Introduction
The establishment of a company creates a distinct legal entity, separate from its owners and directors. This concept, known as separate legal personality, is a cornerstone of UK company law and was famously established in the case of Salomon v A Salomon & Co Ltd.¹ This principle creates a "veil of incorporation" which separates the company's liabilities from the personal assets of its shareholders. However, the courts have recognised that this veil should not be used to facilitate fraud or injustice. Consequently, in very limited circumstances, the judiciary is prepared to disregard the separate legal personality of a company and attribute liability to its members or directors. This essay will discuss this process, known as "lifting the corporate veil," by examining the key case law that has shaped its development, from the traditional grounds to the modern restrictive approach.
The Foundation of Separate Legal Personality
The House of Lords' decision in Salomon v A Salomon & Co Ltd is the starting point for any discussion on this topic. In this case, Mr Salomon sold his business to a limited company which he had formed, and in which he and his family were the sole shareholders. When the company became insolvent, the liquidator attempted to make Mr Salomon personally liable for the company's debts, arguing that the company was merely his agent or a sham. The House of Lords rejected this argument, holding that the company was a validly formed, separate legal person. This meant that the company’s debts were its own, and Mr Salomon was not personally liable for them. Lord Macnaghten stated that the company is "at law a different person altogether from the subscribers to the memorandum".² This ruling confirmed that even a one-person company is not the agent or trustee of its controller, establishing a rigid veil of incorporation.
Traditional Grounds for Lifting the Veil
Despite the strong precedent set by Salomon, the courts have shown a willingness to lift the veil where a company is used as a device to evade legal obligations or to perpetrate a fraud. These instances have often been described as situations where the company is a "mere façade" or "sham". Two classic cases illustrate this principle. In Gilford Motor Co Ltd v Horne,³ a former employee was subject to a contractual clause preventing him from soliciting his former employer’s customers. To circumvent this, he set up a company to conduct the competing business. The court found that the company was "a mere cloak or sham" for the purpose of enabling him to breach his covenant and issued an injunction against both him and the company.
Similarly, in Jones v Lipman,⁴ Mr Lipman agreed to sell land to Mr Jones but then changed his mind. To avoid the specific performance of the contract, he transferred the land to a company that he had created for this purpose. The court described the company as "a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity" and ordered specific performance against both Mr Lipman and his company. These cases show that where a company is interposed purely to defeat an existing legal right, the courts have been prepared to look behind the veil to provide a remedy.
The Modern Approach: Prest v Petrodel Resources Ltd
Over the years, the case law on lifting the veil became inconsistent and was often described as unprincipled.⁵ The Supreme Court sought to bring clarity to this area of law in Prest v Petrodel Resources Ltd.⁶ In this case, which concerned a matrimonial dispute over assets held by companies owned by the husband, Lord Sumption delivered the leading judgment, which significantly narrowed the doctrine. He established two distinct principles: the "concealment principle" and the "evasion principle".
The concealment principle involves looking behind the veil to understand the true facts, but it does not involve disregarding the veil itself. It is simply a recognition that a company's separate identity can be used to hide the identity of the real actors. The evasion principle, however, is the true basis for lifting the veil. Lord Sumption stated that this principle applies when a person is under an existing legal obligation or liability and deliberately interposes a company, under their control, to defeat or frustrate that obligation.⁷ This is a very narrow ground and applies only where there is a deliberate attempt to evade an existing duty. The decisions in Gilford Motor Co and Jones v Lipman were re-interpreted as classic examples of the evasion principle. In the Prest case itself, the veil was not lifted; instead, the properties were transferred to the wife on the basis that they were held on resulting trust for the husband, an application of the concealment principle.
Conclusion
In conclusion, the principle of separate legal personality established in Salomon remains a fundamental rule of company law. While courts have historically been willing to lift the veil of incorporation where a company is used as a "façade" to avoid legal obligations, the doctrine was often applied inconsistently. The Supreme Court's judgment in Prest v Petrodel Resources Ltd has provided much-needed clarification, confirming that the veil can only be truly pierced under the "evasion principle". This applies in the very specific circumstance where a company is deliberately used to frustrate an existing legal obligation. This has significantly restricted the doctrine, reinforcing the robustness of the corporate veil and ensuring it is only lifted in exceptional and clearly defined situations, primarily to prevent its abuse.
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¹ Salomon v A Salomon & Co Ltd [1897] AC 22. ² Salomon v A Salomon & Co Ltd [1897] AC 22, at 51. ³ Gilford Motor Co Ltd v Horne [1933] Ch 935. ⁴ Jones v Lipman [1962] 1 WLR 832. ⁵ Dignam, A. and Lowry, J. (2020) Company Law. 11th edn. Oxford University Press. ⁶ Prest v Petrodel Resources Ltd [2013] UKSC 34. ⁷ Prest v Petrodel Resources Ltd [2013] UKSC 34, at [35].
References
Dignam, A. and Lowry, J. (2020) Company Law. 11th edn. Oxford University Press.
Gilford Motor Co Ltd v Horne [1933] Ch 935.
Jones v Lipman [1962] 1 WLR 832.
Prest v Petrodel Resources Ltd [2013] UKSC 34.
Salomon v A Salomon & Co Ltd [1897] AC 22.
