The Defence of the Corporate Veil - Parent Companies Beware! :: Business Management Studies

The Defence of the Corporate hide - Parent Companies BewareMuch amour has recently been shown in the latent consequences ofthe judgment given in Stocznia Gdanska SA -v- Latvian Shipping Co andothers, which was easily upheld by the Court of Appeal on 21June 2002. Although the case related to Shipbuilding Contracts, theresult has reinforced the traditional view that the Courts will noncountenance any further erosion of the fundamental principle of slope Company Law that a company is to be regarded as a legal entitywith a enjoin legal personality, distinct from that of its sections.However, the case has highlighted authorisation alternative sources ofliability for parent companies establishing wholly ownedsingle-purpose subsidiaries - in some industry sectors, includingshipping, property and big-ticket asset finance.The basic principlesThe principle of separate corporate personality has been establishedfor over a century. In the stellar(a) case of Salomon -v- Salomon & Co.(189 7), the House of Lords held that, regardless of the extent of a limited shareholders interest in the company, and notwithstandingthat such shareholder had sole control of the companys affairs as itsgoverning director, the companys acts were not his acts nor were itsliabilities his liabilities. Thus, the accompaniment that one shareholdercontrols all, or virtually all, the shares in a company is not a fit reason for ignoring the legal personality of the companyon the contrary, the veil of internalisation will not be lifted so asto associate the rights or liabilities of a company to itsshareholders.The basic principle established in Salomon in relation to singlecompanies was extended to sorts of companies by a relativelyrecent decision of the Court of Appeal in Adams -v- Cape IndustriesPLC (1990). In that case, the Court of Appeal held that, as a matterof law, it was not authorize to lift the corporate veil against adefendant company, which was a member of a corporate group, mer elybecause the corporate structure had been used so as to ensure that thelegal liability in respect of particular future activities of thegroup would fall on another member of the group rather than on thedefendant company. In effect, the Court of Appeal spurned theargument that the corporate veil should be pierced just because agroup of companies operated as a single economic entity.Related principles and considerationsA corollary of the basic Salomon principle is that a company cannot becharacterised as an constituent of its shareholders unless there is clearevidence to show that the company was in fact acting as an agent in aparticular work or series of transactions.