Does the Law in ADAMS V CAPE PLC Still Good Law or should further Reform Prevail?

Does the law in ADAMS v CAPE PLC still good law or should further reform prevail? The approach in Adams v Cape plc in lifting the veil of incorporation has always been a debatable issue. Despite the obvious economic connection between companies within the same group, English company law has steadfastly maintained its policy of treating such companies as distinct legal entities. . To lift or not to lift the veil of incorporation is a matter for the court to decide in each and every case. Should the approach in Adams v Cape plc ltd (1990) continue to be used or statutory provisions should come into play? Years ago the English Courts had established the basic principle of separate corporate personality: “the corporation has a separate existence from the shareholder” per Vaughan Williams J in Salomon v Salomon. It is the leading case on the fundamental importance of the separate personality of a company. A distinct legal personality can own and deal with property, sue and be sued in its own name and contract on its own behalf. The emergence of group structures in UK was to curtail tax as the Corporate Structures became more prominent. When we speak of lifting the veil of incorporation it equals to a veil which stands in between the company and its members, employees, employers and shareholders. If the veil of incorporation is removed both bodies would be treated as a single legal entity. Just like in any state of affairs we have a conqueror and a loser, the Court often founds itself into the quandary as whether to lift or not to lift the veil of incorporation to determine where the loss lie, more explicitly who will bear the burden of costs. The Court will either award an injunction; Gilford motor Company Ltd v Horne (1933), specific performance; Jones v Lipman (1962) or damages. An enhanced picture of Group companies consist of a parent A ltd which is the chief company and its two subsidiaries X ltd and Y ltd. If A ltd runs its most perilous business through X ltd and in the event X ltd collapse or goes into liquidation and a person is injured while working, the question which arises is whether the parent company A ltd should be liable for its subsidiaries. In economic reality there is a sole business pertaining work through three different legal personalities. Yet again the question is should the veil be lifted or not. In Re A Company (1985) it was held that irrespective of corporate structure used, the veil will be lifted to achieve justice. The key case regarding parent and Subsidiaries Company is Adams v Cape Plc Ltd (1990). Its judgement has drastically narrowed the ability of the courts to lift the veil. Here the subsidiaries found in the US mined asbestos and when Adam while working in one of Cape Ltd subsidiaries was injured sought relief against the parent company fund in the UK. The Court of Appeal revised this complex area of law and concluded that the veil should be lifted in three conditions. Primarily where the corporate structure is a mere façade concealing the true facts. Furthermore if an express agency relationship exists between a company and its shareholders or between a parent and subsidiary company in a group structure. Thirdly where the group of companies is in reality a single economic entity. The motive of the subsidiary company in Adams was to prevent tax and there were no express agency agreement since parent company had no control over the subsidiary company. Therefore, the Court didn’t lift the veil of incorporation. If one of the above three issues are present the veil of incorporation will be lifted. Otherwise the Salomon principle applies. We has had statutory intervention under s.399 CA 2006 where parent companies have a duty to produce Group accounts and under s.409 CA 2006 they have to provide details of shares it holds in the subsidiaries and subsidiaries names and country of activity. Also s.993 CA 2006 introduces the criminal offence of fraudulent trading. Nevertheless the Court has always been keen and watchful in safeguarding the corporate veil. Sec 213-215 Insolvency Act 1986 deal veil lifting. Since the Corporate form was being used as an instrument of fraud namely fraudulent trading s.213 Insolvency Act 1986 came into play but the dilemma was that we had to prove intent which was difficult and attracted criminal charge of imprisonment and fine. S.213 of the Insolvency Act 1986 deals with situation where any business of the company carries intent to defraud and applies to everyone. The purpose of this section was to restrict fraudulent trading, nonetheless, the high standard of proof as required by the court negated its effect due to the possibility of a criminal charge arising. s.214 Insolvency Act 1986 on the other hand applies mainly to directors who had been negligent leading to the insolvency of the company for example in Re Produce Marketing Consortium Ltd (1989) the 2 directors were liable to pay £75000 to the debts of the company since they didn’t put the company in liquidation before it reached to the point of insolvency. Since Adams the Court has lifted the veil of incorporation in various state of affairs. For example in tort in Lubbe v Cape Plc (2000), the parent company owed a duty of care to anybody injured by subsidiary company in a group and in Chandler v Cape Plc (2011) duty of care has been breached by parent company. The point in tort is that a personal injury caused by a UK subsidiary operating in a jurisdiction with a developed country such as USA will not give rise to any liability on part of the parent company but a personal injury caused by a subsidiary of a UK company in an underdeveloped jurisdiction will. In addition, if the tort is deceit rather than negligent, Court will allow liability to flow to director or employee. In so far the court has extended the principle of lifting the veil of incorporation in various new situations which arose and the Court was left to the choice of whether to lift the corporate veil or not. Location Title Words Matched Match (%) Unique Words Matched Unique Match (%) Documents found to be plagiarised Directors’ duties and derivative actions | Modernising UK … 244 10 244 10 v Moir (No 2) – Wikipedia, the free encyclopedia 45 2 45 2 11 : Majority rule flashcards | Quizlet 664 27 534 22 Law – Routledge Revision61 3 0 <1 doctrine of foss v harbottle – Online law school … 77 3 0 <1 Law – Shareholder Cases flashcards | Quizlet 31 1 0 <1 Act 2006 – legislation 140 6 0 <1’ Derivative Claims – Scribd – Read Unlimited Books 47 2 0 <1 Law Reform Bill [HL] 103 4 0 <1 Kenya Law Resource Center: MAJORITY RULE ( Foss vs … 64 3 10 <1 A Guide To The Companies Act 2006 – Part 1 – Corporate … 95 4 0 <1 Development of Statutory Derivative Actions | Law Teacher 50 2 0 <1 for minority shareholders – Lees Solicitors 78 3 34 1 Minority Shareholders Protection In Cyprus – Remedies … 17 1 0 <1 by Dignam and Lowry Company Law – Scribd 613 25 49 2 S.260 of Company Act 2006 is an unnecessary piece of legislation. 198 8 0 <1 CLAIMS flashcards | Quizlet 129 5 0 <1 17 1 0 <1 Act 2006 – 48 2 0 <1 where there is a breach of directors’ duties 40 2 0 <1 New Derivative Action May Lead To Increased Claims Against … 18 1 0 <1 Law Reform Bill [HL] 114 5 0 <1 Company Law Guide 613 25 0 <1 Matching Content: 40%. Moreover in Prest v Petrodel [2013] seven companies held by Mr Prest a very wealthy man could be transferred to his wife upon dissolution of their marriage as ancillary relief during Matrimonial proceedings. While the defence of Mr Prest was that his companies should have separate legal entity, the Court of Appeal held that the corporate veil will be pierced in very limited circumstances. Firstly where there is a deliberate abuse of a corporate entity (i.e. to hide behind the corporate veil) for improper purposes and secondly the specific facts show that the assets are genuinely held on trust for a party to the proceedings. The reason why Mrs Prest succeeded in her claim was due to the special facts of her case. At various time Mr Prest tried to conceal the fact that the seven companies were held on trust for him. Moreover both he and the company failed to cooperate with disclosure allowed the court to infer that Mr Prest and the companies were attempting to hide the true beneficial owner of the properties. However it should be noted in this case, Lord Sumption sheds light on the nature and extent of the doctrine. He extracted principles which are concealment and evasion principles. In the first principle we have to investigate as to who are the ‘real actors’ that is . the real controller of the company just like in Gilford Motors v Horne. In the latter principle, the Court pierces the veil to prevent a party from avoiding a legal obligation by virtue of the fact that they have interposed a company in an attempt to defeat a right which will be enforced against them. To conclude with the question of whether to lift the veil of incorporation or not will depend on each and every case. The Court has always respected the legal personality of a company and will lift the veil in very limited conditions. The separate legal personality of the company has been established for more than a century, the decades that have intervened have encouraged a belief in this principle but have also allowed exceptions to the concept when lifting of this corporate veil is permitted for example in situations of fraud, or sham. Nevertheless the courts have the power to continue developing the law in this area when public policy requires it. It can be seen in Prest v Petrodel (2013) that a director can be liable to contribute to the debts of the company if he has been negligent in the company going into insolvent liquidation and did nothing to prevent that. The veil will be pierced if subsidiaries have been created with motive of defrauding creditors or to prevent a transaction. Moreover, if the subsidiary company worked under the control of the parent company and there was an express agency agreement between the two such that the two are inter-linked. If tort is deceit instead of negligent liability will flow to employees or director. Furthermore, the Court won’t be easily fooled if someone tried consistently to conceal facts which are of utmost importance for the Court. Thus there is currently the possibility of extension of the law at the courts’ discretion. My study of the law in this area leads me to the conclusion that the case for more radical reform of liabilities within groups has not been made. The law as it currently stands reflects the balance that is required between the needs of the economy and the needs of justice. Words: 1687 Bibliography Wikipedia University of Leceister (pdf notes) Secondary sources Recent developments of company law (UOL) Alan Dignam and John Lowry . In this category most specifically we refer to sham. In Gilford Motor CO ltd v Horne (1933), a former employee was bound by a contractual obligation not to solicit customers from his former employer after he left the job. To avoid the contractual obligation horne incorporate a company and solicit customers. The court found that it was in the interest of justice for the court to act as the new company was a sham. Similarly in jones v lipman the court held that company was a sham and was an attempt to avod a pre existing legal oblgation. the court gave an order for specific performance for the house to be transferred to the original purchasers. Company Law Textbook

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