The Doctrine of the Veil of Incorporation and Its Consequences

Caselaw
Agricultural Mortgage Corp v Woodward [1995] 1 EGLR 1 (CA).
Gilford Motor Co Ltd v Horne [1933] Ch 935 (CA).
Lee v Lee's Air Farming Ltd [1961] AC 12 (PC).
P v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415.
Prest v Petrodel Resources Ltd [2013] UKSC 34.
S v A Salomon & Co Ltd [1897] AC 22 (HL).

Legislation
Companies Act 2006, s 3(2), 399–402.
 The Doctrine of the Veil of Incorporation and Its Consequences

Introduction

Incorporation is the legal process by which a business is registered and brought into legal

existence. Companies may be incorporated through various means, such as by Royal Charter,

statute, or registration under the Companies Act 2006. This essay will focus on companies

incorporated through registration. According to Company Law by Lee Roach, the person

responsible for undertaking the registration process is called a promoter. 1 The Companies Act

2006 states that a Certificate of Incorporation is issued once the registrar is satisfied that the

documentation for registering a company is complete. 2 The doctrine of incorporation establishes

that a company is a legal entity distinct from its members. In order to curb abuses resulting from

taking advantage of this, courts have devised some exceptions through which they have to pierce

the corporate veil and find them liable.

The Veil of Incorporation: Doctrine and Consequences

Upon incorporation, the company acquires a separate legal personality with rights, duties,

and characteristics separate from those of the shareholders. The consequences of this principle,

supported by legal precedents and statutes, are significant. They include:

1. Corporate Personality

The principle of corporate personality, established in Salomon v A Salomon & Co Ltd [1897]

AC 223, ensures that a company is separate from its members, allowing it to operate distinctively

and limit liability for corporate debts. According to Lee Roach, this principle has promoted

investment and entrepreneurship by minimizing personal risk for investors. However, it can be

modified or disregarded when abused, such as in fraud cases.

1
L Roach, Company Law (4th ed, Oxford University Press 2021). (PG 56).
2
Companies Act 2006 s15.
3
Salomon v A Salomon & Co Ltd [1897] AC 22
2. Limited Liability

When a company is formed, it assumes a separate legal personality and is liable for its debts.

This principle of corporate personality – was engendered by Salomon v A Salomon & Co Ltd

[1897] AC 22, whereby the company adopted legal responsibility for its financial and contractual

engagements and freed the members from any risk of personal liability for the company’s debts.4

In a limited company, the liability of members can only extend up to the value of the shares or

the amount they have contributed.

On the other hand, in an unlimited company, the liability of its members will be unlimited.

3. Perpetual Succession

Under the principle of a separate entity, the company is insulated from the mortality of its

members; it survives the death of all shareholders, continuing to exist as a perpetual entity. As

Lee Roach explains, “A company does not die when its members do; it is a separate legal person

with its own life, unaffected by the personal circumstances of those associated with it.” 5 This

reflects its separation from its members, as the effect of members’ death does not affect the

company in any way.

4. Contractual Capacity

A company can enter into contracts in its name, bringing into existence a contractual

relationship. This was evident in Lee v Lee's Air Farming Ltd [1961] AC 12, where Mr. Lee

carried out business owning and controlling the company at the same time, was an employee. He

died in an accident; the wife sought a worker’s compensation. The court resolved that the

company was different from Mr. Lee and could make a contract with him as an employee so his

4
Salomon (n3).
5
Hannigan, Brenda, Company Law (7th ed, Oxford University Press 2024).
widow could legally receive compensation. 6 This shows how different legal entity provisions

enable companies to enter contracts independently.

5. Ownership of Assets

A company possesses assets that are different from the shareholders' equity. This

principle was brought out in Macaura v Northern Assurance Co Ltd [1925] AC 619, where

Macaura insured some timber owned by the company with a policy prepared in their name. The

timber was burnt, and he had no insurable interest in the property because it belonged to the

company and not to him, as the court ruled. 7This ruling emphasizes that it should not be lost that

company property and shareholder property are two distinct things.

6. Ability to Sue and Be Sued

Companies are recognized as distinct legal persons and, as such, can sue or be sued in

their name. The Companies Act 2006 states that through the company's constitution, the

company becomes legally bound to legal obligations in complete autonomy of its

members.8Additionally, it complies with the proper claimant rule as stated in Foss v Harbottle 67

ER 189, which states that only the company satisfying the wrong can sue and seek redress.9

7. Transferable Shares

Shares may be sold, bought, or allotted. For a company with share capital, it is much easier to

transfer interests because of the transferable nature. Any shareholder may sell his shares at any

time, which will terminate his interest in the company.

8. Floating Charges

6
Lee v Lee's Air Farming Ltd [1961] AC 12 (PC).
7
Macaura v Northern Assurance Co Ltd [1925] AC 619
8
Companies Act 2006 (n2),s 33.
9
Foss v Harbottle 67 ER 189
 Floating charges are charges on assets that can change in value, such as inventory or

accounts receivable. They enable companies to pledge as security to acquire loans debenture,

source funds at their convenience, and have command over their operating assets. For example, a

manufacturing firm bases several raw materials and products on the stock as security for capital

that it will need to continue making products.

9. Nationality and Residence

Once a company is incorporated, its nationality is determined by the jurisdiction in which

it is registered and where it conducts its primary business operations. Additionally, it may be

influenced by where it maintains its principal place of business or where its central management

and control are located. These factors help define the company's legal identity and determine

which laws govern its activities.

Piercing the Corporate Veil via Common Law

Under common law, the principle of piercing the corporate veil was previously articulated in

Adam v Cape Industries plc [1990] Ch 433.10 Lord Justice Roskill explained the limited

circumstances in which the court could pierce the veil of incorporation. Historically, common

law allowed the veil to be pierced in two key circumstances:

1. Agency: A company acting as an agent of its members, effectively treating the corporate

structure as an extension of the individuals behind it. This was established in Smith,

Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116, where the court

held that the company could not claim a separate legal personality when it was merely

acting as the agent of its true principal.11

10
Cape (n 17).
11
Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116.
 2. Fraud or Sham: Where the company is used to conceal or evade legal responsibilities,

often for fraudulent purposes. This was exemplified in Gilford Motor Co Ltd v Horne

[1933] Ch 935, where the defendant used a company to avoid a non-compete clause in a

contract.12

Circumstances for Piercing the Corporate Veil

Although the separate legal entity principle is fundamental to corporate law, the courts

sometimes prematurely penetrate the corporate curtain in cases of abuse. The leading judgment

in establishing the decision is illustrated in Gilford Motor Co Ltd v Horne [1933] Ch 935.13 The

court stated that it was an alter ego of the company and lacked any substantial business purpose,

but to avoid litigation obligations, the court enjoined its operations. The same approach was seen

in Jones v Lipman [1962] 1 WLR 832. The court looked past the corporate entity and determined

that the company's formation was to avoid liability. In these cases, the courts are open to getting

involved when required to stop misuse of the corporate shelter. 14

In Prest v Petrodel Resources Ltd [2013] UKSC 3415The UK Supreme Court developed

veil-piercing, which is a principle that is divided into evasion and concealment.16 Lord Sumption

also pointed out that the ability to pierce through the corporate veil was possible only based on

the evasion principle. Adams v Cape Industries plc [1990] Ch 433 shows the fear that courts

displayed while deciding when the corporate veil should be lifted. The Court of Appeal

dismissed the possibility of treating a parent company and its subsidiary as one company, even

12
Motor (n 13).
13
Gilford Motor Co Ltd v Horne [1933] Ch 935.
14
Jones v Lipman [1962] 1 WLR 832.
15
Prest v Petrodel Resources Ltd [2013] UKSC 34.
16
Hamiisi Junior Nsubuga and L Watkins, 'The Road to Prest v Petrodel: An Analysis of the UK Judicial Approach
to the Corporate Veil—Part 2: Post Prest' (2020) 31(11) International Company and Commercial Law Review 597,
608. (Last Accessed 27th November 2024).
with economic integration claims. Slade LJ argued that a holding company must not be

amputated from its subsidiary unless it asks for something tainted by fraud, impropriety, or

evasion. 17

The court, of course, does not upset the applecart, which is evidence of the strong desire

to preserve the stability of operation afforded by the principle of incorporation. It also shows that

the judiciary sometimes attempts to offset those advantages with an eye toward responsibilities

abused at the corporate level. Using principles like evasion and concealment of corporate

identity, the courts can meet two objectives: avoid eroding the principle of separate legal

personality and effectively deal with fraudulent and unjust cases.

Piercing the Corporate Veil under Statute

Statutory grounds for piercing the corporate veil are provided under Section 213 of the

Insolvency Act 1986, which addresses fraudulent trading. This provision allows the courts to

disregard the corporate entity where it is used to carry out fraudulent activities intended to evade

liabilities.18 The principle was applied in Agricultural Mortgage Corporation Ltd v Woodward

[1995] 1 EGLR 119, where the court ruled that a transaction had been structured to defraud

creditors.20 Similarly, the Insolvency Act 1986 21enables the courts to set aside transactions

entered into to defraud creditors.22

Modern approach to the doctrine of piercing the corporate veil

The modern approach to piercing the corporate veil under common law, as exemplified in

Prest v Petrodel Resources Ltd [2013] UKSC 34, is based on the principles of evasion and

17
Adams v Cape Industries plc [1990] Ch 433.
18
Insolvency Act 1986 s213
19
Agricultural Mortgage Corporation Ltd v Woodward [1995] 1 EGLR 1.
20
A Schall, 'The new law of piercing the corporate veil in the UK' (2016) 13 European Company and Financial Law
Review 549, 565-709 (Last Accessed 20th November 2024).
21
Insolvency Act 1986. (n18), s423.
22
Corporation Ltd v Woodward.
concealment.23 Lord Sumption clarified that the corporate veil could only be pierced when the

company structure was used to evade or conceal legal obligations, not just to avoid general

liability. He emphasized that piercing the veil should not be routine but only applied in

exceptional circumstances where there is a clear and deliberate use of the corporate structure to

frustrate justice.

Although Lord Sumption’s comments were made as obiter statements, they have shaped

subsequent case law. For instance, in R v Sale [2014] 1 WLR 142424 Moreover, Wood v Baker

[2018] EWCA Civ 302, the courts have refined the approach to piercing the corporate veil,

particularly in cases involving fraudulent or abusive conduct.25 Lord Neuberger’s obiter

statements in Prest have since guided decisions in these cases, where the veil was pierced to

prevent evasion of legal responsibilities.26

Critiques and Policy Considerations

Skeptics have repeatedly questioned the legal effects of common law interventions on

legal certainty by insisting that the discretionary nature of such interventions poses particular

risks for businesses that base their legal strategies on doctrine. However, in Prest, Lord

Neuberger was somewhat critical of relying on veil-piercing too frequently, with further remarks

stating that, more often than not, it would be better to look for other ways of obtaining the

desired relief, such as constructive trusts or statutory claims. Although Neurenberg’s statements

were delivered as Obiter statements, they have since informed the decision in subsequent cases,

23
Petrodel (n15).
24
R v Sale [2014] 1 WLR 1424 (CA).
25
Wood v Baker [2018] EWCA Civ 302.
26
Robert B Thompson, 'Piercing the Corporate Veil: An Empirical Study' (1990) 76 Cornell Law Review 1036. (Last
Accessed 22nd November 2024)
such as R. V Sale, a clear example of the concealment principle.27, and Wood v Baker [2015]

EWHC 2536 (Ch), where the company's corporate personality was disregarded.28

The opponents, such as Roach, Hannigan, and French, have said there is a legal risk due

to the discretionary nature of veil piercing. Legal tools such as s 423 of the Insolvency Act 1986

suffer from the difficulty of evidence fraud. However, veil piercing is still crucial for dealing

with corporate misconduct and preserving corporate independence and responsibility. As this

continues to be practiced, the courts and lawmakers must be able to address these risks while not

negativizing incorporation. Achieving this balance, however, requires constant review of the

legal structures to fashion them to reflect the realities of the societies they seek to serve.

Conclusion

The incorporation doctrine remains the foundation of present corporate law. However, its

abuse requires creating something like veil piercing to counter the vast issues it makes. It is

recognized that statutory and common law remedies still need to be completed, but they have an

essential function of enforcing corporate responsibility. With changes taking place in the legal

environment, there is a need to make reforms to ensure that challenges are met while at the same

time maintaining corporate structures.

27
Sale (n 27).
28
Baker (n 28).
 Bibliography

Textbooks
Brenda Hannigan, Company Law (5th ed, Oxford University Press 2018).
Hannigan B, Company Law (7th ed, Oxford University Press 2024).
Derek French, Mayson, French & Ryan on Company Law (37th ed, Oxford University Press
2020).
L Roach, Company Law (4th ed, Oxford University Press 2021).
Alaric Watson and Stephen Baister, 'Antecedent Transactions' in Bankruptcy: Law and Practice
(Edward Elgar Publishing 2023) 306–333.

Articles
A Schall, 'The new law of piercing the corporate veil in the UK' (2016) 13 European Company
and Financial Law Review 549, 565–70.
E Lim, 'Salomon reigns' (2013) Law Quarterly Review 480, 483–84.
Hamiisi Junior Nsubuga and L Watkins, 'The Road to Prest v Petrodel: An Analysis of the UK
Judicial Approach to the Corporate Veil—Part 2: Post Prest' (2020) 31(11) International
Company and Commercial Law Review 597, 608.
Mark WH Hsiao, 'The Legal Transplant of the English Floating Charge and the Pledge Over
Receivables into Chinese Law' (2014).
Robert B Thompson, 'Piercing the Corporate Veil: An Empirical Study' (1990) 76 Cornell Law
Review 1036.