Lifting the Veil: Is 'facade' the only ground?

In a recent judgment in Hashem v. Shayif, Justice Munby of the England and Wales High Court considered in depth several cases on the corporate veil issue, and concluded that for the veil to be lifted; that defendant must have control of the entity, and there must have been some impropriety.

Now, although Adams v. Cape [1991] 1 All ER 929 rejected the ‘single economic entity’ argument, it left open the door for agency-based arguments. In this context, ‘agency’ would mean not just a formal contractual relationship but also a ‘factual’ agency. It needs to be considered, then, whether the Justice Munby’s judgment closes the door on agency-type arguments as well because of the insistence on impropriety. Further, at times, Courts have relied on an “interests of justice” rationale to lift the veil. Hashem v. Shayif categorically rejects this approach.

The important conclusions reached by the Justice Munby are as follows [in paragraphs 159 to 164 of the judgment]:

1. Ownership and control of the company are not sufficient to justify the piercing of the corporate veil.
2. The Courts cannot pierce the corporate veil merely because it is thought to be in the interests of justice.
3. The veil can be pierced only if there is some impropriety.
4. Again, mere existence of impropriety is also not sufficient. The impropriety must be linked to the use of the company structure to avoid or conceal liability.
5. It is essential to show both control and impropriety in the sense mentioned in point 4.
6. The test for lifting the veil is – is the company a façade at the relevant time? Whether it is a façade or not is determined by factors 1 to 5. If the answer is “no, it is not a facade”, the veil cannot be lifted at all.

Further, Justice Munby notes that whenever the Courts have lifted the corporate veil, “… the wrongdoer controlled the company, which he used as a façade or device to facilitate and cover up his own wrongdoing … in each of these cases there were present the twin features of control and impropriety.” Thus it would appear that the only way in which the veil can be lifted in by proving the existence of a façade. Agency-type arguments (such as “the company so habitually acts according to the wishes of the defendant that it is should be treated as an alter-ego”) are not sufficient to lift the veil because of the element of “impropriety”. Indeed, specific agency-based arguments were raised before the Court – Justice Munby however said that for any question of lifting the veil, the above factors were the essential test.

Leading authorities including Gower, Palmer and Pennington suggest several grounds on which the veil has been lifted. These include ‘evasion of obligations’, ‘protection of public interest’, ‘abuse of corporate form’, ‘countering fraud, sharp practice and oppression’, ‘disguise of the controlling hand’, ‘substance over form doctrines’ etc. Can all these categories be collapsed into a single category of ‘fraud/sham’?

Also, Courts are often unclear when they use the phrase “lifting the corporate veil”. In a seminal article in the Modern Law Review (May 1990), Prof. S. Ottolenghi characterized judicial action in “corporate veil” cases to be of four types:

1. Peeping behind the veil – merely for the purpose of looking at the controlling persons and for nothing more. This is done in seeing whether a company is a “wholly-owned subsidiary”, an “associated enterprise” etc.
2. Penetrating the veil – for the purpose of fastening liability on the shareholders for the acts of the company or for granting shareholders direct interest in a company’s assets. This does not mean that the company is treated as non-existent; but that despite the company being existent, certain factors require the Court to directly look at the shareholders.
3. Extending the veil – lifting the veil over one company and then pulling it down to include another entity in the same veil. This is the approach in both ‘single economic entity’ and ‘factual-agency’ arguments.
4. Ignoring the veil – entirely ignoring the existence of the company as a ‘façade’ or a ‘sham’.

(Note: Until here, this note is an abridged version of an earlier note on the Indian Corporate Law blog. The following three paragraphs try to see how far Justice Munby was correct in relying on an earlier House of Lords judgment)

Hashem v. Shayif relies on several cases to support the “no lifting unless façade” approach, but quite prominently on an observation by Lord Keith in the House of Lords decision in Woolfson v. Strathclyde Regional Council that “it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts.” In my view, this statement – when read in its proper context – does not support Hashem v. Shayif’s conclusions.

In Woolfson, the judgment itself notes, “The appellants’ argument before the lands carried on in the premises was truly that of the appellants, which Campbell conducted as their agents… Before the Second Division this line of argument was abandoned.” Thus, the Court was not required to consider agency-based arguments at all. That left the Court with the arguments of ‘single economic entity’ and ‘façade’. It is in this context that the Court held that a façade was a necessary requirement for lifting the corporate veil.

Woolfson rejected the ‘single economic entity’ argument – that does not mean that it negated agency-based arguments also. The distinction between these two kinds of arguments is in fact strengthened by Adams v. Cape Industries, which rejected the ‘single economic entity’ rationale expressly, but rejected the agency arguments only on the grounds that a factual agency was not established. Thus, the position arising from Adams is that a group of companies cannot be treated as one on the sole ground that the companies are part of the same economic group. However, if it can be established that a company habitually acts according to the wishes of one shareholder, then a factual agency can very well be established. This would allow the Courts to life the corporate veil. In other words, a ‘single economic entity’ argument is based on the premise that two or more companies are part of one economic group; while a ‘factual agency’ argument is based on the degree of control over a company by another (legal or natural) person. Rejection of one argument does not mean rejection of the other.

It appears that this aspect escaped Justice Munby’s attention. A further note on this – and on the interpretation of Adams v. Cape – will be posted shortly. But it does appear that Justice Munby's decision should be confined to the 4th category named by Prof. Ottolenghi, and not be applied to the other categories.