A company is considered as a separate legal personality after its formation and registration. It has separate rights and liabilities that are independent from its members. However, there may arise scenarios where after form a company UK and start running it, the separate identity of the company gets ignore. This concept is known as “Piercing the corporate veil”. This articles elaborate two similar scenarios where the court may order for a lift of the corporate veil.
Piercing the Corporate Veil (Fraud Company)
A situation where piercing the corporate veil may find its application is when the company formed is used for the purpose of carrying out any fraud. For instance, the company has been registered at companies registration office UK but for a purpose that is not merely running any business. For an elaboration the case study of Re Darby is presented in the text that follows:
An England company register named City of London Investment Corporation Ltd. was formed with having its registered office in Guernsey. The owners were Gyde and Darby and both had been subjected to numerous convictions. The company had initially seven shareholding members. An issuance of 11 pounds was done on a nominal capital of 100,000 pounds. All the profit of the company would be given to Darby and Gyde as they were the only directors of the company. The corporation later claimed to register in England another company, which had a nominal capital of 30,000 pounds and was named Welsh Slate Quarries Ltd. It was also claimed that a licence and a plant were sold to the company, which costed them 3500 pounds but were sold at a price of 18,000 pounds. Apparently, the corporation played the role of vendor and promoter only. And the fact that the profit would be received by Darby and Gyde was not disclosed. The Welsh company was unsuccessful and soon went into bankruptcy. The liquidator claimed against Darby earning the profit secretly due to promotions done by Darby. However, Darby counter claimed that the profit would be received by the corporation and not by him. However, Court overruled Darby’s objection.
Phillimore J Held:
- Darby and Gyde have been convicted for defrauding previously as well. The name of the registered company was just a means of concealing themselves and carrying out business.
- It is an assumption that every time both the convicted persons planned to start a business with a certain name and hid the fact that they were the true receivers of profit of the company, their objective was to carry out any fraud.
- They are being convicted as fraudulent because they ran the company themselves, conducted the transactions themselves and received the profit themselves but showed that the corporation having a position and standing and that differed from the two persons, actually did all that.
- After the registration of corporation, they with the intention of doing fraud, made an agreement for buying a negligible amount of interest of a Welsh slate quarry for a small price given in cash and some shares. Later the corporation claimed to auction the same interest to the Welsh Slate quarry by a great margin of profit.
- The claim states that the two men concealed the fact from the Welsh company that they were they vendors as well as promoters in reality. Moreover, the large profit gained was also hidden from the Welsh company.
- Now, they would have been allowed to hold the profit if they had disclosed this fact of gaining the profit at the right time. However, as this has not been done, they are liable to accountability for the profit made by them.
Inferences from the Case Study
- In another case, Aveling Barford Ltd., the utilisation of lifting the corporate veil was done to provide justice to a company whose asset-stripper was accused of defrauding the company.
- It may be possible in certain scenarios that court orders to freeze the assets of a company. It means that the assets cannot be then abandoned by the jurisdiction or seized. This may be done when the person who owns the assets is likely to get penalised for any action done by him and the court finds it quite probable that the assets would not be present at the time of fulfilling the liability. Another commonly given order by the court is the “Restraint Order”. It is given when the purpose is to disallow a person who has been accused of something, to make use of the assets that are to be seized as a liability. Such an order has been extended to the assets that may not be owned by the person under conviction but are owned by a company that is controlled by him, as in cases like International Credit and Investment Co. and Re H.
- In the case, The Law Society of England and Wales, a fraud was claimed and it also involved a solicitors’ company’s knowing receipt. The court did not opt for lifting the corporate veil because the payments done outside an account cannot have a beneficiary ultimately set up by the Law society.
Piercing the Corporate Veil (Violating a Provision of Contract)
The court may order for the lifting of corporate veil when it is evident that a violation of any obligation given by the contract has been done deliberately. For instance, a company is registered at companies registration office UK but done so to save the controller of the company from any rule or liability.
For further elaboration, consider the following case:
Gilford Motor Co Ltd
There were two defendants of the case. The first one was Mr. Horne who had once remained a director for management of the plaintiff company. When he signed an agreement with the company, it was mentioned in the agreement that after the termination of his job, Mr. Horne would not solicit the customers of plaintiff company. After his period of employment ended, he decided to establish a business of his own undermining the prices given by plaintiff. However, after getting advised by a legal person, he planned the formation of another company that had his wife and another employee as sole holders of shares. The business established by Mr. Horne was taken over by this newly formed company. Later the company solicited plaintiff company’s customers. It was held by Farewell J that agreement had been violated however he did not give any jurisdiction penalising the couple because he believed it to be contradicting the public policy. An appeal was made by the plaintiff and both the defendants were decreed against the fraud they did.
Farewell J Held:
- The company on defence, is solely controlled by Horne who is the defendant. There is no intervention made by Mrs. Horne in the administration of the company. The son holds a subordinate rank in the company. Whereas the second director of the company is merely an employee. As mentioned by a witness, all the transactions made by the company were controlled by the boss who in every case was Mr. Horne.
- Hence, there is no doubt in the fact given by the evidences that the company was a mere medium for Horne to run his business. The company has a separate legal identity from the defendant Horne. Yet it is quite evident that Mr. Horne had formed the company to save himself from committing the breach of provisions given by the agreement.
Lord Hanworth MR Held:
- I agree with the views given by Farewell J. It is quite satisfactory that the company was created to conceal the true dealings being made for the business of Mr. Horne. The aim was to allow Horne to conduct deals which otherwise would have been objected by plaintiff company.
- The plaintiff company demands an action to be taken against Horne under the 9th clause of the agreement because the company formed by Horne has acted as an agent to him and breached the agreement.
An injunction was given against the defendants which was in accordance with the 9th clause of the agreement.
Inferences from the Case Study
- A similar verdict was given in the case, Jones v Lipman. The defendant had signed a contract to auction a land to any plaintiff. However, later he transferred the land to a company especially made for the purpose to make the land out of the reach of a verdict for specific performance. The effective owner and controller of the company was the person himself. A specific performance was ordered by Russel J under the concept of piercing the corporate veil, against the defendant and the company owned by him.
- Upon the verdict given for Jones v Lipman, the views of Lord Cooke throw light upon an important point that the courts usually state the company is being treated as a fraud, which means that the corporate veil is lifted and the separate identity is ignored. This is a way to provide reasoning for holding the controlling individual of the company and the company liable to certain restrictions. The separate legal personality of a company is subjected to disregard.
- In the cases discussed, that are Gilford Motor Co. Ltd and Jones v Lipman, the companies who were subjected to lifting the corporate veil had been established for the sole purpose of violating any provision of the agreements signed by the controlling individuals of the companies. In the case Adams v Cape, the same point was highlighted. It was stated by the court in this case that where ever there is an allegation of sham, the perpetrator may have a materialistic goal. Referring companies as sham has become a common practice in such cases.
- In the case of Gencor ACP Ltd. a public firm’s director had via unfair means transferred the property from this company to another company that was under his control. An order was given against the company and the director that the benefits gained by them should be released. Another case of Trustor AB gave a similar verdict. Sir Andrew Morritt V-C stated that it may not be fine to lift the corporate veil for the mere reason of involvement of the company in any misconduct. But it is important to lift the veil whenever the company is used as a veil to conceal the realities and liabilities of the persons responsible for it.
- Another case is the case of Acatos & Hutcheson, where a company, A Ltd, held 30% shares of the company A & H. According to a rule given by Trevor v Whitworth, it was not permissible for a company to be an owner of shares in itself. However, the rule has changed now but at that time, Lightman J held that the A & H could gain those shares by purchasing them. However, he also stated that he would have opted for piercing the corporate veil by declaring the transaction illegitimate if it was evident that A Ltd had been deliberately formed by A & H to violate the rule in Trevor v Whitworth.
- The Court may not order for lifting the corporate veil in a way that a non-party is obliged to sign an agreement having terms that have not been assented upon by it.
To form a company UK, it is important to have fair goals, because at some point in time false and unfair objectives may lead the company to devastation. All the above mentioned cases depict that the unfair use of a business name registration UK may not be concealed so easily.