From Peeping Behind the Corporate Veil, to Ignoring it Completely
| Date | 01 May 1990 |
| Published date | 01 May 1990 |
| DOI | http://doi.org/10.1111/j.1468-2230.1990.tb01816.x |
| Author | S. Ottolenghi |
From Peeping Behind the Corporate Veil,
to Ignoring
it
Completely
S.
OttolenghP
Preamble
The subject of ‘Lifting the veil’ is well known
in
the literature on company law. The problem
which authors face is how to explain the judgments which deviate from the strict rule
of the separate legal entity of the company. Notwithstanding much endeavour, no conclusive
answer has yet been given to the question of when the courts will lift the veil. Indeed,
the plea is often made, both by judges’ and jurists,* that the legislature should lay down
definite rules.3
In
the absence of such statutory directions, it has remained the task of jurists to propose
suggestions for some inroads into this jungle of
judgment^.^
Let me outline
a
few of
them.
Gower’s is a very common dictum, namely, that the courts would lift the veil ‘when
corporate personality is being blatantly used as a cloak for fraud or improper conduct.’S
Pennington6 enumerates four inroads which have been made by the law on the principle
of the separate legal personality
of
companies: the first two are statutory ones,’ followed
by ‘judicial disregard of the principle where the protection of public interests is of paramount
importance, or where the company has been formed to evade obligations imposed by the
law.’* Schmithoff divides the authorities under two headings: ‘the cases in which the
courts applied the principal and agent construction, and the cases in which the courts lifted
the corporate veil because a clear abuse of the corporate form occurred.’9 Another
definition of lifting the veil is that it is
‘a
tactic used by the judiciary in a flexible way
to counter fraud, sharp practice, oppression and illegality.
’lo
Friedman says that courts
would disregard the concept of juristic personality in the frustration
of
tax
evasion, the
*Associate Prof., Faculty of Law, Tel Aviv University, Israel.
This article, based on my Ph.D. on ‘Lifting the veil in Israeli law’, with adaptation and updating
in
respect
of
the English judicature and legislature, is a result of discussions with Prof. L.C.B. Gower during my sabbatical
in London, to whom
I
am indebted, as well as to Mr
H.
Rajak,
for reading this article and proposing suggestions
for its improvement. They are not responsible, however, for the views expressed, which are solely mine.
1 As, for example, Lord Parker: ‘The legislature might, but
no
Court could possibly, lay down a hard
2 See Wedderburn, ‘Multinationals and the Antiquities of Company Law’ (1984) 47
MLR
87,
90.
3 Sealy, however, does not wish a full intervention of the legislator, when he points out the benefits of
‘retaining the flexibility of the present approach, especially where it enables the court to counter fraud,
oppression
or
sharp practice
or
to condone some informality in the affairs of small companies’
-
L.S.
Sealy,
Cases
and
Materials in Company Law
(1985). p.44.
4 Refraining from classification, Lord Palmer simply enumerates special cases in which the veil has been
lifted, by the legislator as well as by the courts: Palmer’s
Company Law,
(24th ed., 1987), Ch 18-23.
5
Gower,
Modern Company Law
(4th
ed.
1979), p.137.
6 Pennington,
Company Law,
(5th ed. 1985), p.53.
7 The first to be mentioned, and ‘by far the most extensive’ is the tax legislation, followed by two sections
of the Companies Act 1985
-
s
24 and
s
630 (now
s
213 Insolvency Act 1986). With regard to these
sections,
see
infra.
8
Pennington,
ibid.
And see also Samuels, ‘Lifting the Veil’, [1964] JBL 107.
9 Schmitthoff, ‘Salomon
in
the Shadow’ [1976] JBL 305, at 307. The first heading describes
what
the courts
does, whereas the latter
when.
10 Smith
&
Keenan,
Company Law
(7th ed 1987), p. 19. They
do
not mention that lifting the veil is practised
also in less dramatic situations, and by the legislature
as
well. And
see
also Northey
&
Leigh,
Introduction
to
Company Law
(4th ed 1987), p.20, enumerating
4
instances in which the veil would
be
lifted: in time
of
war, to determine the enemy character of the company; in cases where the company was formed for
a fraudulent purpose; as between a holding company and its subsidiaries; and in revenue cases.
and fast rule
. .
.’.
Daimler
v
Continental Tyre
&
Rubber Co.
[1916] 2 AC 307, 346.
338
The Modem Law Review
53:3 May 1990 0026-7961
May
19901
Peeping Behind the Corporate Veil
consideration of the real purpose of a transaction as against its legal form, and the disguise
of the controlling hand through subsidiary companies
.I1
The concept of ‘piercing the veil’ in the United StatesI2 is much more developed than
in the
UK.I3
The motto, which was laid down by Sanborn,
J.
and cited since then as the
law, is that ‘when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association
of persons.’I4 The same can be seen in various European jurisdictions.15
The general nomenclature of the subject in England is ‘lifting the veil’, although ‘veil’
is but one
of
the metaphors selected by the court. Other labels include ‘cloak’, ‘alias’,
‘alter ego’, ‘agent’, ‘fiction’, ‘instrumentality’
,
‘puppet’, and ‘sham’.I6 Can such labels
help
us,
or do they divert our attention from the real ~ubstance?’~ Cardozo,
J.
once said
that ‘Metaphors
in
law are to be narrowly watched, for starting as devices to liberate thought,
they end often by enslaving it.’’*
The courts use ‘veil’ as a metaphor in various circumstances, however different their
approach to the veil be in each case. Part of the confusion in this area is due to the fact
that the courts do not differentiate between the various attitudes with which they address
the company when lifting its veil. Thus they can in the same case both ignore the veil
completely and issue injunctions against the company as a separate legal entity. Again,
two incompatible terms for the company may be used side by side in a judgment
-
a
‘puppet’ and ‘an agent’I9
-
the first totally negating the possibility of an independent
legal entity, the latter recognising its existence as a separate legal body and attributing
to it the power to negotiate and finalise a contract on behalf of its principal.20 Which of
these two should prevail?
This confusion can be seen in the literature as well. We often find considerations side
by side with justifications, both forming part of the definition of ‘lifting the veil’;2’ or
11
12
13
14
15
16
17
18
19
20
21
Friedman,
Legal Theory.
(5th ed. 1967), p.523.
As ‘lifting the veil’ is called there.
The ‘Deep Rock’ doctrine (which emerged from
Taylor
v
Standard
Gas
&
Electric
Co.
(1939) 306 US
307), for example, has no parallel in the UK judicature. See Gower,
ibid,
at p.137, especially n 80.
And see also Wedderburn’s remark that ‘experience in the United States ought surely to encourage us
. . . to experiment with the removal of the corporate mask in cases of under-capitalisation’. And ‘our
courts ought surely not to be more afraid of this foray into ‘abuse of rights’ doctrines than are the US
Courts’ (K.W. Wedderburn, ‘A Corporation Ombudsman?’ (1960) 23 MLR 663,667). In Israel we tend
to follow the
UK
trend rather than that of the USA.
US
v
Milwaukee Refrigerator Transit Co.
142 Fed. 242,247. And
see
also Womser, ‘Piercing the Veil
of Corporate Entity’ (1912) 12
Col
LR
496; and Womser,
The Disregard
of
the Corporate Fiction
and
Allied Corporate Problems
(1927). Another classification is by Aronofsky
,
who divides the veil-piercing
responses into three distinct groups: veil-piercing by statute, by alter ego or instrumentality analysis,
and under an enterprise
or
unitary business theory.
See
Aronofsky, ‘Piercing the Transnational Corporate
Veil: Trends, Developments and the Need for Widespread Adoption of Enterprise Analysis’ (1985)
10
NU
IL
&
Com. Reg.
31, 37.
e.g. Machen, ‘Corporate Personality’ (1910) 23
Ham.
L.R
253; Cohn and Simitis, “‘Lifting the Veil”
in the Company Law of the European Continent’ (1963) 12 ICLQ 189.
See Henn and Alexander,
Laws
of
Corporations,
(3rd ed. 1983), p.347. See also a long list assembled
by Pickering, ‘The Company as a Separate Entity’ (1968) 31 MLR 481.
Mayson, French
&
Ryan on
Company
Law
(1988-89)
s
5.2.2,
p.100
point out that ‘The use of this
vague metaphorical language makes it very difficult to discover what the true issues are’. See also Stone,
J.
in
Re Clark’s Will
204 Minn. 574, 578: ‘The method of decision known as “piercing the corporate
veil” or “disregarding the corporate entity” unnecessarily complicates decision.
’
It is dialectically ornate
and correctly guides understanding, but over a circuitous and unrealistic trail. And see (1982) 95
Ham.
L.R
853.
Berkey
v
Third Avenue Ry.
244 N.Y. 84, 94, 155 N.E. 58, 61, (1926) 50 ALR 599, 604.
By Lord Denning MR in
Wallersteiner
v
Moir
(No.1)
[1974] 3 All ER 217 (CA).
See
Henn
&
Alexander: ‘The tem “instrumentality” as applied to a subsidiary is ambiguous, connoting
either identity or separateness’
(op cit
p356, end of n 8).
See
Pennington,
op cit,
who after enumerating the ‘inroads’ continues by saying that it has also been
done ‘by the courts implying in certain cases that a company is an agent or trustee for its members’.
As for the first observation
I
would suggest that this is already
whar
the courts are doing and not
when
they should do it and secondly, this is only
one
of the ways in which the courts lift the veil.
339
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