Beyond the Corporate Veil

In 1897 the House of Lords in Salomon v Salomon clearly established that a company is a legal entity distinct from its shareholders. Ever since that date businessmen have asked their legal advisors the question: "If I have a claim against a company and it transpires that it has no assets, am I able to claim against another party which does have assets?". This is a question that is particularly relevant in shipping and international trade transactions where single asset companies are common.

In this article we explore the various means by which a party can precontract protect himself when dealing with a single asset company and postcontract pierce or otherwise avoid any corporate veil which lies between him and the assets that he seeks to attach.

PRE-CONTRACT:

At the time of the negotiation of a contract a party can insulate itself against the consequences of default by its contractual counterparty by obtaining a guarantee of performance from a third party of strong financial standing such as a parent company or a bank. Such guarantees are common place in certain transactions (such as ship building) but less common in others (such as chartering). Letters of comfort or memoranda of understanding differ from guarantees in that they are generally nonbinding and create no enforceable obligation.

POST-CONTRACT:

The principle of separate corporate personality remains intact and it is generally difficult for a claimant to seek to enforce a contractual claim against assets other than those owned directly by its contractual counterparty. There are however exceptions to this rule which need to be considered at the onset of any litigation where there is a concern as to the ability of the contractual counterparty to satisfy any judgment or award given against it. These exceptions can be divided into three categories:

claims in respect of which the corporate form of the contractual counterparty can be ignored/by-passed (the fraud exception)

claims which may be brought against assets owned by a party other than the contractual counterparty (sister-ship/associated-ship claims)

claims in respect of which a parent company can be held liable for the debts of its subsidiary (claims for the tort of inducing a breach of contract and claims under section 213/4 of the Insolvency Act 1986)

Claims where the corporate form can be ignored/by-passed: the fraud exception

The courts have demonstrated that they are prepared to pierce the corporate veil in...