Despite the changing approaches to the very notion of ‘lifting the veil of incorporation’ over

the years, it remains a fact that this area of law has remained vague, inconsistent and
unpredictable. The scope of discussion within this essay seeks to discuss the criticisms,
debates and judgements on the reasoning to ‘lift or not to lift the veil of incorporation’ in
light of the hallmark of corporate jurisprudence, separate legal personality.

First and foremost, the doctrine of separate legal entity provides the notion that the
essence of a company lies in its separate legal personality that provides the company with
an identity that is separate from that of its members, to which this is bestowed upon its
incorporation when created in accordance with the Companies Act 1985 and the
Companies Act 2006 today. Although the principle of separate legal personality was
established prior to Salomon v Salomon 1897 (hereafter abbreviated as ‘Salomon’),
however the 1897 case was the first to uphold and give effect to the importance and
relevance of this doctrine in the analysis of laws relating to companies.

The question has noted that the law is capable of lifting the corporate veil, this meant that
‘piercing the corporate veil’ is a judicial doctrine that refers to the possibility of looking
behind the company framework has regarded as an exception to the fundamental tenet of
company law that a company has a separate legal personality from its shareholders. In other
words, the concept of separate legal personality is not absolute and the courts had
developed limits on the consequences of incorporation in that the artificial veil that exists
between members of the company can be lifted and disregarded by statute or judicial
interpretation in exceptional circumstances for purposes such as to access its assets. This is
so as there are considerable criticisms against Salomon principle as the corporate veil may
at times produces unjust and purely technical results where Simon Goulding had noted in
The Law Quarterly Review that the reason for the criticisms of the unanimous ruling made
by the House of Lords in Salomon was two-fold, firstly the ruling gives even apparently
honest incorporators the benefit of limited liability even in situations where it is
unnecessary in order to encourage and initiate trade and business, and secondly the ruling
provides unscrupulous promoters of private companies opportunities to abuse the
privileges afforded under the Corporations Act (; a moral and/or intellectual force will be
exerted upon judges under such circumstances which the Salomon principle will be
circumvented therefore yielding a more “just” result.)These exceptional circumstances is
based on and often revolves around the single economic entity theory, the justice theory,
and the façade theory where the veil will be lifted if it is proven that the (the corporate form
was avoiding liability or enabling the shareholders to acquire unlawful benefits by masking it
under a pretence.) However although there are some clear instances where the courts will
remove the veil such as where the company is a sham or façade, however it is noted that
the list is not exhaustive as it is not exactly known where the boundary lies between a
piercing the veil of incorporation and leaving it intact.

There are a series of recent developments concerning ‘lifting the corporate veil,’ such as the
recent Supreme Court judgement of Prest v Petrodel Resources Ltd (2013) (hereafter
abbreviated as ‘Prest’) where the Supreme Court had attempted to address the vast amount
of criticisms underlying the Salomon principle and to provide some ‘coherent, practical and
principled basis’ for piercing the corporate veil as well. The case had concerned a high-
profile matrimonial dispute where the Supreme Court had ruled in favour of Mrs Prest’s
application for ancillary relief on divorce and ordered that the properties vested in several
companies belonging to the Petrodel Group which were wholly owned and controlled by the
husband. The case held that while the power to lift the corporate veil exists, the veil will
only be pierced only in those rare cases especially where a company is being used to evade
an existing legal obligation which they are under. The judgement was interpreted to have
strike a good balance between the various competing interests between the family courts
and the commercial courts, whilst also simultaneously upholding the principle of separate
legal personality.

It is observed that the Supreme Court judgement in Prest had reaffirmed the judgement in
Adams v Cape Industries 1990(hereafter abbreviated as Adams) which had significantly
narrowed the ability of the courts to lift the veil. In retrospect, Adams is arguably regarded
as obstructive to companies seeking to enforce rights while it is also clearly advantageous to
companies seeking to avoid liabilities in certain situations as the courts’ abilities to lift the
veil was significantly narrowed.

One of the grounds for lifting the corporate veil is in the interests of justice, to which this
ground was championed by Lord Denning in Wallesteiner v Moir [1974]. There has been
considerable controversies and inconsistency as to this ground due to the conflicting views
in Re a Company [1985] where Cumming-Bruce LJ has stated that ‘the court will use its
powers to pierce the corporate veil if it is necessary to achieve justice,’ and Adams v Cape
Industries [1990] where Slade LJ stated that the courts not free to disregard the principle of
Salomon just because justice requires so. Nevertheless Adams remains the current
dominant view where the courts will not pierce the veil simply because justice demands as
this would undoubtedly result in considerable inconsistency as standards of justice varies
between judges.

Firstly, the veil of incorporation will be lifted where an express agency relationship is evident
in that the court has found that the corporation is acting as an an agent of its shareholder,
to which the principal will be responsible for the agent’s actions as well as any debt or
liabilities. This was illustrated in Salomon where the High Court had accepted the argument
that the company Mr Salomon had created to solely transfer his business was in reality his
agent and he as the principal will be liable for its debts to unsecured creditors. However the
House of Lords had rejected the agency argument and held that the mere fact of
incorporation will not result in an agency relationship between the company and its
members. Furthermore, the applicability of the agency argument is best illustrated in cases
involving groups of companies such as in Smith, Stone & Knight Ltd v Birmingham
Corporation (1939), where the finding of a relationship of agency was established and the
veil was lifted. (Despite that, the Salomon principles does not pose as the true exception
towards any finding of a relationship of agency, it is only the normal agency principles that is
applicable in this case in point.)

The second submission is based on the single economic entity theory where it theoretically
allows the court to circumvent the Salomon principle of the separate corporate entity.

In addition to the examples at common law, statutory provisions may remove the protection
of the veil of incorporation and allow the courts to hold people who have invested or
operated the company’s operations liable for any debts or profits in circumstances such as
where directors have engaged in fraudulent or wrongful trading, the statutory provisions of
ss213-214 of the Insolvency Act 1986 provides that they may be liable to contribute to the
assets of a company that has ceased trading and is in insolvent liquidation. (Creditors of the
company do not receive the rights at once from these statutory provisions but they serve to
illustrate the instances where the strict consequences improved the separate legal
personality of the company which the assets are only accessible by the creditors, through
increasing the extent of the liquidator’s actions which in turn will advantageous for creditors
in terms of handling directors and in some instances even shareholders.)

Although the law is capable of lifting the veil in some circumstances such as involving sham
or façade, however even with some clarity provided by Prest v Petrodel Resources, it
remains a fact that academicians and practitioners alike has found it a daunting task to find
a consistent basis to justify circumstances where the courts may lift the veil where Rogers
AJA has pointed out in Briggs v James Hardie & Co Pty Ltd (1989) that there is ‘a lack of a
common and unifying principle underlying the court’s decision to lift or ignore the corporate
veil’ and that more precise guidance is required. Despite the occasional indications of
Denning-esque views in recent decisions such as in Ratiu v Conway 2005, the reluctance of
the courts to lift the corporate veil was illustrated in both Adams and Prest due to that
corporate personality is bestowed by statute. Even with several successful attempts to
pierce the corporate veil, nevertheless; the Salomon principle remains intact and central as
the courts had maintained a protective stance towards the Salomon principles that has since
been enshrined in article 16 of the Companies Act 1997 as well as being widely followed in
company proceedings in court. ( In conclusion, the courts come to a decision about
disregarding the separate legal personality of the company due to the unattainable degree
of legal consistency required for the cases. All in all, the courts will proceed with following
Salomon and have respect the doctrine which states that the company is to be distinct from
its members, unless valid and convincing factors with regards to fairness and justice exists.)
This question seeks to advise Parker on his chances of success if he were to bring a petition
either under S994 of the Companies Act 2006 or under S.122(1)(g) of the Insolvency Act
1986 in order to get out of the company and recover the full value of his shares. Assuming
that Alex, Marshall and Parker have equal shareholdings since they have been running the
business in partnership for some time prior to incorporating it as a limited company, this
signifies that any one of them can block a special resolution and any two in combination can
pass an ordinary resolution.

Every company is required to have an Article of Association, which forms part of the
constitution of the company as defined in section 17 and regulates the relationship between
the company, shareholders and management. Furthermore S33 of the Companies Act 2006
provides that Articles of Association have contractual effect and its provisions and articles
bind the company and the members. However, if the Articles of Association contradicts
statute, then it cannot be enforced. TDL Ltd’s Article of Association provides that in the
event any director is removed from the board by way of any ordinary resolution, his votes
would multiply by 300. In other words, S33 Companies Act 2006 allows the Article of
Association to bind the members and the company as if it is a covenant to each other and
Parker will be able to rely on the Article of Association in the subsequent attempt to remove
him from the Board of Directors by Alex and Marshall provided that he is an insider and not
an outsider. On the facts, there is no complication of insider and outsider distinction as
James is a member and not an outsider, so he can rely on the Articles. (Elle v Positive
Government; Beattie v Beattie).

On the facts, Alex, Marshall and Parker had set up the company together and due to the fact
there is an informal agreement between them, therefore they are not to make decisions
without each other’s consent. A preliminary note is that Parker was part of the original
partnership with Alex and Marshall, therefore the courts are likely to treat the company as a
partnership for the purpose of a claim brought by Parker because he had joined the
partnership prior to it was incorporated. On the facts, there is an informal agreement
between Alex, Marshall and Parker that they will retain the company’s profits for expansion.
However, Parker has breached the terms of the shareholder agreement after deciding that
he needs TDL Ltd’s profits to be paid out to him since he needs a greater income and he will
sue the Company for it.
The subsequent issue pertains to whether Parker can successfully bring an unfair prejudice
petition under S994 of the Companies Act 2006 (hereafter known as CA2006.’ A shareholder
is permitted under S994 to make a petition on the ground that the affairs of the company
are being conducted in such a manner that is unfairly prejudicial to his interests. In other
words, Parker must establish that his interest has been prejudiced and the interests in such
context have been held to be interests as a member only. Furthermore, the interest may
also extend beyond ‘pure membership rights’ (Re JE Cade Ltd 1991) and can include mutual
trust and confidence, agreement to transfer shares as well as agreement to participate in
management.’ (O’Neill v Phillips 1999). Firstly, it is essential to consider whether Parker is a
member of the company, this is so as cases such as Hickman v Kent has provided that the
Articles of Association only binds the company and its members if the Parker is trying to rely
on an article that affects him in his capacity as a member. Since Parker is a shareholder and
therefore has the locus standi to bring a petition under S994. In order to bring a claim under
S994 under the CA2006, Parker’s complaint must relate to the conduct of the company’s
affair and not his own individual affairs. The resolution to remove Parker from the board
can be considered as a company’s affair because it is connected with the acts done by the
general meeting of the company rather than the act of an individual shareholder acting in a
personal capacity as per Re Legal Costs Ltd 1999.

Between them, Alex and Marshall could vote Parker off the board by passing an ordinary
resolution under S168 of the CA2006 as S168 allows for the removal of a director before the
expiration of his period of office via ordinary resolution at a shareholder meeting. (enables
the dismissal of a director before the end of his term in office through the ordinary
resolution reached during a shareholder meeting). An ordinary resolution under S282 means
a resolution

In addition, if this also has the effect of terminating a separate service contract with the
company; and he was removed in breach of the terms of this, then the company may be
liable for the substantial damages payable to Parker as per Southern Foundries v Shirlaw.
However, it is possible to attach weighted votes clause to the shares of a director whom it is
proposed to remove in order to circumvent this provision. This is the purpose of Article 32
of TDL Ltd’s articles of association, where when the resolution is voted upon, Parker will
have 300 times more votes against the votes of Alex and Marshall with the result that s168
that cannot be relied to remove Parker as Parker will be virtually irremovable. Judicial
validity for weighted voting rights was given and approved in the case of Bushell v Faith
(1970) which concerns where it was held that the articles of association of a company can
validly contain Therefore, it is concluded that the weighted votes clause is valid and Parker
can enforce and rely on Article 32 of TDL Ltd’s articles of association as a shareholder in the
event Alex and Marshall tries to remove Parker. However, it is noted that Parker can only
enforce Article 32 within TDL Ltd’s Articles of Association in the capacity of a shareholder
and not as the director where following the Salomon v Salomon principle as opposed to the
Wedderburn principle, directors are non-members and non-members cannot enforce the
contract.

Consequently, Alex and Marshall has passed a resolution in a general meeting removing
Article 32 from the articles of association. This requires the discussion of alteration of
Articles of Association as (a special resolution allows the articles to be altered (s.21)
meaning that a pass for the resolution must be achieved through a majority vote of not
fewer than 75 percent (s.283), as opposed to an ordinary contract where all the party’s
agreement are compulsory for the amendment.) This reflects how important the Articles are
in terms of the company’s governance, and also affords protection to the shareholders,
directors and to the company itself. (The importance of the Articles are clearly illustrated in
terms of the company’s governance as well as providing shareholders, directors and the
company with the necessary protective measures.) However, common law and statute have
imposed a number of restrictions on a company’s abilities to alter its the Articles such as the
company cannot make alterations that contravenes either company law or an order of the
court.

Additionally, Lindley MR had laid down the most important limitation on a company’s ability
to alter the articles must be exercised bona fide for the benefit of the company as a whole
as was held in Re Greene & Allen v Gold Reefs of West Africa Ltd, however this is a
subjective test and a challenge is unlikely to succeed unless the change was so ‘oppressive’
that it casts doubt on the majority’s good faith (Shuttleworth v Cox Brothers). (however
unless there is change “oppressive” enough that disputes the good faith of the majority
(Shuttleworth v Cox Brothers), this will only be a subjective test and the possibility of the
challenge to succeed will be improbable.) Therefore, the court may overturn the alteration
of the articles if it is held not to satisfy the ‘bona fide’ test. On the facts, it is argued that
removing Article 32 from the Articles of Association as well as removing Parker from the
Board of Directors may be done out of malice so that the shareholder agreement may
proceed. Furthermore, the alteration is only valid if it is passed in bona fide (good faith) and
for the benefit of the company as a whole; to which on the facts this is not satisfied as Alex
and Marshall have altered the Articles of Association for one reason, because Parker had
breached the shareholder agreement, to which it is asserted that this is not done in good
faith and that this alteration will not be allowed.

Consecutively, the subsequent issue revolves around the breach of the object clause, to
which an object clause defines the legal capacity as well as the activities that can be
undertaken by the company. Although the facts of the question did not explicitly and
specifically mention the object clause within TDL Ltd’s Constitution, however, it is assumed
that the object clause of TDL Ltd is to provide pathology services to the NHS and by
transporting high risk Covid-19 samples, the facts had explicitly stated that this had
breached the company’s objects clause in the Articles of Association. However, S 39 CA
2006 has provided that even if one breaches the objects clause, it is still a valid transaction.
Nevertheless, the best

The subsequent point of discussion revolves around the last resort claim in S122(1)(g)
Insolvency Act 1986, which is the just and equitable winding up of the company. (Re Phoner
Ltd) On the facts, Parker is a founding member of the company and it is argued that it is
unjustified for him to be simply removed from the Board of Directors and not be able to
claim the full value of his shares because he has an integral part in the founding of the
company. The argument here is that the an alternative cause of action for Parker is to rely
on S122(1)(g) Insolvency Act 1986 and to wind up the company because he has helped form
the company and the act of him not getting the full value of his share and walking away may
be unfair to him. However, s.125(2) IA 1986 stated the court need not grant a winding up
order if it is opined that some alternative remedy is available to the petitioners and they
have acted unreasonably in not pursuing it. (if it is opined that some alternative remedy are
readily accessible to petitioners and they have taken unreasonable course of actions in not
pursuant of the order, then the winding up order is unnecessary to be granted). Since it is
likely that Parker would get a claim under s.994, thus winding up remedy would be
dismissed.

In conclusion, the weighted votes clause is valid and Parker in the capacity of a shareholder
may attempt to enforce article 32 against Alex and Marshall, while contrarily the attempt to
alter article 32 by Alex and Marshall is not deemed to be in good faith, therefore the
alteration is not likely to be successful.

Parker may bring an unfair prejudice petition under S994 as the courts has a wide discretion
as to the remedy granted and that he could only bring a petition under S122(1)(g) of the
Insolvency Act 1986 for just and equitable winding up as a means of last resort in the event
that his claim under S994 had failed. Provided that the court is satisfied with the petition
under S994, the courts may order as it finds fit in granting relief with respect to the matters
complained of