Companies may under British company register work as groups. After a limited company formation UK, the company has to give limited liabilities to its members. It means that the members are free from any obligation of satisfying the creditors at the time of liquidation.
The Debate between Separate Legal Personality & Lifting of the Corporate Veil
A company having a limited liability whether in the form of bounded guarantee or in the form bounded shares, may be subjected to different principles. A debate has remained a part of history in UK case laws that, can the separate legal personality of a company be ignored and the members held responsible to a greater extent than the statute permits for them? Many cases have given rise to different possible answers to the question. The most basic and strict in its principle is the Salomon case. It strictly forbids lifting of the corporate veil. Whereas cases like Re Darby, Gilford Motor, Trebanog Working Men’s club, Re FG etc. provide the different aspects by which the problem can be viewed. The DHN case utterly supports the lift of the corporate veil by treating the companies in a group as a single unit. As a counter case to DHN, Adams V Cape is presented in this article.
Separate Legal Personality under the light of Verdict of Adams v Cape
A leading case among the UK case laws is Adams v Cape. It deals with the separate legal personality of a company and the limitations of the concept of lifting the corporate veil. This article discusses the case study of Cape, to give a better understanding of the scenarios when the veil cannot be lifted.
Adams v Cape
The company was English and had a UK plc company formation. Moreover, it was the leader of a group that was constituted of many companies completely owned by the English company. These companies were subsidiaries to the English company. The subsidiary companies would mine asbestos somewhere in South Africa and then the mined asbestos was sold by different other subsidiary companies to different countries. These countries included United States. Due to the dust of asbestos, people had to suffer injuries and hence many lawsuits against it were brought in the court of Texas. The lawsuit was brought against one of the subsidiaries of Cape, named NAAC. It had its basis in Illinois. However, the Court of Appeal refused to hold Cape responsible for the damage by treating it as a separate legal identity. As Cape had not opted for offshore company formation UK but rather contracted with a subsidiary company for the same purpose. The Court of Appeal rejected the three following arguments:
- As in DHN, Cape and its subsidiary companies should be considered a single body.
- The purpose for working with subsidiaries was to use them as a sham to hide some realities.
- There was a presence of the Agency relationship between the parent company, Cape and the subsidiary, NAAC as if it was an offshore company formation UK of Cape.
The text that follows contains the judgement passed by the Court of Appeal.
Slade LJ held:
Regarding the first argument about the Single Identity of Parent and Subsidiaries:
- This is not a compulsion to consider all the companies working in a group as a single unit in every situation. There is no such rule generally. However, when it comes to separate legal identity, it is a fundamental law to accept every company working in a group as a separate personality under law and possesses legal rights and responsibilities that are separate as well, as stated by Roskill LJ in The Abazero.
- Hence, there is no need left to prove that Cape, NAAC, CPC and Capasco are separate legal identities under law.
- It was never submitted by Mr. Morison that the relationship of holding-subsidiary company between Cape and NAAC led to the presence of Cape or Capasco in Illinois. However, it was admitted by him that whenever it seemed appropriate to the court it may treat all the companies working in a group as one body. It may do this whenever it becomes a requirement of the justice. Hence this statement of Mr. Morison gave many authorities to the court.
- Mr. Morison also assented that when it is to be decided whether a company had presented itself to get subjected to the verdicts given by courts of foreign countries, the situation should be referred as a commercial reality. Because, the companies who intend to work internationally, have to face the risk of lawsuit in foreign courts.
- Mr. Morison’s views can be sympathised because there is a difference between a company that trades in foreign countries on its own and a company that does the trade via its subsidiary company that is fully under the control of its parent company and this difference is slender for a layman.
- The fact that in cases like Holdsworth, Revlon, Scottish Cooperative and Commercial Solvents, certain statute’s wordings has been interpreted as such to provide a justification for the treatment of parent and subsidiary company as a single body in some scenarios. Even the judgement given for DHN case had some parts in it that were relevant to the rulings given by the statue for the compensation. However, the House of Lords was doubtful about the decision given for DHN in the case of Woolfson.
- These cases have been generally defined by Mr. Morison as situations where the technical legalities brought some sort of injustice to the members of the company. Such technical legalities should be prevented. According to Sir Godfray, even in scenarios where the wordings of a statute demand justice, the principle mentioned in Salomon should not be ignored.
- The law identifies the formation of the companies that are subsidiaries to any parent company. Although, in one perspective, the subsidiaries are the creatures of parent companies, they will be treated by the law generally, as separate legal bodies and their rights and liabilities will be recognised as separate.
- The court must lead an inspection about the relation between the holding and the subsidiary companies, whenever it has to decide about the presence of a company in any foreign country via its subsidiary, which is present in that country as well.
- Once the inspection about the relationship has been done, the inspection provides relevant information to determine whether the subsidiary company was having an agency relationship with the parent company. And what were the conditions if there was any existence of such a relation.
- However, it cannot be presumed that there is an existence of an agency relationship between a holding company and its subsidiary and that the subsidiary company is alter ego of its holding company.
- In a court below, the judge gave refusal to assume that Cape and NAAC had signed an agreement of agency relationship just like one that existed amidst Capasco and Cape. This appeal is not being used to question that refusal.
- A company has the allowance to make such an arrangement of its subsidiary companies that the business run by the subsidiary in any foreign company is termed to belong to the subsidiary and not to the parent company. In any class of case it is not openly allowed to the court to ignore the isolated legal identity of a company as depicted by the Salomon Principle just for the reason that the court feels not to treat the company as a separate legal personality.
It was concluded that despite the fact that Cape was authorised to control the general policies of NAAC, yet it did not have any interference and control over the daily routine running of NAAC, hence the proposition of treating Cape and NAAC as a single legal body was declined.
Slade LJ held regarding the second argument of Lifting the corporate veil:
- In the case of Woolfson, Lord Keith of Kinkel stated in reference to the ruling given for the DHN case that:
- There are doubts regarding whether the decision given for DHN by the Court of Appeal, was made after properly applying the principle that states piercing the corporate veil is correct if there is an existence of evidences indicating an exceptional situation where the company is only a sham created to hide certain realities.
- According to Mr. Morison, a court is allowed to pierce the corporate veil if a person forms a corporate structure or uses it to violate any of the following:
- Any provision that restricts his action under law.
- Any rights that the third parties may own against any conduct of that person.
- Any rights that may not exist in present but are to be gained by the third parties in future against any action of that person.
- Even if an assumption is made about the first and the second arguments that they are sufficient as reasons for bringing an action via piercing the corporate veil, none of the situations mentioned in these arguments can be found in the case under consideration.
- Any arrangements made in the present case neither involve any illegal action nor is there any intention found behind the arrangements for taking away the legal rights of anyone.
- Irrespective of the ambiguity that such an arrangement should be approved morally or not, the arrangements made by Cape to run its business in a foreign country and gain minimum attention towards its indulgence in the auction of Cape asbestos in the States, whether via subsidiary or on its own, were legal.
- As far as the third condition is concerned, it is unacceptable that a court is allowed to pierce the veil of corporate against the company under allegation and a part of any corporate group when the court feels that the use of the corporate body has been done as such for the purpose of securing the company at defense from any liability that may be applicable upon any action that has to be taken in future by the corporate group by making sure that the liability falls upon any member of the corporate group other than the defendant company.
- Such a utilisation of corporate structure comes in inheritance of the law of corporate.
- Mr. Morison stressed on the point that Cape intended to relish all the benefits from the United States of America due to the trade on asbestos but wanted to remain secure from the risks of any liability. Even it was the intention of Cape, it has the right under law to conduct its business in such a manner.
- Hence, the principle of Salomon will be implementable.
The court declined the argument of lifting the corporate veil.
Slade LJ held regarding the third argument given by the appellant of Relationship of Agency between the company and its subsidiary:
- We believe that the subsidiary company, that is in this case the NAAC, should be treated as a separate legal person for any purpose that is relevant.
- After considering all the evidences, it becomes clear that the judgement given in the first place that the business run by NAAC solely belonged to NAAC was correct.
The case of the company Cape, having a UK plc company formation depicts the implementation of Salomon principle on a public limited company. It further suggests that the companies working in a group should be recognised as separate legal identities contradicting the verdict of DHN.