The Defence of the Corporate Veil - Parent Companies Beware!

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The Defence of the Corporate Veil - Parent Companies Beware!

Much interest has recently been shown in the potential consequences of

the judgment given in Stocznia Gdanska SA -v- Latvian Shipping Co and

others, which was substantially upheld by the Court of Appeal on 21

June 2002. Although the case related to Shipbuilding Contracts, the

result has reinforced the traditional view that the Courts will not

countenance any further erosion of the fundamental principle of

English Company Law that a company is to be regarded as a legal entity

with a separate legal personality, distinct from that of its members.

However, the case has highlighted potential alternative sources of

liability for parent companies establishing wholly owned

single-purpose subsidiaries - in many industry sectors, including

shipping, property and big-ticket asset finance.

The basic principles

The principle of separate corporate personality has been established

for over a century. In the leading case of Salomon -v- Salomon & Co.

(1897), the House of Lords held that, regardless of the extent of a

particular shareholder's interest in the company, and notwithstanding

that such shareholder had sole control of the company's affairs as its

governing director, the company's acts were not his acts; nor were its

liabilities his liabilities. Thus, the fact that one shareholder

controls all, or virtually all, the shares in a company is not a

sufficient reason for ignoring the legal personality of the company;

on the contrary, the "veil of incorporation" will not be lifted so as

to attribute the rights or liabilities of a company to its


The basic principle established in Salomon in relation to single

companies was extended to groups of companies by a comparatively

recent decision of the Court of Appeal in Adams -v- Cape Industries

PLC (1990). In that case, the Court of Appeal held that, as a matter

of law, it was not entitled to lift the corporate veil against a

defendant company, which was a member of a corporate group, merely

because the corporate structure had been used so as to ensure that the

legal liability in respect of particular future activities of the

group would fall on another member of the group rather than on the

defendant company. In effect, the Court of Appeal rejected the

argument that the corporate veil should be pierced just because a

group of companies operated as a single economic entity.

Related principles and considerations

A corollary of the basic Salomon principle is that a company cannot be

characterised as an agent of its shareholders unless there is clear

evidence to show that the company was in fact acting as an agent in a

particular transaction or series of transactions.

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