Fundamental principles of company

There is no justification for the doctrine of piercing the veil, which undermines the fundamental principles of company and creates unnecessary uncertainty.’ Discuss One of the fundamental principles of a company is the notion that a company is recognised as a separate from its members. This doctrine as first established in Salomon v Salomon1 states “Once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself”.

The notion separate legal personality of a company is often expressed as the veil of incorporation and it is on this principle that it is the company itself rather than its members or directors which are liable on its contracts and its debts. However, in some circumstances the court has been asked to disregard the veil of incorporation, effectively ‘piercing’ it to reveal the reality of who owns and controls the company. In this, there is an inherent problem with the doctrine in that it appears to undermine one of the fundamental principles of company law, the doctrine of limited liability and has been said to create unnecessary uncertainty in Company Law cases.

One initial debate which arises concerns the issue of when it is deemed acceptable for the corporate veil to be lifted. Sir Andrew Morritt V-C endorses one such argument in Trustor AB v Smallbone3 who concluded that the corporate veil should be pierced in the interest of justice, a notion which is all but now redundant. The general viewpoint on piercing the veil is said to be expressed by Lord Keith in Woolfson v Strathcylde Regional Council who concluded “It is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts.”

However, the interpretation of the term mere fa�ade has been found to be a subjective rather than an objective test. There have been plenty of examples of courts applying the ‘fa�ade’ test. However, these courts have generally provided, as the Court of Appeal acknowledged in Adams v Cape Industries plc5 ‘ there is only sparse guidance’ as to the principles that courts should use in determining whether a faade has occurred. Thus rationale over whether a particular case is a mere fa�ade or not is left to the subjective nature of the judicially system.

There have been attempts to enshrine the doctrine in statutory provisions. Through the interpretation of provisions in the Companies Act such as section 732 it has been concluded that the veil should be lifted in certain circumstance such as where the company structure is being used to evade limitations imposed on them by the conduct of the law6. However, even within statutory provisions uncertainty lies. In Dimbleby ; Sons Ltd v National Union of Journalists7 it was held that Parliament’s intention that the veil should be lifted must be expressed in ‘clear and unambiguous language.’ Therefore, the interpretation of these particular provisions as with the ‘faade’ test rests with individual judges and precedent rather than the regulatory nature of a statute.

The uncertainty of the doctrine is compounded in that the approach to the doctrine has been inconsistent and there appears to be no clear view as to when the courts will be prepared to lift the veil and when they will decline to do so. One such example is found in the case of DHN Food Distribution Ltd v Tower Hamlets L.B.C.8 who while exhibiting similar case facts to that of Woolfson v Strathcylde9, Lord Denning in DHN vigorously rejected the House of Lords decision in Woolfson and doubted whether the Court of Appeal had applied the correct principle in DHN.

In closing, the view on the doctrine of piercing the veil is best expressed by Lord Keith in Woolfson v Strathcylde10 who concluded that ‘there is no basic constant with the principle upon which the corporate veil should be pierced’11. The problem with the doctrine of piercing the corporate veil does not lie with the justification as it is clear that in certain circumstances the veil of incorporation exists a mere fa�ade. However, the issue does arise that do to the lack of entrenchment of the doctrine, applying to the relevant case law makes it uncertain in nature.