The corporate veil in the United Kingdom is a metaphorical reference used in UK company law for the concept that the rights and duties of a corporation are, as a general principle, the responsibility of that company alone. Just as a natural person cannot be held legally accountable for the conduct or obligations of another person, unless they have expressly or implicitly assumed responsibility, guaranteed or indemnified the other person, as a general principle shareholders, directors and employees cannot be bound by the rights and duties of a corporation. This concept has traditionally been likened to a "veil" of separation between the legal entity of a corporation and the real people who invest their money and labour into a company's operations.
The corporate veil in the UK is, however, capable of being "lifted", so that the people who run the company are treated as being liable for its debts, or can benefit from its rights, in a limited number of circumstances defined by the courts. This matters mostly when a company has gone insolvent, because unpaid creditors will wish to recover their money from anyone who was involved in the company that has it.
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English law recognised long ago that a corporation would have "legal personality". Legal personality simply means the entity is the subject of legal rights and duties. It can sue and be sued. Historically, municipal councils (such as the Corporation of London) or charitable establishments would be the primary examples of corporations.[1] Without a body to be kicked or a soul to be damned,[2] a corporation does not itself suffer penalties administered by courts, but those who stand to lose their investments will. A company will, as a separate person, be the first liable entity for any obligations its directors and employees create on its behalf.[3] If a company does not have enough assets to pay its debts as they fall due, it will be insolvent - bankrupt. Unless an administrator (someone like an auditing firm partner, usually appointed by creditors on a company's insolvency) is able to rescue the business, shareholders will lose their money, employees will lose their jobs and a liquidator will be appointed to sell off any remaining assets to distribute as much as possible to unpaid creditors. Yet if business remains successful, a company can persist forever, even as the natural people who invest in it and carry out its business change or pass away.
Most companies adopt limited liability for their members, seen in the suffix of "Ltd" or "plc". This means that if a company does go insolvent, unpaid creditors cannot (generally) seek contributions from the company's shareholders and employees, even if shareholders and employees profited handsomely before a company's fortunes declined or would bear primary responsibility for the losses under ordinary civil law principles. The liability of a company itself is unlimited (companies have to pay all they owe with the assets they have), but the liability of those who invest their capital in a company is (generally) limited to their shares, and those who invest their labour can only lose their jobs.[4] However, limited liability acts merely as a default position. It can be "contracted around", provided creditors have the opportunity and the bargaining power to do so.[5] A bank, for instance, may not lend to a small company unless the company's director gives her own house as security for the loan (e.g., by mortgage). Just as it is possible for two contracting parties to stipulate in an agreement that one's liability will be limited in the event of contractual breach, the default position for companies can be switched back so that shareholders or directors do agree to pay off all debts. If a company's investors do not do this, so their limited liability is not "contracted around", their assets will (generally) be protected from claims of creditors. The assets are beyond reach behind the metaphorical "veil of incorporation".
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If a company goes insolvent, there are certain situations where the courts lift the veil of incorporation on a limited company, and make shareholders or directors contribute to paying off outstanding debts to creditors. However, in UK law the range of circumstances is heavily limited. This is usually said to derive from the "principle" in Salomon v A Salomon & Co Ltd.[6] In this leading case, a Whitechapel cobbler incorporated his business under the Companies Act 1862. At that time, seven people were required to register a company, possibly because the legislature had viewed the appropriate business vehicle for fewer people to be a partnership.[7] Mr Salomon met this requirement by getting six family members to subscribe for one share each. Then, in return for money he lent the company, he made the company issue a debenture, which would secure his debt in priority to other creditors in the event of insolvency. The company did go insolvent, and the company liquidator, acting on behalf of unpaid creditors attempted to sue Mr Salomon personally. Although the Court of Appeal held that Mr Salomon had defeated Parliament's purpose in registering dummy shareholders, and would have made him indemnify the company, the House of Lords held that so long as the simple formal requirements of registration were followed, the shareholders' assets must be treated as separate from the separate legal person that is a company. There could not, in general, be any lifting of the veil.[8]
The principle in Salomon's case is open to a series of qualifications. Most significantly, statute may require directly or indirectly that the company not be treated as a separate entity. Under the Insolvency Act 1986, section 214 stipulates that company directors[9] must contribute to payment of company debts in winding up if they kept the business running up more debt when they ought to have known there was no reasonable prospect of avoiding insolvency.
A number of other cases demonstrate that in construing the meaning of a statute unrelated to company law, the purpose of the legislation should be fulfilled regardless of the existence of a corporate form. For example, in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd,[10] the Trading with the Enemy Act 1914 said that trading with any person of "enemy character" would be an offence. So even though the Continental Tyre Co Ltd was a "legal person" incorporated in the UK (and therefore British) its directors and shareholders were German (and therefore enemies, while the First World War was being fought).[11]
There are also case based exceptions to the Salomon principle, though their restrictive scope is not wholly stable. The present rule under English law is that only where a company was set up to commission fraud,[12] or to avoid a pre-existing obligation can its separate identity be ignored. This follows from the leading case, Adams v Cape Industries plc.[13] A group of employees suffered asbestos diseases after working for the American wholly owned subsidiary of Cape Industries plc. They were suing in New York to make Cape Industries plc pay for the debts of the subsidiary. Under conflict of laws principles, this could only be done if Cape Industries plc was treated as "present" in America through its US subsidiary (ie ignoring the separate legal personality of the two companies). Rejecting the claim, and following the reasoning in Jones v Lipman,[14] the Court of Appeal emphasised that the US subsidiary had been set up for a lawful purpose of creating a group structure overseas, and had not aimed to circumvent liability in the event of asbestos litigation.
The harsh effect on tort victims, who are unable to contract around limited liability and may be left only with a worthless claim against a bankrupt entity, has been ameliorated in cases where a duty of care in negligence may be deemed to be owed directly across the veil of incorporation.
Even if tort victims might be protected, the restrictive position remains subject to criticism where a company group is involved, since it is not clear that companies and actual people ought to get the protection of limited liability in identical ways. An influential decision, although subsequently doubted strongly by the House of Lords,[15] was passed by Lord Denning MR in DHN Ltd v Tower Hamlets BC.[16] Here Lord Denning MR held that a group of companies, two subsidiaries wholly owned by a parent, constituted a single economic unit.[17] Because the companies' shareholders and controlling minds were identical, their rights were to be treated as the same. This allowed the parent company to claim compensation from the council for compulsory purchase of its business, which it could not have done without showing an address on the premises that its subsidiary possessed. Similar approaches to treating corporate "groups" or a "concern" as single economic entities exist in many continental European jurisdictions. This is done for tax and accounting purposes in English law, however for general civil liability the rule still followed is that in Adams v Cape Industries plc. It is very rare for English courts to lift the veil.[18] The liability of the company is generally attributed to the company alone.
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