Lifting The Corporate Veil For Associate Companies and Group Enterprises in Setup UK with relevant Case Studies

08 Nov

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:

  • When a company acts as an agent to any member. Due to the presence of agency relationship one of the company is controlled and influenced greatly by one of its members or any other corporate body. However, there must exist a solid evidence for the agency relationship to take any action against that company. As in the case of Re FG Ltd.
  • When there exists a trust relationship between the company and its members, even then the separate legal personality may be ignored and the members of the company may be penalised for any wrong done. A trust relationship may exist as such that the company is trustee and the role of beneficiaries is being played by the members. However, to lift a corporate veil in such scenarios, there should be a proof given to the court about the presence of a trust relationship. A mere assumption may not prove sufficient. For instance, the case of Trebanog Working Men’s Club.
  • Lifting the corporate veil may find its application if a company is formed and utilised for the purpose of committing any fraud. For instance, the Re Darby case.
  • It may be possible that a company is formed for the purpose of preventing someone from any obligation that is liable upon him. To prevent such a violation of obligation done with deliberation a corporate veil may be pierced. For a further elaboration consider the example of Gilford Motor Co Ltd.

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:

  • The claimants further present an argument that there was such a oneness in the group of companies that despite their being separate lawful bodies, they had a complete identity together. The shareholders as well as the members of the companies DHN and Bronze were same. They both were interested in keeping the site maintained that was being used in the business.
  • Suppose the companies were considered as separate legal bodies and not treated as one collectively, there would have been no basis for claiming any kind of compensation. For instance, DHN would have found no interest in the land but would have owned the business. Similarly, Bronze would not have been effected by the disturbance caused in the business but would have been the owner of the land.
  • This relationship between DHN and Bronze was flawless. There was no trade being done by Bronze as well as no other business being run by Bronze. Hence, the creditors of Bronze merely included DHN. The legitimate title could be transferred at any moment by the directors from Bronze to DHN.
  • It was claimed by Mr. Eyre that if any such transfer had been made before the notice of treatment was presented, that is, before 12th of October in 1970, the company would have enjoyed a secured claim against the disturbance created by the auction of the land.
  • Moreover, if the company had gone for this option, they would have benefitted from all the advantages that were to be derived from the date of isolation of interest and title of the two companies and would have also qualified legally for the compensation given by the notice of treatment by rearranging the matter of transfer before the date of issuance of the notice i.e. October 1970. Doing so would not have laid any blame upon DHN.
  • If the decision given by Lands Tribunal was correct, even in such a scenario it would have only made all the difference for DHN to not to take any such action.
  • Hence, the relationship between both the companies should not be ignored in a situation where the ignorance may lead to injustice.
  • If the companies are strictly differentiated as two separate identities, their common traits should depict in the least that the determination of DHN’s occupation could and would not be done without the assent of DHN itself. If DHN was a licensee, it depended upon its will to continue the license. So as long as DHN wished, the license remained effective and the relationship between the subsidiary and parent company remained active.
  • The decision given by the President of Lands Tribunal was too strict to determine the fate of this case.

Hence, the appeal was allowed by Shaw LJ. Lord Denning MR and Goff LJ gave similar verdicts.

Lord Denning Held:

  • The case may be possibly termed as “Three in one”. That is, three companies working as one company. An alternative name of the case may be “One in three”, that is three companies grouped into one.

Group Enterprises

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,

  • It was a deluded suggestion given by the council that to differentiate between the holding and the subsidiary company would be technical. In terms of economics both the companies were united. However, our concern is law and in terms of law both the companies are different and two separate entities and this difference cannot be ignored.

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.

* The email will not be published on the website.