liability
How limited is my liability?
  • 12th Jun 2019
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Although a limited liability company cannot function without the people behind the running of the company, in essence the company has its own legal personality, or identity, which is not the same as the identities of its individual shareholders, directors, parent or subsidiary companies.

 

The decision of the House of Lords in the case of Salomon v Salomon & Co Ltd [1897] AC 22 cemented this principle which has formed the foundation stone of company law for more than 100 years.  However, as with most legal principles, there are exceptions to this rule so that the ‘corporate veil’ can be ‘pierced’.  These have grown over the years mainly by the passing of various pieces of legislation although there has been recent case law on the subject which has made the people behind the running of the company to become personally liable for the company’s actions, omissions or debts in certain circumstances.

 

Piercing the corporate veil

 

Piercing the corporate veil is a term used to mean looking beyond the company’s independent legal identity and fixing liability to the shareholders.

 

A landmark case was Petrodel Resources Ltd v Prest [2013], which concerned a dispute over matrimonial assets, where the Court held that in very limited circumstances, and in cases where there was fraudulent activity, the corporate veil could be pierced to enable a company’s assets to be pursued.

 

In this case it was explained by Lord Sumption that the corporate veil can be pierced through what is called the “evasion principle”. This is when a person in charge of a company is subject to a legal right, however puts the company in between them and this right. It was further said that the piercing of the corporate veil could only be done to prevent the abuse of the company’s legal personality.

 

Statutory exceptions

 

There are further exceptions to the rule established in the Salomon case through statutory means.

 

The first of these is seen in Part 2A of the Environmental Protection Act 1990 where a company may commit environmental offences. It is explained that the enforcing authority must require those who are accountable to remediate it so the land is fit for use. The statutory guidelines helped to clarify that this also meant a director of the company could be liable for the necessary remedial work depending on the circumstances.

 

The Proceeds of Crime Act 2002 (POCA) also sets an authority for how the corporate veil can be pierced. Through POCA, the Court can make a confiscation order for an amount equal to the party’s benefit from criminal conduct (sections 6 and 7), make a restraint order (section 41) and appoint a receiver to manage any property (section 48).

 

In the case of R v Sale [2013], the Court of Appeal set out the three circumstances when the Court can pierce the corporate veil under POCA to apply a confiscation order to assets owned by the company but controlled by a defendant.

 

  1. The defendant attempts to shelter behind a corporate façade to hide a crime and their benefits from it.
  2. When an offender does act in the name of the company, which leads to the offender’s conviction due to a criminal offence.
  3. Where the transaction or business structure constitutes as a “device” to disguise the true nature of the transaction or to deceive a third party or Court.

 

Treacy LJ stated that the three situations above are examples of the “concealment principle”. This is because the offender is attempting to “conceal” their actions behind the separate personality of the company. However, in this instance the corporate veil protecting the individual offender can be pierced allowing them to be personally liable.

 

Wrongful and fraudulent trading

 

Wrongful and fraudulent trading by a director of a company is another example of when individuals within a company can become personally liable.

 

The Insolvency Act 1986 provides that if the company has gone into insolvent liquidation and the director knew or ought to have known of the liquidation prior to the commencement, they should not continue to trade under the company.  Fraudulent trading is where it appears that the business of a company has been carried out with the intent to defraud creditors.

 

If the director does continue to trade after insolvent liquidation proceedings have begun, they may be ordered to contribute to the company’s assets as the Court sees fit. This suggests once again that the corporate veil is not an unbreakable security for the liability of the individuals in the company.

 

The resilience of the corporate veil

 

The limited liability company has proven to secure unique protection of individuals within a company against dispute liability. As the tests above show, it is only under exceptional cases that the corporate veil is to be pierced and the liability of the individual within the company to be in question.

 

Therefore, the tool of limited liability is seen to be pivotal in the protection of the company’s shareholders. However, as shown above, when this security is abused there is a power in place to counteract this protection and stop the limitation to the individual’s liability.

 

If you have any further questions on these issues please do not hesitate to contact us.