The Defence of the Corporate Veil - Parent Companies Beware! :: Business Management Studies

The Defence of the Corporate Veil - Parent Companies BewareMuch interest has recently been shown in the potential consequences ofthe judgment given in Stocznia Gdanska SA -v- Latvian Shipping Co andothers, which was substantially upheld by the Court of Appeal on 21June 2002. Although the possibility related to Shipbuilding Contracts, theresult has reinforced the traditional behold that the Courts will notcountenance any further erosion of the fundamental rule ofEnglish Company Law that a company is to be regarded as a legal entitywith a separate legal record, distinct from that of its members.However, the case has highlighted potential alternative sources ofliability for parent companies establishing wholly ownedsingle-purpose subsidiaries - in many an(prenominal) industry sectors, includingshipping, property and big-ticket asset finance.The grassroots principlesThe principle of separate corporate personality has been establishedfor over a century. In the leading case of Salomo n -v- Salomon & Co.(1897), the House of Lords held that, regardless of the extent of a fussy shareholders interest in the company, and notwithstandingthat such shareholder had sole control of the companys affairs as its presidency director, the companys acts were not his acts nor were itsliabilities his liabilities. Thus, the fact that one shareholdercontrols all, or virtually all, the shares in a company is not asufficient reason for ignoring the legal personality of the companyon the contrary, the veil of incorporation will not be lifted so asto attribute the rights or liabilities of a company to itsshareholders.The basic principle established in Salomon in relation to singlecompanies was extended to groups of companies by a comparativelyrecent decision of the Court of Appeal in Adams -v- Cape IndustriesPLC (1990). In that case, the Court of Appeal held that, as a matterof law, it was not entitled to lift the corporate veil against adefendant company, which was a member of a corpo rate group, merelybecause the corporate structure had been used so as to ensure that thelegal liability in respect of particular future activities of thegroup would fall on another member of the group rather than on thedefendant company. In effect, the Court of Appeal rejected the command that the corporate veil should be pierced just because agroup of companies operated as a single economic entity.Related principles and considerationsA corollary of the basic Salomon principle is that a company cannot becharacterised as an factor of its shareholders unless there is clearevidence to show that the company was in fact acting as an agent in aparticular transaction or series of transactions.