Piercing The Corporate Veil — Recent Developments

Two judgments handed down in the last year have caused renewed interest in the court's ability to 'pierce the veil of incorporation'. The starkly contrasting decisions given by Mr Justice Burton in Antonio Gramsci Shipping Corp v Stepanovs [2011] EWHC 333 (Comm) ("Gramsci"), and by Mr Justice Arnold in VTB Capital plc v Nutritek International Corp [2011] EWHC 3107 (Ch) ("VTB Capital") have provoked debate about the scope of the concept. This article will explore whether the parameters are being altered, or are set to be in the near future, which may have far-reaching implications for those seeking redress against parties who seek to protect themselves behind a relatively impenetrable shield of incorporation.

The principle in Salomon

It is a fundamental principle of law that a company is an independent legal person distinct from its members. This principle derives from the observation from Lord Macnaghten in Salomon v A Salomon & Co Ltd that a 'company is at law a different person altogether from the subscribers to the memorandum'.1 This concept of separate legal personalities applies equally within groups of companies. In Adams v Cape Lord Justice Slade described subsidiary companies as being 'separate legal entities with all the rights and liabilities which would normally attach to separate legal entities' despite 'in one sense [being] creatures of their parent companies.'2

Counsel for the defendants in VTB Capital described piercing the corporate veil as a 'convenient label which is used to identify cases in which the courts have granted relief which involves, or perhaps more accurately appears at first blush to involve' disregarding the principle in Salomon.3 The courts are only willing to take this step for certain purposes and in very limited circumstances. In order to understand the significance of the conflicting positions adopted in Gramsci and VTB Capital it is helpful, as Arnold J did in VTB Capital, to look at the circumstances where the courts were first willing to grant relief and pierce the veil of incorporation.

Piercing the Corporate Veil – some early examples

The House of Lords emphasised in Woolfman v Strathclyde Council that it is only appropriate to pierce the corporate veil where the circumstances indicate that the company is merely a 'façade concealing the true facts'.4 Two of the earliest and best known examples where such a finding was made are Gilford v Horne [1933] Ch 935 ("Horne") and Jones v Lipman [1962] 1 WLR ("Lipman").

In Horne, the Court of Appeal granted an injunction against both Mr Horne and J.M. Horne and Co Ltd, a company owned by his wife and a friend. The court found that the company had been created as a 'cloak' under which Mr Horne had attempted to conceal his business activities, which were in breach of non-compete and non-solicit covenants he had made with his former employer.5 Relief was therefore granted despite J.M. Horne and Co Ltd not being a party to Mr Horne's restrictive covenants, and Mr Horne not being the legal personality acting in breach of those covenants.

Similarly...

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