COMPANY LAW THIRD ASSESMENT

(CASE ANALYSIS OF JONES v LIPMAN)

Submitted by

Maharshi Raj Bharali

Division C, Roll No 17010223019, Class B.A. LLB

of

Symbiosis Law School, NOIDA

Symbiosis International (Deemed University), Pune.

In

August, 2019

Under the guidance of

Prof. Rajnish Jindal and Sonakshi Kumar

(Assistant Professor)

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 CASE ANALYSIS
DETAILS OF THE CASE
Jones v. Lipman, (1962) I. W.L.R. 832
JURISDICTION: England and Wales
COURT: The English High Court
JUDGE: Russell J.
DEFANDENT: Mr.Lipman
PLANTIFF: Mr. Jones

FACTUAL BACKGROUND
The defendant had contracted to sell his land. He changed his mind, and formed a company
of which he was owner and director, transferred the land to the company, and refused to
complete. The plaintiff sought relief.
1. Lipman agreed to sell a property to Jones for £5,250, but subsequently changed his
mind.
2. He then formed his own company, which had £100 in capital, and made himself the
director and owner.
3. He then transferred the land, which he had agreed to sell to Jones, to this sham
company for £3,000.
4. To enable such a transaction, Lipman had borrowed over half the money needed
by way of a bank loan, and the remainder was owed to other sources.
5. Under the Rules of the Supreme Court Order 14A, the purchaser applied for specific
performance to be carried out against the vendor and the vendor’s company for
the transfer of the property in question.
QUESTION OF LAW ANSWERED BY THE COURT
The court was required to decide if an order of specific performance could be enforced in
the circumstances. Specifically, it was important for the court to assess the company that
Lipman had created and the transaction of the sale of the property to see if it was
equitable. The court also had to establish whether it was appropriate for the Rules of the
Supreme Court to be applied to the circumstances.

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REASONING BEHIND THE QUESTION OF LAW
Brief about piercing the corporate veil
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights
or duties of a corporation as the rights or liabilities of its shareholders. Usually a
corporation is treated as a separate legal person, which is solely responsible for the debts
it incurs and the sole beneficiary of the credit it is owed. Common law countries usually
uphold this principle of separate personhood, but in exceptional situations may "pierce"
or "lift" the corporate veil. A simple example would be where a businessman has left his
job as a director and has signed a contract to not compete with the company he has just
left for a period of time. If he sets up a company which competed with his former company,
technically it would be the company and not the person competing. But it is likely a court
would say that the new company was just a "sham", a "cover" or some other phrase, and
would still allow the old company to sue the man for breach of contract.
Despite the terminology used which makes it appear as though a shareholder's limited
liability emanates from the view that a corporation is a separate legal entity, the reality is
that the entity status of corporations has almost nothing to do with shareholder limited
liability.For example, English law conferred entity status on corporations long before
shareholders were afforded limited liability. Similarly, the United States' Revised Uniform
Partnership Act confers entity status on partnerships, but also provides that partners are
individually liable for all partnership obligations. Therefore, this shareholder limited liability
emanates mainly from statute.
It’s Nature in United Kingdom
In United Kingdom the corporate veil in company law is pierced very rarely. After a series
of attempts by the Court of Appeal during the late 1960s and early 1970s to establish a
theory of economic reality, and a doctrine of control for lifting the veil, the House of Lords
reasserted an orthodox approach. According to a 1990 case at the Court of Appeal, Adams
v Cape Industries plc, the only true "veil piercing" may take place when a company is set up
for fraudulent purposes, or where it is established to avoid an existing obligation. The veil
is also often ignored in the process of interpreting a statute, and as a matter of tort law it
is open as a matter of authority that a direct duty of care may be owed by the managers
of a parent company to accident victims of a subsidiary.There are also significant
statements still among the judiciary in support of a broader veil lifting approach in the
interests of "justice".
Incorporation by registration was introduced in 1844 and the doctrine of limited liability
followed in 1855. Subsequently in 1897 in Solomon v. Solomon & Company the House of
Lords effected these enactments and cemented into English law the twin concepts of
corporate entity and limited liability. In that case the apex court simply laid down that a
company is a distinct legal person entirely different from the members of that company.
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What this means is that the company has life of its own, can own property, can sue and be
sued in it's own name, has perpetual life and existence to name a few of the benefits of
incorporation. It is a trite law that a rather hefty veil is drawn between these two that can
be lifted only in a limited number of circumstances that seem to be fluctuating according
to current judicial thinking.
However the courts have not always applied the principal laid down in Solomon v. Solomon
& Co. In a number of circumstances, the court will pierce the corporate veil or will ignore
the corporate veil to reach the person behind the veil or reveal the true form and character
of the concerned company. The rationale behind this is probably that the law will not allow
the corporate form to be misused or for the purposes which is set out in the statute. In
those circumstances in which the court feels that the corporate forms is being misused it
will rip through the corporate veil and expose its true character and nature disregarding
the Solomon principal as laid down by the House of Lords.
When the veil is lifted:
The courts have been more that prepared to pierce the corporate veil when it fells that
fraud is or could be perpetrated behind the veil. The courts will not allow the Solomon
principal to be used as an engine of fraud. The two classic cases of the fraud exception are
Gilford motor company ltd v. Horne and Jones v. Lipman.
In the first case, Mr. Horne was an ex-employee of The Gilford motor company and his
employment contract provided that he could not solicit the customers of the company. In
order to defeat this he incorporated a limited company in his wife's name and solicited the
customers of the company. The company brought an action against him. The Court of
appeal was of the view that "the company was formed as a device, a stratagem, in order
to mask the effective carrying on of business of Mr. Horne" in this case it was clear that the
main purpose of incorporating the new company was to perpetrate fraud. Thus the court
of appeal regarded it as a mere sham to cloak his wrongdoings
In the second case of Jones v. Lipman a man contracted to sell his land and thereafter
changed his mind in order to avoid an order of specific performance he transferred his
property to a company. Russel judge specifically referred to the judgments in Gilford v.
Horne and held that the company here was " a mask which (Mr. Lipman) holds before his
face in an attempt to avoid recognition by the eye of equity" he awarded specific
performance both against Mr.Lipman and the company. Under no circumstances will the
court allow the ant form of abuse of the corporate form and when such abuse occurs the
courts will step in.
The issue is discussed at length in a 2013 UK Supreme Court case, Prest v Petrodel
Resources Ltd.

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HELD
Firstly, the court held that the Rules of the Supreme Court could apply to the circumstances.
Further to this, it was found that the defendant’s company was created by the defendant
as ‘a mask to avoid recognition by the eye of equity’ (at p.836) and on this basis, a
requirement of specific performance could not be avoided. It was clear that the defendant
had control of the sham company which held the property, and therefore Lipman was the
only individual who could perform the agreement.
OTHER JUDGEMENTS ON THE SAME QUESTION OF LAW
Adams v Cape Industries plc [1990] Ch 433
This is a UK company law case on separate legal personality and limited liability of
shareholders. The case also addressed long-standing issues under the English conflict of
laws as to when a company would be resident in a foreign jurisdiction such that the English
courts would recognise the foreign court's jurisdiction over the company. It has in effect
been superseded by Lungowe v Vedanta Resources plc, which held that a parent company
could be liable for the actions of a subsidiary on ordinary principles of tort law.
Facts
Cape Industries plc was a UK company, head of a group. Its subsidiaries mined asbestos in
South Africa and shipped it to Texas, where a marketing subsidiary, NAAC, supplied the
asbestos to another company in Texas. Employees of the Texas subsidiary became ill, with
asbestosis. They sued Cape and its subsidiaries in a Texas court. Cape was joined and
argued there was no jurisdiction to hear the case. Judgment was still entered against Cape
for breach of a duty of care in negligence to the employees.The tort victims tried to enforce
the judgment in the UK courts. The requirement, under conflict of laws rules, was either
that Cape had consented to be subject to Texas jurisdiction (which was clearly not the case)
or that it was present in the US. The question was whether, through the Texas subsidiary,
NAAC, Cape Industries plc was ‘present’. For that purpose, the claimants had to show in
the UK courts that the veil of incorporation could be lifted and the two companies be
treated as one.
Scott J held that the parent, Cape Industries plc, could not be held to be present in the
United States. The employees appealed.
Judgment
The Court of Appeal unanimously rejected three allegations: that Cape should be part of a
single economic unit, that the subsidiaries were a façade and that any agency relationship
existed. All these were rejected "on the facts". Slade LJ (for Mustill LJ and Ralph Gibson LJ)
began by noting that to ‘the layman at least the distinction between the case where a
company itself trades in a foreign country and the case where it trades in a foreign country

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through a subsidiary, whose activities it has full power to control, may seem a slender
one….’ He approved Sir Godfray’s argument ‘save in cases which turn on the wording of
particular statutes or contracts, the court is not free to disregard the principle of Salomon…
merely because it considers that justice so requires.’ On the test of the ‘mere façade’, it
was emphasised that the motive was relevant whenever such a sham or cloak is alleged,
as in Jones v Lipman.
A company must be set up to avoid existing obligations, not future and hypothetical
obligations not yet arisen. The court held that one of Cape's subsidiaries (a special purpose
vehicle incorporated in Liechtenstein) was in fact a façade, but on the facts, it was not a
material subsidiary such as to attribute liability to Cape. Cases like Holdsworth, Scottish
Coop and DHN were distinguishable on the basis of particular words on the relevant
statutory provisions. It noted that DHN was doubted in Woolfson.
“Mr. Morison submitted that the court will lift the corporate veil where a defendant by the
device of a corporate structure attempts to evade (i) limitations imposed on his conduct
by law; (ii) such rights of relief against him as third parties already possess; and (iii) such
rights of relief as third parties may in the future acquire. Assuming that the first and second
of these three conditions will suffice in law to justify such a course, neither of them apply
in the present case. It is not suggested that the arrangements involved any actual or
potential illegality or were intended to deprive anyone of their existing rights. Whether or
not such a course deserves moral approval, there was nothing illegal as such in Cape
arranging its affairs (whether by the use of subsidiaries or otherwise) so as to attract the
minimum publicity to its involvement in the sale of Cape asbestos in the United States of
America. As to condition (iii), we do not accept as a matter of law that the court is entitled
to lift the corporate veil as against a defendant company which is the member of a
corporate group merely because the corporate structure has been used so as to ensure
that the legal liability (if any) in respect of particular future activities of the group (and
correspondingly the risk of enforcement of that liability) will fall on another member of the
group rather than the defendant company. Whether or not this is desirable, the right to
use a corporate structure in this manner is inherent in our corporate law. Mr. Morison
urged on us that the purpose of the operation was in substance that Cape would have the
practical benefit of the group's asbestos trade in the United States of America without the
risks of tortious liability. This may be so. However, in our judgment, Cape was in law
entitled to organise the group's affairs in that manner and (save in the case of A.M.C. to
which special considerations apply) to expect that the court would apply the principle of
Salomon v A Salomon & Co Ltd [1897] AC 22 in the ordinary way. ”
The court separately had to consider whether Cape had established a presence within the
United States, such that the English court should recognise the jurisdiction of the United
States over Cape, and enforce a US judgment against it (one of the criticisms made of the
decision by US lawyers is that the Court of Appeal fundamentally misunderstood the nature

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of the federal system in the US, but that misunderstanding does not affect the general
principles laid down by the court). The Court of Appeal held that for a company to have a
presence in the foreign jurisdiction, both of the following must be established:

 the company has its own fixed place of business (e.g. a branch office) in the
jurisdiction from which it has carried on its own business for more than a minimal
time.
 the company's business is transacted from that fixed place of business.
On the facts, the Court of Appeal held that Cape had no fixed place of business in the US
such that recognition should not be given to the US judgment awarded against it.
Aftermath
After the decision (which has been followed), English law has suggested a court cannot lift
the corporate veil except when construing a statute, contract or other document; if a
company is a "mere façade" concealing the true facts or when a subsidiary company was
acting as an authorised agent of its parent, and apparently not so just because "justice
requires" or to treat a group of companies as a single economic unit. In the case of tort
victims, the House of Lords suggested a remedy would, in fact, be available. In Lubbe v
Cape Lord Bingham held that the question of proving a duty of care being owed between
a parent company and the tort victims of a subsidiary would be answered merely according
to standard principles of negligence law: generally whether harm was reasonably
foreseeable.
In Chandler v Cape , it was held that the corporate veil was not relevant in tort cases, thus
effectively circumventing Adams. In VTB Capital plc v Nutritek International Corp, Lord
Neuberger remarked, "In addition, there are other cases, notably Adams v Cape Industries
[1990] Ch 433, where the principle [of piercing the corporate veil] was held to exist (albeit
that they include obiter observations and are anyway not binding in this court)."
CONCLUSION
The Judgment of the Court Of Appeal in the Adams case is the current law, which is nothing
more than a reiteration of the law laid down by the House of Lords in Solomon's case. The
bottom line being only the court will lift the veil in the face of grave abuse of the corporate
form not otherwise