LW5962

Business and Companies Law

Seminar 4
Exceptions to Corporate
Personality

1
Doctrine of Corporate Personality
and
Lifting the Corporate Veil

2
Intended Learning Outcomes
• Explain why there should be limits to the
doctrine of corporate personality
• Explain and apply the concept of the
corporate veil
• Explain and apply rules when the
corporate veil may be lifted
• Explain and apply the consequences of
lifting the corporate veil

3
Corporate Veil—Personality
• Meaning: a co is a separate legal entity from its
members/shareholders.
• Members will enjoy limited liability and the liability
of the co itself is unlimited.
• The co can sue and be sued in its own name, can
enter into contracts in its own name, purchase
property etc. It gives legal status to an artificial
nuts
entity (legal person). 5

Legal Entity Shareholders

Corporate Personality
Salomon v Salomon & Co [1897] AC 22 HL
Salomon owned a boot making business as sole proprietor
He sold the business to a newly incorporated co--Salomon &
Co Ltd
In order to purchase S’s business, co had a loan of £10,000
from S. S was issued secured debentures over the co assets.
The co went into liquidation with assets remaining of only
£6,000. S was repaid from these assets. Other unsecured
creditors were owed £12,000 and remained unpaid
The creditors argued that S was in effect the co and therefore,
he could not owe money to himself.
Held: the co and S were two and distinct persons and as such
the company incurred the debt. Absent fraud S was not liable.

Loan £10,000
Sold
repaid £6,000
Corporate Personality
Macaura v Northern Assurance Ltd [1925] AC 619 HL
M sold his entire stock of timber to Irish Canadian Sawmills
Ltd, in consideration of 42,000 fully paid £1 shares
M then proceeded to take out an fire insurance policy to cover
the timber in his own name
The timber was destroyed by fire and the insurance co
refused to satisfy M’s claim.
Held: M’s claim was disallowed. He had no ownership to the
timber and, thus, no insurable interest to insure. The timber
was owned by the co, a separate entity, independent of its
shareholders. The co should have been taken out the
insurance policy.

Timber sold

Insurance
Common Law Rules on Lift Veil
(1) Fraudulent or improper purpose不不当欺诈
Ct is prepared to lift the veil where the co is formed
as a sham to evade existing liability or defeat
the law.
__ztre
Gilford Motor Co v Horne [1933] Ch 935
H was employed as Managing Director of G Co. He
covenanted that after the termination of his employment he
would not solicit his former employer’s customers.
H then set up a new co in which his wife and an employee
were the sole shareholders. H used the new co to solicit
G’s customers. G sued H for breach of the covenant.
Held: the new co was H’s agent and solicited under H’s
direction. Veil lifted. Injunction granted.

covenant
New Co solicited Customers
G Co H (eyee)
W+Y G Co 7
Fraudulent or Improper Purpose
Jones v Lipman [1962] 1 WLR 832
L entered into a contract to sell land to J. L
subsequently acted in breach of contract by selling
the land to a co formed by himself.
J sued for specific performance. L argued that a
3/p (the co) had already acquired interest in land.
Held: veil lifted and made an order for SP against L
& the co.
It depends on whether there is any deception or
fraud involved.
sold
__ land
New Co L J
(L) Seller Buyer 8
sue SP
⑦Fraudulent
欺诈⼗十⼆二时
or Improper Purpose
HKSAR v Leung Yat Ming [1999] 2 HKLRD 402 CA
CU offered a rent allowance to L(W) employees on
condition that the proposed accm/n was “not owned by the
eyee, her spouse or relatives and should not have any
financial interest in the property”. L’s husband purchased a
shelf co which he controlled and an apartment was
purchased in the co name & L applied for rent allowance.
Convicted under Prevention of Bribery Ord on using false
docs to deceive.
Held: where the justice of the case required, it was
permissible to go behind the corp veil, particularly where it
was a cloak for deception. Veil lifted.

L Rented + owned New Co

(E/yee, W) Hse allowance (L’s H) 9
Fraudulent or Improper Purpose
• There must be clear evidence of fraud or
cheating.
• It is legitimate to use a ltd co as a vehicle
of business in order to minimise the risk of
the business.
• Court will exercise its power to lift the veil
with care.
• Ct is not prepared to assume that there is
a relationship of agency between the co &
the person who controls the co (Bakri case)
10
Business Structure

Passenger ship “The Costa Concordia” grounded

in Italy in Jan 2012. 17 people were killed.
Think: What is the difference if the shipping
company owns 3 ships or the group has 3 cos to
own 1 ship by each co. N 11
Fraudulent: Group of companies
Bakri Bunker Trading Co Ltd v Neptune [1986] HKLR 345
X controlled 3 cos. Each co owned a ship. The 3
ships were provided with supplies from the same
creditor. 2 ships ordered goods and failed to pay
the creditor after delivery. Creditor sued the 2 cos
holding their own ships and obtained judgment, but
was unable to enforce judgment. Creditor then
arrested the 3rd ship, on the grounds that all 3
ships were owned by X.
Held: Court refused to lift the veil as there was no
improper use of the separate corp entity principle.

not paid
owned S
X
arrest 12
Fraudulent: Group companies
Using the corp structure to evade legal obligations
is objectionable (after obligations arise). Using
a corp structure to avoid the incurring of any
legal obligations in the 1st place is not
objectionable.
China Ocean Shipping Co v Mitrans Shipping Co
Ltd [1995] 3 HKC 123 CA
P chartered a ship to MMP which failed to pay P
some money awarded to it during arbitration. P
claimed that MMP’s parent co was liable to pay.
Held: No veil lift. MMP’s contract was with P.
char
tered
MMP ship
MSL
Cosco
Parent Co Claimed MMP’s debts
13
Fraudulent: Group companies
Adams v Cape Industries plc [1990] 1 Ch 433
“... the court is [not] entitled to lift the
corporate veil as against a defendant co
which is the member of a corp group
merely because the corp structure has
been used so as to ensure that the legal
liability (if any) in respect of particular
future activities of the group …will fall on
another member of the group rather than
the defendant co. Whether or not this is
desirable, the right to use a corp structure
in this manner is inherent in our corp law.”
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(2) National Emergency
Daimler v Continental Tyre & Rubber Co [1916] 2
A.C. 307 HL
During WW1, England & Germany were enemy
states. CT was incorporated in Eng. However
German residents held all of its shares (except
one), & all the directors resided in Germany. CT
sued Daimler for the price of certain goods
delivered before the war.
Held: Corp veil lifted. Although CT was incorped in
Eng, ct looked behind the veil and ruled that the co
should be regarded as a German co.
Sued $ control German:
shareholders/
directors 15
2. Statutory Provisions
(1) Criminal acts
S 101E, Criminal Procedure Ord: when a co
commits a statutory offence, and it is proved that
the offence was committed with the consent or
connivance of an officer concerned in the
management of the co, then he will be guilty of the
same offence. Aas t proveknowledge
in
actualknowledge r
Rv Mirchandani [1977] HKLR 523 Co was charged
under the Obscene Publications Ord for distributing
obscene magazines. Co’s officers were charged
under s 101E. It was held that the words
wiufublindnaslgnoraru.ge
‘consented’ or ‘connived’ covered a situation where
the officers had deliberately shut their eyes to an
obvious means of knowledge. Both co and officers
were liable.
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(2) Fraudulent Trading
S 275(1) Companies (Winding Up and
Miscellaneous Provisions) Ordinanceimpaling (Cap 32):
“If in the course of the winding up of a co it
appears that any business of the co has been
carried on with intent to defraud creditors of the
co or creditors of any other person or for any
fraudulent purpose, the court … may …declare
that any persons who were knowingly parties
to the carrying on of the business [in such
manner] shall be personally responsible,
without any limitation of liability, for all or any of
the debts or other liabilities of the co as the court
may direct.” Poor Co
Credits
Cre/tor
by defraud
Knowing the defraud
ons ibility
Director d for resp 17
Sue
Fraudulent Trading
Concepts of ‘defraud’ & ‘fraudulent purpose’
Re William C Leitch Ltd [1932] 2 Ch 71
Earlier view: Co in financial difficulty by
March—director ordered more goods after that
date—gds became subject to director’s
debenture
“If a co continues to carry on business when there
is to the knowledge of the directors no
reasonable prospect of the creditors receiving
payment of their debts, it is, in general, a proper
inference that the co is carrying on business with
intent to defraud..”
18
Fraudulent Trading
Re Patrick and Lyon Ltd [1933] Ch 786
Maughan J moved away from view in Re
William and said: “..the words ‘defraud’
and ‘fraudulent purpose’ are words which
connote actual dishonesty involving …
real moral blame’.

19
Fraudulent Trading
Personal liability in fraudulent trading
Re White & Osmond (Parkstone Ltd) [1960]
unreported Buckley J said: ‘[T]here is nothing
wrong in the fact that directors incur credit at a
time when, to their knowledge, the co is not able
to meet all its liabilities as they fall due. What is
manifestly wrong is if directors allow a co to incur
credit at a time when the business is being carried
on in such circumstances that it is clear the co will
never be able to satisfy its creditors.’

20
Fraudulent Trading
Aktieselskabet Dansk Skibsfinansiering v Brothers
[2000] 1 HKC 511 CFA
WMI, a subsidiary of WM (parent co), obtained
loans from ADS when there was no reasonable
prospect of repayment. In the past, parent co had
always supported WMI.
CFA upheld the decision that the directors of WMI
had not been fraudulent. They honestly believed
that the co would return to prosperity.
WM
(parent)
former
supports No reasonable
prospect to repay
WMI ADS
(debtor) (creditor) 21
loans
Fraudulent Trading
Aktieselskabet Dansk Skibsfinansiering v Brothers
Lord Hoffman said “It is well established that s 275
requires proof that someone carried on the
business of the co with fraudulent intent and that
the other directors sought to be held liable were
knowingly party to the fraud …”
“the q whether the person … was fraudulent was
subjective in the sense that he personally must
have been dishonest.” (519-20)

22
Fraudulent Trading
Meaning of “party to the carrying on the
business”
Re Maidstone Building Provisions Ltd [1971]
1 WLR 185, it was held that a co secretary
who knew that the co was insolvent but
failed to advise the directors to cease
trading was not a “party to the carrying on
the business” with intent to defraud
creditors.

23