Dance of the Corporate Veils

The “corporate veil” is the principle by which the liabilities of a limited company cannot be pursued against directors or shareholders, who are not personally liable for actions conducted within the normal course of their roles.

UK legal history includes numerous attempts to “pierce the corporate veil”, often when the company in question is insolvent, leaving creditors unable to recover their debts but allowing directors and shareholders to walk away unscathed despite their possible responsibility for the company’s collapse.

In a recent case, Housemaker Services Ltd v Cole, the court considered the extent of the veil. The claimant company was a building firm that had been dissolved following a failure to file accounts and reinstated 20 months later to pursue a claim against a client who was in dispute regarding the quality of building works. The company had a single director and early work was conducted between Cole and the director as a sole trader, before the company was incorporated and raised the later unpaid invoices.

The initial matter before the court was an application to allow a claim to be made outside the usual limitation period. The court refused the application and ordered the company to pay the defendant’s costs in relation to it, which of course was worth little given the company’s financial position.

Cole then applied to the court to join the director as a second claimant and apply the costs order to him directly on the basis that the company was purely a legal construct for his business, there was no real distinction between the man and the company, and the director had funded the litigation and would be the chief beneficiary had it succeeded.

On the face of it, this seems a relatively extreme case where a dissolved company is brought “back from the dead” so that (on Cole’s case) a sole director could use it as a vehicle to pursue an unsuccessful claim for long-disputed fees. However, the judge followed the courts’ general reluctance to breach the veil and refused to expose the director to any personal liability – it held that an additional component of bad faith, such as improper conduct or the claim not being truly for the benefit of the company (even if it was a very thin shell around the director) was required.

When threatened with a claim brought by a company that will never be able to satisfy a costs order, is there any other remedy? At an early stage, it may be worth the defendant applying for an order for security for costs. This order would require the claimant to pay funds into court to be used to satisfy any subsequent costs order, or else abandon the claim. Courts can be reluctant to make such orders, however, and unfortunately one reason for refusal can be that the inability of the claimant to make such a payment should not be a bar to its right to seek justice.

Picture of Luke Patel

Luke Patel

Luke Patel
Partner
Commercial Dispute Resolution Team
LPatel@LawBlacks.com
0113 227 9316

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