Key Consequences of Corporate Status

1) Separate Legal Personality from members

2) Limited & Unlimited Liability

3) Common law & statutory rights & duties of company & its officers – person in its own right

4) Co enjoys contractual capacity & can acquire rights & liabilities & properties on its own behalf

5) Co may be sued & can sue in its own name – rather than suing members individually

6) The ownership-management divide – management of the co by the directors on behalf of the shareholders – directors manage & take risks on behalf of the shareholders

7) Perpetual succession – the company continues in existence until formally wound up

8) Corporation tax – favourable rate

A company acquires corporate status by incorporation by registration with the CRO where the registrar is satisfied all documents are in order & the association is lawful: the certificate of incorporation is a birth cert of the co, evidencing the existence of the co & serves as conclusive proof all requirements of CA are complied with. Otherwise the co’s foundation would be built on sand rather than rock & there would be potential for their corporate status to be rendered void, with disastrous consequences for third parties. This prevents inquiry into matters prior to & contemporaneous with registration & appears to oust the jurisdiction of the courts.

The Veil of Incorporation Principle

Separate Legal Personality

A corporation is more than a mere aggregation of its individual units: it constitutes a juristic or legal person with a legal identity separate & distinct from that of its individual members. While it is a metaphysical person, only ultimately capable of acting through other persons, they are artificial entities or “abstractions of law” yet this is something of a misnomer as in law, they are no more artificial than natural persons.

Salomon v Salomon: sole trader operating prosperously as boot manufacturer for 30 years set up registered co owned by him & was de facto one man co: he was the principal shareholder & principal creditor of the new co: when the co went into liquidation, he sought to recover his debenture debt, which would leave unsecured trade creditors with nothing. COA held he abused the privileges of incorporation which were intended only for bona fide shareholders who were not the mere puppets of an individual who adopted the machinery of incorporation to carry on his old business as before. He was liable to indemnify the co against its liabilities in full as a constructive trustee of the co. HOL unanimously reversed: Held the co was validly incorporated & capable of exercising all the functions of an incorporated co & Lord Macnaghten failed to understand how a corporate body who attains maturity on its birth could lose its individuality by issuing the bulk of capital to one person. “Either the co was a legal entity or it was not. If it was, the business belonged to it & not to Mr Salomon. The co is at law a different person altogether from the subscribers to the memo & although it may be that after incorporation the business is precisely the same as it was before, the same persons are managers & the same hands receive the profits, the co is not at law the agent or a trustee for them. the motive of the shareholders was not a field of inquiry which the statute regarded as legitimate. Priority was given to Salomon’s debentures. Seminal case of co law, the bedrock upon which this corpus of law is founded: has a degree of authority been accorded to this decision which it doesn’t warrant given its heavy reliance on (now redundant) statutory provisions? Once statutory formalities are complied with, a whole new entity comes into being at law. Co is distinct from shareholders – distinct tenet of co law of separate legal personality - debts of the company are not the same as the debts of the members. Seems a co may limit liability to an amount which is invested in the co & protect this investment by subscribing for secured debentures rather than shares to rank in priority to unsecured creditors or later debenture holders. The decision has been criticised on the basis that it was calamitous, the court failing to see through the rigidities of the folklore of corporate entity in favour of the legitimate interests of the co’s creditors. Principles generally applied assiduously. Salomon entrenched the principle that shareholders may entirely insulate their own financial positions from that of their co, in that they themselves are not in jeopardy of being bankrupted if the co is wound up without being able to pay its debts. Principle: Where a company exists by virtue of legal incorporation, properly administered, that company will be regarded as an autonomous legal person in its own right, capable itself of owning property and bearing rights and obligations, and existing independently and distinct both from its original incorporators and the controlling mind(s) who may at any time be operating the company's business. Held SLP should prevail regardless of any economic or moral considerations that might otherwise justify regarding a registered company as the mere extension of its de facto incorporators or controllers.

Moore: thoroughly literal and, consequently, permissive interpretation of the incorporation requirements & sanctioned the use by a sole trader of a shrewd and opportunist arrangement that enabled him not only to immunise himself from personal liability towards his creditors, but also to “trump” them on the winding up Forde & Kennedy argue that it would not be difficult to distinguish Salomon: it may be argued public policy supporting limited liability must be reconciled with, if not forced subordinate to, the broad principle that those who, through no fault of their own, suffer damage as a result of anothers fault ought not to go uncompensated. Perhaps the economic & social goals that limited liability are intended to achieve may not be unduly compromised by allowing recourse against shareholders who in any event stand to benefit from the cos risky activities.

Consequences of the Veil of Incorporation

Macaura v Northern Assurance Co: co property was destroyed by fire & held a shareholder couldn’t recover on an insurance policy taken out inadvertently in his name: no shareholder, held Lord Buckmaster, has any right to any item of property owned by the co, for he has no legal nor equitable interest therein & so has no insurable interest in the property. The shareholder is not the corporation! As a separate legal person, a co owns property in its own right & a shareholder doesn’t, by mere virtue of his shareholding, enjoy any proprietary interest in the co’s assets. It is the shares, not the co assets, in which the shareholder has any legal or equitable interest. Clearly legal segregation not invariably a boon to shareholders!

Roundabout v Beirne: staff co all joined union, so the co was closed & a picket placed on the premises. The controllers of the co formed a second co & leased the property from the first co with non-union workers as scabs. Since they had no employees, they weren’t an employer & couldnt be subject of trade dispute: co sought injunction against union to restrain picketers on the basis the business was conducted by a different legal person to that with which the ex-employees had a trade dispute: Dixon J held the two cos were distinct & proceeded on the basis that a new & distinct legal person is now in occupation of the premises & carrying on business, though he had sympathy with the contrary view, he said it lacked in evidence of it being the sole or primary purpose. Thus separate legal personality may be relied upon to avoid obligations which would otherwise fall on controlling shareholders. Seems spurious & clear this was a sham transaction entered to extinguish the original trade dispute

Lee v Lee’s Air Farming: gaining separate legal personality may alter relations between the enterprise & the world at large including the co/controller relationship. A sole trader who incorporates his business may find himself to be an employee of the legal person he has created with all the statutory protection that affords. Lee owned all beneficial shares in co & was sole governing director employed as a salaried pilot. Held they were legal persons separate & he could enter a contract of service with it even though the duality of roles could lead to Lee as governing director giving orders to himself as employee. Held the question was whether the employer possesses a right of control & following Salomon, it was held one person may function in dual capacities. His broad power didn’t alter that he was distinct from the co. It follows that a controlling shareholder may maintain an action against the co where a winding up of the co would cause a breach of service contract shareholder & co, & wouldn’t be precluded by the fact the shareholder had voted in favour of the winding up.

Battle v Irish Art Promotion Centre:

Gresham’s Industries Ltd (in liq) v Cannon:

State (McInerney) v DCC: Applicant (parent) co bought land though conveyed it to the subsidiary: the applicant was refused planning permission & sought to challenge this though only the owner of the land could under statute challenge the decision. DCC argued locus standi. Carroll J refused to regard them as one body for instant purposes as the court will not set aside a segregation at the request of a co which takes legal & fiscal advantage of distinct corporate structures, she said ‘the corporate veil is not a device to be raised or lowered at the option of the parent company or group. The arm which lifts the corporate veil must always be that of justice.’

Neufield v Secretary of State for BERR: CA was deciding two appeals concerning whether a controlling shareholder and director could be an employee in relation to redundancy legislation. COA Rimer J expressed disquiet at the conceptual level of classifying them as an employee as you need a level of control in the employment relationship, but he followed Lee - affirmation of separate legal personality.

Judicial Attitudes to Piercing the Veil of Incorporation

Examining Human Behaviour behind a Company

The separate legal personality of a co may be disregarded though metaphorical language (of lifting the cloak or shell or veil of incorporation or the puppet or alter ego) is unhelpful as it obscures & give the impression that regard may never be had to the identity of those who control a co. Salomon recognises the possibility of departure from its principle where there was fraud or agency or the co was a fiction. Courtney argues the courts have failed in a systematic manner to identify the additional factors permitting the disregard of separate legal personality of a co, which failure has produced an unprincipled jurisprudence with each case treated ad hoc according to convenience. There has of late been a concerted effort to restate the significance of the Salomon principle & restore principle. Does the doctrine provide a forum to favour form over substance? Courtney is apt to call for definite rules to be posited by the legislature. The true principles of Salomon will be reflected by the abandonment of the ‘justice of the case’ criterion, as there is nothing in the case to suggest such a special rule. Ordinary principles of contract, agency & trusts should be applied when inferring the existence of a connecting relationship & it is unsatisfactory to suggest a co may be regarded as the agent of its members simply because injustice may otherwise be done. Where SLP is disregarded, the focus shifts to the day-to-day controllers of the co who will most likely be identified with the co. While SLP is not easily disregarded, persons are free to assume (sometimes unwittingly) the rights & responsibilities of others through contract, tort, agency & trusts. For instance, SLP is easily circumvented by agreement (many lenders insist on director-members of smaller cos to give personal guarantees in respect of the co’s debts – member liable for co’s obligations!)

Marc Moore argues the circumstances in which the principle of SLP will be disregarded is uncertain & the courts have adopted a generally laissez faire approach towards determining the legality of attempts by traders to exploit the legal machinery of separate corporate personality, in conjunction with members' limited liability, in order to mitigate their personal liability towards creditors. The reluctance of the English courts to strike out opportunist uses of the corporate veil is understandable from a practical perspective, insofar as a permissive approach is necessary to preserve Salomon. The sham exception to Salomon is a complex trade-off between legal certainty and moral propriety. Moore proposes a “genuine ultimate purpose” rule as derivable from case law & practically workable, as well as normatively defensible. It is difficult to start to rationalise the exception-cases except under the broad, rather question-begging heading of policy”. There is a need to protect against economically harmful or morally reprehensible abuses of the corporate form by traders.

Indeed, the absence of an express and appreciable doctrinal link between this line of authorities and Salomon casts doubt upon the validity of the “sham” exception to Salomon because in that case, it was said the legal incorporation of the co couldn’t be disputed ex post facto.

Ottolenghi: Jungle of judgments on lifting the veil disclose no unifying principle & “piercing the veil” may refer to different things: peeping behind the veil (examine characteristics of the co like residence, control, composition type – doesn’t lead to personal liability of shareholder), penetrating the veil (imposes on shareholders responsibility for the co acts or establishes direct interest of shareholder in co assets – agency is a means of penetrating the veil – by peeping behind the veil & controlling the true relationship between the shareholder & the co, the veil is penetrated by creating an agency relationship to make the controlling shareholder responsible for the acts of the co), extending the veil (veil is lifted & drawn over a number of cos, like single economic entity), ignoring the veil (co founded as sham to defraud creditors or laws). Ottolenghi argues that the final category of ignoring the veil goes too far & removes the co from the scope of the law as it cannot then be the subject of an order & can occasion injustice on third parties who would be better served by having the relevant act nullified. Courts are less reluctant to pierce the veil when dealing with a group of cos rather than with one co. He argues that beside a careful examination of the facts, the court should also consider the type of co, the motives for its formation, the type of legal action, the identity of he seeking to pierce the veil,

Residence for Tax Purposes

S2 Finance Act 1999: a company is tax resident in the state in which it is incorporated. The court may look behind (& regularly does) the SLP of the co in order to attribute to it a human characteristic, like residence, required by law & in doing so, doesn’t ignore SLP but examines the background.

De Beers Consolidated Minds v Howe: test for determining actual residence: Lord Loreburn in HOL rejected that a co resides where it is registered & nowhere else: in a natural sense, it resides nowhere so an artificial test is called for: a co canont eat or sleep but can keep house & do business & we ought to see where it really keeps house & does business: majority of directors resided in England where the directors meetings were held & all important co business was decided: As it was controlled from England, it was held to reside there. The location of the company’s central management and control would determine its residence for tax purposes - where the head and brains of the company reside

The King (Cottingham) v Justices of Cork: licensing statute required applicant to be of good character: where a co is that applicant, the character will be found in the agents & controllers. Could a beer dealers licence be granted to a brewing co? Held the co was of good character & business had been conducted peaceably – held co can by others act & through others do acts which in the case of a natural person would affect conscience and be the foundation of that reputation which the law knows as character. The conduct of the authorised agents of a co is its conduct. Why should that conduct not give rise to a reputation as to its character? Seems SLP may be disregarded by looking at its controlling members in order to characterise it (here, to attribute to it a characteristic like residence) which compromises separateness though doesn’t ignore the legal existence of the co. Courtney points out that separate legal personality may be disregarded without ignoring the fact that the co still exists as a legal person: the separateness is compromised by identifying the co with its members.

John Hood v Magee: co held to be controlled by shareholders in general meeting: resident where general meetings took palce & the registered office is situated (Belfast) rather than NY where MD resided. Madden J held the place is “where the central mgmt & control actually abides”

Companies Formed or Utilised for Fraudulent or Improper Purposes

The court will disregard SLP upon misuse of the corporate form, eg use of the corporate personality as a cloak to conceal impropriety. Fraud is used in a broad equitable sense of impropriety or misconduct

Re Bugle Press Ltd: use of co as device to expropriate minority was struck down by court as hollow sham: attempt to abuse fundamental principle that minority of shareholders couldnt expropriate minority: formed a co, make takeover bid to enable them compulsorily acquire shareholding of minority shareholder (permitted by legislation where 90% agreed to external buyout) – Harman LJ disregarded SLP of the new co, saying it was “nothing more than a little hut built around the majority shareholders” – misuse of statutory takeover rules! Not genuine takeover bid!

Re Shrinkpak Ltd: liquidation of one co & subsequent establishment of another co choreographed to deliberately defraud creditors of the liquidated co

Creasey v Breachwood Motor Ltd: court will be justified in disregarding the corporate veil “so as to achieve justice between the parties”: dismissed general manager who commenced wrongful dismissal proceedings: co ceased trading & transferred all assets to a new co: Held the takeover of the new co was carried out in total disregard of directorial duties so SLP was disregarded & judgment could be enforced against the new co. Public policy issues! This is the case from which the “justice of the case” exception has its origins. Courtney argues however that the facts didn’t justify finding it to be a facade concealing the facts: by transferring assets they produced a stronger balance sheet in the members interest – no reliance by judge on any fraudulent motives or evasion of legal obligations – no liability imposed on directors but new co substituted as defendant for old one

DCC v Elton Homes Ltd Where the controllers of a co are guilty only of mismanagement, the court will not disregard SLP so as to make them personally liable for the co obligations: The co had planning permission but went into liquidation before the development was completed. The council sought to compel the directors of the company to complete the works. Barrington J refused to lift the veil to require the directors to complete the work at their own expense. He distinguished between fraud and mismanagement. “If the case were one of fraud, or if the directors had siphoned off large sums of money out of the co, so as to leave it unable to fulfil its obligations, the court may be justified in lifting the veil of incorporation & fixing the directors with personal responsibility. Here, they are fairly small men who have failed in a particular enterprise & stand to lose heavily arising out of the transaction without suspicion of impropriety.” Gallagher argues the courts have the power to order enforcement of their judgments or orders against any party whom they think will ensure compliance with the order should they be named therein which was affirmed here where the orders were made against the co & the directors.

Dun Laoghaire Corporation v Park Hill Developments: were co & director indistinguishable? No AGM ever held: no formal directors meeting convened: no directors fees or dividends on shares paid to other director: no financial reports issued to shareholders: he was the only person with knowledge of the financial affairs of the co: in total control of the co & managed it without regard for the Companies Acts. Hamilton P observed that there was however, no fraud or misrepresentation, nor misapplication of funds or negligence nor any evidence of impropriety & consequently he traded with the benefit of limited liability. Courtney notes that any unpalatable consequences of this distinction are ameliorated by legislative provisions to protect creditors from abuse of corporate form through fraudulent or reckless trading.

Re H (Restraint Order: Realisable Property): SLP disregarded where co owners used co as facade to conceal criminal activities including fraud: permitted to treat co assets as the realisable property of the controllers

Avoidance of Legal Duty

Cummings v Stewart: court will disregard SLP where otherwise would allow controller to evade existing legal obligation: where Steward was unable to make profit from patents, in an attempt to evade his liability for royalties thereon, he transferred the licence to a limited co formed by him. Held he was liable for all arrears of royalties including those due for the period during which the licence was held by the co: Meredith MR held it was an engine for the destruction of legal obligations & the overthrow of legitimate & enforceable claims: co wasn’t formed to carry on business of plaintiff but to extinguish the patent rights for the purpose of refraining from carrying on any work connected with the patents of the plaintiff. MR was prepared to completely ignore corporate existence. Courtney argues this determination could have been justified without disregarding SLP as it was more a case of contractual interpretation.

Gilford Motor Company v Home: agreed he wouldn’t compete with former employers were he to leave his job & then proceeded to set up rival co in competition: was he in competition or the co in its own entity? Injunction restrained them carrying on the business in competition: HOL held the new co was formed for the purpose of enabling him under a cloak to engage in business in respect of which he had a fear that the plaintiffs might intervene & object. Company was a mere “cloak or sham”, the only purpose of which was to enable the defendant to continue to breach the terms of his restrictive covenant – issued injunction effective against both the defendant and his company. Moore has questioned the authority of this decision & claims it is confined to its own facts on the basis that the company law aspects were not decisive & were based on questionable authority, lacking any reference to Salomon & consequently their exception is more moral than legal based - concerned a narrow and definite set of facts. Ottolenghi argues this constitutes “extending” rather than piercing the corporate veil, as the co & the defendant were considered one enlarged legal entity.

Jones v Lipman: SLP ignored completely where co is erected merely as a sham or facade to defraud or avoid existing legal obligations. Contract to sell house but changed his mind & sought to avoid having to convey the house by acquiring a ready-made co whose object was the acquiring of land (in an attempt to put the land beyond the reach of an action for specific performance) & whose sole shareholder was the defendant: held the co was “the creature of the defendant, a device & a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity”. Co held bound by obligations of member. There have been no uniform criteria for determining sham & Courtney argues this outcome could have been reached by application of more conventional legal methods. Moore argues this decision was based heavily on Gilford, which was wrong & so the whole doctrinal basis of the sham exception is unsustainable: the court paid little more than dismissive reference to the Salomon judgment, undoubtedly ignoring the effect that this decision might have on their ability to disregard the legal boundary between independently registered companies with the ease and for the reasons that they did. Consequently, the doctrine that later became known by the courts as the “sham” exception to the principle in Salomon had, within just over a decade of the decision in Salomon, taken on its own autonomous trajectory of development, existing independently of and without either reference to or respect for the significance of the Salomon judgment itself.

Adams v Cape Industries: Held the court is not generally free to disregard separate legal personality on the vague & elusive “justice of the case” criterion, but only where

1. the co is a mere facade (corporator uses a company as nothing more than an artificial device for the purpose of “shielding” themselves from their pre-existing liabilities – the more promising avenue), or;

2. the co is an authorised agent of its members. (autonomous identity of a company will be disregarded on this basis only in the exceptional case where a subsidiary is totally and utterly under the control of its parent to the extent that the subsidiary cannot be said to be carrying on its own business in distinction from its parent – v narrow exception)

Held the court will not lift the corporate veil on the ground that a company is seeking to avoid its legal duty where the company arranges its corporate structure so as to ensure that the effect of prospective or future legal liabilities falls not on one company but on another company within that group. It stated that “… the right to use a corporate structure in this manner is inherent in our corporate law”: co involved in settlements for injuries to employees & established new co – while it wasn’t a subsidiary it was instructed by it from time to time – (judgment could only be enforced under US law against the co regarded as carrying on business in the US: could US subsidiaries of an English parent group be considered as carrying on business in the US): Held the new co was established with a view to minimising the appearance of the cos involvement in the sale of asbestos in America & with a view to lawfully reducing the possibility of the co being made liable for US tax or future tort cases. However, held it was an independent corporation wholly owned by its executive & carrying on its own business: Held “court not entitled to lift corporate veil merely because corporate structure is used so as to ensure that legal liability in respect of future activities of the group will fall on another member of the group rather than the def co: whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law.” COA declined to find the US subsidiaries were purely a sham as they had legitimate activities in their own right

Moore argues that by favouring concrete doctrinal principles over potentially subversive considerations of “fairness” or “policy”, the court guarded against the likely floodgates problem consequent upon the “moralisation” of the issue of piercing the veil. This certainty, however, may have been won at the expense of failing to develop a more sophisticated system of norms to govern this area that might have better succeeded in reflecting socially accepted standards of commercial morality: success or failure of a wronged plaintiff hinging upon the arbitrary, mechanical and morally dubious test as to whether the defendant's conduct can be characterised as sham. He notes the lack of any coherent line of argumentation linking the “sham” ground for piercing the corporate veil (as affirmed in Adams ) to Salomon v Salomon. He argues the particular grounds for piercing the veil that Slade L.J. enunciated in Adams do not provide a true reflection of the complex line of jurisprudence that the courts have developed in this area over time. Indeed, the case for neglecting any doubts raised as to the doctrinal validity of the “sham” exception to Salomon are particularly strong in view of the fact that it is arguably the only concrete common law exception to Salomon and should therefore be preserved, if only for the insurmountable practical difficulties (not to mention palpable injustice) that might result if courts were to follow the principle in Salomon through to its logical conclusion in every conceivable case. Yet the present law allows SLP to be disregarded by a court only in a narrow and arbitrarily defined range of cases, is doctrinally unsustainable. There is a need for a wider ambit of possible cases in which the separate legal personality of a company may be disregarded so as to expose opportunist usages of the corporate veil by individual or corporate traders. The “true” meaning of a sham company, as established in the real foundational authorities on this point, and not the arbitrary selection of authorities that the courts of the late 20th century have used to establish the doctrine of the sham company in its existing format, applies to past & future obligations. The law must mirror the established standards of fair dealing and commercial morality upon which the English system of company law has been constructed. By reconstructing the common law test for piercing the veil on the basis of its neglected doctrinal origins, the English courts might better equip the doctrine for processing “hard” cases such as Creasey v Breachwood Motors, where the conduct complained of, whilst not amounting to use of the corporate form either fraudulently or as a mere sham, certainly served to deprive a plaintiff of what were, for all intents and purposes, his legitimate expectations based on contractual entitlement. Nevertheless, whilst a policy-based, case-specific approach towards determining the legality of any particular usage of the corporate veil might represent the only satisfactory guarantee of justice for aggrieved plaintiffs, the judicial task of establishing an acceptable and functional framework of substantive norms to govern such a system would be a challenge of Herculean proportion. In any event, “opening up” the common law corporate veil test to policy considerations would be plainly inconsistent with the “letter of the law” approach advocated unequivocally by the House of Lords in Salomon. In a case where the legal validity of the corporate veil is called into question, a court will be justified in disregarding the formally separate legal personality of that company where the “head and brains” or controlling mind behind its strategic operations is situated within its individual or parent owner. Meanwhile, the Gilford authority can be taken as a general rule to the effect that a company's separate legal existence may be ignored where the corporate form exists as nothing more than a façade to hide an otherwise improper business arrangement.

The application of this in Ireland was questioned in Fyffes

Imputation of Agency Relationship to Group Companies

Company is not per se to be treated as the agent or trustee of its members, there is no objection to a co agreeing to act as agent or trustee of its members. An agent has authority to do acts affecting the legal position of the principal & his acts on behalf of the principal are considered those of the principal himself. SLP is circumvented where member is a principal of the co (as agent); the alter-ego principle is usually used as a matter of avoiding injustice; it may be argued that subsidiaries are being directed by the parent as mere puppets & lack real autonomy.

Smith, Stone & Knight v Birmingham Corporation: subsidiary carried out business on plaintiffs land & the plaintiff beneficially owned the subsidiary & treated it as a mere department of the plaintiffs co & the plaintiff was entitled to all its profits. Had access to plaintiffs books: Atkinson J accepted subsidiary to be carrying on business as agent to the plaintiff co: Atkinson J posited criteria to determine whether an agency relationship exists & answered all 6 in the affirmative in this case.

(i) Are the profits of the subsidiary treated as the profits of the parent?

(ii) Were those conducting subsidiary business appointed by parent/holding co?

(iii) Was parent head & brains of trading venture?

(iv) Did parent govern venture?

(v) Were subsidiary co profits made by skill & direction of parent?

(vi) Was parent in effective & constant control of subsidiary?

In that case the subsidiary of the plaintiff company was treated as a department and the plaintiff was entitled to all of the profits of the subsidiary without the declaration of a dividend. The plaintiff succeeded in its application for compensation when the defendant compulsorily acquired the land on which the subsidiary was located on the basis that the subsidiary had acted as its agent at all times and so should not be regarded as a separate legal entity from it. Atkinson J noted that there was nothing in the circumstances to prevent the claimants at any moment deciding to carry on the business in its own name. Courtney argues that if these criteria, which centre on the concept of control of the subsidiary’s day to day operations, are applied to each case in which the day to day co affairs are controlled by a member, a significant number of cos may be regarded as agents of their members. The disregard of SLP would become the rule rather than the exception. The pragmatic criteria may be thought to be rather fact specific, as suggested by Keane, who considers the factors to be overly-amenable to the imputation of agency.

Moore: Given the extraordinary nature of the facts of Smith, Stone and Knight, and the resultant lack of analogous subsequent cases, it is fair to conclude that a parent company will only be deemed by a court to be acting as a de facto agent of its subsidiary in a very exceptional range of circumstances.

Firestone Tyre v Llewellin: co formed wholly-owned subsidiary & sought to avoid liability for tax on the basis that it was a distinct legal person separate from its subsidiary. The subsidiary was independent in its day-to-day operations & only one of its directors was also a director of the parent co: HOL found the subsidiary to be an agent of the parent on the basis of the actual arrangement of the affairs, Evershed MR holding that the subsidiary was wholly controlled by the parent – in making the parent co’s articles, it acts under the close direction of the parent in al respects & in selling those articles to the parents customers, it does so on terms fixed by the parent & profits also go to parent co. Foreign co able to carry on business in England through agency of UK subsidiary to obtain tax advantage there. Where express agency agreement exists, the q of piercing the corporate veil doesn’t arise: matter of agency principles.

Munton Bros v Secretary of State: NI: claim of parent co to compensation in respect of criminal damage done to property of its subsidiary: manufactured parents product – finances arranged so it never made profit or loss – Gibson J held the subsidiary was the agent of the parent co: while the court is extremely reluctant to hold that a co is its shareholders agent, “the same objections do not apply where it is sought to demonstrate that the subsidiary is in fact the agent of its parent co because the conception of incorporation remains intact”: held even in the absence of agency, some circumstances demand closely-integrated cos in a group situation be treated as one. Given the exceptionally close business relations between the two cos, held the wholly owned subsidiary was the parents agent or alter ego & accordingly, damage done to the subsidiary was damage done to the parent. Courtney argues this is unconvincing as incorporation also remains intact where the company is treated as an agent of its member regardless of whether that member is a natural or a corporate member.

Single Economic Entity

The SLP may be disregarded by regarding the co as a mere constituent of a larger legal entity such as a group of co’s where justice required & this is the reality, if not legality, of the situation: identity consumed by larger entity – novel concept. Courtney notes this never firmly took root in Ireland & recent years observe a trend revealing reluctance to disregard SLP beyond those envisioned in Salomon.

DHN v Tower: holding co conducted business on land owned by one wholly owned subsidiaries – when council compulsorily acquired land, holding co sought compo in respect of the disturbance: COA per Denning MR held the court could look to the economic entity of the whole group & treat the business as being carried don by that whole group. He said this was especially the case where a parent co owned all the shares of a subsidiary so much so that it can control every movement of the subsidiaries. The subsidiaries are bound hand & foot to the parent co – virtually the same as a partnership – shouldn’t be treated separately so as to be defeated on technical point: UK has retreated from this “justice of the case” base & caution expressed on its propriety, save in exceptional cases.

Woolfson: suggests justice of the case will only permit a co to be regarded as a part of a single economic entity where it is established merely as a facade to conceal improprieties or where the court is interpreting statute. Lord Keith obiter entertained doubts as to whether DHN properly applied the principle that it is appropriate to pierce the corporate veil only where it is a facade concealing the true facts – ie the veil should only be lifted against the favour of shareholders. Rejected that a court will be justified in piercing the corporate veil where such a course of action is necessary to give legal effect to the “realities” of the business situation “any departure from a strict observation of the principles laid down in Salomon has been made to deal with special circumstances when a limited company might well be a façade concealing the true facts”

Adams v Cape Industries: Slade LJ did not favour the single entity argument, saying DHN did not lay down any broad principle to be applied. COA determined that DHN must be regarded as decision on the statutory provisions at hand: held that save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principles of Salomon merely because justice requires; our law for better or worse recognises subsidiary cos which fall to be treated as separate entities agency & single economic entity arguments – a firm denouncement – no longer based on notions of palm tree justice

Re Polly Peck Intl (in admin): Walker J held the court must look to the legal substance of any transaction & not its economic substance when deciding whether a co is a mere facade regardless of any perceived injustice that arose because the co became insolvent. Wholly-owned subsidiary established to raise funds through bond issues from the group: v small paid up capital & no independent mgmt & no bank account & all funds passed on to holding co: holding co guaranteed subsidiaries obligations: Walker J held it wasn’t open to the court to disregard SLP & treat a closely integrated group of cos as a single unit on the basis of perceived justice of the case, particularly in cases where the separate legal existence of the cos assumed greater existence once they became insolvent. Full force has to be given to the legal meaning of the docs in question as to regard them otherwise would deprive them of any legal meaning & would be at variance with the intentions of the parties nor was the subsidiary a sham. Walker J thought there was considerable difference between creation & operation of single-purpose financial vehicle & creation of a sham or facade simply to cloak the true character of certain transactions.

Ord v Belhaven Pubs: disregard of separate legal personality is to be exercised with restraint.

The Irish Approach

Gresham Industries v Cannon: fundamental principle of the law is that if a person decides to obtain & use the benefit of trading through limited liability cos & if for any purposes whether the limitation of his liability tax purposes or otherwise he transfers assets from one co to another or makes drawings from one co & invests them in his own name in another co that he cannot subsequently be heard to ignore the existence of the separate legal entities consisting of the different cos & to look upon the entire transaction as a personal one: as a matter of law even a 100% shareholder in a co cannot for the purposes of settling an account between him & another individual or co be identified with the co for the purposes of setting off a debt.

Power Supermarkets: alter-ego principle to group of cos: landlords of shopping centre were wholly owned subsidiary of Dunnes stores group & entered lease with Quinnsworth for one of the units & convenanted not to grant a lease for another such outlet: shopping centre was conveyed to the parent co & Dunnes Stores Crumlin Ltd was incorporated for the purposes of acquiring a lease in the shopping centre: Individual cos in Dunnes group were only notionally separate & their holding co was that original landlord: Held Dunnes were bound by the covenant even though they weren’t party to the lease as it was part of a single economic entity with those who the original landlords of the shopping centre & those who later bought it – evidence disclosed the subsidiary wasn’t ever treated as an autonomous legal & economic entity – 2 cos merely vehicles for carrying out wishes of Dunnes Family. “Business notionally carried on by one will be regarded as the business of the group or another member of that group if this conforms to the economic & commercial realities of the situation. Not to treat them as a single economic entity would involve injustice to the plaintiffs as their rights under the covenant would have been defeated by the mere technical device of the creation of a co which had no independent life of its own.” Costello J claims it was well-established that a court may where the justice of the case requires, treat two or more related cos as a single entity so that he business carried on by one would be regarded as the business of the group where that conforms to the economic & commercial reality of the situation – he claimed it would be difficult to find a clearer case than the present one for application of the principle: bound by the terms of the original lease even though they had not formally been a party to it on the basis that they were part of a single economic entity. This case has since been approved by SC in Re Bray Travel though its precedential value is questioned by Courtney, being ex tempore

State (McInerney): the court must not be too ready to lift corporate veil in group companies – Carroll J refused to regard two subsidiaries of the same holding co as part of a single economic entity so that one could, when refused planning permission for land which by then had been conveyed to the subsidiary, take the case: no proprietary relationship in the subsidiary: Carroll J held the corporate veil is not a device to be raised or lowered at the option of the parent co group but that the arm which lifts the corporate veil much always be that of justice. Here, the group operated to maximise benefits gained from individual corporate identity of each subsidiary. Lacked locus standi as didn’t own land! Carroll J held a controller cannot be allowed to disregard SLP of a co simply when it suits him. “ It appears to me that here is a group of companies operated so as to maximise the benefits to be gained from the individual corporate identity of each subsidiary …. It is not for the corporate group to claim that the veil should be lifted to illuminate one aspect of its business while it should be left in situ to isolate the individual actions of its subsidiaries in other respects.”

Rex Pet Foods: def acquired 52% shareholding in plaintiff: mgmt of plaintiff remained unaltered & separate books of account maintained: when plaintiff got into financial trouble, managers from the def co joined its board. Costello J held the defs discharged creditors from time to time,though this is normal enough for cos in a group: invocices from suppliers of plaintiff sent directly to def: mgmt changed but for reasonable purposes: def co was sole distributor for plaintiffs co: facts established didn’t merit disregarding SLP: crucially, held no evidence to suggest any funds of plaintiff co were siphoned off into any of def cos in such circumstances as would raise an equitable claim to the assets of def co – the fact a def co may occasionally discharge plaintiff creditors was an insufficient basis on which to declare the co’s a single legal entity. Casts doubt on the single economic entity approach?

Allied Irish Coal Supply Ltd: SC rejected that the mere existence of a close relationship between cos in a group could per se lead to their separate legal personalities being disregarded: Murphy J argued Power Supermarkets didn’t purport to question Salomon’s authority & Power didn’t intend to lay down any revolutionary principle of law: where members conduct the business of a co in such a way as to render their assets liable to meet claims in respect of the business normally carried out by the co, this is an altogether exceptional state of affairs. SC clearly keen to relegate the single economic entity approach to circumstances in which the exceptions identified in Salomon exist. Murphy J sought to argue that Power Supermarkets was not seeking to lay down any revolutionary principle of law – the argument is not to be lightly applied – Held that Salomon remains the cornerstone of company law & the proposition that the assets of a parent co should be generally available to meet liabilities of a trading subsidiary was so fundamentally at variance with those principles as to be “wholly unstateable”.

Fyffes v DCC: held where a public co might avoid civil liability under companies acts by routing transactions through wholly-owned subsidiaries which have no economic interests of their own, the co & its subsidiaries may be treated as single economic entity for the purposes. Defendant held substantial shareholding in Fyffes, as did its subsidiary. When the shares reached an unprecedented high, they were sold: the chief executive of the defendant was director of plaintiff & had info concerning the plaintiffs business (forecasts of poor trade which would reduce share price), so proceedings were advanced against him for insider trading. He contended the decision in respect of the purchase was made by a subsidiary as beneficial owner of the Fyffes shares. Laffoy J. made the important point that just because a parent can exert pressure on a subsidiary because it can always change the board to ensure the board will do the parent's willing does not necessarily mean the subsidiary is not independent. Held the structuring in such a manner that the present directors enjoyed a right of effectively veto re BOD decisions when coupled with the appointment of the CFO of DCC as a sole director indicates the BOD didn’t function independently. Laffoy J held that on account of the relationship between DCC & the subsidiary, the manner in which the latter was controlled by the former & the manner in which the transaction was carried out, they should be treated as single economic entity as regards sale of those shares, since otherwise the statutory remedy for insider trading would be avoided & cause injustice to third parties. “the only offers which were going to come to the subsidiary were offers which Mr Flavin chose to pass on”: the subsidiary had no real input into the process whereby the agreed terms were arrived at: the director and not the subsidiary decided on which types of shares would be sold and in particular how the preference shares would be dealt with”. In the event, he lacked the price sensitive info needed to trigger liability: “In the case of a group of companies, the court may sometimes treat the group as one entity, particularly where to do otherwise would have unjust consequences for outsiders dealing with companies in the group & would avoid liability of an effective statutory remedy.” She spoke of “factual identification of acts” in the case. Dowling argues that the purpose of incorporating the subsidiary was not a sham set up to avoid the statutory liability referred to or facilitate insider trading but to hold a particular asset & mitigate tax liability so the finding was unwarranted: ultimately obiter as the info in question was ultimately found not to be price sensitive. Dowling argues the real legal legacy Fyffes v DCC will not be its determinations on insider trading but its analysis of the “group company” structure: agency, shadow directorships and single economic entities

It doesn’t appear that there is any discernable principles in the area: Roundabout is starkly against the trend though the courts are usually more strict: Fyffes shows that the justice of the case should no longer be considered sufficient: not a growth area in recent years: not an easy task to pierce the corporate veil

Single economic entity: all concerns co but lifting the corp veil is about person & the co

Corporate Liability for Torts & Crimes

As the co is a separate & distinct legal person, & is not per se the agent of its shareholders, only the co & not its members may be sued for its obligations & can sue to enforce its rights. Shareholders cannot sue to enforce a co contract as he is not a party to the contract, albeit third parties may insist controlling shareholders or directors give personal guarantees of the co’s obligations. Academic concern, with impact on everyday practice: usually require human agents, eg human behaviour & mens rea: the co is an artificial legal entity & so the courts are slow to impose liability on a director or member of a company:

Sweeney v Duggan: plaintiff obtained judgment against employer who couldnt satisfy it: sued principal shareholder, arguing he was the alter ego of the co & should have ensured adequate insurance to meet such claims. Barron J upheld SLP, saying it was a different person in law & wasn’t a sham or instrument of fraud & to allow the judgment against the defendant would be in effect depriving the defendant of his protection under co law & to nullify all essential principles of that law.

While you can’t directly sue the co directors, how can one establish liability for the company itself?

Torts:

The fact a co’s object clause doesn’t contemplate the commission of torts doesn’t allow the co to avoid liability on the grounds that the activity complained of is ultra vires. Most commonly a co’s tortious liability arises vicariously through the operation of the principle respondeat superior (liability of employer for acts of employee) though the co may be entitled to indemnity in the circumstances. For those torts which are a result of the co’s own acts [primary as opposed to vicarious liability], authorised under the direction of the BOD, the court will look to the actions of those who control the co to determine any mental element required.

Lennards Carrying Co v Asiatic Petroleum: a corporation is an abstraction with no mind or body of its own: its active & directing mind & will of the co, the very ego & centre of the personality of the co is not merely an agent but someone for whom the co is liable because their action is the very action of the co itself. This identification doctrine recognises certain human actors in the co may have their acts attributed to the co itself: Courtney argues that the directing mind & will could be found in different persons in respect of different activities though there is an artificiality in seeking to force complex & varying corporate structures into a uniform human mould. Where power is diffused through a corporation, it may be impossible to identify one person as representing the directing mind & will.

The Lady Gwendolen: ship collision due to failure to use radar: Assistant MD of traffic department while not a director was at fault by failing to ensure the captain was properly instructed on use of the radar system & his fault was imputed as the actual fault of the co for any matters concerning anything to do with the cos ships – he is embodiment of co – where tort requires malice or intent, the court may impute that of the controllers of the co to the co itself.

Shinquin v King Ltd: plaintiff operated circular saw in factory & he lost his three fingers & thumb: HC held the co & the manager of the factory were negligent, the latter not having provided proper training in relation to the use of the saw. The co was uninsured & had no assets, so it was no good pursuing the co: factory manager found liable separately & SC held he involved himself so closely in the operation of factory & supervision of plaintiff as to make himself personally liable for the injuries: an exceptional case

Criminal Liability:

Though companies may not prosecute, they may be prosecuted in appropriate circumstances though there are theoretical & practical difficulties & outside of regulatory crimes, there is little evidence of co’s being prosecuted for crimes. The criminal law is thought to punish violations of social duties of men & corporations cannot be expected to have a conscience when they have “no soul to be damned, no body to be kicked”. The question is whether to focus criminal law on the individuals acting within the co or the co itself? To fail to attach blame to the publicly perceived wrongdoer creates a perception the real wrongdoer is getting away with criminal activity. Yet conviction of an individual in the co shouldn’t result automatically in conviction of the co where there is no significant corporate participation in the crime or policy considerations for imposing blame for ones acts on another. Perhaps to focus on individuals within the corporate structure would deflect attention from the momentum & dynamic of the co itself which may seriously influence individual conduct. It may be preferable to introduce measures to improve management practices where the fault lies in the system of mgmt dispersed throughout the corporation. There is no evidence however that corporations react to criminal sanction by mending their ways & adopting remedial policies.

Certain crimes cannot be attributed to cos without absurdity – bigamy, treason, perjury or rape. Punishments involving death , corporal punishment or imprisonment are incapable of being suffered by corporations – the only viable punishment is a fine or sequestration (deprivation of property temporarily) though some co’s are, in respect of the latter, able to buy their way out of justice & would punish shareholders rather than management who are more likely to be wrongdoers. Who should be most affected, considering hierarchical structures in which BOD policy is delegated for implementation.

HL Bolton Engineering: Lord Denning held a co have hands which hold the tools & act in accordance with directions from the centre: they do not represent the mind or will. Others are directors & managers who represent the directing mind & will of the co & control what it does: the state of mind of these is the state of mind of the co & is treated as such. Those with governing executive authority for the co have their conduct attributed to the co. The problem is that not every person who exercises managerial discretion may be said to control the co.

Tesco Supermarkets v Natrass: Tesco not liable where the offence was due to the acts of a branch supermarket manager, of which the co employed hundreds & was thus the hands, not the brains of the co. Lord Diplock held only those entrusted with the exercise of the powers of the co could qualify. They must be in actual control of the co operations, not responsible to another person in the sense of being under orders: HOL rejected that subordinate employees & officials could render the co criminally responsible: corporation must act through living persons: they act as the co & their mind is that of the co: if it is a guilty mind, then it is the guilt of the co: usually BOD, MD & superior officers are directing mind & will though may be others where the BOD or others delegate their authority. See also organisational approach. Courtney argues this identification doctrine is of uncertain limits.

P&O Ferries (Dover) Ltd: assistant bosun & chief officer of co not sufficiently high up in management hierarchy of co for their carelessness to be held that of the co. Courtney notes that a consequence of the identification doctrine is that it is easier to convict small, closely-held companies than it is to convict larger ones with diffuse organisational structures, such as P&O. Would a better approach be to remove corporate liability for the smaller corporation where nothing is gained by making the corporation liable?

Meridian Global Funds Management (Asia): more flexible & broader principles of attribution: co failed to issue notice disclosing substantial shareholding contrary to legislation: shares acquired by employees acting on behalf of the co without knowledge of the BOD or MD: this displaced the identification principle & posits a broader approach to cases involving statutory provisions: where attribution would defeat the purposes of the statute, a different rule of attribution would be developed, which rule would be devised in each case: Courtney argues the purposive approach to attribution gave recognition to the complexities of diffuse management structures & the fact that the corporations don’t always operate on a purely hierarchical or vertical model.

Fyffes: Laffoy J noted that the stat provisions had dealt with the nature of liability though seemed to favour Meridian.

Corporate Manslaughter:

Much discourse surrounds the need to establish an offence of corporate manslaughter or corporate killing: LRC concerned there was no certain regime to prosecute corporate manslaughter here though many cases could hypothetically be brought: Safety & Welfare legislation is limited & lacks stigma (maximum penalty is derisory): Blood Service Transfusion Board not having screened blood & contaminated persons dying: ruthless construction practice with failure to comply with health & safety: LRC advocated statutory scheme & offence of corp manslaughter & a secondary offence for high managerial agents who had played a role: initially favoured ID doctrine though in report leaned towards organisational liability, looking at corporate policy as a whole & human behaviour & overall circumstances of co: what sanctions? No prison sentences: turnover based fines & adverse publicity orders, disqualification orders against directors. DPP at present would be conscious of taking prosecution

Corporate Manslaughter Bill introduced by Private Member didn’t progress: in Sept 2010, govt approved drafting of legislation though didn’t indicate they would implement:

UK had policy discussion & many cases on rail crashes: enacted Corporate manslaughter & corporate homicide act based on the concept of organisational liability – how was the co activities managed – safety policies & how they’re operated in practice; substantial part of failure must be at senior level (those who make substantial decisions about the corporation – outside BOD to include operational mgmt)

Different types & how they work – EXAM NB

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