Piercing the Corporate Veil and Limited Liability of Members on Starting a Limited Company UK


When it comes to pay for the loss of any creditor, or pay any debts of a liquidated company, the rulings given by Companies Act 2006 are not the only way to deal with the matter. There are certain other principles as well. This article will give some important information to those who want to know more about how to start a limited company UK. The text that follows will be discussing a new concept of “Piercing the corporate veil” as a treatment to the insolvency matters.

Companies with Limited Liability

In the process to create limited company UK, one has to first understand the meaning of a limited company. According to Companies Act 1985, a company may be incorporated as either a limited company or as an unlimited or private or public. A limited company is one that:

  • Offers a limited liability to its members such that any amount that is left to be paid on the shares by the shareholders, sets the limit of liability for the members to the creditors via the memorandum. Hence it is known as “limited by shares”.
  • Offers a limited liability to its members in such a way that the decided amount may be paid by the members at the time of liquidation of the company for the contribution in assets. Hence, it is known as “limited by guarantee”.

General rule regarding Limited Liability

One who intends to create limited company UK must be aware of the general rule regarding limited liability. In case of a company having a limited liability either by shares or by guarantee, the members are not obliged to satisfy the creditors. Not even when the company is unable to pay all of its liabilities due to lack of capital. Different cases support this notion. For instance, the Salomon case and the Lee’s Air Farming case.

Exceptions in the general rule

However, there may arise situations where it becomes inevitable to ask the members to come and pay for the liabilities of the company. For instance, if any subsidiary company that has insufficient funds causes loss to the hundreds of victims and its holding company is comparatively quite profitable, the victims may require the payment of liabilities from the parent company then. As in the case of Adams v Cape. It may also be possible in the case of single member companies where the company is itself unable to pay the liabilities but the only member of the company is rich enough to pay them. Again considering the case of Salomon. From the general rule, it clearly seems impossible. However, this article may discuss if there are any exceptions that may allow the contribution of members in the liabilities by an amount that is greater than their prescribed amount.

Piercing the corporate veil

The term lifting the corporate veil is an answer to the above mentioned queries. By definition, it is an option where the general law is ignored in some particular situations and the members are held liable to the outsiders. Normally, the members are protected under the legislation, and are not liable to pay any amount other than the pre-set value to the creditors, even if they are principals, agents, or play any other role. This general rule may be countered by different arguments. The following conditions may cause the members liable to the creditors:

  • The company acts as an agent and the members play principal role.
  • The members are beneficiaries whereas the company only acts as a trustee to their assets.
  • The members are constructive trustees or are knowing assistants when the company commits something wrong. For instance, the Re FG (films).

Director’s Liability to the Creditors

A director cannot be made easily liable to the creditors too. For any such reason, the directors cannot be sued by third parties. The third parties are generally allowed to sue the companies in place of directors. However, the directors can be sued in one situation. That is the possibility of advancing any agency or trust arguments that had been aired before. Even in this case, the directors are sued on the basis of their directorship and not on the basis of their membership. The directors do not have a limited liability. The directors can be sued by the firm if any wrong is done by them to the company. The money recovered from the directors can be used to pay the third parties at the time of need. The nature of director’s liability is not strict. As the directors are not liable to pay because the company is unsuccessful. They are termed liable when they take any action against the interests of the company, thus, wronging the company.

Procedure to Lift the corporate veil

As depicted by the Salomon case, the concept of separate legal personality of a company is the foundation of laws for company. Even with such importance, this isolated corporate personality can be ignored in exceptional situations. To lift the corporate veil, the first step is to consider every step taken by the company as steps taken by the shareholders of that company. Even the rights and liabilities of the company should be treated as the rights and liabilities of the shareholders. For instance, the business of a company can be attributed as its principal shareholder’s business. Moreover, the firm’s shareholding can be considered for some lawful goal. As an example, the nationalities of the shareholders can be checked to know if there is any influence, at the wartime, of the enemy on the company, as in the Daimler case. The procedure to lift the corporate veil may be at the time of need ratified by statutory law or by court. If we take the cases like Salomon as situations where the piercing of corporate veil was requested by the appellant. However, the request was eventually declined. The concept of piercing of corporate veil will become clearer. The verdicts given in such cases were not merely a restatement of the general rule of limited liability. The concept cannot be isolated from the laws of company. It has to be decided in every case again and again that whether the isolated personality of a company has to be taken into consideration or disregarded. Considering the cases of past, it may be noticed that many times the judiciary gave orders for piercing the veil in a way that contradicted the notion of isolated personality. And this used to be done unknowingly. For instance, Petrodel Resources case. It was difficult for the initial commentators to find any pattern in the verdicts of cases. Usually, a contradiction could be found in the verdicts of most of the cases.

Auld J held in the case, Conway, that the courts were supposed to lift the corporate veil for justice whenever the reality and common sense demanded it. Laws LJ agreed with the judgement of Auld J to the fullest. As a contradiction to this judgement, the cases usually revolve around agreements and property. Hence, the courts should not be pursuing the lift of corporate veil in every case, as advised by Browne-Wilkinson in the case of Tate Access.

His words are as follows:

  • People being a part of corporate bodies benefit from the fact that corporate bodies are separate persons. Such that they are legally independent from their members, shareholders and directors. So their assets and legal actions are not attributed to any of their members. It is not possible for the shareholders that control the company, to benefit from the status of separate legal personality of their company whenever possible. And later when they seek disclosure against these corporations, they support the concept of lift the veil.

Directions in the Statute for Piercing the Corporate Veil

Revenue Law provides with most of the directions for lifting the corporate veil. Also, they are given by Landlord and Tenant Act 1954 Section 30(3) and the Trading with the Enemy Act 1939 section 2. Companies Act 2006 does not include any provisions allowing for the lift of corporate veil. It rather gives rulings for any wrong that may be done by the directors. Or in other words, the directors along with the rest of the officers are held responsible by the act for any wrong done by the company.  The regulations for Insolvency also hold the directors accountable and liable to paying the debts of the company with limited liability or at the time of liquidation the directors and other officers have to contribute in the assets of the company. The subsection 213-215 of Insolvency Act 1986 provides provisions for holding directors and other officers responsible for unfair trade and fraud. Similar rulings are provided by subsection 216-217 by the same act for reusing inappropriately the name of the company that is insolvent. Also, section 15 of the Company Directors Disqualification Act 1986 sets penalties for the person who plays the role of the director, thus, violating an order of disqualification. Neither of the mentioned Acts, lay down any rules for the allowance of piercing the corporate veil and considers ignoring the concept of separate legal personality. In fact, all of them either fine or penalise the directors and in some cases other authoritative persons of the company.

Modern approach of Piercing the Veil

In past, this topic was comparatively of greater interest than the present era. It was the DHN case which gave the most attention to this principle as the judges were eager to disregard the Salomon principle. However, the trend has changed since then. The notion of “piercing the veil” has remained a part of books of company law. But now, it seems as if there is little potential in this concept to get transformed into a doctrine. For instance, the case of Creasy. The transfer of the belongings had been done from the first company to the second company. An old employee claimed against the first company. The judge was eager to implement the idea of piecing the veil to provide justice to the old employee. However, the verdict was highly doubted in the case Ord which disregarded the claims of the old employee. Consider the following two cases to better understand the value of “Pierce the corporate veil” in the present era:

Jennings

In the Jennings case the court ordered for piercing the veil. As it wanted the conviction of an employee for defrauding. The company would ask people to pay fees for any loan that was never intended to be taken. The employee was acting on behalf of the company, however, the employee could not defend himself by presenting this logic.  The case was taken to the court in 2008

Chandler

In the recent case (2012) of Chandler, the subsidiary company was dissolved. The parent company was being held responsible for the caring for the employee of that subsidiary company. Hence, this was done by applying orthodox ignorance rules for this purpose. According to Arden LJ, there was nothing in the verdict given by the court related to piercing the veil. 

Although, piercing the corporate veil is an interesting concept, it is no more a preferable solution to the problem of paying liabilities. The recently created companies with formation of UK will have to abide by the principle as mentioned in Salomon case. Probably the article succeeds in giving an insight about how to start a limited company UK that handles the wrongs done by the company or the members in a modernised manner.

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