Friday 17 October 2008

UK: England and Wales: lifting the veil of incorporation

In Hashem v Shayif & Anor [2008] EWHC 2380 (Fam), Mr Justice Munby provides detailed analysis of the principles governing the circumstances in which the separate legal personality of the company can be ignored (often known as lifting or piercing the veil of incorporation). This issue arose in ancillary relief proceedings brought by an ex-wife against her former husband in which she argued that he and a company were "one and the same" and that, as such, the company's assets belonged to the husband. 

In his judgment, delivered in the Family Division, Munby J. stressed that in determining whether the veil could be lifted, the same principles applied in the Family Division as in the Chancery Division.  In this regard he cited with approval the following dicta of Bodey J. (in Mubarak v Mubarak [2001] 1 FLR 673, p. 682): "it is quite certain that company law does not recognise any exception to the separate entity principle based simply on a spouse's having sole ownership and control". The need for Munby J. to make these points might, at first sight, be surprising but it is clear from his judgment that he believes that some involved with Family Division proceedings do not fully appreciate the principles flowing from the company's separate legal personality (see, e.g., paras [149] and [159]). 

Munby J. accepted as definitive the following statement by Lord Keith of Kinkel in Woolfson v Strathclyde Regional Council 1978 SC(HL) 90, 96: "it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts". His Lordship also articulated the following principles:
  • Ownership and control of a company are not of themselves sufficient to justify piercing the veil (para. [159]). 
  • The veil cannot be pierced merely because it is thought to be necessary in the interests of justice (para. [160]).
  • The veil can be pierced only if there is some impropriety but this alone is not sufficient: the impropriety must be linked to the use of the corporate structure to avoid or conceal liability (paras. [161] - [162]).
  • There must be control by the wrongdoer(s) and impropriety, i.e., (mis)use of the company by them as a device or façade to conceal their wrongdoing (para [163]).
  • A company can be a façade even though it was not originally incorporated with deceptive intent (para. [164]).

1 comment:

Jorge said...

At least one common law country seems to have adopted a different approach to the issue. The Bombay High Court decision in the Vodafone tax case seems to life the veil over group companies following a “single economic entity” argument. A came across this post analyzing the judgment on the Law and Legal Developments blog which is an up-and-coming Indian law blog.

Several interesting issues related to corporate taxation…