Directors' Liabilities under the Companies Act UK

The concept of a company having a separate identity from its directors and shareholders was established in Salomon v Salomon & Co [1897] AC 22. In that case, it was held that the company’s acts were not those of a shareholder, nor were its liabilities the liabilities of the shareholders, even where the shares were held on trust for them. Further a company cannot be characterised as an agent of its shareholders unless there is clear evidence to show that the company was in fact acting as an agent in a particular transaction:Ebbw Vale UDC v South Wales Traffic Area Licensing Authority [1951] 2 KB 366. The property of a company in no sense belongs to its shareholders, Bank voor Handel en Scheepvaart NV v Slatford [1953] 1 QB 248.

This concept whereby a company has a separate liability to its directors and shareholders is referred to by a number of different references, including the company's legal personality, the corporate veil and separate legal entity. All of these terms reflect the common idea that a company has a completely separate legal existence to its subscribers, shareholders, directors and company officers.

Corporate Personality and Liability

A company’s corporate personality prevents directors from being held liable in respect of company obligations. In Williams v Natural Life Health Foods [1998] 1 WLR 830, the Court restricted the circumstances in which a director of a company would be personally liable to claimants for loss which they suffered as a result of negligent advice given them by the company. Liability for negligence requires an assumption of responsibility that must be determined objectively. A claimant must first establish that there is a direct relationship between the director and the claimant that includes the statements made and the personal conduct of the director in the particular matter. Another test to establish personal liability on the part of director is that the claimant must have relied on the statements made and the conduct of the director is examined in the provision of services. This is separate liability to that of the company. The reliance must been seen to have created a special relationship between the director and the claimant in that the director has taken personal responsibility for the matter and is not merely acting in the capacity of a manager of the company.

Later cases have followed this reasoning, however a director and controlling shareholder have been held liable jointly with the company for infringement of copyright, MCA Records Inc v Charly Records Ltd [2001] EWCA Civ 594, but the director will not be held liable if the director does no more that carry out the constitutional role in the governance of the company which is simply to vote at board meetings. For the liability to arise it has to be shown that the director committed the breach of copyright personally procured or induced the breach by the company, which is a provision that arises by virtue of the Copyright, Designs and Patents Act 1988 UK..

Lifting the Veil of Incorporation

There are certain situations where courts are prepared to lift the veil of incorporation, and ignore the separate legal personality of a company. The fundamental principles established in Salomon v Salomon & Co [1897] AC 22 are not ignored, but rather the director is found liable for the fraud in their personal capacity, as the corporate form cannot be used for the purposes of fraud, Re Darby [1911] 1 KB 95, or as a device to evade contractual or other legal obligation, Gilford Motor Co v Horne [1933] Ch 935.

In certain cases courts have found that holding companies were in fact carrying on business through the agency of its subsidiary company but only where the activities of the subsidiary company are so closely controlled and directed by the parent company that the latter can be regarded as merely an agent conducting the parent companies business, Smith Stone and Knight Ltd v Birmingham Corporation [1939] 4 All ER 116.

While respecting the separate legal personality of a company in which there is not a true lifting of the veil of incorporation, courts have treated the conduct or characteristics of its directors, managers or shareholders as attributable to the company itself. In doing this, they have examined the way the company is actually managed in order to find where the centre or centres of management are in fact located to determine both civil and criminal liability, De Beers Consolidated Mining Ltd v Howe [1906] AC 455.

Where fraud or deliberate breach of trust can be shown there is a willingness to set aside the corporate form even where this involves a network of interlocking foreign and English companies, Re a Company Ltd [1985] BCLC 333. The court will use its powers to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the company under consideration.

It is not sufficient that the company has been involved in some impropriety not linked to the use of the company structure to avoid or conceal the liability, Adams v Cape Industries plc [1990] Ch 443.

Groups of Companies

Courts have been prepared to go some way towards recognising the economic entity of a tightly controlled group of companies so as to ignore the separate legal entities of the companies within the group, DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852. The degree of domination of the subsidiary by the holding company is not stated with precision in the Companies Acts or elsewhere. It is difficult to predict with any certainty when the separate legal personality of the companies within the group will be set aside by the courts. The courts will not however ignore the limited liability of a subsidiary so as to allow the creditor of an insolvent subsidiary to seek redress from the holding company.

However if circumstances exist indicating that there is a mere sham or façade concealing the true facts where a company is incorporated ahead of the crystallisation of liabilities as a means of avoiding, limiting or otherwise managing those liabilities the soundness of the previous case is thrown into some doubt requiring special circumstances to lift the corporate veil, Woolfson v Strathclyde Regional Council [1978] SLT 159.

More recently doubt has been thrown onto the ability of the principle in Salomon v Salomon & Co [1897] AC 22 to insulate the company’s legal status in the context of group corporate activity given the principle in Salomon which was developed on he basis of a one man company. In Stocznia Gdanska SA v Latvian Shipping Co [2002] EWCA Civ 889 a parent company was held liable for indirectly inducing the breach of a contract between its subsidiary and a third party using unlawful means through failure to comply with an agreement to fund the subsidiary’s purchase of goods.

In another case, Odyssey (London) Ltd v OIC Run-Off Ltd [2000] 97 (13) LSG 42, the court held a company liable due to an individual's perjury in legal proceedings to which to the company was a party to those proceedings. The common factor in the two cases was the liability of the company and the cornerstone of any discussion of whether a parent may be liable for inducing a breach of contract is the decision in Salomon v Salomon & Co [1897] AC 22 that protects the corporate personality. As to what amounts to actionable inducement appears to be one that is outside the operation of independent corporate governance of the subsidiary.

In Conclusion

A Court rarely lifts the corporate veil of a company, and there are established exceptions, some of which are discussed here. If it may be proven that fraud has taken place or the company is not being used for valid means within the bounds of the law a court may lift this veil exposing the directors of the company to liability. Fraud unravels all.