The principle of separate legal personality, established in the House of Lords decision in *Salomon v A Salomon & Co Ltd* [1897] AC 22, is a cornerstone of UK company law. It establishes that a company is a legal entity distinct from its shareholders and directors. This creates a ‘veil of incorporation’ which separates the company from its members, meaning the members are generally not liable for the company’s debts. However, this fundamental principle is not absolute. The courts have, in limited circumstances, been prepared to ‘pierce’ or ‘lift’ the corporate veil, disregarding the separate personality of the company to impose liability on its members. This essay will explain the main situations where courts will depart from the corporate veil, focusing on the common law position as clarified by the Supreme Court and briefly mentioning statutory exceptions.
The Common Law Position
Historically, the courts’ approach to piercing the corporate veil was inconsistent, often relying on vague metaphors like ‘façade’ or ‘sham’ which led to uncertainty (Dignam and Lowry, 2020). Cases such as *Gilford Motor Co Ltd v Horne* [1933] Ch 935 and *Jones v Lipman* [1962] 1 WLR 832 are classic examples. In *Gilford*, a former employee who was subject to a restrictive covenant set up a company to carry on a competing business. The court issued an injunction against both him and the company, describing the company as a “mere cloak or sham” used to evade his contractual obligation. Similarly, in *Jones v Lipman*, Mr Lipman agreed to sell land but then, to avoid the sale, transferred it to a company he owned. The court ordered specific performance against both Mr Lipman and the company, holding that the company was a “creature of the defendant… a device and a sham, a mask which he holds before his face”. These cases established that the veil could be disregarded where a company was used to evade an existing legal obligation.
This area of law was significantly clarified by the Supreme Court in *Prest v Petrodel Resources Ltd* [2013] UKSC 34. Lord Sumption, giving the leading judgment, sought to define the doctrine restrictively. He distinguished between the ‘concealment principle’ and the ‘evasion principle’. The concealment principle, he argued, does not involve piercing the veil at all; it is where the court looks behind the corporate structure to discover the true facts and identify the real actors. The court does not disregard the veil but looks through it. The evasion principle, by contrast, is the true basis for piercing the veil. Lord Sumption stated that this applies only when “a person is under an existing legal obligation or liability… and he deliberately evades or frustrates [it] by interposing a company under his control” (*Prest*, at [35]). This confirmed the reasoning in cases like *Gilford* and *Jones*. The principle is therefore very narrow and can only be used as a last resort when all other legal remedies are unavailable. Indeed, in *Prest* itself, the veil was not pierced; instead, the court found that the properties held by the companies were held on resulting trust for the husband, and so could be transferred to the wife as part of the divorce settlement. This demonstrates the courts’ preference for using established legal principles over the exceptional measure of piercing the veil.
Statutory Exceptions
In addition to the common law doctrine, Parliament has created specific statutory provisions that allow the corporate veil to be lifted. These are generally found in legislation aimed at preventing fraud or holding directors accountable for misconduct. A key example is found in the Insolvency Act 1986. Section 213 of the Act deals with fraudulent trading. If, in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors, a court can declare that any persons who were knowingly parties to the carrying on of the business in that manner are to be liable to make such contributions to the company’s assets as the court thinks proper. A related provision is section 214, which covers wrongful trading. This imposes liability on a director if they continued to trade when they knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation. In these situations, a director can be ordered to contribute to the company’s assets, thereby making them personally liable for company debts, which is a clear departure from the *Salomon* principle.
Conclusion
In conclusion, the courts are highly reluctant to depart from the corporate veil, recognising that the principle of separate legal personality is vital for commercial certainty. Following the Supreme Court’s decision in *Prest v Petrodel*, the common law power to pierce the veil is now confined to the very narrow ‘evasion principle’, where a company is used to frustrate an existing legal obligation and no other remedy is available. Alongside this limited common law doctrine, Parliament has created specific statutory exceptions, most notably in the context of insolvency, which allow for personal liability to be imposed on individuals who misuse the corporate form. Therefore, while the veil is a strong feature of UK company law, it is not entirely impenetrable, and can be departed from in specific and narrowly defined circumstances to prevent injustice and abuse.
References
Dignam, A. and Lowry, J. (2020) *Company Law*. 11th edn. Oxford University Press.
*Gilford Motor Co Ltd v Horne* [1933] Ch 935.
Insolvency Act 1986.
*Jones v Lipman* [1962] 1 WLR 832.
*Prest v Petrodel Resources Ltd* [2013] UKSC 34.
*Salomon v A Salomon & Co Ltd* [1897] AC 22.
