Removal of separate legal personality and the ‘veil of incorporation’ by the courts

Introduction

The doctrine of separate legal personality, also known as the veil of incorporation, seeks to protect individuals from liability. However, it is important that there remain exceptions to this doctrine in order to preserve the interests of the public. This is because unless certain circumstances could give rise to the piercing of the corporate veil, the doctrine would allow for significant abuses to occur. In light of this the various exceptions will thus be discussed in this assignment in order to determine what circumstances the veil of incorporation will be removed by the courts.

Doctrine of Separate Legal Personality

The doctrine of separate legal personality was established by the House of Lords in Salomon v Salomon & Co Ltd [1987] AC 22 when they made it clear that individuals could not be held personally liable for the wrongdoings and failures of a company. This provides significant protection to individuals wishing to invest in a company and ultimately protects them against liability. Regardless of this, however, there are certain circumstances in which the protection afforded to members by separate legal personality and the ‘veil of incorporation’ will be removed by the courts. In effect, the veil of incorporation will be capable of being pierced or lifted so that individuals that have acted in a wrongful or unjust manner will not be protected by the law. Although it has been said that this undermines the doctrine (Davies, 2010: 32) and resultantly “undermines the confidence of shareholders” (Hopt and Pistor, 2001: 30), such exceptions are important in preventing abuse as shown in Adams v Cape Industries plc [1990] Ch 433. In Chandler v Cape Plc [2012] EWCA Civ 525 it was held that the veil will be pierced when there is “evidence of fraud, illegality or a sham or if the company is a mere facade concealing the true facts” (sections 213-215 of the Insolvency Act 1986, section 993 of the Companies Act 2006 and section 15 of the Company Directors Disqualification Act 1986). It has nonetheless, been said that much difficulty arises with these exceptions as “veil piecing is not an end in itself but a means to an end” (Talbot, 2007: 29).

Piercing the Corporate Veil

Unless the circumstances of the case give rise to fraud or a pre-existing obligation, however, the courts will be unlikely to pierce the veil in its entirety; Pirelli Cable Holding NV v IRC [2006] UKHL 4. Arguably, the courts will “go to great lengths to avoid any obvious penetration of the corporate veil, whilst still making the sort of inquiries that would be satisfied by just such a process” (Watcher, 2007: 157). This ensures that doctrine is not being completely undermined, whilst at the same time providing protection to the public; Millam v Print Factory (London) 1991 Ltd [2007] EWCA Civ 322. Given the confusion that this may cause, it is integral that the veil is only lifted in exceptional circumstances (French, Mason and Ryan, 2011; 124). This is because individuals will otherwise be discouraged from investing in companies (Ghaiwal, 2012: 3). Therefore, the courts should only be able to “draw back the corporate veil to do justice when common sense and reality demand it” as in Conway v Ratiu [2006] 1 All ER 571.

Conclusion

Although it would seem as though the doctrine of separate legal personality is being undermined by the existence of exceptions, it is important that these remain intact in order to protect the public from abuse. Hence, there needs to be a balance between the interests of the public and the interests of a company and its members. Whether this balance is currently being attained is arguable, though the courts will go to great lengths to determine each case on its own facts in order to maintain fairness. Thus, it is important that the veil of incorporation does not protect those individuals found to have been acting in an unlawful manner. At the same time, however, the integrity of the veil should also be preserved so that a company’s members are not being found personally liable when the company is genuinely suffering.

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