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Hiding Behind the Corporate Veil

Hiding Behind the Corporate Veil

One of the cornerstones of UK company law is that companies have separate legal existence from their owners (shareholders), directors or employees. Although the company cannot physically sign contracts or take a loan from the bank, its directors enter into various contractual and other obligations on a daily basis on the company’s behalf. They act as agents of the company. But, it is solely the company which is liable for its debts and responsible for its various obligations. The company’s – not the shareholders’ – assets are then pursued in case of debts or defaults, and the company, not the shareholders will be sued in court in case of breach of contract.

In other words, the owners are protected behind the ‘corporate veil,’ which creates a shield between them and the company they own. To lift this veil means to allow shareholders to be made responsible for the actions of the company or make their assets vulnerable despite the protections given to them by the fact of their distinct legal personality. The ‘lifting’ or ‘piercing’ of the corporate veil is a very rare event in UK courts, but it is important to understand the circumstances in which it would be justified to disregard this principle.

A straightforward example of this is where someone signs a contract not to compete with their company after leaving it for some time. If this person then sets up a company which competes with the former company, technically it would be the new company and not the individual competing. However, the court is likely to conclude that that the old company can sue the individual for breach of contract since the incorporation into a company will be seen as just a façade for the person’s activities. So, in such a case, the individual will not be able to hide behind the corporate veil. Indeed, according to a 1990 case at the Court of Appeal, Adams v Cape Industries plc, the corporate veil will not protect the owners when a company has been set up fraudulently, or where it is created to avoid an existing obligation.

Another landmark case on the ‘corporate veil’ is Petrodel Resources Ltd v Prest [2013]. The decision of UK’s Supreme Court in this case confirmed that a court could disregard a company’s independent legal personality but that this would only be justified in very limited situations, and specifically where there were no other means of achieving justice. In this divorce case, the ex-husband’s group of companies were ordered to transfer a number of UK properties to the ex-wife to satisfy the ex-husband’s debt to her. The corporate veil did not protect the ex-husband’s assets, which were held ‘on trust’ by his companies.

The significance of the corporate veil is not limited to family related cases. If we look at the financial crisis of 2008, the term ‘corporate veil’ becomes particularly important. Numerous companies collapsed, however their directors and shareholders were rarely implicated or pursued. Even more recently, the case of the British Home Store’s (BHS) collapse raised a question of whether the corporate veil should be lifted more readily by the courts to prevent socialised losses and to recover the public’s confidence in the capitalist system. So, although corporate veil has obvious legal and economic implications, its ethical basis is equally thought-provoking and should be analysed alongside other factors.

References

Davis, David, 2016. Philip Green, the king of shops and the dark side of capitalism. Financial Times. [Online] Available at: https://www.ft.com/content/36b04f7c-0be1-11e6-b0f1-61f222853ff3. Accessed: 2 May 2017.

Garvey, Sarah, 2013. Supreme Court issues guidance on "Piercing the corporate veil". Allen & Overy publications. [Online] http://www.allenovery.com/publications/en-gb/Pages/SUPREME-COURT-ISSUES-GUIDANCE-ON-PIERCING-THE-CORPORATE-VEIL.aspx. Accessed: 2 May 2017.

Lawton, Jill, 2017. Lifting the Corporate Veil. CWJ Business Services[Online] http://www.cwj.co.uk/site/businessservices/commerciallitigation/corporate_veil.html. Accessed: 2 May 2017.

This article was written by Karina Kizhner