Piercing the Corporate Veil: Grounds and Case Law in English Company Law

In Adams v Cape Industries plc [1990], Slade LJ provided the most authoritative statement of the grounds upon which a court can disregard a company's autonomous existence.1 His Lordship identified two grounds upon which the court can ‘pierce the corporate veil’. The two grounds that will be considered in further posts are ‘sham and facade’ and ‘agency’ grounds.2

The common ground on which a court is permitted to neglect a company's separate legal personality is explained as the ‘sham or facade’ ground. These exceptions have been generally categorized as ‘sham’ companies, where the courts will pierce the corporate veil if it can be demonstrated that the company is merely a ‘sham or facade’ created by its incorporator to apply unlawful conduct.3 By rationalizing these exceptions under the ‘sham and facade’ ground, the courts have attempted to maintain a balance between preserving the dignity of corporations and preventing the misuse of these.4

In this ground, the exception applies in a situation when a company is used as nothing more than a factitious instrument by an existing incorporated or unincorporated trader to hide themselves from their pre-existing liabilities under contract.5 With regard to Gilford Motor Co v Horne, the defendant established a company to circumvent the effect of a restrictive covenant that prohibited him from soliciting customers from his former employers.6 In accordance with this, the Court of Appeal approved the plaintiff's claim that the company in question was a sham or a mere facade, and therefore disregarded the corporate veil. Consequently, they granted the plaintiff an injunction that would be effective not only against the defendant but also against the company that was intended to breach the covenant.7

Following the precedent applied by the Court of Appeal in Gilford, the court held a similar decision regarding Jones v Lipman, where the defendant attempted to avoid transferring land to the plaintiff, after the agreement, by transferring ownership of the property to a company he had set up.8 Presided over by Russell J, the court refused to recognize the corporate veil and instead ordered both the defendant and the company to fulfill their contractual obligations through specific performance.9

References

  1. Adams v Cape Industries plc [1990] Ch 433
  2. Marc Moore ‘"A temple built on faulty foundations": piercing the corporate veil and the legacy of Salomon v Salomon’ J.B.L.180-203 (March, 2006), accessed 13 May 2023
  3. Rian Matthews, “Clarification of the doctrine of piercing the corporate veil’ J.I.B.28(12). 516-520 ( 2013), accessed 21 May 2023
  4. Charles Wild, Stuart Weinstein, ‘Smith & Keenan’s Company Law’ (Pearson 2019, 18th edn) p.78
  5. Rian Matthews, “Clarification of the doctrine of piercing the corporate veil’ J.I.B.28(12). 516-520 (2013), accessed 21 May 2023
  6. Gilford Motor Co Ltd v Horne [1933] Ch 935
  7. ibid
  8. ibid