Lifting the Corporate Veil: Was the House of Lord Right in Daimler’s Case?
By ATER, Solomon Vendaga
Abstract
The “veil of incorporation” refers to the legal principle that considers a company as a separate legal entity from its owners, as established in the case of Salomon v. Salomon and Co. Ltd. The courts generally adhere to this principle, which creates a fictional separation between the company and its members. However, there are situations where the court may disregard this principle and pierce the corporate veil to expose the company’s true nature or reach the individuals behind it. This is done to prevent the misuse or abuse of the corporate form. The lifting of the corporate veil can be achieved through judicial provisions such as fraud, the character of the company, protection of revenue, and the concept of a single economic entity, as well as statutory provisions like reduction in membership, misdescription of name, fraudulent conduct of business, and failure to refund application money. This article analyzes Daimler’s case as a leading authority in lifting the veil of incorporation, where it is perceived that a company has an enemy character.
1.0. INTRODUCTION
The “lifting of the corporate veil” is a legal principle that allows a court to disregard the separate legal personality of a company and look beyond it to the individuals or entities behind the company. Generally, a company is treated as a separate legal entity, distinct from its shareholders, and liable for its debts and obligations. However, courts may disregard this separation in certain circumstances and hold the individuals or entities behind the company personally liable. Thus, in United States V. Milwaukee Refrigerator Co ., this position was summed up as follows:
“A corporation will be looked upon as a legal entity as a general rule……but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons.”
Denning MR, in Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs , also observed as follows:
“The doctrine laid down in Salomon v. Salomon and Salomon Co. Ltd has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited liability company through which the Courts cannot see. But that is not true. The Courts can and often do draw aside the veil. They can and often do pull off the mask. They look to see what really lies behind“.
These decisions, therefore, point to the logical conclusion that the veil of incorporation is not absolute. The court will not hesitate to lift it when it deems fitting to do so in the interest of justice. It is this approach that this work approaches from a jurisprudential lens to see if the court was right in Daimler’s case.
2.0. FACTS:
In the case of Daimler Co Ltd v Continental Tyre and Rubber Co Ltd , the respondent company was incorporated in England in order to sell tyres made by a German company. It had 25,000 shares issued. A non-German national held only one share. The company’s directors were German.
During the First World War against Germany, the appellant company, Daimler Ltd, claimed that it did not have to pay the money it owed to the respondent company. The appellant company argued that such payment would constitute ‘trading with the enemy.’
3.0. ISSUE:
Whether Daimler Ltd was entitled to refuse the payment because the respondent company was controlled by the enemy?
4.0. DECISIONS OF COURTS
i. COURT OF FIRST INSTANCE
At the court of first instance, Scrutton J approved the decision of the master that the contracts were valid for summary judgment without proceeding to trial.
ii. COURT OF APPEAL
Lord Reading CJ, Cozens-Hardy LJ, Phillimore LJ, Pickford LJ, and Kennedy LJ affirmed the decision, too, holding there would be no offence. They held the company did not change its character because of the outbreak of war. They say it “remains an English company regardless of the residence of its shareholders or directors either before or after the declaration of war.” Mr. Gore-Browne argued, for Daimler Co Ltd, that the technicality should be swept aside in time of war. But Lord Reading CJ replied that the fact of incorporation was not just a ‘technicality.’ The company, he said,
is a living thing with a separate existence which cannot be swept aside as a technicality. It is not a mere name or mask or cloak or device to conceal the identity of persons, and it is not suggested that the company was formed for any dishonest or fraudulent purpose. It is a legal body clothed with the form prescribed by the legislature…. ‘
He relied on Janson v Driefontein Consolidated Mines , where Lord Macnaghten, Lord Brampton, and Lord Lindley held that a foreign corporation does not become British because it means all are.
Buckley LJ delivered a dissenting judgment, holding that though the company is a legal person existing apart from its corporators, it still had enemy character.
The artificial legal person called the corporation has no physical existence. It exists only in contemplation of law. It has neither body, parts, nor passions. They cannot wear weapons nor serve in the wars. It can be neither loyal nor disloyal. It cannot compass treason. It can be neither friend nor enemy. Apart from its corporators, it can have neither thoughts, wishes, nor intentions, for it has no mind other than the minds of the corporators. These considerations seem to be essential to bear in mind in determining the present case .
iii. HOUSE OF LORDS
The House of Lords unanimously reversed the decisions below, saying the secretary was authorized to commence no action. It held the company was capable of acquiring enemy characters.
Lord Parker said,
I do not think, however, that it is a necessary corollary of this reasoning [Salomon] to say that the character of its corporators must be irrelevant to the character of the company, and this is crucial for the rule against trading with the enemy depends upon enemy character.
Just like a natural person can have an enemy character though born in the UK, so can a legal person.
I think that the analogy is to be found in control, an idea which, if not very familiar in law, is of capital importance and is very well understood in commerce and finance. The acts of a company’s organs, its directors, managers, secretary, and so forth, functioning within the scope of their authority, are the company’s acts and may invest it definitely with enemy character… it must at least be prima facie relevant… Certainly, I have found no authority to the contrary .
The Earl of Halsbury LC, Lord Atkinson, Viscount Mersey, Lord Kinnear, and Lord Sumner concurred. Lord Shaw and Lord Parmoor concurred with the result but dissented on this point.
5.0. POSITION TAKEN BY THE WRITER
From the decision of the court, it is important to note that sometimes it becomes essential to unravel the true character of persons who are managing and controlling the company. The thought of the House of Lords is that the real controllers of the company were from England, the enemy country, but the people who manage and control the affairs of the company can be either enemy or friend. Accordingly, it was decided that the action brought by the company could not be sustained, as its managers were from an enemy country.
Given the above realities, the writer is of the same opinion as the House of Lords’s decision and believes that even if a company is an artificial person. It has no nationality. As it is not natural, it cannot be loyal or disloyal; similarly, it cannot be a friend or an enemy. Even in times of war, it should not be classified as “Enemy.” But it becomes necessary to find the nationality and interests of the people having control over the company. Thus, at the time of war, it may become necessary to lift the corporate veil of a company to determine whether the company has an enemy character. In such a case, the courts may, at their discretion, examine the character of persons who are in real control of the corporate affairs of the company.
6.0. CONCLUSION
It is important to state here that the decision reached by the House of Lords in Daimler Co Ltd v Continental Tyre and Rubber Co Ltd did introduce a concept of interest in the corporate legal world- the enemy Character of a company. This is because a company being an artificial personality, is controlled by humans who are capable of inheriting and acquiring enemies, and since their actions can affect the company, it is only right to consider them. This is, of course, an addendum to the lifting of the company’s veil, which is sometimes desirable to determine the affairs of those working behind the actions of the company.
About the Author
Ater Solomon Vendaga is final year law undergraduate at the University of Abuja Nigeria, the Vice President of Association of Nigerian Taxation Students and the Associate, Programs at Sabilaw Foundation. He can be reached on 08025263078 or soloater12@gmail.com
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