Piercing the Corporate Veil: Should we bother teaching it?

The short answer is yes. The concept has been reduced to little more than an anecdote or, at best, evidencing examples of fraud when practically applied in the UK. It is unlikely one would need to dedicate a whole lecture to it anymore. However, the concept still has considerable comparative wealth, which should justify a more fuller inclusion on advanced degrees.

The reason for this was the decisive judgment in Prest v Petrodel Resources Ltd [2013] 2 AC 415. The decision confirms that the courts will only pierce the corporate veil where: 1) there has been an evasion of an existing legal obligation, liability or restriction; and, crucially, 2) no other existing remedy is available. Ben Hashem v Ali Shayif [2008] EWHC 2380 provides that this evasion must be entirely de hors of the company. 

Subsequent case law has confirmed the position in Prest. Recently, Persad  v Singh [2017] UKPC 32 (Trinidad and Tobago) at [17] cited Prest with approval. Pennyfeathers Ltd v Pennyfeathers  Property Co Ltd [2013] EWHC 3530 at [112]-[119] followed Prest by declining to pierce the corporate veil. Finally, Antonio Gramsci Shipping Corporation v Stepanovs [2013] EWCA Civ 730 per Beaston LJ predicted that piercing the corporate veil would come to be seen as an anomaly incapable of further development.

The second element is crucial because there will always be some other remedy available. I will not go into detail on the aspects of these other remedies. What it does show is the pragmatic approach English courts take to the company. They recognise that a company is a distinct legal person from its incorporators and controllers. Therefore, the law applies to it as it does anybody else to respect that distinction, formally recognised by the court ever since the decision in Salomon v A Salomon and Co Ltd [1897] AC 22. Therefore, when questions arise on separate legal personality, the substance of that case is not company law. The substance is who is liable/obligated/restricted under some other aspect of law. In Prest it was an issue concerning family law. In Persad it was land law. Pennyfeathers was tax law. Chandler v Cape plc [2015] EWCA Civ 525 was tort law. Macuara v Northern Assurance Co Ltd [1925] AC 619 was insurance law. Gilford Motor Co ltd v Horne [1933] Ch 935 was restrictive covenants.

What this leads one to conclude is that when dealing with separate personality, the focus should not really be on when will it be disregarded. The simple answer to that is very rarely. The focus needs to be on the realisation that English courts will treat the company pragmatically and when applying the law to a company you apply it in the same way you would a natural person. This has been the approach since 1897.

This pragmatic approach is at odds with recent developments in the United States.  The discussion below shows that from a comparative perspective the concept of 'piercing' or separate legal personality still has a lot to offer.

The well known example of Burwell v Hobby Lobby Stores Inc (2014) is evidence of this, albeit there have been subsequent decisions that reaffirm this position, Trinity Lutheran Church of Columbia Inc v Comer (2016).

With Hobby Lobby, as a matter of law (emphasis added), the decision was correct. The discussion and reasoning of the court though demonstrates the different approach taken by the court to the nature of the company. It seemed unnecessary to expand into the discussion they did about the nature of the company, opening themselves up to justifiable criticism about equality.

In Hobby Lobby one question the court had to answer was whether the company was a person within the meaning of the Religious Freedom Restoration Act 1993. This Act provided that the government would not burden a person's exercise of religion even if the burden results from a rule of general applicability unless it was in furtherance of a compelling governmental interest; and is the least restrictive means of furthering that compelling governmental interest. The Patient Protection and Affordable Care Act 2010 provided that employers must provide minimum essential coverage or pay a substantial price. The owners of Hobby Lobby objected to this on the basis the company was a person within the meaning of the 1993 Act.

Under US constitutional law the ‘exercise of religion’ involves not only belief and profession but the performance of, or abstention from, physical acts that re engaged in for religious reasons. Business practices that are compelled or limited by the tenets of a religious doctrine fall comfortably within that definition. A law that operates so as to make the practice of religious beliefs more expensive in the context of business activities imposes a burden on the exercise of religion.

The reason the case is correct as a matter of law is because the Act applied to 'persons' and it is recognised that a company is a person. Therefore, government could not burden its religious freedom. Failure to recognise the company as a 'person' would have had "dramatic consequences", Alito J at [21]. This would certainly be true in the UK too, where Prest shows the steadfast commitment to doctrine and the company's separate personality as a distinct legal person. The best one could criticise the Act for, on a purely legal basis, is that is did not define 'person' clearly, if one wished to restrict it extending to companies.

However, the judgment then descends into an unnecessary expansion on the nature of the company. It shows that the rationale in the US for treating the company as a separate person is not one of pragmatism, but one of protecting the fundamental freedoms enshrined in the US constitution; in this case freedom of religion under the first amendment. From this, the question of piercing the corporate veil comes much more prevalent. For if one respects that the company is a legal person, is there any limit to what it can and cannot do, including holding religious rights? Or in this instance should we pierce the corporate veil and hold the controllers of Hobby Lobby were the real persons the rights applied to and not the company?

Alito J states that, in regards to the company, "the purpose of this fiction is to provide protection for human beings. A corporation is simply a form of organization used by human beings to achieve desired ends...". He continued "when rights... are extended to corporations, the purpose is to protect the rights of these people" and "protecting the free exercise rights of corporations like Hobby Lobby ... protects the religious liberty of the humans who own and control those companies". Effectively those freedoms should not be lost where on wishes to run a company, is the view of the Supreme Court. Alito J accepts that the consequence of the company being a person may undermine the religious freedoms of the incorporators and controllers and extends those freedoms to the company, to be determined by those incorporators and controllers.

This is easy enough to apply to small, closely held companies, but it becomes much harder to apply to large widely held corporations. It is also unclear how the reverse would work as well. How are the religious freedoms of third parties protected against the company? How are tension resolved where there are competing religious views either internally or with a third party? As Ginsbury J observed in her dissenting judgment, it would allow companies to impose disadvantages on others and protects the religious beliefs of a few regardless of the impact it can have on thousands, even a whole gender. There are also tensions created as to whose religious rights should prevail. In the Equal Employment Opportunity Tribunal v Abercrombie & Fitch (2015) the court ruled in favour of a job applicant who was denied a job at Abercrombie on the basis she was a practising Muslim. What would the court have done had the employers held religious beliefs regarding a woman's right to work?

The complexities of the US system based on this subtle difference in the way the courts treat the company as a 'person' raises questions about legal realism and how institutional complementarities can shape outcomes. Certainly, if the US believes in freedoms and capitalism, it seems odd that they would deny people access to goods, services, and rights based on personal characteristics of individuals.  

    

Can Companies Vote in the EU Referendum?

With the impending EU referendum, there is a natural drive to get those who can vote to register. Who can and cannot vote is not always straight forward, but the question here is whether companies can vote?

The answer is, of course, no. Thank-you very much for reading this post...

but this leads to another question, should companies be able to vote? So, on some quick research in to politics and the law on voting, a helpful comment from a colleague, pre existing knowledge of company law I will tackle this question.

To me, this question took on more pertinence after the decision in Prest v Petrodel Resources Ltd [2013] UKSC 34. It arguably has significance well beyond simply acknowledging the obscurity of piercing the veil. To summarise the decision, the court effectively held that the court will never pierce the corporate veil and hold those behind it responsible for the company's liabilities and obligations. Privity applies to companies as much as it does to you or me. Where the company is used as a vehicle to avoid personal liability and obligations, there is always an equitable tool on hand to hold the company liable in its own right. So in Prest, the husband's transfer of assets to the company were held on a bare trust in divorce proceedings for the wife. It did not have to hold the company liable for the divorce to recover the property, which would have been absurd.

What we see an emergence of here is that final step to full recognition of the company as a separate legal entity. Responsible completely by itself, with no lingering possibility of controllers being liable personally for the company's debts. Its limitations are merely practical, not legal. I often remember being taught in my undergraduate days that a company cannot drive a lorry, used as an example to demonstrate the limits to its legal liability. Whilst it is true that it cannot drive a lorry, this is not a legal limit, it is a practical one. It could still be liable, where that lorry crashes, for negligence, if they failed to train the driver properly, for example.

Therefore, something I often say to anyone who asks about company liabilities, rights, or obligations, if you find yourself treating the company differently than you would a natural person then you have done something wrong. For example, saying shareholders own the company is treating a company differently from a natural person, as you cannot own a person. A shareholder merely owns the share. Whilst the law may seek to regulate the company's relationships in a way that is responsive to nuances, that is no different from other relationships involving natural persons.

Therefore, now the company has been fully recognised as a separate legal person, completely responsible for its own rights, liabilities and obligations, should it not be able to vote on those issues that can affect those rights, liabilities and obligations?

Now, I am not pretending that there are not some obvious and strong arguments that they should not vote. Nor am I advocating that they should, simply exploring if they should. I am also hoping I am not completely ignorant of some reason why the shouldn't or can't vote in a way that makes this post seem more ridiculous than it might already appear. So let's review some of the arguments and authorities.

The starting point is that there is nothing that says a company cannot vote because the law sets out that citizens can vote and provides a, seemingly exhaustive, list of those who cannot, which does not include companies.

The Treaty on the Functioning of the European Union, Art 22 provides that a citizen is entitled to vote. Equally, who can vote has to be compliant with any Human Rights provisions. But who can vote has always been a national decision, so a 'citizen' is defined nationally under the British Nationality Act 1981. While a company might not, yet, be classed as a citizen, the legislation includes the ability to apply for citizenship. To apply there needs to be a 'real' connection and capacity. The latter would not be an issue, but the 'real' connection might be difficult, but if its registered office and place of incorporation is in the UK then this, or either, might be enough to establish a real connection.

The next step would be whether they are entitled to vote if they are a citizen. The Representation of the People Act 2000 bases this on citizenship, in line with Art 22, with no restrictions on companies.

Ignoring the existing law, one may consider whether the law should enable it to do so, if it currently does not permit it.

The policy argument is the one stated, if they are a separate legal person with its own capacity it should be able to have a democratic voice on how its position may be effected by political decisions.

Now there are obviously practical difficulties in voting as a company. In a referendum though it is a one off vote, not linked to any particular constituency. The directors, as the guiding mind of the company. The vote would need in the best interests of the company, compliant with Companies Act 2006, s.172.

Granting a person with legal capacity the right to vote would not be anything new, as there is precedent for it. Women over the age of 30 were granted the right to vote in 1918 and over 21 in 1928. Whilst companies were recognised as having separate legal status in 1897 in Salomon v Salomon (1897) AC 22, it was not until a few years ago that it was fully recognised that a company's controllers will not be liable for the company's obligations. Therefore, an argument advanced that 'why would companies be given the vote when women did not have it', cannot be sustained without question. A woman had clearly become a separate legal person with full legal capacity from their husband or the like, and should be given the vote. This was not as clear for companies. It is now after the decision in Prest.

One point is that allowing a company to vote would destroy the equality among citizens, regardless of wealth and education but they are equal for the purposes of the democratic principle. Yet, companies are of different size and wealth. They may be less or more powerful than an individual or another company. The principal 'one person, one vote' never said that person had to be natural.

Another is that certain companies may operate contrary to public policy. One argument presented is that a tobacco company's view cannot prevail as it should be restrained for health reasons. But on such logic you could ban any smoker from voting. That itself is contrary to the democratic process. Take a more concrete example and prison inmates' rights to vote. Their incarceration might be a result of a law they disagree with. Their right to vote for a politician that might support their release by overturning such a law should not be banned from voting. Therefore, a company should be entitled to vote to support their position, even if it runs contrary to the current public policy of the existing Parliament.

One practical problem is subsidiaries. How many votes should a group of companies get? If companies were to get votes, specialised rules would have to be set out to prevent abuse, with the democratic process eroded by faceless, shell companies dictating the direction of the legislature.

A historical point might offer some further pause for granting the vote to companies. It is the legislature who needs to control who votes. Otherwise it cannot be taken to be seen as supreme. Thus, when companies were granted that status, it was previously as a result of Royal Charter. Parliament, however, was the donor of the right to vote. Giving companies the right to vote would enable to Crown to reassert some power over voting, questioning Parliamentary supremacy. However, companies are now traditionally formed through registration with a public body, in the UK that is Companies House. Therefore, such companies registered would not undermine parliamentary supremacy. However, other type of companies, such as those formed under a Royal Charter should be denied such a right if companies were to be given one.

A final problem might be a result of a company's practical limitations. It cannot age per se and therefore could never reach the age of maturity to vote. Yet this could be overcome by adjudging its age by number of years since its incorporation.

Overall, the company, now with full legal capacity, has a case for the right to vote. If it were to be given a vote, it should be one vote, with certain restrictions. But it is arguably undemocratic to not allow one with full legal capacity to vote.

Any observations, always welcome to hear them.

Corporate Directors: The current law and reform

For those who are regular readers you may remember earlier posts about corporate directors and the definition of a director see here, here, and here. This was in response to the Supreme Court's decision in Revenue and Customs Commissioners v Holland [2010] UKSC 51 as to whether an individual who controlled a corporate director (i.e. a legal incorporated company acting as a director of another company) was a de facto director of the company which the corporate director sat on. The majority answered in the negative meaning the individual was not liable to contribute to the funds upon insolvency. I disagreed with Watts' case comment in the Law Quarterly Review that the decision failed to furnish a rationale as I argued that Watts looked to find a ratio based on a question the court was not faced with. Watts sought to find a ratio as to whether Holland was a de facto director but the question faced by the court was whether the concept of de facto directorship could be extended to cover individuals who controlled corporate directors.

The negative answer the courts gave this question left a question unanswered, that whilst the court was right to not extend the principle, it effectively allows those who control corporate directors to commit unlawful acts and incur no liability because everything was done in the name of the company. Here one does have to accept that we treat a company as a separate legal entity for genuine reasons and its personality does need to be protected to allow people to run companies without fear of incurring personal liability.

Vince Cable's recent proposals on further restrictions on the use of corporate directors and keeping a register of shareholders, see here also (the discussion paper can be found here) lead nicely to a review of the current law and its suitability in holding people to account.

Therefore I am currently looking at whether the law offers suitable avenues of recourse against those who use corporate directors for an unlawful means and consider the practical consequences of changing the law to only allow natural persons to act as directors as well as consequences of proposals for reform in the paper. Current means of holding an individual liable that will be considered include: knowing assistance, de facto and shadow directorship, section 155 of the Companies Act 2006 and agency. 

Forthcoming publication

In amongst life as a 1st year academic I have managed to find a slither of time for a case comment on the Court of Appeal decision in Chandler v Cape plc [2012] EWCA Civ 525.

It is due out in January and will be published by the International Company and Commercial Law Review. The thurst of the article (spoiler alert) is to highlight that whilst the decision may be interesting and hold practical significance, it does not alter the legal landscape as it was based on a pre-existing concept of assumption of responsibility.

Companies and separate legal personality: Found when needed

I am having early thoughts about research in to this topic. The more I read on the separate legal personality of companies the more I seem to find instances of it being ignored or found depending on whether it suits the court or not.

Take the instance of Chandler v Cape plc [2012] EWCA Civ 525, for which I summarise as I have blogged about in more detail here. The individual was attempting to claim against his company's parent company for harm suffered from asbestos poisoning claiming the parent company owed a duty of care to its subsidiary employees. Here the court actively recognised both company's separate legal personality to find that the parent company was capable of owing a duty of care based on the criteria for owing such a duty. It was not ignoring the separate legal personality of the subsidiary though.

Now take the number of instances involving corporate directors i.e. a company as a separate legal entity serving as a director. On numerous occasions the court has found that individuals who control corporate directors cannot be shadow directors "without more". See Revenue and Customs Commissioners v Holland [2009] EWCA Civ 625 for an overview and example of this. Thus, they leave the door open to certain circumstances where an individual controlling a corporate director may be a shadow director. Generally speaking the court finds they are not. They often find that merely attending the meetings and voting will not open up the individual to personal liability where those decisions can be attributed to the corporate director, and it is not "without more" enough to constitute them as a shadow director, nor a de facto director.

However, in most these cases there has been individuals controlling a sole corporate director. It is difficult to perceive how an individual who makes all the decisions of the corporate director can do more so as to be classed a shadow director.

Ultimately the court is saying that an individual and the corporate director are separate and that all the decisions whilst made by the individual, are attributed to the corporate director as a separate legal entity. The difficulty is that it seems inconsistent with Chandler. The court is ignoring in this instances the ability of an individual to tell the corporate director as a separate legal personality what to do; whereas they acknowledged in Chandler the ability of the parent company to owe a duty of care. The courts would undoubtedly find such a circumstance to be a shadow directorship if the corporate director was a natural person instead. It seems absurd that the only reason they are not a shadow director is because they did not have communicate to anyone what they wanted the corporate director to do.

Ultimately section 155 of the Companies Act 2006 may remedy this anomaly, which I have blogged about here. Since this requires every company to have one natural person, where an outside individual controls a corporate director to avoid liability, they will undoubtedly have to control the individual in question as well and thus it is much more likely to be classed as a shadow directorship.

More cases will need to be examined to fully address these concerns.

On another note, blog post may be slightly less frequent over the next few months as I am in the writing up phase of my PhD.

Do companies actually require a natural director or is Section 155 not worth the paper it is written on?

Under the Companies Act 2006 section 155 all companies are required to have at least one natural director. This is different from the common law position which allowed companies to have a sole corporate director (i.e. a company itself being a director) as established in the case of Bulawayo [1907] 2 Ch 458.

For any rule there has to be deterrent or incentive to follow it. Section 156 gives the Secretary of State power to give direction to any company where it does not satisfy this requirement. Section 156(6) makes it an offence for failure to comply with that director and is committed by every officer in default including shadow directors.

But what if the company is simply a sole corporate director that has no officers and no other directors? How can anyone commit the offence?

Naturally one may assume, well it should be the one who controls the corporate director and thus makes them a shadow director.

Unfortunately that natural assumption is incorrect according to the courts of first instance and Court of Appeal. On a number of occasions courts have categorically denied that an individual who controls a corporate director is a shadow director "without more". What the courts have meant by without more is that it means that the individual must not simply be performing the functions of a de jure director (i.e. someone formally appointed) at another company, or simply discharging the functions of the corporate director in that capacity. For case examples of this denial see Re Hydrodam [1994] BCC 161 or Secretary of State for Trade and Industry v Hall and Nuttall [2006] EWHC 1995 (Ch)

Thus the courts have not denied that on the facts it is possible for someone to be classed as a shadow director. However, it seems fanciful that it will ever be the case on the facts when in the recent case of Holland [2009] EWCA Civ 625 at first appeal, better known for the Supreme Court ruling [2010] UKSC 51, the court found the individual was not a de facto director despite being the guiding mind behind the company and the only one involved in the process. It is most likely that the court also affirmed Holland would not have been a shadow director either if the liability in question extended to shadow directors. The obiter comments from the Court of Appeal seem to suggest as much.

Thus, whilst the common law reached the position that an individual who controls the corporate director is prima facie not a shadow director, it is possible that Parliament have altered that position through section 156(6) otherwise the deterrent of ensuring one natural director will have no substance.

However such a stance does not pierce the corporate veil, i.e. treating the individual and the corporate director as one. It recognises that section 251 of the Companies Act 2006 is designed to catch those trying to usurp the position of director without formal appoint. Section 251 defines a shadow director as someone who the de jure directors have become accustomed to act on their direction and instruction. Thus the courts would be recognising that the corporate director as a separate legal entity has become accustomed to act on the individual's instruction and direction.

Despite this the courts may still be reluctant to find as much since they were unwilling to extend the concept of de facto directorship in the Supreme Court case of Holland on the basis, inter alia, that to do so would be to say all individuals who control corporate directors are de facto directors. Thus the same would apply here that to rule as such would be to say all individuals who control corporate directors are shadow directors regardless of whether they have instructed or directed them. However, this may be defeated on the basis that shadow directorship is case sensitive and it is not to say it does extend it for every case. This would effectively reverse the ratio from Hydrodam that without more someone is not a shadow director. This is because it would create the assumption that someone controlling a corporate director is a shadow director unless shown they did not instruct or direct them, rather than the other way round that someone is not a shadow director without more i.e. they did instruct or direct the corporate director.

The distinction is very artificial that has been created by the common law and section 155 attempts to remedy that through the requirement of having one natural director responsible for every company. However, if that requirement is to have substance it must be acknowledged that someone who controls a corporate director is in some capacity connected to that company, and is suggest that connection is through shadow directorship, otherwise the common law principles will prevent that enforcement.

Much ado about nothing? Is Chandler v Cape significant?

A recent Court of Appeal in Chandler v Cape plc [2012] EWCA Civ 525 decision has found that a parent company owed a duty of care to its subsidiary employees.

This is the first time an employee has successfully established liability to him from the parent company. Some people are claiming this is an attack on the separate legal personality principles, fundamental to company law. The case of Adams v Cape [1990] Ch 433 affirmed that a group of companies was not one legal entity. Each individual company in a group has its own legal personality. Whilst at first glance one may think this is open to abuse by having a rogue trader set up a number of companies to avoid liability this very rarely happens in practice. On the contrary allowing a group company to have different legal personality is beneficial for reasons such as diversification in business or due to geographical locations. Arcadia may be a good example of this. Furthermore, there are market forces that, at some level, prevent the abuse by parent companies of their subsidiaries, especially if they have similar creditors or suppliers.

Returning to the Chandler case the court found a duty of care was owed by the parent company to the employee of the subsidiary. The court of first instance had applied the test for how a duty of care is established, which is highlighted from the case of Caparo Industries v Dickman [1990] 2 AC 605 that a duty of care is owed if there is:
1) Reasonable to foresee harm
2) Proximity
3) Whether it is fair, just and reasonable for a duty of care to be owed

So, it may not come as quite a surprise that a duty of care was owed by the parent company to the employees of the subsidiary when one looks at this test. If the facts of the case demonstrate this three criteria then stringent rules of separate legal personality should not prevent a duty of care being owed. That would effectively, and excuse my limited knowledge of tort, go against basic principles that developed from Donoghue v Stevenson [1932] UKHL 100. To the effect it would basically imply if the parent company could not be liable then a manufacutrer of goods could not be liable to an eventual purchaser due to an intervening supplier of the goods after production.

And one must argue that the facts of the case do support a duty of care being owed. Here the parent company had superior knowledge of the health and safety of the particular industry; the parent company knew, or ought to have known that the subsidiaries system of work was unsafe; The parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using the superior knowledge for the employees' protection and it was not necessary to show the parent company often interfered with the health and safety practices of the subsidiary. The court will look at the relationship between the companies more widely.

So is this piercing the corporate veil and ignoring the principle of separate legal personality for different companies in a group. The court was emphatic in rejecting such a notion. They note the question was simply whether the parent company owed a duty of care. An article written by Eccles suggest that this does pierce the corporate veil. But his arguments as to why seem to be merely restating the facts and recognised law in relation to duty of care, rather than stating why the veil has been pierced here.

He notes this pierces the corporate veil...'but only on the basis of an existing concept of assumption of responsibility - Caparo Industries v Dickman'. As you can see he merely restates that a duty of care was owed under the existing principles. A person who takes certain responsibility will owe a duty of care if the facts satisfy the criteria above.

I would agree with Eccles though that in practice companies with subsidiaries may want to review any existing insurance policies if this has been overlooked.

For the corporate veil to be pierced one needs to ask if the two separate companies are being treated as one for the purposes of liability. The answer here is no. The parent took on a duty of care through its (in)actions. Thus, the court recognised the parent company's separate legal personality and was not piercing the corporate veil to say the parent and the subsidiary were one. Perhaps further work in light of quite a few new cases, see here here and here, on this topic needs to seek a more accurate definition or categories of when the corporate veil will be pierced.