Re-evaluating the corporate veil

In 1985, American scholars Frank Easterbrook and Daniel Fischel described the doctrine of “piercing the corporate veil” as “rare, severe, unprincipled and confused”. English law is now considerably clearer following the Supreme Court’s decision in Prest v Petrodel Resources Ltd. However, clarity does not necessarily mean fairness.

The doctrine remains exceptionally narrow. This creates difficulties where multinational corporate groups use separate subsidiaries to isolate risk, leaving creditors unable to recover from a better-resourced parent company. 

The starting point: separate corporate personality

The modern law begins with Salomon v A Salomon & Co Ltd. The House of Lords held that a properly incorporated company has a legal personality separate from its shareholders. Even where one shareholder effectively controls the entire business, the company’s debts remain its own.

This principle underpins limited liability. Shareholders are generally not required to contribute towards the company’s debts beyond the amount invested in their shares. It enables investment, facilitates the transfer of shares and protects investors from unpredictable exposure.

The courts have therefore been reluctant to disregard separate corporate personality merely because the result appears unfair. In Adams v Cape Industries plc, the Court of Appeal rejected the proposition that a court has a general discretion to pierce the veil whenever justice requires it.

The corporate structure may lawfully be organised so that liabilities fall on one company while assets remain elsewhere in the group. Whether that outcome is desirable or not, the court held that it is inherent in English company law.

The restrictive approach in Prest

In Prest, Lord Sumption sought to clarify the circumstances in which the corporate veil could be disregarded. He identified two principles: concealment and evasion.

The concealment principle applies where a company is interposed to hide the identity of the real actors or the true nature of a transaction. Strictly speaking, the court does not pierce the veil. It simply looks behind the corporate structure to identify the relevant facts.

The evasion principle applies where a person is already subject to an existing legal obligation and deliberately interposes a company to defeat or frustrate its enforcement. In those circumstances, the court may disregard the company’s separate personality.

This framework brought welcome clarity to a previously uncertain body of case law. However, it arguably confines veil-piercing to cases resembling fraud or deliberate evasion. It does little to address situations where a corporate structure produces injustice without being created for a fraudulent purpose.

Earlier cases had occasionally adopted a broader approach. In Creasey v Breachwood Motors Ltd, for example, the court disregarded a corporate restructuring so that “substantial justice” could be achieved for a judgment creditor. Lord Sumption’s formulation leaves little room for that kind of reasoning.

Corporate groups and involuntary creditors

The limits of the doctrine are most visible in multinational corporate groups. A parent company may control a network of subsidiaries while maintaining that each is legally independent. Activities involving significant environmental, employment or health and safety risks can be undertaken through an undercapitalised subsidiary.

If the subsidiary causes injury or environmental damage, its assets may be insufficient to meet the resulting claims. The parent company nevertheless remains protected by limited liability, despite having benefited economically from the subsidiary’s activities.

This is especially problematic for involuntary creditors. Banks and commercial suppliers can investigate a company’s financial position, negotiate contractual protections or adjust the price of credit. Employees, local communities and victims of torts generally have no comparable opportunity to protect themselves.

Limited liability therefore generates substantial economic benefits, but it may also transfer the costs of corporate risk-taking to those least capable of bearing them.

Parent-company liability as an alternative

Recent tort cases have provided a possible route around the narrow veil-piercing doctrine. In Chandler v Cape plc, the Court of Appeal held that a parent company could owe a direct duty of care to employees of its subsidiary where the parent possessed relevant knowledge and had assumed responsibility for health and safety matters.

The court emphasised that this was not technically an instance of piercing the corporate veil. The parent was liable for its own negligence, rather than for the subsidiary’s debts.

Similarly, in Vedanta Resources plc v Lungowe, the Supreme Court accepted that a parent company might owe a duty of care in relation to environmental damage caused by a foreign subsidiary. Whether such a duty exists depends on the extent to which the parent manages, supervises or assumes responsibility for the subsidiary’s operations.

These cases achieve an outcome like veil-piercing. They make the parent company’s assets available where its involvement in the group’s activities justifies liability. From a functional perspective, they recognise that a corporate group may operate as a single enterprise even though it is divided into separate legal persons.

A more principled approach

A preferable approach would examine the “genuine ultimate purpose” of the relevant corporate activity. Where separate companies genuinely conduct independent businesses, their distinct legal personalities should be respected. Where a subsidiary is used principally to isolate liabilities arising from activities directed or controlled by the parent, the court should be more willing to treat the group as a single economic enterprise.

This would not abolish limited liability. Instead, it would balance its economic advantages against the need to prevent companies from externalising the costs of their activities onto employees, communities and other involuntary creditors.

Conclusion

Prest has made English law clearer, but the doctrine of piercing the corporate veil remains rare and excessively restrictive. Its focus on concealment and evasion fails to address many of the injustices produced by modern corporate groups.

Cases such as Chandler and Vedanta suggest a more realistic approach. By concentrating on control, responsibility and the true purpose of corporate arrangements, the courts can preserve the benefits of limited liability without allowing corporate structures to become instruments for avoiding responsibility.

Michael Coumas, an experienced law tutor at LLT in pursuit of academic and professional excellence. 

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