Lifting the Corporate Veil

Understand Lifting the Corporate Veil

Key rules to remember

Basic rule (Salomon)

Company = separate legal person, distinct from its members

Start every answer with this. Lifting the veil is the exception, not the rule.

Judicial grounds

Sham or cloak + fraud or evasion of obligation, tax or law = veil lifted

Other recognised grounds: enemy character, agency or trust, and group companies treated as one unit in some cases.

Statutory lifting

Specific default in the Act = named persons personally liable

Examples: fraud at incorporation, fraudulent trading, misstatement in prospectus, wrong name use. Give a section number only if you are certain of it.

Gilford Motor Co. v Horne

Company formed to evade covenant = mere cloak; injunction granted

Horne, a former employee, was bound not to solicit his old employer's customers. He formed a company in which his wife and an employee were shareholders and used it to solicit them. The company was held a device to evade the covenant.

Jones v Lipman

Company formed to defeat a contract of sale = mask; specific performance against both

Lipman agreed to sell land, then transferred it to a company he owned and controlled. The court ordered both to perform.

Daimler v Continental Tyre

Control by enemy aliens = enemy character

The company was registered in England, but all its directors and all its shareholders except one were Germans resident in Germany or in enemy territory. The court held that the company had enemy character and could not sue to recover the trade debt during the war.

Re Dinshaw Maneckjee Petit

Sham company used to divert personal income and avoid tax = income taxed in the person's hands

The assessee formed several companies, had his dividend and interest income paid to them, and took the money back as advances or loans to avoid tax on his personal income. The court held the companies were a sham and taxed the income in his hands.

How to solve Lifting the Corporate Veil questions

1. 1State the general rule: a company is a separate legal person from its members (Salomon v Salomon & Co. Ltd.).
2. 2Identify what the facts show: who controls the company, why it was formed, and who benefits.
3. 3Look for the abuse: fraud, avoiding a contract or covenant, tax evasion, a sham, enemy character, or an agency arrangement.
4. 4Decide whether the source is statutory (a stated default in the Act) or judicial (the court acting on its own).
5. 5Cite the case with the closest facts. Give two or three lines on its facts and holding.
6. 6Apply the case to the question facts in plain words.
7. 7Conclude clearly: the veil is lifted or not, and who becomes liable.

Quickest way: Rule, abuse, case, conclusion

Common mistakes in Lifting the Corporate Veil

• Saying the veil is lifted whenever one person owns almost all the shares.

  Students link control with sham.

  Fix: Salomon shows that a one-man company is still separate. Lift the veil only if there is abuse such as fraud or evasion.

• Mixing up the facts of Gilford and Jones v Lipman.

  Both involve a company formed to avoid an obligation.

  Fix: Gilford is about a restrictive covenant with an employer. Jones v Lipman is about a contract to sell land.

• Treating Salomon as a case on lifting the veil.

  It is listed in the same chapter.

  Fix: Salomon is the base rule. Use it to start your answer, then show the exception.

• Writing that the company ceases to exist when the veil is lifted.

  Students read lifting as removal.

  Fix: The company still exists. Only for that purpose, the court looks at the persons behind it.

• Confusing statutory and judicial lifting.

  Both end with personal liability.

  Fix: Statutory means the Act names the default and the liable person. Judicial means the court decides on the facts, as in the cases.

• Quoting section numbers from memory.

  The exam rewards precision and students try to sound exact.

  Fix: Give a number only if you are sure. Describe the provision in words otherwise.

Worked examples