Introduction
The concept of the ‘veil of incorporation’ is a fundamental principle in company law, establishing a company as a separate legal entity distinct from its shareholders and directors. This doctrine, solidified in the landmark case of Salomon v A Salomon & Co Ltd [1897] AC 22, protects individuals from personal liability for company debts and actions. However, courts have occasionally ‘pierced’ or ‘lifted’ this veil to hold individuals accountable, particularly when justice demands it. This essay examines whether case law supports the assertion that the veil of incorporation is rarely pierced except in the interests of justice. It explores key judicial decisions, analyses the principles guiding veil piercing, and considers the balance between maintaining corporate separateness and ensuring accountability. The discussion will argue that while the veil remains a robust shield, courts are willing to intervene in exceptional circumstances, often driven by the need to prevent abuse or uphold fairness.
The Foundation of the Corporate Veil: Salomon v Salomon
The principle of the corporate veil was firmly established in Salomon v A Salomon & Co Ltd [1897] AC 22, a seminal House of Lords decision. In this case, Mr. Salomon incorporated his business as a limited company and held the majority of shares, with his family owning nominal shares to meet legal requirements. When the company became insolvent, creditors argued that Salomon should be personally liable, claiming the company was merely his ‘alias.’ The court rejected this, affirming that a duly incorporated company is a separate legal entity, regardless of the level of control by a single individual. This decision entrenched the veil of incorporation as a cornerstone of company law, providing certainty and protection for shareholders (Macintyre, 2018). Indeed, the ruling underscored that piercing the veil would be an exception rather than the norm, a principle that continues to shape judicial reasoning.
Judicial Reluctance to Pierce the Veil
Case law demonstrates a clear judicial reluctance to pierce the corporate veil, reflecting a commitment to the Salomon principle. For instance, in Adams v Cape Industries plc [1990] Ch 433, the Court of Appeal refused to hold a parent company liable for the obligations of its subsidiary, even though the subsidiary was used to avoid legal responsibilities in a foreign jurisdiction. The court emphasised that the corporate structure must be respected unless there is evidence of sham or fraud. Slade LJ articulated that piercing the veil is only justified in cases where the company is a mere façade concealing the true facts (Ross, 2019). This restrictive approach highlights that courts prioritise the integrity of the corporate entity over creditor or claimant interests, reinforcing the notion that the veil is rarely pierced.
Furthermore, in VTB Capital plc v Nutritek International Corp [2013] UKSC 5, the Supreme Court reiterated this cautious stance. The court declined to pierce the veil to hold controllers liable for a company’s contractual obligations, stating that the doctrine should not be expanded beyond its traditional limits. Lord Neuberger emphasised that piercing the veil is a remedy of last resort, applicable only when other legal principles cannot address the issue (Hannigan, 2018). These cases collectively illustrate that the judiciary upholds the corporate veil as a fundamental protection, piercing it only under stringent conditions.
Exceptions to the Rule: Interests of Justice
Despite this reluctance, courts have pierced the veil in exceptional circumstances where justice demands accountability or the prevention of abuse. One notable example is Jones v Lipman [1962] 1 WLR 832, where the defendant attempted to evade a contractual obligation by transferring property to a company he controlled. The court pierced the veil, treating the company as a ‘sham’ or ‘cloak’ for the defendant’s actions, and enforced the contract against him personally. This case demonstrates that courts will intervene when the corporate structure is misused to perpetrate fraud or injustice (Sealy and Worthington, 2020). Arguably, such decisions reflect a pragmatic approach, balancing the sanctity of incorporation against the need to prevent legal principles from being exploited.
Another significant case is Gilford Motor Co Ltd v Horne [1933] Ch 935, where the defendant used a company to circumvent a non-compete clause. The Court of Appeal lifted the veil, ruling that the company was a mere device to mask the defendant’s breach of obligation. These early cases set a precedent for piercing the veil in the interests of justice, particularly where individuals hide behind the corporate form to evade legal duties (Macintyre, 2018). However, it must be noted that such interventions remain exceptional, applied only when the evidence of abuse is clear and undeniable.
Modern Developments and Criticism: A Narrow Scope for Justice
In recent years, the scope for piercing the veil has arguably narrowed further, as seen in Prest v Petrodel Resources Ltd [2013] UKSC 34. This case involved a divorce settlement where the wife sought to access company assets controlled by her husband. While the Supreme Court ultimately addressed the issue through trust law rather than piercing the veil, Lord Sumption clarified that veil piercing should be limited to situations of ‘evasion’—where a company is used to deliberately evade an existing legal obligation. This distinction between ‘evasion’ and mere ‘concealment’ (where the company structure hides underlying facts) suggests a more restrictive framework for intervention (Hannigan, 2018). Critics argue that this narrow interpretation may limit the courts’ ability to deliver justice in complex cases, particularly where corporate structures are used to obscure accountability (Ross, 2019). Nevertheless, Prest reaffirms that the interests of justice remain a guiding factor, albeit within a tightly defined scope.
Analysis: Does Case Law Support the Conclusion?
Reflecting on the cases discussed, it is evident that case law largely supports the conclusion that the veil of incorporation is a cornerstone of company law and is rarely pierced, save where justice demands it. The foundational principle in Salomon continues to underpin judicial reasoning, with courts demonstrating consistent reluctance to disregard corporate separateness, as seen in Adams v Cape Industries and VTB Capital. However, exceptions in cases like Jones v Lipman and Gilford Motor Co illustrate that courts will intervene to prevent abuse or uphold fairness. The modern approach in Prest further refines this balance, limiting veil piercing to clear cases of evasion while seeking alternative remedies where possible. Therefore, while the veil remains robust, the judiciary retains discretion to act in the interests of justice, though such actions are exceptional and narrowly construed.
Conclusion
In conclusion, case law broadly endorses the assertion that the veil of incorporation is a fundamental principle rarely pierced except where justice demands intervention. The enduring authority of Salomon v Salomon ensures that corporate separateness is upheld, providing certainty and protection for shareholders. Nonetheless, courts have demonstrated a willingness to lift the veil in cases of fraud, sham, or evasion, as seen in historic and modern precedents. While this intervention is limited, as clarified in Prest v Petrodel, it reflects a commitment to preventing abuse of the corporate form. The implications of this balance are significant: it safeguards the integrity of company law while ensuring accountability in exceptional circumstances. Future cases may further test the boundaries of ‘justice’ in this context, potentially prompting greater clarity on when and how the veil should be pierced.
References
- Hannigan, B. (2018) Company Law. 5th edn. Oxford: Oxford University Press.
- Macintyre, E. (2018) Business Law. 9th edn. Harlow: Pearson Education Limited.
- Ross, M. (2019) ‘Piercing the Corporate Veil: A Modern Perspective’, Journal of Business Law, 45(3), pp. 210-225.
- Sealy, L. and Worthington, S. (2020) Sealy & Worthington’s Text, Cases, and Materials in Company Law. 12th edn. Oxford: Oxford University Press.
