Lifting the Veil of Incorporation

The concept of a company being a legal entity can sometimes give undesirable results. In

particular, shareholders could use a company to obtain funds dishonestly, and then not be

liable for repayment.

There are therefore numerous exceptions to the rules defined by Salomon v Salomon & Co

Ltd. These can be implemented by the courts on a case-by-case basis, or by statute.

Exceptions implemented by the courts

Since the courts rule on a case-by-case basis, it can be difficult to classify the exceptions.

Generally, courts will intervene where justice demands it. Some examples of this include:

a) In cases of fraud or sham. These occur where individuals have used the

separate legal entity to do something they are personally forbidden from

doing.

Gilford Motor Co Ltd v Horne (1933)

H was a car salesman, and left G. His contract stated that he wasn’t

allowed to sell to G’s customers for a period after leaving. H set up a

company which then approached his former customers; H argued that

firstly his company was approaching the customers, not him; and

secondly, if thee was wrongdoing, his company was liable and not him.

The courts held that the company was sham, and granted an injunction

against his company as well as him.

Catamaran Cruises Ld v Williams (1994)

W was employed by C. W set up a company and C then subcontracted

with this company, paying the company W’s wages gross of tax. W

worked and had the same benefits as all other employees of C. C ended

their contract with W’s company, but the courts held that this was the

same as dismissing W directly, and W was able to sue for unfair

dismissal (however, W lost this case, since the dismissal was held to be

fair).

b) When the courts recognise an agency relationship. If a subsidiary

company is acting as an agent for its holding company, it may be bound

by the same liabilities and rights of its holding company. However, no

court has yet found subsidiary companies liable for their holding

company’s debts.

Smith, Stone & Knight Ltd v Birmingham Corporation (1939)

SSK owned some land, an a subsidiary company operated on this land.

BC issued a compulsory purchase order on this land. Any company

which owned the land would be paid for it, and would reasonably

compensate any owner for the business they ran on the land. Since the

subsidiary company did not own the land, BC claimed they were entitled

to no compensation. The courts held that the subsidiary company was an

agent and BC must pay compensation.