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Piercing the Corporate Veil
Corporate Legal Personality and Shareholder Liability
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Piercing the Corporate Veil | Corporate Legal Personality and Shareholder Liability
Piercing the Corporate Veil Corporate Legal Personality and Shareholder Liability
The recent Privy Council case of Persad v Singh emphasised once again that only in exceptional circumstances will a court “pierce the corporate veil� and attach liability to a shareholder for the actions of a company. Whilst this does not necessarily break new ground, it reaffirms a long-standing principle of contract law, and provides some salutary lessons for parties to take note of when entering into commercial contracts.
John McDermott Solicitor john.mcdermott@laytons.com +44 (0)161 214 1600
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Piercing the Corporate Veil | Corporate Legal Personality and Shareholder Liability
The principle was determined back in 1897 in the case of Salomon v A Salomon and Co Ltd, which established the difference between a company and its shareholders as legal personalities. Since then the rule has been debated at length, and challenged in some quarters, but the principle remains the same to this day.
Key facts and findings The key facts and findings to take away from this case are: 1. Change in parties:
it was intended throughout preliminary negotiations that P would take on the lease personally. In fact, CHTL was only incorporated immediately before the lease was executed. The first that S knew of CHTL was when the draft lease was returned to him executed by CHTL instead of P. This held little sway with the Judge. The key issue was who the contracting parties were, whether
Case summary The present case concerned a claim for damages and
the contract was clear on this point, and whether it had been validly executed. Therefore, contracts should be scrutinised carefully to check that they match the terms as understood by the parties;
various other remedies brought by Mr Singh (“S”) arising out of alleged breaches of a commercial lease, for which he submitted that Mr Persad (“P”) was jointly liable, along with a company of which P was sole director and shareholder.
2. Single-owner companies:
S sought to argue that because P was the sole director and shareholder of CHTL, that P and CHTL were one and the same, and P should therefore be liable for
In 2002 S had granted the lease of a commercial premises
CHTL’s actions. The Judge was equally dismissive of this
to Chicken Hawaii (Trinidad) Ltd (“CHTL”), P’s company. After
argument, stating that “if such a factor justified piercing
receiving complaints of nuisance, and observing disrepair
the veil of incorporation, it would make something
at the premises, in 2004 S issued legal proceedings for
of a mockery of limited liability both in principle and
possession, arrears of rent, damages for breach of covenant,
practice”;
and mesne profits. Crucially, both CHTL and P were named as defendants. Judgment was duly given in S’s favour. The case in question was P’s appeal against the finding that he was personally liable for the actions of CHTL.
3. Avoiding liability is not in itself illegal:
this is directly related to the above point. A court will only consider piercing the corporate veil where a person is under a legal obligation but uses a company
P was successful at appeal, with the Judge reiterating the
to “deliberately evade” that obligation, or “deliberately
well-established principle that the corporate veil will only
frustrate” its enforcement. In short, the bar is set so
be pierced in the most exceptional of circumstances, and
high that conduct would need to verge on fraudulent
concluding emphatically that “the facts of this case do not
before the corporate veil could be pierced. Merely
begin to justify piercing the veil of incorporation”.
using a corporate vehicle to limit or avoid liability falls way short of such a threshold, and is, in fact, a fundamental aspect of company and partnership law: “one of the key reasons that an individual… will take advantage of limited liability is to avoid personal liability if things go wrong”;
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Piercing the Corporate Veil | Corporate Legal Personality and Shareholder Liability
4. ‘Fairness’ is not a consideration:
this again flows from the points above. A court will not
3. Seek security:
protect your interests by obtaining security to back up
consider piercing the corporate veil simply because
the contract. In particular, when entering into a contract
a party has been treated “unfairly”. The threshold set
with a corporate entity seek personal guarantees from
out in point 3 above must be met. Therefore, feeling
directors and/or shareholders to stand behind the
unjustly treated is not itself sufficient grounds to seek to
obligations of the company. If necessary (i.e. in the
hold a shareholder liable for a company’s actions. On
case of a loan agreement) these should be backed up
this issue the courts deal in legal principles only, and
by legal charges over those individuals’ properties, as
therefore the safest way to protect your interests when
well as the property of the company. Conversely, if
entering into commercial contracts is to take the steps
entering into a commercial contract with an individual,
set out below.
seek guarantees from any companies which he or she is a director or shareholder of, and security over the
What you should do
property and assets of the company or companies if necessary.
You can protect your interests when entering into commercial
Taking such action would ensure that liability would
contracts by taking the following steps:
ultimately attach to both the company and key individuals in the event of a dispute, and avoid being
1. Legal advice:
left exposed as S was in the present case. This is
seek the best possible legal advice at the outset of
an especially vital precaution against the risk of the
contract negotiations. Your legal adviser will be able
contracting company becoming insolvent with no assets
to identify and strike out or modify any issues that
to pursue;
would leave you exposed, and to argue for more advantageous terms than you may have been able to negotiate on your own. An affordable legal spend at
4. Single-owner companies:
don’t labour under the illusion that it will be any easier
the outset of negotiations is infinitely less costly than
to pierce the corporate veil in respect of a company
having to hire a lawyer to litigate in the event of a
that has just one shareholder-director. The case at
dispute after a contract has been signed and ultimately
hand emphasises that this has no bearing on a court’s
breached;
thinking; the fact that the other contracting party is a “one-man band” does not remove the need to fully
2. Agree a term sheet at the outset:
protect yourself via the above measures.
sometimes known as a Heads of Terms or Memorandum of Understanding, this is a short document which summarises the parties’ agreed understanding of a transaction’s key terms. It is a useful tool for recording and retaining a focus on exactly what has been agreed. More significantly, it is much easier to challenge a deviation from a set of agreed terms – such as P substituting a different party from that originally intended – when those terms are agreed in writing instead of verbally; laytons.com | 5
Piercing the Corporate Veil | Corporate Legal Personality and Shareholder Liability
Corporate We advise on every facet of our client’s corporate legal needs through the complete life-cycle of an enterprise, from its inception, through its growth and expansion to, perhaps, its sale or flotation on a public market. Our teams focus on acquiring a deep understanding of the particular needs and objectives of our clients to deliver advice and outcomes that are tailored to those needs and objectives and which meet them swiftly and cost-effectively. The approach to technical problems is informed, insightful and proportionate, and we take pride in viewing problems from a fresh perspective to provide innovative solutions.
Our Team Michael Barrington
Kathryn Beasley
Ben Crichton
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Solicitor kathryn.beasley@laytons.com +44 (0)20 7842 8000
Solicitor ben.crichton@laytons.com +44 (0)20 7842 8000
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Partner daniel.oldfield@laytons.com +44 (0)20 7842 8000
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This information is offered on the basis that it is a general guide only and not a substitute for legal advice. We cannot accept any responsibility for any liabilities of any kind incurred in reliance on this information.
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