5/8/2011 Company Law I Lecture 4:Piercing the Corporate Veil Limited liability and separate entity doctrines in reality ·How things are“in reality"? Hypo case:application of the separate entity principle Is there any injustice? 1
5/8/2011 1 Company Law I Lecture 4: Piercing the Corporate Veil 1 Limited liability and separate entity doctrines in reality • How things are “in reality”? • Hypo case: application of the separate entity principle • Is there any injustice? 2
5/8/2011 Responses to the effects(or problems)of separate entity doctrine ·“Piercing the corporate veil'" 。Meaning Piercing or non-piercing cases Case study Gilford Motor Co v Horne [1933]Ch 935 Horne agreed not to steal customers from Gilford after leaving employment Horne set up JM Horne Co Mrs.Horne and employee were sole s/ers and directors Co did steal Gilford's customers Lord Hanworth MR:co was "a mere device for enabling Horne to continue to commit breaches...". Injunction issued against both Horne and JM Horne Co. 2
5/8/2011 2 Responses to the effects (or problems) of separate entity doctrine • “Piercing the corporate veil” Meaning Piercing or non-piercing cases 3 Case study Gilford Motor Co v Horne [1933] Ch 935 • Horne agreed not to steal customers from Gilford after leaving employment • Horne set up JM Horne & Co • Mrs. Horne and employee were sole s/ers and directors • Co did steal Gilford’s customers • Lord Hanworth MR: co was “a mere device for enabling Horne to continue to commit breaches …”. • Injunction issued against both Horne and JM Horne & Co. 4
5/8/2011 Jones v Lipman and Another [1962]1 WLR 832 House owner transferred to a wholly owned co to avoid going through with promised sale Russell J:"the defendant co is the creature of the first defendant,a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity." Specific performance ordered against both Lipman and the co Russell J:"the proper order to make is an order on both the defendants specifically to perform the agreement between the plaintiffs and the first defendant." Any alternative remedy? What is the similarity between Gilford Motor Co v Horne and Jones v Lipman? What is the difference between two cases? What is the test used in both cases? Were the relationships created in each case by the incorporation of the companies a real "sham"? 3
5/8/2011 3 Jones v Lipman and Another [1962] 1 WLR 832 • House owner transferred to a wholly owned co to avoid going through with promised sale • Russell J: “the defendant co is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.” • Specific performance ordered against both Lipman and the co • Russell J: “the proper order to make is an order on both the defendants specifically to perform the agreement between the plaintiffs and the first defendant.” • Any alternative remedy? 5 • What is the similarity between Gilford Motor Co v Horne and Jones v Lipman? • What is the difference between two cases? • What is the test used in both cases? • Were the relationships created in each case by the incorporation of the companies a real “sham”? 6
5/8/2011 ·What is the meaning of“sham"? Oxford English Dictionary: >A"mask"is "a covering worn on or held in front of the face for disguise”. >A sham is "something that is intended to be mistaken for something else,or that is not really what it purports to be". Snook v London and West Riding Investments Ltd [1967]1AWER518: >Lord Diplock:acts done or documents executed by the parties to the 'sham'which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations(if any)which the parties intended to create. Common law Special circumstances indicating that the company is a mere facade concealing the true facts:eg Adams v Cape Industries Pic [1990]Ch 433,Eng CA DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976]1 WLR 852 Woolfson v Strathclyde Regional Council [1978]SC(HL)90,HL Toptrans v Delta Resources Co Inc (2005),CFI ·What is the meaning of“a mere facade concealing the true facts"? 4
5/8/2011 4 • What is the meaning of “sham”? Oxford English Dictionary: A “mask” is “a covering worn on or held in front of the face for disguise”. A sham is “something that is intended to be mistaken for something else, or that is not really what it purports to be”. Snook v London and West Riding Investments Ltd [1967] 1 All ER 518: Lord Diplock: acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create. 7 Common law • Special circumstances indicating that the company is a mere facade concealing the true facts: eg Adams v Cape Industries Pic [1990] Ch 433, Eng CA DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 Woolfson v Strathclyde Regional Council [1978]SC(HL) 90, HL Toptrans v Delta Resources Co Inc (2005), CFI • What is the meaning of “a mere facade concealing the true facts”? 8
5/8/2011 Fraud HKSAR v Leung Yat Ming(1999) Co used to perpetrate fraud. 2 academics(husband and wife)received rent allowance from employer on condition that the accommodation was not owned by them or their relatives. H acquired a company which purchased an apartment and which then rented the apartment to H and W. H and W convicted under the Prevention of Bribery Ordinance(Cap 201). 。 Corporate form ignored on the ground that H and W had financial interests in the property. Held:permissible to go behind the corporate veil where it was a cloak for deception. Agency How to set up a contractual relationship of agency? Express agency -Implied agency Co can act as agent of another co(including a s/h) 10 5
5/8/2011 5 Fraud HKSAR v Leung Yat Ming (1999) • Co used to perpetrate fraud. • 2 academics (husband and wife) received rent allowance from employer on condition that the accommodation was not owned by them or their relatives. • H acquired a company which purchased an apartment and which then rented the apartment to H and W. • H and W convicted under the Prevention of Bribery Ordinance (Cap 201). • Corporate form ignored on the ground that H and W had financial interests in the property. • Held: permissible to go behind the corporate veil where it was a cloak for deception. 9 Agency • How to set up a contractual relationship of agency? - Express agency - Implied agency • Co can act as agent of another co (including a s/h) 10
5/8/2011 Agency If X(a s/h)controls a company,is the company necessarily an agent of X? Salomon v Salomon Adams v Cape Industries Plc [1990]Ch 433 Smith,Stone Knight v City of Birmingham [1939]:wholly owned subsidiary held to be agent of holding company. What are the critical factors?-business never transferred to subsidiary;profits of subsidiary were treated as profits of the holding company. 11 Agency Smith,Stone Knight v City of Birmingham [193914 All ER 116 Atkinson J:...the question is whether the subsidiary was carrying on the business as the company's business or as its own....In all revenue cases...what the courts regarded as of importance for determining that question:who was really carrying on the business? 1. Were the profits treated as the profits of the company? Were the persons conducting the business appointed by the parent company? 3. Was the company the head and the brain of the trading venture? 4. Did the company govern the adventure,decide what should be done and what capital should be embarked on the venture? 5. Did the company make the profits by its skill and direction? Was the company in effectual and constant control? 12 6
5/8/2011 6 Agency • If X (a s/h) controls a company, is the company necessarily an agent of X? Salomon v Salomon Adams v Cape Industries Plc [1990] Ch 433 Smith, Stone & Knight v City of Birmingham [1939]: wholly owned subsidiary held to be agent of holding company. • What are the critical factors? -business never transferred to subsidiary; profits of subsidiary were treated as profits of the holding company. 11 Agency • Smith, Stone & Knight v City of Birmingham [1939] 4 All ER 116 Atkinson J: … the question is whether the subsidiary was carrying on the business as the company’s business or as its own. … In all revenue cases… what the courts regarded as of importance for determining that question: who was really carrying on the business? 1. Were the profits treated as the profits of the company? 2. Were the persons conducting the business appointed by the parent company? 3. Was the company the head and the brain of the trading venture? 4. Did the company govern the adventure, decide what should be done and what capital should be embarked on the venture? 5. Did the company make the profits by its skill and direction? 6. Was the company in effectual and constant control? 12
5/8/2011 Agency Is this agency test same as the agency under contract law? What are the criteria? How is the term 'agency'used and understood in the piercing cases? Corporate groups Why/how do companies set up/use subsidiaries? ·“Single economic unit" But separate legal entities in reality: 14 7
5/8/2011 7 Agency • Is this agency test same as the agency under contract law? • What are the criteria? • How is the term ‘agency’ used and understood in the piercing cases? 13 Corporate groups • Why/how do companies set up/use subsidiaries? • “Single economic unit” • But separate legal entities in reality: 14
5/8/2011 Corporate groups DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976]1 WLR 852 Lord Denning MR:a "three in one"or "one in three"case Question:what is the effect of the firm being in truth the three companies? Professor Gower in Modern Company Law 3rded(1969)p.216:"there is evidence of a general tendency to ignore the separate legal entities of various companies within a group,and to look instead at the economic entity of the whole group." ■ What's the focus of the court's analysis? Lord Denning:"this group is virtually the same as a partnership in which all the three companies are partners."..."the three companies should be treated as one,and the parent co should be treated as that one." Goff L:"in this case the two subs were both wholly owned,they had no separate business operations whatsoever;..whether the owners of this business have been disturbed in their possession and enjoyment of it" Shaw L refers to the "utter identity and community of interest between DHN and Bronzer" What's the test? Shaw U and Lord Denning appeared to consider the factor of doing 'justice'to the facts. 15 Corporate groups Woolfson v Strathclyde Regional Council [1978]SC(HL) 90 Similar(but not identical)facts to DHN House of Lords:DHN is inapplicable Why? What's the distinguishing features btw Woolfson and DHN? Following Woolfson,there is a clear conceptual framework to address the question of when the corporate veil can be pierced:the question to ask is whether there are special circumstances indicating that the company in question is a facade concealing the true facts? What then are these special circumstances and what amounts to a facade? This case does not fall within the "facade exception"but the case provides no guidance on what would. 8
5/8/2011 8 Corporate groups DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 Lord Denning MR: a “three in one” or “one in three” case Question: what is the effect of the firm being in truth the three companies? Professor Gower in Modern Company Law 3rded(1969) p.216: “there is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead at the economic entity of the whole group.” What’s the focus of the court’s analysis? Lord Denning: “this group is virtually the same as a partnership in which all the three companies are partners.” … “the three companies should be treated as one, and the parent co should be treated as that one.” Goff LJ: “in this case the two subs were both wholly owned, they had no separate business operations whatsoever; … whether the owners of this business have been disturbed in their possession and enjoyment of it” Shaw LJ refers to the “utter identity and community of interest between DHN and Bronzer” What’s the test? Shaw LJ and Lord Denning appeared to consider the factor of doing ‘justice’ to the facts. 15 Corporate groups Woolfson v Strathclyde Regional Council [1978] SC (HL) 90 Similar (but not identical) facts to DHN House of Lords: DHN is inapplicable Why? What’s the distinguishing features btw Woolfson and DHN? Following Woolfson, there is a clear conceptual framework to address the question of when the corporate veil can be pierced: the question to ask is whether there are special circumstances indicating that the company in question is a facade concealing the true facts? What then are these special circumstances and what amounts to a facade? This case does not fall within the “facade exception” but the case provides no guidance on what would. 16
5/8/2011 Justice or "doing justice" Is"justice"or"doing justice"a factor in piercing the corporate veil? .China Ocean Shipping Co v Mitrans Shipping Co Ltd,CA DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976]1 WLR 852 Would 'doing justice'alone suffice? Cummings L in Re a Company [1985]BCLC 333:'in our view the cases...show that the court will use its power to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration. .The factual setting fits in the category of 'evading existing obligations' A'justice-based'approach is not a basis. Fyffes plc v DCC plc [2005]IEHC 477:Irish position is that justice'is a basis. 17 Statutory provisions Companies Ordinance s 275(3):fraudulent trading Persons knowingly party to fraudulent trading by the company can be personally liable for the company's debts. Transfer of Businesses (Protection of Creditors) Ordinance (Cap 49) .Some circumstances can lead to a transferee of a business being liable for the debts of the business incurred by the transferor prior to the transfer. 18 9
5/8/2011 9 Justice or “doing justice” • Is “justice” or “doing justice” a factor in piercing the corporate veil? China Ocean Shipping Co v Mitrans Shipping Co Ltd, CA DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 • Would ‘doing justice’ alone suffice? Cummings LJ in Re a Company [1985] BCLC 333: ‘in our view the cases … show that the court will use its power to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration.’ The factual setting fits in the category of ‘evading existing obligations’ A ‘justice-based’ approach is not a basis. Fyffes plc v DCC plc [2005] IEHC 477: Irish position is that ‘justice’ is a basis. 17 Statutory provisions • Companies Ordinance s 275(3): fraudulent trading Persons knowingly party to fraudulent trading by the company can be personally liable for the company’s debts. • Transfer of Businesses (Protection of Creditors) Ordinance (Cap 49) Some circumstances can lead to a transferee of a business being liable for the debts of the business incurred by the transferor prior to the transfer. 18
5/8/2011 Criminal Procedure Ordinance(Cap 221)s 101 E. .Where a company commits offence under any ordinance with consent or connivance of a director or other officer in the management of the company. .Director or officer is guilty of the same offence. R v MG Mirchandani(1977) .Company convicted of distributing obscene materials Why were the officers of company also convicted of the offence? 19 Lifting or piercing the corporate veil Attribution of rights or liabilities or actions of company to persons behind the company. Attribution of obligations of persons onto a company controlled by them. 10
5/8/2011 10 • Criminal Procedure Ordinance (Cap 221) s 101 E. Where a company commits offence under any ordinance with consent or connivance of a director or other officer in the management of the company. Director or officer is guilty of the same offence. • R v MG Mirchandani(1977) Company convicted of distributing obscene materials Why were the officers of company also convicted of the offence? 19 Lifting or piercing the corporate veil • Attribution of rights or liabilities or actions of company to persons behind the company. • Attribution of obligations of persons onto a company controlled by them. 20