Company Law
Disregarding Separate Legal Personality (Part 1 +2)
Lecture 5 + 6
SLP – Courts shouldn’t question SLP due to limited liability, no ability of the courts to disregard
SLP based on that, even if it was a dummy entity based on Salomon v Salomon
Two lectures are important for the essay for company law, sponsored by McCann Fitzgerald
Caveat
•“For many students and Scholars of company law, it is very difficult to make any principled sense of the
cases that are presented as “lifting” or “piercing cases”. For these students and scholars, the differential
impact between the cases of, on the one hand, the entity doctrine and, on the other hand, attempts to
do fairness and justice to the facts when the entity doctrine creates unexpected results, have resulted in
a set of decisions that do not have any principled thread connecting them” – (D. Kershaw, Company Law
in Context)
Hard to find principled thread between them, vague categories for them
Unprincipled area with contradictory cases
When the courts tried to clarify this area, it has not been too successful, still a lot of uncertainty.
Lift entirely and look behind it or look through it
Difficult to find rational other than the courts trying to administer justice
If the courts allowed separate legal personhood to stand it would lead to an unfair or unjust outcome,
an equitable idea, however what is unjust what satisfies unjust?
Unjust outcome in Soloman? Could argue. What is good, savvy commercial practice limiting your
liability and evading some other obligations?
First Objective of the next three classes
Finding a Structure
to Describe the Circumstances in which we “Disregard” Separate Legal Personality
Second Objective: Look at the Cases which fit within this Structure
First Objective: Finding a Structure
Salomon v A Salomon & Co Ltd
•Lord Halsbury referred to applying the separate legal personality principle provided that there is:
“No fraud and no agency and if the company is a real one and not a fiction or a myth.”
Note: no fraud no agency, not fiction and not a myth?
Least useful would be if the company if real, not real attack.
,Not real; not set up for any legitimate business purpose, not really doing anything other than
obfuscating or erect a barrier between the shareholders and some other liability
shell company to avoid limited liability
Only setting it up as a defense of other obligation you have, courts term it as façade cases or shams
cases.
Motivaiton is limited liability – why accepted in some cases and not in others?
Moral condemnation - don’t like what you’re doing – Courts deciding what is legitimate and illigitimate
is a matter of opinion of ethics.
Creditors held as the authors of their own misfortune because everyone knew they were dealing with a
company so no fraud, didn't do enough to protect themselves and the law is not there to protect fools.
Prest v Petrodel Resources [2013] UKSC 34 – second landmark next to Soloman
Facts: concerns a couple Mr. & Mrs. Prest, Mrs. Prest alleges that Mr. Prest has moved assets out of
their personal ownership and put them into corporate vehicles and he has all of these companies that
he exclusively owns and controls, he argues that these companies shouldn’t be seen as separate entities
instead they should be seen as an extension of Mr Prests own net worth for the purposes of divorce
because she wants her part of the money in the divorce settlement
Mr Prest argues that these companies for all intents and purposes standalone separate entities with
their own legitimate existence and they have nothing to do with my personal divorce not an issue of
(limited liability issue), company gaining entity shielding of the woes and obligations of the shareholders
aswell. Company shielded from shareholder divorce. (Statutory remedies in family law not the focus of
this course)
•Ownership and control is insufficient to pierce the veil.
- Just because you own the company entirely or only director, insufficient for us to pierce the
corporate veil.
•Piercing will not arise solely in the interests of justice.
- Here they question the rationale; is it doing justice in the case?
- UK Courts; skeptical of saying in the interest of justice we’ll disregard separate legal personality
because that is the most discretionary and unclear exception you can have ig you just leave the
discrtion o the courts to disregard separate legal personality in the interest of justice
- Difficult to work with especially in commercial certainty which companies strive for above all
else, liable or not?
- Having to work in a system so uncetain and piercing the veil for ‘the interest of justice’ can be a
step too far
•Instead we require:
–the company be used to avoid or conceal some liability.
–some impropriety. - fraud, court thinking you're misusing corporate entity hood
, –the company to be a façade, even if incorporated originally without deceptive intent. - quite
controversial, one core rationale to disregard SLP; the company isn't real a façade a sham, even if set up
as a sham or even if it was it was set up to do so, the court is saying a company may start off legitimately
but through some misuse of the corporation can become a façade. (CONTROVERSIAL)
Prest v Petrodel Resources [2013] UKSC 34 – per Lord Sumption obiter
“I conclude that there is a limited principle of English law which applies when a person is under an
existing obligation or liability or subject to an existing legal restriction which he deliberately evades or
whose enforcement he deliberately frustrates by interposing a company under his control. The court
may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company
or its controller of the advantage that they would otherwise have obtained by the company's separate
legal personality. The principle is properly described as a limited one, because in almost every case
where the test is satisfied, the facts will in practice disclose a legal relationship between the company
and its controller which will make it unnecessary to pierce the corporate veil.”
- Move assets to the company because even though you're facing liability yourself you personally
have nothing to pay anymore. (Evasion through company to not let wife get funds she is owed
(half)
- Principle is limited to; where test is satisfied the facts will disclose a legal relationship between
the company and the controller which will make it necessary to pierce the corporate veil
- Court is saying we don’t have to disregard the company al the time, could hold contract/agency
relationship, restitution claim and might be able to hold that there's a trustee relationship. None
of this disregard the company as a separate entity
- It enforces and validates the company's separate entity hood. E.g. if you say the company isa
trustee and the person behind it is a beneficiary you're acknowledging that they are separate
people by validating the separateness.
- You don’t need to disregard, usually alternative remedy that still allows company to have its
own entitihood while achieving justice in a particular case.
Evasion Principle (very limited circumstances)
Court thrusting hand through the curtain but is a separate legal entity and imposing an obligaiton on the
company
Pulling back asset or property.
Must be existing legal obligation due to limited liability, shield yourself from prospective or future
liabilities.
= involves “piercing the corporate veil”. The controller is under an existing legal obligation which exists
independently of the company's involvement and company is interposed so that the separate legal
personality of the company frustrates its enforcement.
Courts: Trying to get around us, stopping us doing our job, were not going to let you get away with that,
obiter observation.
What guidance can we provide to future cases given the unprincipled approach
Disregarding Separate Legal Personality (Part 1 +2)
Lecture 5 + 6
SLP – Courts shouldn’t question SLP due to limited liability, no ability of the courts to disregard
SLP based on that, even if it was a dummy entity based on Salomon v Salomon
Two lectures are important for the essay for company law, sponsored by McCann Fitzgerald
Caveat
•“For many students and Scholars of company law, it is very difficult to make any principled sense of the
cases that are presented as “lifting” or “piercing cases”. For these students and scholars, the differential
impact between the cases of, on the one hand, the entity doctrine and, on the other hand, attempts to
do fairness and justice to the facts when the entity doctrine creates unexpected results, have resulted in
a set of decisions that do not have any principled thread connecting them” – (D. Kershaw, Company Law
in Context)
Hard to find principled thread between them, vague categories for them
Unprincipled area with contradictory cases
When the courts tried to clarify this area, it has not been too successful, still a lot of uncertainty.
Lift entirely and look behind it or look through it
Difficult to find rational other than the courts trying to administer justice
If the courts allowed separate legal personhood to stand it would lead to an unfair or unjust outcome,
an equitable idea, however what is unjust what satisfies unjust?
Unjust outcome in Soloman? Could argue. What is good, savvy commercial practice limiting your
liability and evading some other obligations?
First Objective of the next three classes
Finding a Structure
to Describe the Circumstances in which we “Disregard” Separate Legal Personality
Second Objective: Look at the Cases which fit within this Structure
First Objective: Finding a Structure
Salomon v A Salomon & Co Ltd
•Lord Halsbury referred to applying the separate legal personality principle provided that there is:
“No fraud and no agency and if the company is a real one and not a fiction or a myth.”
Note: no fraud no agency, not fiction and not a myth?
Least useful would be if the company if real, not real attack.
,Not real; not set up for any legitimate business purpose, not really doing anything other than
obfuscating or erect a barrier between the shareholders and some other liability
shell company to avoid limited liability
Only setting it up as a defense of other obligation you have, courts term it as façade cases or shams
cases.
Motivaiton is limited liability – why accepted in some cases and not in others?
Moral condemnation - don’t like what you’re doing – Courts deciding what is legitimate and illigitimate
is a matter of opinion of ethics.
Creditors held as the authors of their own misfortune because everyone knew they were dealing with a
company so no fraud, didn't do enough to protect themselves and the law is not there to protect fools.
Prest v Petrodel Resources [2013] UKSC 34 – second landmark next to Soloman
Facts: concerns a couple Mr. & Mrs. Prest, Mrs. Prest alleges that Mr. Prest has moved assets out of
their personal ownership and put them into corporate vehicles and he has all of these companies that
he exclusively owns and controls, he argues that these companies shouldn’t be seen as separate entities
instead they should be seen as an extension of Mr Prests own net worth for the purposes of divorce
because she wants her part of the money in the divorce settlement
Mr Prest argues that these companies for all intents and purposes standalone separate entities with
their own legitimate existence and they have nothing to do with my personal divorce not an issue of
(limited liability issue), company gaining entity shielding of the woes and obligations of the shareholders
aswell. Company shielded from shareholder divorce. (Statutory remedies in family law not the focus of
this course)
•Ownership and control is insufficient to pierce the veil.
- Just because you own the company entirely or only director, insufficient for us to pierce the
corporate veil.
•Piercing will not arise solely in the interests of justice.
- Here they question the rationale; is it doing justice in the case?
- UK Courts; skeptical of saying in the interest of justice we’ll disregard separate legal personality
because that is the most discretionary and unclear exception you can have ig you just leave the
discrtion o the courts to disregard separate legal personality in the interest of justice
- Difficult to work with especially in commercial certainty which companies strive for above all
else, liable or not?
- Having to work in a system so uncetain and piercing the veil for ‘the interest of justice’ can be a
step too far
•Instead we require:
–the company be used to avoid or conceal some liability.
–some impropriety. - fraud, court thinking you're misusing corporate entity hood
, –the company to be a façade, even if incorporated originally without deceptive intent. - quite
controversial, one core rationale to disregard SLP; the company isn't real a façade a sham, even if set up
as a sham or even if it was it was set up to do so, the court is saying a company may start off legitimately
but through some misuse of the corporation can become a façade. (CONTROVERSIAL)
Prest v Petrodel Resources [2013] UKSC 34 – per Lord Sumption obiter
“I conclude that there is a limited principle of English law which applies when a person is under an
existing obligation or liability or subject to an existing legal restriction which he deliberately evades or
whose enforcement he deliberately frustrates by interposing a company under his control. The court
may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company
or its controller of the advantage that they would otherwise have obtained by the company's separate
legal personality. The principle is properly described as a limited one, because in almost every case
where the test is satisfied, the facts will in practice disclose a legal relationship between the company
and its controller which will make it unnecessary to pierce the corporate veil.”
- Move assets to the company because even though you're facing liability yourself you personally
have nothing to pay anymore. (Evasion through company to not let wife get funds she is owed
(half)
- Principle is limited to; where test is satisfied the facts will disclose a legal relationship between
the company and the controller which will make it necessary to pierce the corporate veil
- Court is saying we don’t have to disregard the company al the time, could hold contract/agency
relationship, restitution claim and might be able to hold that there's a trustee relationship. None
of this disregard the company as a separate entity
- It enforces and validates the company's separate entity hood. E.g. if you say the company isa
trustee and the person behind it is a beneficiary you're acknowledging that they are separate
people by validating the separateness.
- You don’t need to disregard, usually alternative remedy that still allows company to have its
own entitihood while achieving justice in a particular case.
Evasion Principle (very limited circumstances)
Court thrusting hand through the curtain but is a separate legal entity and imposing an obligaiton on the
company
Pulling back asset or property.
Must be existing legal obligation due to limited liability, shield yourself from prospective or future
liabilities.
= involves “piercing the corporate veil”. The controller is under an existing legal obligation which exists
independently of the company's involvement and company is interposed so that the separate legal
personality of the company frustrates its enforcement.
Courts: Trying to get around us, stopping us doing our job, were not going to let you get away with that,
obiter observation.
What guidance can we provide to future cases given the unprincipled approach
