The corporate veil in the United Kingdom is a metaphorical reference used in UK company law for the concept that the rights and duties of a corporation are, as a general principle, the responsibility of that company alone. Just as a natural person cannot generally be held legally accountable for another person's conduct or obligations unless they have expressly or implicitly assumed responsibility, guaranteed or indemnified the other person, shareholders, directors and employees are generally not bound by the rights and duties of a corporation. This concept has traditionally been likened to a "veil" of separation between the legal entity of a corporation and the real people who invest their money and labor into a company's operations.
The corporate veil in the UK is, however, capable of being "lifted", so that the people who run the company are treated as being liable for its debts, or can benefit from its rights, in a very limited number of circumstances defined by the courts. It generally only happens when there is wrongdoing by the people/person in control. This matters mostly when a company has gone insolvent, because unpaid creditors will wish to recover their money if they can prove wrongdoing by the people in control.
Separate legal personality
English law recognised long ago that a corporation would have "legal personality". Legal personality simply means the entity is the subject of legal rights and duties. It can sue and be sued. Historically, municipal councils (such as the Corporation of London) or charitable establishments would be the primary examples of corporations.In 1612, Sir Edward Coke remarked in the Case of Sutton's Hospital (1612) 10 Rep 32; 77 Eng Rep 960, 973, "the Corporation itself is onely in abstracto, and resteth onely in intendment and consideration of the Law; for a Corporation aggregate of many is invisible, immortal, & resteth only in intendment and consideration of the Law; and therefore it cannot have predecessor nor successor. They may not commit treason, nor be outlawed, nor excommunicate, for they have no souls, neither can they appear in person, but by Attorney. A Corporation aggregate of many cannot do fealty, for an invisible body cannot be in person, nor can swear, it is not subject to imbecilities, or death of the natural, body, and divers other cases." Without a body to be kicked or a soul to be damned,The turn of phrase used in Northern Counties Securities Ltd v Jackson & Steeple Ltd 1 WLR 1133, per Walton J, "Mr. Price argued that, in effect, there are two separate sets of persons in whom authority to activate the company itself resides. Quoting the well known passages from Viscount Haldane LC in Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd AC 705, he submitted that the company as such was only a juristic figment of the imagination, lacking both a body to be kicked and a soul to be damned." n.b. Lord Haldane never used such figurative words. They may trace back to Lord Chancellor Thurlow (1731–1806), who is said to have asked rhetorically, "did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked?" Though it seems his exact phrase was, "Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like." John Poynder, Literary Extracts (1844) vol 1, p 2 or 268 a corporation does not itself suffer penalties administered by courts, but those who stand to lose their investments will. A company will, as a separate person, be the first liable entity for any obligations its directors and employees create on its behalf.For a very old example, see Edmunds v Brown and Tillard (1668) 83 ER 385-387 If a company does not have enough assets to pay its debts as they fall due, it will be insolvent - bankrupt. Unless an administrator (someone like an auditing firm partner, usually appointed by creditors on a company's insolvency) is able to rescue the business, shareholders will lose their money, employees will lose their jobs and a liquidator will be appointed to sell off any remaining assets to distribute as much as possible to unpaid creditors. Yet if business remains successful, a company can persist forever, even as the natural people who invest in it and carry out its business change or pass away.
Limited liability
Most companies adopt limited liability for their members, seen in the suffix of "Ltd" or "plc". This means that if a company becomes insolvent, unpaid creditors generally cannot seek contributions from the company's shareholders or employees, even where those individuals may have benefited from the company's activities. The liability of a company itself is unlimited (companies have to pay all they owe with the assets they have), but the liability of those who invest their capital in a company is (generally) limited to their shares, and those who invest their labour can only lose their jobs.See Insolvency Act 1986 s 74(2)(d) in the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member'. However, limited liability acts merely as a default position. It can be "contracted around" where creditors have the opportunity and bargaining power to negotiate additional security or guarantees.See generally, PL Davies, An Introduction to Company Law (Clarendon 2002) ch 4 A bank, for instance, may not lend to a small company unless the company's director gives her own house as security for the loan (e.g., by mortgage). Just as it is possible for two contracting parties to stipulate in an agreement that one's liability will be limited in the event of contractual breach, the default position for companies can be switched back so that shareholders or directors do agree to pay off all debts. If a company's investors do not do this, so their limited liability is not "contracted around", their assets will (generally) be protected from claims of creditors. The assets are beyond reach behind the metaphorical "veil of incorporation".
Assumption of responsibility
Williams v Natural Life Health Foods Ltd 1 WLR 830
Lifting the veil
If a company goes insolvent, there are certain situations where the courts lift the veil of incorporation on a limited company, and make shareholders or directors contribute to paying off outstanding debts to creditors. However, in UK law the range of circumstances is heavily limited. This is usually said to derive from the "principle" in Salomon v A Salomon & Co Ltd.Salomon v A Salomon & Co Ltd AC 22 In this leading case, a Whitechapel cobbler incorporated his business under the Companies Act 1862. At that time, seven people were required to register a company, possibly because the legislature had viewed the appropriate business vehicle for fewer people to be a partnership.See R Grantham, 'The Doctrinal Basis of Company Law' (1998) 57 Cambridge Law Journal 554, 560 Mr Salomon met this requirement by getting six family members to subscribe for one share each. Then, in return for money he lent the company, he made the company issue a debenture, which would secure his debt in priority to other creditors in the event of insolvency. The company did go insolvent, and the company liquidator, acting on behalf of unpaid creditors attempted to sue Mr Salomon personally. Although the Court of Appeal held that Mr Salomon had defeated Parliament's purpose in registering dummy shareholders and would have made him indemnify the company, the House of Lords held that, so long as the formal requirements of registration were followed, the shareholders' assets were separate from those of the company as a legal person. There could not, in general, be any lifting of the veil.See also, Lee v Lee's Air Farming Ltd
Wrongful trading
The principle in Salomon's case is open to a series of qualifications. Most significantly, statute may require directly or indirectly that the company not be treated as a separate entity. Under the Insolvency Act 1986, section 214 stipulates that company directorsOr "shadow directors", defined under IA 1986 s 251 as "a person in accordance with whose directions or instructions the directors of the company are accustomed to act". See Re Hydrodam (Corby) Ltd BCC 161. must contribute to payment of company debts in winding up if they kept the business running up more debt when they ought to have known there was no reasonable prospect of avoiding insolvency.
Statutory purpose A number of other cases demonstrate that in construing the meaning of a statute unrelated to company law, the purpose of the legislation should be fulfilled regardless of the existence of a corporate form. For example, in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd,Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd 2 AC 307 the Trading with the Enemy Act 1914 said that trading with any person of "enemy character" would be an offence. So even though the Continental Tyre Co Ltd was a "legal person" incorporated in the UK (and therefore British) its directors and shareholders were German (and therefore enemies, while the First World War was being fought).See also, Re FG Films Ltd 1 WLR 483, where the film 'Monsoon', although owned by a UK company, was considered "made" under the Cinematograph Film Act 1948 by the Americans who financed and worked on it.
Tunstall v Steigmann 2 QB 593
Avoiding a pre-existing duty There are also case based exceptions to the Salomon principle, though their restrictive scope is not wholly stable. The present rule under English law is that only where a company was set up to commission fraud,e.g. Re Darby, ex parte Brougham 1 KB 95 or to avoid a pre-existing obligation can its separate identity be ignored. This follows from the leading case, Adams v Cape Industries plc. Ch 433 A group of employees suffered asbestos diseases after working for the American wholly owned subsidiary of Cape Industries plc. They were suing in New York to make Cape Industries plc pay for the debts of the subsidiary. Under conflict of laws principles, this could only be done if Cape Industries plc was treated as "present" in America through its US subsidiary (i.e. ignoring the separate legal personality of the two companies). Rejecting the claim, and following the reasoning in Jones v Lipman,Jones v Lipman 1 WLR 832, where to avoid an order for specific performance, Mr Lipman sold his house to a company. Russell J held that this attempt to avoid a pre-existing obligation meant the court could ignore the separate legal identity of the company and award specific performance as a remedy anyway. the Court of Appeal emphasised that the US subsidiary had been set up for a lawful purpose of creating a group structure overseas, and had not aimed to circumvent liability in the event of asbestos litigation.
Tort victims
The harsh effect on tort victims, who are unable to contract around limited liability and may be left only with a worthless claim against a bankrupt entity, has been ameliorated in cases where a duty of care in negligence may be deemed to be owed directly across the veil of incorporation.
Lee v Lee’s Air Farming Ltd AC 12, a statutory compensation system in part operated because the veil was not lifted, and a director was treated as a worker of the company Connelly v RTZ Corp Plc AC 854 Lubbe v Cape Plc 1 WLR 1545 Chandler v Cape plc EWHC 951 (QB) held that a parent company (Cape plc) owed a duty of care to one of the employees of a subsidiary company
Company groups