Piercing the Corporate Veil Problem Question

Ayreon

hey there folks, just a quick question on a company law exam problem question for anyone that might have it fresh in their heads. It's on seperate legal personality, (more specifically 'piercing the veil'). A typical format of the question is this:

Prince Ltd. is an Irish private limited liability company which has a subsidiary company, Pauper Ltd., in Angola. The business of Pauper consists of removing land mines. A number of its employees have been gravely injured in the course of their duties. They realise that Pauper probably does not have the financial resources to meet their claims for compensation and for that reason seek to sue Prince. When incorporating Pauper, Prince knew of the likely risks in the business the subsidiary would be conducting and so in anticipation of the relevant consequences it ensured that Pauper would have very limited capital and assets. Lawyers for the injured employees have stated in newspapers that the lack of resources within Pauper is a “massive and unconscionable fraud” on its employees and that in reality Pauper is a mere “façade and sham” as well as an “alter ego” of Prince. The directors of Pauper are appointed by Prince and enjoy independence in the day to day running of the mining operation but have no role in the key decisions affecting the business.

Advise the injured persons on how the principle of separate legal personality and the exceptions to this principle are likely to affect their claim to sue Prince Ltd.


I know it gives some scope to discuss SLP and its exceptions on a large scale, but I'm finding it hard to decide whether its end result is that there is a legitimate insulation that avoids future legal obligations as in Adams v Cape Industries plc [1990] Ch 433, or that the actual prior knowledge would amount to fraud.

If it comes up in an essay question I'm pretty set, could use a pointer or two for the problem question though.

Many many thanks in advance!

Tom Young

Dealing with this all day. Including a rather interesting refused Masters Court Discovery Motion.

Veil can be pierced by:

1. Agreement;
2. Case Law; and
3. Statute S. 140/141; 297A/256(8); 204; 114; 36; 136 (1)(3)&(4).

Try use Irish case law.

See Judgment of Laffoy J. In DCC v Fyffes [2005] IEHC 447 - page: 98. Laffoy analyses Adams v Cape.

A Single Economic Entity:

In recent times – Courts have disregarded Separate Legal Personality of related companies “Where the justice of the case requires” they’ll be treated as single economic activity.

DHN Food Distributions Ltd v Tower Hamlet LBC (1976) – Denning LJ: Two requirements to disregard Single Legal Personality:

Justice of case requires it conforms to economic and commercial realities

Power Supermarkets Ltd v Crumlin Investments Ltd et al (HC 1981) – Lease on unit for supermarket chain within centre – restrictive covenant clause – informally run.

Costello J: “mere technical device and had no real independent life of it’s own”

Court may “if justice of the case require it” treat 2 or more related companies as one so that the business notionally carried on by one will be treated as business of the group if this conforms to the economic and commercial realties of the situation – this avoided “considerable injustice” – approved by Super Court.

English persuasive authorities have moved away from DHN – suggesting that justice of the case will only permit a co to be regarded as part of Single Economic Entity where it is at best merely as façade to concealed improprieties

Adams v Cape Ltd (1990) – Slade J: Court not free to disregard the principles of Salomon v Salomon merely because justice so requires – “Our law, for better or worse, recognises …”

Rex Pet Foods Ltd v Lamb Bros Ltd (HC 1985) Plaintiff was Sub of Defendant and Receiver sought to treat them as Single Legal Entity because: Defendant had a 52% Share Holding in Rex Pet Foods; Common Directors; Defendant sole distributors for Plaintiff; invoices of Plaintiff occasionally discharged by Defendants;

Costello J: insufficient grounds to lift veil

Power & Rex demonstrate positive things co should do to minimise veil lift:

1. Give Sub autonomous life of its own, with board/director meetings
2. Comply with Companies Acts re accounting and other requirements
3. Distinguish between business of various entities – who owns assets etc –

Gresham Industries Ltd v Cannon HC (1980) – Finlay P refused to allow a director to set off against a debt owed to a creditor, a debt owed by that creditor to one company in the group, all of which were beneficially owned by the debtor.

Lac Minerals Ltd v Chevron Mineral Corp of Ireland (1995) – 2 requirements to lift Corporate Veil

1. Decisions of one company so dominated by another it refutes Separate Legal identity; and

2. Requirements of justice:

Allied Irish Coal Supplies Ltd v Powell Duffryn International Fuels (1988) – contract coal supply – Defendant was WOS of Powell Duffryn plc – fears of insufficient funds – sought to join plc as co-defendant – HC – Laffoy J refused – P’s proposition “so fundamentally at variance with Salomon v Salomon, and the concept of Limitation of Liability, that is wholly unstateable”

Super Court – Murphy J upheld – concept of Limited Liability to enable separate compartments.

Courts have discretion where ‘justice’ rationale and rely on the agency courts.

Irish courts now differ from English courts in this regard:

See: Yukong Line Ltd of Korea v Reidsburg Investments Corp of Liberia (1997) – Toulson J reviewed relevant precedent:

Endorsed The Coral Rose (No.1) (1991) Staughton LJ – this is how cos are used – just because they’re incorporated doesn’t make them agent/principal.

Dismissed Smith, Stone & Knight (1939) – test for agency – as contrary to Salomon vSalomon, i.e. whole point of incorporation in SLI – com reality sufficient to disregard Separate Legal Identity.

Rejected DHN – where justice of case requires it

Endorsed Adams v Cape

Rejuvenated Snook v London & West Riding Inv Ltd (1969) Diplock J – can disregard Single Legal Identity – ‘sham’ –

“acts done or docs executed by the parties to the ‘sham’ which are intended by them to give them third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create".

So, you tell us now. Does Salomon v Salomon subsist? Do the Irish Courts really like or uphold the concept of the Corp Veil and Single Legal Personality? I know the answer.

Tom

Victor

Ayreon wrote: »

The directors of Pauper are appointed by Prince and enjoy independence in the day to day running of the mining operation but have no role in the key decisions affecting the business.

By directors, you mean managers?

Ayreon

ah great stuff, cheers tom that was an answer more in depth than i had anticipated! i had intended to address single economic entity in the answer but its seems in essence that is what the question largely concerns.

In the problem question at hand, would you say that fraud is somewhat irrelevant and to focus predominantly on avoidance of future legal obligation (distinguishing from existing), agency and single economic entity?

Hmm to your last question, i figure Salomon does still subsist in Irish law today. Keane seems to give a pretty solid summary of where things stand, which were cited with approval by Laffoy J. in Fyffe's:

1. The rule in Salomon’s is still the law. Co and shareholders are separate legal persons and the courts normally cannot infer from the degree of control exercised by the shareholder a relationship of principal and agent or beneficiary and trustee between the shareholders and company.
2. However, the courts will not permit the statutory privilege of incorporation to be used for a fraudulent, illegal or improper purpose. Where it is so misused, the court may treat the company thus incorporated as identical with its promoters.
3. In certain cases, where no actual misuse of the privilege of incorporation is involved, the courts may nonetheless infer the existence of an agency or a trust if to do so would lead to injustice or facilitate the avoidance of tax liability.
4. In the case of corporate groups the court may sometimes treat the group as one entity, particularly where to do so otherwise would have unjust consequences for outsiders dealing with companies in the group.
5. The rule in Salomon’s case does not prevent the court from looking at the individual members of the company in order to determine its character and status and where it legally resides.

I'm hoping I'm close enough to the target with that summary, anything you'd add/change?

many thanks for that post btw, very informative

and hey victor, yes directors in the context are just the management of the subsidiary afaik

NoQuarter

I would have thought Salomon is still law in England as is Adams v Cape Industries, ie, you cant disregard Salomon because justice requires it.

In Ireland however, I thought it was Crumlin Investments that was present law, ie, if justice requires, 2 or more related companies can be treated as a single entity. Upheld in Re Bray Travel 7 Bray (Holdings). See Keane's book p140. [11.52] Although he states that this case may state the law "too widely". So I get what your saying bout the fyffes case.


Also I would look at Smith, Stone and Knight as Keane set out 5 criteria that all must be answered in the positive to establish whether the subsidary is an agent or an "alter ego".

Also section 279 Co's Act '63 states the veil can be pierced for fraudulent trading, not sure if it would apply but could be worth a mention, even to dismiss it.

Lastly, Good luck tomorrow

impr0v

The veil wouldn't be lifted in this instance - even under Irish case law. There's no evidence of fraud in the facts that we've been given. Protection of this nature is exactly what the device of a company is designed to provide.

The only chink of light is to investigate how Pauper is funded - if it has little capital and little assets, it's going to find it hard to make money, especially in the business that it's in (insurance costs, if it has any, are going to be high one would imagine). If Prince funds it to the extent that Pauper's money is its money and vice versa, then there may be scope to lift it.