sons. In another case, Beckett Investment, the Court of Appeal gave such an interpretation, for a restricting clause of trade, that proved sufficient to protect the corporate group and did not insist on the separate legal identity of the companies.
There may be benefits if one intends to establish company in UK and work in association with other companies and such association plan may help in the fast company formation UK and fast growth of the company. However, it varies from court to court the way they treat the fact of separate legal identity of companies.