For over 100 years, the law has recognised that companies have a distinct legal personality from their directors and shareholders. This means that the individuals behind a company or a limited liability partnership are shielded from personal liability by a ‘corporate veil’ and will not usually be held liable for the acts or omissions of that company. However, the principle of ‘piercing the corporate veil’ enables the Court to go behind the corporate structure to find the individuals who control the company liable for the actions of that company.
The Courts have repeatedly confirmed that the doctrine of legal personality is a fundamental part of English law but while the principle of corporate personality is well established, in certain limited circumstances the Court will allow the corporate veil to be pierced.
The veil can be lifted where a company is either established to perpetrate a fraud or to avoid an existing legal obligation or where it is subsequently used for such purposes. This will involve the use of the corporate structure as a facade concealing the true facts.
There have been conflicting decisions from the High Court in recent times, which appeared to indicate that piercing the veil could have the effect of supplanting an individual shareholder into a contract made with the company. This would mean that a non-party would become subject to the terms of a contract to which it had not been a signatory and would be bound by it.
The Court of Appeal has roundly rejected that position in the case of VTB Capital plc –v- Nutritek International Corp and held that there is no basis upon which the effect of piercing the corporate veil will be to make the controller of a company a party to a contract entered into by the company. To do so would directly contradict the fundamental principle of separate legal personality and basic contract law requiring intention between the parties.
In the VTB case, the Claimant brought an action against the company but also sought to claim breach of contract against other connected companies and shareholders on the basis that the company was no more than a sham. The Claimant sought to argue that the terms of the agreement could be enforced not only against the puppet company but against the puppeteers themselves.
The Court did not accept this and held that the puppeteer pulling the strings in the puppet company will not be bound by contracts entered into by the company. In other words, the effect of piercing the veil does not serve to make a shareholder a party in their own right to a contract entered into by the company. Lifting the veil will enable the Court to make an order against the individual shareholder (such as an Injunction or an Order to pay Damages) but will not actually place the shareholder in the company’s contract.
In rejecting this in-road into established principles of company and contract law, the Courts have provided more commercial certainty for businesses, which is one of the reasons why the English Courts are favoured for the determination of disputes by international parties.
The Courts are therefore keen to uphold the principle that companies are separate legal entities. In order for them to take the unusual step of piercing the veil, a claimant must show that the corporate structure itself has been used as a means of avoiding liability; it is not enough to show that there has been some impropriety.
The concept of separate legal personalities applies equally within groups of companies, with the parent company and all subsidiaries treated as separate entities. However, Directors of companies should be aware that they can be held personally liable in other circumstances, such as for fraudulent and wrongful trading under the Insolvency Act 1986.
Commercial Dispute Resolution Department