December 2022
In the final part of her series, Marina Matyukhina looks at three relevant cases and explains the outcomes.
The article follows on from ‘Separate Legal Personality – part 1’, and aims to help LW (ENG) and LW (GLO) student understand when the veil of incorporation can be lifted if the ‘actor’ behind the veil is another company. So far, most of the situations with lifting the veil in a group of companies have been unique. Rather than a set of principles what we have is a series of cases.
Behind the veil: another company
Compensation for disturbance under compulsory purchase orders
Let’s look at three cases, two where the veil was lifted, and one where it was not.
In all three, land was compulsorily purchased by city authorities from one company, but there was another related company that had an interest in that land.
In Smith, Stone and Knight Limited v Birmingham 1939, the parent owned land occupied by its wholly owned subsidiary. When the land was compulsorily purchased, the parent claimed compensation for disturbance to the business and won. The veil was lifted on the grounds that the subsidiary was acting as the parent company’s agent.
In DHN Food Distributors Ltd v Tower Hamlets LBC 1976, the situation was the opposite: the subsidiary owned the land and was paid under compulsory land purchase. Yet the purchase also disturbed the whole business. DHN was a group of three companies importing and distributing groceries. The subsidiary in question owned the group’s only warehouse to which no alternative could be found. Also, all three companies had common directors. Lord Denning MR held that the subsidiaries were ‘bound hand and foot to the parent company’ and the veil was lifted. The companies were treated as a single economic entity, similar to their accounting treatment.
However, not all claims for compensation for disturbance have been so successful, particularly, when the ultimate goal was to compensate the shareholders’ loss.
In Woolfson v Strathclyde Regional Council 1978, the city compulsorily purchased properties occupied by Campbell Ltd operating a bridal clothing shop. The shop units were rented part from Mr Woolfson directly and part from Solfred Ltd. Solfred, as well as Campbell, were owned by Woolfson and his wife. Woolfson and Solfred claimed compensation for the disturbance of business.
The House of Lords found the structure and control over business distinguishable from DHN. Although the Lords acknowledged the loss suffered by Woolfson, they stated that
the ‘special value’ element had already been included in the compulsory purchase price
and that compensating any other shareholders’ interest would be ‘too remote’ to justify lifting the veil.
Negligence
Another group of cases where the corporate veil is regularly attacked concerns the employer’s negligence. Several prominent cases involve a well-known energy company, Cape plc (part of Altrad group since 2017) that used to mine asbestos in South Africa.
The first legal action was initiated in 1974 in a Texas court. Over 400 US employees of Cape’s marketing subsidiary sued both the subsidiary and its UK-based parent. Their claims succeeded against the American company, and against Cape.
However, since Cape was a British company, for the judgement to be enforced either
Cape had to consent to be subject to Texas jurisdiction (which they clearly would not)
or the claimants had to prove that Cape was present in the US.
In 1990, the employees reached the UK courts (Adams v Cape Industries plc 1990), and their attempt to enforce the decision failed as Cape’s presence was not established: it had no ‘fixed place of business’ in the US.
In the late 1990s, over 3,000 employees of Cape’s South African subsidiary applied to the UK courts claiming damages for personal injuries from asbestosis. Cape plc successfully argued the case should be heard in South Africa, but the claimants reversed this judgement on appeal (Lubbe v Cape Plc 2000). In 2003, Cape and its successor settled out of court with the plaintiffs. The parent company paid out over £7.5 million and subsequently established a fund of £40 million for claimants based in the UK.
In Chandler v Cape plc 2012, Cape was successfully sued by a former employee of its South African subsidiary. The judge applied dicta made in Lubbe v Cape Plc 2000 and imposed liability upon Cape for the subsidiary’s negligence. However, he paradoxically dismissed any suggestions about lifting the veil of incorporation referring to the very specific circumstances of the case.
Conclusion
In compulsory purchase cases, courts often ignore separate legal personality, but are very hesitant about doing so in subsidiary negligence cases.
Marina Matyukhina FCCA is a law tutor with FME Learn Online. For part one of her feature see page 32 in the October issue (https://tinyurl.com/y43m86j4)
