Piercing the Corporate Veil

LAYTONS LLP

Piercing the Corporate Veil

Corporate Legal Personality and Shareholder Liability

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Piercing the Corporate Veil | Corporate Legal Personality and Shareholder Liability

Piercing the Corporate Veil Corporate Legal Personality and Shareholder Liability

The recent Privy Council case of Persad v Singh emphasised once again that only in exceptional circumstances will a court “pierce the corporate veil� and attach liability to a shareholder for the actions of a company. Whilst this does not necessarily break new ground, it reaffirms a long-standing principle of contract law, and provides some salutary lessons for parties to take note of when entering into commercial contracts.

John McDermott Solicitor john.mcdermott@laytons.com +44 (0)161 214 1600

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Piercing the Corporate Veil | Corporate Legal Personality and Shareholder Liability

The principle was determined back in 1897 in the case of Salomon v A Salomon and Co Ltd, which established the difference between a company and its shareholders as legal personalities. Since then the rule has been debated at length, and challenged in some quarters, but the principle remains the same to this day.

Key facts and findings The key facts and findings to take away from this case are: 1. Change in parties:

it was intended throughout preliminary negotiations that P would take on the lease personally. In fact, CHTL was only incorporated immediately before the lease was executed. The first that S knew of CHTL was when the draft lease was returned to him executed by CHTL instead of P. This held little sway with the Judge. The key issue was who the contracting parties were, whether

Case summary The present case concerned a claim for damages and

the contract was clear on this point, and whether it had been validly executed. Therefore, contracts should be scrutinised carefully to check that they match the terms as understood by the parties;

various other remedies brought by Mr Singh (“S”) arising out of alleged breaches of a commercial lease, for which he submitted that Mr Persad (“P”) was jointly liable, along with a company of which P was sole director and shareholder.

2. Single-owner companies:

S sought to argue that because P was the sole director and shareholder of CHTL, that P and CHTL were one and the same, and P should therefore be liable for

In 2002 S had granted the lease of a commercial premises

CHTL’s actions. The Judge was equally dismissive of this

to Chicken Hawaii (Trinidad) Ltd (“CHTL”), P’s company. After

argument, stating that “if such a factor justified piercing

receiving complaints of nuisance, and observing disrepair

the veil of incorporation, it would make something

at the premises, in 2004 S issued legal proceedings for

of a mockery of limited liability both in principle and

possession, arrears of rent, damages for breach of covenant,

practice”;

and mesne profits. Crucially, both CHTL and P were named as defendants. Judgment was duly given in S’s favour. The case in question was P’s appeal against the finding that he was personally liable for the actions of CHTL.

3. Avoiding liability is not in itself illegal:

this is directly related to the above point. A court will only consider piercing the corporate veil where a person is under a legal obligation but uses a company

P was successful at appeal, with the Judge reiterating the

to “deliberately evade” that obligation, or “deliberately

well-established principle that the corporate veil will only

frustrate” its enforcement. In short, the bar is set so

be pierced in the most exceptional of circumstances, and

high that conduct would need to verge on fraudulent

concluding emphatically that “the facts of this case do not

before the corporate veil could be pierced. Merely

begin to justify piercing the veil of incorporation”.

using a corporate vehicle to limit or avoid liability falls way short of such a threshold, and is, in fact, a fundamental aspect of company and partnership law: “one of the key reasons that an individual… will take advantage of limited liability is to avoid personal liability if things go wrong”;

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Piercing the Corporate Veil | Corporate Legal Personality and Shareholder Liability

4. ‘Fairness’ is not a consideration:

this again flows from the points above. A court will not

3. Seek security:

protect your interests by obtaining security to back up

consider piercing the corporate veil simply because

the contract. In particular, when entering into a contract

a party has been treated “unfairly”. The threshold set

with a corporate entity seek personal guarantees from

out in point 3 above must be met. Therefore, feeling

directors and/or shareholders to stand behind the

unjustly treated is not itself sufficient grounds to seek to

obligations of the company. If necessary (i.e. in the

hold a shareholder liable for a company’s actions. On

case of a loan agreement) these should be backed up

this issue the courts deal in legal principles only, and

by legal charges over those individuals’ properties, as

therefore the safest way to protect your interests when

well as the property of the company. Conversely, if

entering into commercial contracts is to take the steps

entering into a commercial contract with an individual,

set out below.

seek guarantees from any companies which he or she is a director or shareholder of, and security over the

What you should do

property and assets of the company or companies if necessary.

You can protect your interests when entering into commercial

Taking such action would ensure that liability would

contracts by taking the following steps:

ultimately attach to both the company and key individuals in the event of a dispute, and avoid being

1. Legal advice:

left exposed as S was in the present case. This is

seek the best possible legal advice at the outset of

an especially vital precaution against the risk of the

contract negotiations. Your legal adviser will be able

contracting company becoming insolvent with no assets

to identify and strike out or modify any issues that

to pursue;

would leave you exposed, and to argue for more advantageous terms than you may have been able to negotiate on your own. An affordable legal spend at

4. Single-owner companies:

don’t labour under the illusion that it will be any easier

the outset of negotiations is infinitely less costly than

to pierce the corporate veil in respect of a company

having to hire a lawyer to litigate in the event of a

that has just one shareholder-director. The case at

dispute after a contract has been signed and ultimately

hand emphasises that this has no bearing on a court’s

breached;

thinking; the fact that the other contracting party is a “one-man band” does not remove the need to fully

2. Agree a term sheet at the outset:

protect yourself via the above measures.

sometimes known as a Heads of Terms or Memorandum of Understanding, this is a short document which summarises the parties’ agreed understanding of a transaction’s key terms. It is a useful tool for recording and retaining a focus on exactly what has been agreed. More significantly, it is much easier to challenge a deviation from a set of agreed terms – such as P substituting a different party from that originally intended – when those terms are agreed in writing instead of verbally; laytons.com | 5

Piercing the Corporate Veil | Corporate Legal Personality and Shareholder Liability

Corporate We advise on every facet of our client’s corporate legal needs through the complete life-cycle of an enterprise, from its inception, through its growth and expansion to, perhaps, its sale or flotation on a public market.

Our teams focus on acquiring a deep understanding of the particular needs and objectives of our clients to deliver advice and outcomes that are tailored to those needs and objectives and which meet them swiftly and cost-effectively. The approach to technical problems is informed, insightful and proportionate, and we take pride in viewing problems from a fresh perspective to provide innovative solutions.

Our Team Michael Barrington

Kathryn Beasley

Ben Crichton

Solicitor michael.barrington@laytons.com +44 (0)20 7842 8000

Solicitor kathryn.beasley@laytons.com +44 (0)20 7842 8000

Solicitor ben.crichton@laytons.com +44 (0)20 7842 8000

Patrick Curtis

Martin Donoghue

John Gavan

Partner patrick.curtis@laytons.com +44 (0)161 214 1600

Partner martin.donoghue@laytons.com +44 (0)20 7842 8000

Partner john.gavan@laytons.com +44 (0)161 214 1600

Dimitri Iesini

Barney Leaf

Rupert Lescher

Partner dimitri.iesini@laytons.com +44 (0)20 7842 8000

Partner barney.leaf@laytons.com +44 (0)20 7842 8000

Consultant rupert.lescher@laytons.com +44 (0)20 7842 8000

John McDermott

Daniel Oldfield

David Sefton

Solicitor john.mcdermott@laytons.com +44 (0)161 214 1600

Partner daniel.oldfield@laytons.com +44 (0)20 7842 8000

Consultant david.sefton@laytons.com +44 (0)161 214 1600

Christopher Sherliker

Jonathan Silverman

Cameron Sunter

Partner christopher.sherliker@laytons.com +44 (0)20 7842 8000

Consultant jonathan.silverman@laytons.com +44 (0)20 7842 8000

Partner cameron.sunter@laytons.com +44 (0)20 7842 8000

Daniel Walter

Liza Zucconi

Trainee Solicitor daniel.walter@laytons.com +44 (0)20 7842 8000

Partner liza.zucconi@laytons.com +44 (0)20 7842 8000

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This information is offered on the basis that it is a general guide only and not a substitute for legal advice.

We cannot accept any responsibility for any liabilities of any kind incurred in reliance on this information.

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