Objective to Subjective Test: Piercing the Veils of Corporate Members in Companies Groups
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      Disregard of legal personalities within a company group is of a somewhat particular nature for the shareholder of the subsidiaries is a corporate entity rather than a natural person. Accordingly, there are more tests developed than that of a single corporate entity; however, the standard of application is no less strict at all.

      Definition of company groups

      Statutory definitions, clear under ss258 and 259 of CA 1985, describe such legal relationship between holding or parent company and its subsidiary as within any one of the following four kinds of controls: by holding more than half of voting rights at a general meeting; or by having right to appoint or remove more than half of the directors at board meeting; or by being a member and controlling more than half of voting rights at a general meeting under agreements with other shareholders; or sub-subsidiary one. Accordingly, scholars divide groups into two categories: legally vertical groups which consist of a parent and one or more subsidiaries and legally horizontal groups which are made up of companies with cross-shareholdings.Company group in practice is undoubtedly commonplace and dominating. Various reasons for the establishment of associated companies can be listed, such as taxation advantages and running a risky business.

      Individual corporate personalities in a company group

      Legal corporate personality established by Salomon precedent, as a common and binding sense, is also applicable to individual entities in a company group. Each company, per Roskill LJ, in a group of companies is a separate legal entity possessed of separate legal rights and liabilities.That is to say, despite the fact that the disposal rights of property in subsidiaries are restricted in practice as a result of parent company's control, that holding or parent companies and their subsidiaries or sub-subsidiaries have such independent personalities as followed:

      1) They can sue or be sued in their own name.

      2) They will not be liable for the other parties' debts or obligations in contract or tort nor can the parent or holding company bring an action to enforce rights belonging to its subsidiaries for privity of contract, and vice versa.

      3)Assets of a company in no sense belong to other associated companies: the subsidiary is not a trustee for its property for its holding company. They can carry on their own business by owning and dealing with property themselves.

      4) They can contract with outsiders or associated companies on their own behalf where the act and intention should be ascertained by that of their agent. The holding ones' rights are confined to the share of the profits; or to the surplus assets (if any) after liquidation rather than the transaction profits arising from the contract directly.

      5) A company, as a persona ficta, like any other entity recognised by law, has the capacity to commit torts and crimes through the act of its agents or servants.

      As there being exceptions such as statutory ones (under-capitalisation under s118 of CA 1985; sole member in a public company under s24 of CA 1985; misuse of names under s216 of IA 1986; disqualification directors under s11 of CDDA 1986; fraudulent trading under s213 of IA 1986) and case law ones to lift the veil of single limited company, the exceptions to pierce the veil of entities in a company group exist as well. Although, of course, the author is of entirely the same opinion of the wording in Adams v Cape Industries plc (1990) that the fundamental principle is that each company is a separate legal entity possessed of legal rights and liabilities, the emphases of this essay remain upon the exceptions because that the abovementioned Salomon principle, as long as the corporate entities are created lawfully without defects, is res ipsa loquitur and applicable thereto automatically. The claimants relying upon the exceptions, on the other hand, have to bear the burden of proof and break many negative restrictions imposed by precedents in order to ignore the legal personality. In other words, all the circumstances, at least before new precedents, outside the scope of exceptions to pierce the veil, fall within the scope of the fundamental principle of legal personality self-evidently in the case of company group.

      Lifting the veil

      Regard should be had, in the case of circumventing the veil of group companies, to the three legal relationships: dual external relationships (affiliated companies versus transactional outsider retrospectively) and internal relationship (parent company versus its subsidiary or one subsidiary versus the other controlled by the same holding company). As for the lifting tests, in order for the protection of outside creditors, external relationships are the application field rather than the internal relationship; however, the realities of the latter are the touchstone crucial to the judgment.

      1 Theoretical tests thereto

      (i) Interest of justice as an accessory test

      It was a general approach adopted in the past by judges. As the argument advanced by scholars, 'it suffers from the defect of being inherently vague and providing to neither courts nor those engaged in business any clear guidance'.

      Vagueness itself determines the referencing and transitional fate of the approach. It is difficult to find more than simply a reference to other grounds even in the dicta adopting the test: 'this could be done in the interests of justice irrespective of the legal efficacy of the corporate structure provided he either substantially or effectively controlled the company concerned. The network of companies had been set up in an attempt to confuse and conceal.'As for me, the reasoning on the ground of facade to confuse and conceal, despite using the name of interest of justice, is just a supporting evidence for the Woolfson rule below. The interest of justice approach was also applied in Creasey v Breachwood Motors Ltd . In order for the piercing, the court had to distinguish the decision in Adams v Cape Industries plc where the court refused to pierce the veils of companies in a group. The judge, in the name of interest of justice by the wording that 'to achieve justice where its exercise is necessary for that purpose', held that the cause of action had not accrued in the Adams case whereas it had done so in the present case.

      It is submitted that interest of justice test, which had been and will be an important element and guiding reference at the court's discretion, cannot be regarded as an independent test without the support from other tests and facts for its defects. Therefore, the author will leave it alone in the list of practical applications below, which never means it is meaningless: just the opposite, many wordings in precedents using 'justice so requires', even though a different test had been applied, reflected that 'interest of justice', in spite of its adherent (to other tests) status, did influence the decision at all times.

      (ii) Failure of single economic unit argument

      It was argued that companies in a group, under appropriate circumstances, should be treated as a single economic unit. It has been supported by the precedent DHN Food Distributors Ltd v Tower Hamlets London Borough Council where the veil of DHN and its wholly-owned subsidiary had been lifted. Indeed, creditors or other third parties to a subsidiary may be disadvantaged as a result of that company's position in the company group.

      However, from an economic point of view, what should be borne in mind is that the integrated business strategy in a company group which aims to maximize the interests of the company group as a whole, or more commonly speaking, of the parent company, at the cost of subsidiary, seems to be a main reason why the subsidiary is established. Even in conglomerate group, i.e. groups of diversified business, the advantages of common business are obvious such as access to cheaper resources of production supplied by a subsidiary. Therefore, no illegality can be found even partly the interests of the subsidiary have been sacrificed for the benefits of group as a whole. Nor the outside bona fide parties to subsidiaries are left naked without protection since the subsidiaries are set up lawfully with adequate capitalization and apparent information disclosure. Otherwise, adoption of single unit argument is likely to put the shareholder of the subsidiaries in a difficult situation.

      Then, if the argument I advanced from the economic aspect had been wrong, we can, along with the alerting remarks of Goff LJ in Bank of Tokyo Ltd v Karoon , go to the legal point of view, 'the concept of group as a single economic entity found no support as an independent basis on which the corporation veil might be lifted.'The law will not concentrate upon the economically functional organization of a group; as for judges, the holding company is some kind of artificial shareholder, same as a natural citizen to a limited company, to the subsidiary. As a consideration at the process of discretion of the judge, the business realities do make influences, nevertheless only to an unimportant extent which finally always turn to 'the wording of particular statutory or contractual provisions'.As the Court in Cape said, 'To the layman at least the distinction between the case where a company trades itself in a foreign country and the case where it trades in a foreign country through a subsidiary, whose activities it has power to control, may seem a slender one.' The judges' sympathy, possessing an obvious feature, with the claimants' single entity argument, simultaneously shows two sides of a coin: the non-application of the argument on an independent basis as well as the fact that it did influence His Lordship. Therefore, it was criticised by the House of Lords in Woolfson v Strathclyde DC.It has to be admitted that 'the wording of a particular statute or document may justify the court in interpreting it so that a parent and subsidiary are treated as one unit at any rate for some purpose. However, beyond that it was unwilling to go.'

      (iii) Woolfson Rule (or facade test)

      There is 'one well-recognised' exception to the rule prohibiting the piercing of the 'corporate veil'. It is appropriate to pierce the veil of company only where special circumstances exist indicating that it is a mere facade concealing the true facts.The House of Lords, to some extent, criticized Lord Denning MR's economic entity approach and advanced the rule which has been followed by many influential cases.

      As we can see from the wording, 'only' reflects the tendency of courts to restrict the scope of application of lifting theory and follow the Salomon rule, unless the requirements below are complied with to make it possible within the facade test.

      1) 'Where a facade is alleged, the motive of the perpetrator may be highly material.'In Acatos & Hutcheson plc v Watson (1995), it was permissible for A & H to purchase its own shares irrespective of the 'rule in Trevor v Whitworth', according to Lightman LJ, for the inexistence of an intention to set up A Ltd deliberately and especially for the share transaction and the practical indirect outcome of purchase. It is contended, therefore, the motive with which an associated company was formed, usually manifested by the private pre-incorporation arrangement, articles and memorandum of especially formed company or ordinary business scope, was a matter of fact of a crucially influential nature. It was stressed by Slade LJ in Cape Industries that the arrangements involving CPC were not shown to involve actual or potential illegality nor were they intended to deprive anyone of their existing rights; therefore (along with other reasons of course), the subsidiary CPC was not a fa?ade.

      2) There must be some improprieties before the corporate veil can be pierced.In Ord v Belhaven Pubs Ltd, the affirmation of the Salomon doctrine was delivered for 'in present case, no impropriety is alleged.'

      Using the corporate form for the purpose of fraud can be regarded as an impropriety.Deliberate evasion of an existing obligation can be regarded as an impropriety: Followed in Jones v Lipman where the defendant, having sold land by contract to the plaintiff, conveyed the land to a company specially set-up and effectively controlled by him in order for the evasion of specific performance. As we can expect, specific performance was ordered by Russell J against both the perpetrating company and its subsidiary.

      However, the court does not have the power to disregard the legal personality of entities in a group simply for they have been involved in some impropriety.Other standards, especially 'the interests of justice so require' should also be referred.

      3)  The existing nature of the rights to be deprived of by means of the facade is material. 'Law does not look with similar disfavour on the formation of a limited liability company in order to confine the future or contingent liabilities of an enterprise within specific limits.'Any company, as long as other requirements of formation are met, is entitled (or even encouraged in my opinion) to create sub-structures on purpose to minimize its liabilities and risks in ordinary business. The hinge is focused upon the nature of the liabilities confined by the limited-liability principle-future or contingent one or existing one. Should the former one be evaded, it is wise and sophisticated commercial decision to reduce future burdens and risks; should the latter one evaded, it is possible (not necessary in absence of other standards) to be regarded as illegal. After all, it is the original company's credit and performance which third party relied upon to define the scope of others' existing rights (i.e. company's existing liabilities), rather than the sham or fa?ade'. On the other hand, once associated company has been established to avoid future risk, the other party, knowing the conversion of the opposing transaction party, should reasonably judge and then make decision.

      It is still a developing test; therefore, no precise standard or definite requirements can be given. Nevertheless, as noted by a scholar, 'no doubt as the years go by, future cases will gradually result in the courts developing a detailed jurisprudence of the facade concept'.

      (iv) Agency argument

      There was no doubt that should the company have been Salomon's agent, Mr Salomon, as principal, would have been held liable to the creditors for agency theory. The same rule will be invoked in the company group; nevertheless the difficulties and controversies lie in the heavy proving burden for the inherent characteristics within a group: asymmetric information behind the veils and de facto control links always making an outsider's proof next to unavailability.

      Although the descriptions of the agent subsidiary in decisions are various: 'puppy, dummy or commingling', this argument is applicable in some cases for the agency relationship, de facto or de jure. Elements displayed below, somewhat exacting and oppressive, seem necessary for the piercing, rather than parents' controlling interests.

      (A) Control: 'Generally speaking, the courts are more inclined, in appropriate circumstances, to lift the veil of corporateness where questions of control are in issue than where a question of ownership arises.'The control should be of a long-term nature: the test will be inapplicable even though controls exist in particular or several transactions of its subsidiary.Simultaneously, it should be of an all-round nature: it remains inapplicable provided the control does not extend to day-to-day running of business; even though overall control over subsidiary's general policy exists. The meaning of all-around is a kind of control in every respect. Furthermore, it should be of such a close nature that the subsidiary can be regarded as merely an agent. It is important to note that the mere fact that one company is the subsidiary of another, even a 'wholly owned' subsidiary, is not by itself sufficient to make the subsidiary an agent of its holding company.

      (B) Overlaps: As summed up by Prof. Wood, 'overlaps' may include, inter alia, overlap in meetings, directors, business activity, owners, management, bank account, control of employees, books, contracts, insurance policies, advertising, corporate acts, officers, assets, records… and the like.

      (C) Agreement: It has been held in Cape Industries that it, in absence of an express agreement, will be difficult to establish such an agency relationship.

      (v) Liabilities for tort in groups

      In Lubbe v Cape plc, their Lordships upheld the action brought against a parent company where the actual damage originated from the activities of its subsidiaries.

      It seems that it is easier to claim for the liabilities for tort than the requirements in agency argument. Knowing the wrongful operation of and sufficient control over its subsidiary (either de facto or de jure) are obviously lighter burdens of proof for outsiders than what are required mentioned above in the agency argument. It is submitted that, as a public policy, the protection for 'employees' or 'persons in the vicinity of its factory'relieved the claimants in Lubbe v Cape plc from such heavy proving burden as in commercial disputes circumventing the corporate veil. After all protection of environment and employees in torts and the like are popular trend all over the world which renders the entities in a group comparatively more likely to be exposed to corporate tort regardless of corporate personalities. Tendency to pierce in the very circumstances is just a reflection of the court's attitude towards the trend. No space of application of such doctrine exists, in my opinion, for the greedy merchants in the course of business for monetary relief.

      Paramount public interest (or peeping the veil)

      In a few cases, the court has disregarded the separate legal personalities because there was an overriding public interest to be served.It is referred to as paramount public interestor peeping the veilaccording to some scholars. However, it will not be discussed here because such non-commercial elements as nationality and war are concerned made it nearly a public law question.

      2 Practical application thereto

      By virtue of the theoretical analyses above, the application of disregard of corporate personality in a company group context in practice can be summarized as:

      i Subsidiary's grossly under-capitalisaion.

      ii Commingled business affairs to such extent to be regarded as a puppet or agent.

      iii Subsidiary a mere facade for perpetrating a fraud or improper purposes.

      iv Company group tortious liability.


      Objective to subjective and reasons behind:

      As we can see, the standard the court relied upon has growing to some extent from objective to subjective.As one of the main objective tests, single entity argument, which is unreasonable (or at least arguable) from both economic and legal points in my opinion, has been criticized and abandoned by House of Lords after Woolfson. Or, at least, 'the concept of the group as a single enterprise should be used with caution.'Recent cases seem indicate this enterprise doctrine has lost ground.The other one, i.e. agency argument, seems unlikely to apply to a broad extent as a result of the strictness and difficulties in proof.

      Subjective tests are gradually falling into a dominant position. Obviously, 'interest of justice' rule is individually inapplicable notwithstanding the wording of decisions always using 'justice required'. Along with the previously discussed defects, it can also be backed and summarized by the wording of Staughton LJ that 'the creation or purchase of a subsidiary company with minimal liability, which will operate with the parent's funds and on the parent's directions but not expose the parent to liability, may not seem to some the most honest way of trading. But it is extremely common in the international shipping industry and perhaps elsewhere.'It can only be regarded as an influential element adherent to other tests. In the popular and well-recognised facade test, the court declined to 'attempted a comprehensive definition',with adequate space left for equitable discretion and individual fairness as well.

      It is the development of theories in practice. It is submitted there are reasons behind the trend towards subjectiveness. The case law does pierce the corporate veil, but the judges did not intend to permit even the legal professionals to predict precisely when they would do so. 'The cases tend to hunt in packs of two, each case reaching a different result on almost identical facts.'Furthermore, it is so difficult to define in a very formula when and why to disregard the corporate personality for complexity of transactions and large value thereof that considerable degree of discretion has been conferred upon themselves to determine the balance of the equities and do justice pursuant to the individual facts. It is difficult to make valuation of such a tendency; however, I contended that the unpredictability both facilitates transactions and encourages frauds by means of affiliated companies. It is a value judgment for authorities.

      The doctrine of lifting the veil plays a small role in British company law.'In practice the ability to choose between the application of the rule in Salomon's case and the jurisdiction to pierce the veil of corporateness gives the courts a considerable degree of discretion and enables them to do justice and to decide individual cases in accordance with equitable considerations. But it should be emphasized that the rule in Salomon's case is still the principle and the instances of piercing the veil are the exceptions, though their number is growing.'

      Corporate personality:

      Outside the piercing scope, the corporate personality recognised in Salomon is prima facie applicable to all associated members in a company group. Prima facie in this scenario means that, on the one hand, legal personality comprising of many statutory or case law contents is a kind of automatically applicable right for every company, individually or in a group, unless the transaction done can be proved to fall within the exception; and that, on the other hand, recognition by implication of lifting veil as exceptions thereof, though with exacting terms, have been tested by some precedents.

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