Lifting the Corporate Veil

Chapter# 3

The concept of lifting the corporate veil refers to legal exceptions where the usual
separation between a company and its members 9e.g shareholders) is disregarded.
Courts or legislature m ay intervention to hold individuals or parent company liable,
overriding the principle of corporate separateness. Judges often use metaphors like
“piercing,” “lifting,” or “penetrating,” the veil to describe this process.

A key context for the veil lifting involves corporate group structures, such as a parent
company (e.g. Z Ltd owning subsidiaries (A Ltd, B Ltd, C Ltd). While these entities are
legally distinct, they operate as a single economic unit. this setup let the parent
company protect its own assets if something goes wrong in one of the smaller
companies. However, if this separation is misused (e.g., to avoid paying debts or
commit fraud), the law can “lift the veil” and hold the parent company or owners
responsible.

In short, while companies and their owners are usually treated as separate, the law can
step in to stop this separation from being unfairly. This ensures that people or
companies can’t hide behind legal rules to avoid their responsibilities.

Statutory Examples of “Lifting the Veil”:

1) Taxation & Group Structures:

UK tax laws prevent companies in corporate groups from avoiding taxes by shifting
assets/liabilities. The Companies Act 2006 (s.399) requires parent companies to
prepare group financial accounts, and s.409 mandates disclosures of subsidiary details
(names, locations< shares held) to ensure transparency.

2) Employment Rights:
The Employment Rights Act 1996 protects employees transferred between
companies in a group, treating their employment as continues (e.g., retaining
rights like redundancy pay or notice periods)
3) Insolvency & Fraudulent Trading

Under the Insolvency Act 1986:

Section 213 (Fraudulent Trading)

Allows courts to hold individuals liable if a company's business was run to defraud
creditors. Proving this requires evidence of dishonesty (e.g., intentional deception).
Courts historically set a high bar, as seen in *Re Patrick and Lyon Ltd (1933) *.

Section 214 (Wrongful Trading):

Targets directors who negligently continue trading when they knew or should have
known the company couldn’t avoid insolvency. Unlike fraud, no dishonesty is needed.
For example, in Re Produce Marketing Consortium Ltd (1989) *, directors had to pay
75000 pounds for delaying liquidation, even without fraud.

4) Directors & Shadow Directors:

Section 214 focuses on directors, including those in small companies (who are often
also shareholders. Parent companies can be treated as shadow directors (under CA
2006, s.251) if that secretly control a subsidiary board. This exposes them to liability for
wrongful/fraudulent trading.

Key points:

These laws “lift the veil” to prevent abuse of corporate separateness, ensuring
accountability for tax evasion, employee rights violations, or reckless trading during
insolvency. They target not just fraud but also negligence, holding directors (and
sometimes companies) personally liable.

Veil Lifting by the Courts:

The principle of a company’s separate legal personality, established in Salomon v.

Salamon, has been inconsistently applied by courts in challenging cases. While courts
sometimes uphold corporate separateness, they occasionally hold individuals and
parent company liable. The main categorization attempts explain this phenomenon,
though neither offers definitive predictably:

1) Situational Categories:
Examples include fraud, agency relationships, tax disputes employment issues
or corporate groups. However, courts have both lifted and upheld the veil within
these contexts.
2) Judicial Method Categories:
Peeping (disclosing member information), penetrating (imposing liability on
members), extending (treating corporate groups as one entity), and ignoring
(denying legal recognition).
 But these methods don’t help predict what courts will do next. The truth is courts
are unpredictable. Sometimes they lift the veil and sometimes they don’t.
History helps a little, for example, between 1966-1989, courts were more likely
to lift the veil. But even today, there's no clear rule. Every case is different. In
short, courts decide based on the situation, not fixed rules. It's confusing, but
that's how it works.

Classical Veil Lifting (1897-1966)

During this period, the legal principle of corporate personality established in
Salomon V A Salomon & Co Ltd (1897) prevailed affirming the separation
between a company and its shareholders. The House of Lords inability to
overrule itself limited judicial “veil lifting” (disregarding this separation).
However, courts pierced the corporate veil in exceptional cases where
companies were misused to evade legal obligations or commit fraud. Key
examples include;
1) Daimley Co Ltd v Continental Tyre (1916)

They veil was lifted to deem a company an “enemy” during World War I due to its
German shareholders.

2) Gilford Motor Co v Horne (1933):

A former employee used a company to breach a non-solicitation covenant; the court

ruled the company a front and issued injunction.

3) Jones v Lipman (1962)

A company formed to avoid a land sale contract was deemed a facade and
specific performance was ordered
4) Re Bugle Press (1961):
Majority shareholders created a company to force a minority shareholders
compulsory purchase. The court blocked this, labelling the new company a
facade.

This case illustrates courts intervening to prevent abuse of corporate

structures for improper purposes, such as circumventing contracts or
statutory rules, despite the general adherence to Salomon. The ruling's
emphasized that companies could not be used as a mere instrument to
mask wrongful acts.
 The Interventionist Years, 1966-1989

Between 1966-1989, UK courts started to question the old idea that a

company is always separate from its owners (called the corporate veil).
These periods saw the judges trying to make fairer decisions, even if it meant
ignoring strict legal rules.

1. Judicial Flexibility and the Rise of Interventionism:

The House of Lords, 1966 Practice statement, which allowed it to depart

from precedent, signalled a broader judicial willingness to adopt modern
realities. This shift courts to prioritize fairness over rigid laws in corporate
cases. Lord Denning emerged as a leading advocate for veil-lifting,
arguing in “Littlewoods v IRC (1969) that courts should pull off the mask
of corporate personality to address economic realities. His action
challenged the sanctity of Salomon v Salon (1897).

Key Case: DHN Food Distributors (1976):

Dennings's assertion that a corporate group could be treated as a single
economic entity. This means could ignore the legal separation between
parent and subsidiary companies if it made sense for fairness. However,
this was countered by the House of Lords in Woolfson v Strathclyde
(1978), they said companies should only be treated as one if the structure
was a fake (a facade) to cheat people. But lower courts kept following
Dennings's ideas.

2. The High Point of Interventionism: Re a Company (1985)

The court of appeals 1985 ruling encouraged the interventionist,
declaring that courts could pierce the veils “to achieve justice”
regardless of corporate structures. This elevated justice above
predictably. Denning influence in cases like Wallersteiners v Moir (1974)-
where veil lifting was used to hold controlling shareholder liable-
underscored this trend.
3. Criticism and Backlash

By the late 1980s, academic and judicial backlash emerged.

i. Legal Uncertainty: Scholars like Lowry (1993) warned that irregular veil-lifting
destabilized rhetoric foundational principles of incorporation, deterring
investment and complicating corporate planning
ii. Systemic Impacts: Gallagher and Ziegler (1990) noted unintended
consequences, such as blurring directors’ duties (e.g., to whom do directors
owe loyalty in a group structure/) and undermining tax principles
iii. Judicial Retreat: The 1989 National Dock Labour v Oibb & Wheeler, ruling
marked a deciding pivot. Courts began reasserting the primacy of corporate
separatism, particularly in group structures, signalling a return to formalism.

4. What the Era taught us?

Balance Needed: Judges struggled between fairness (e.g., compensating

victims) and keeping the law stable (so businesses could trust company
structure).
Legacy: Lord Denning’s ideas left a mark. Even today, courts sometimes
“lift the veil” in extreme cases (like fraud)’ but they're careful not to do it
too often
Lesson: While fairness matters, the law needs clears rules. Too much
flexibility can harm confidence in businesses.

In simple terms. The era shows how judges tried to fix unfairness by
looking past company structures but later realised they went too far.
Today, the law tries to balance fairness with clear rules—companies are
usually separate from their owners, except in case of cheating and scam.

Back to Basics, 1989- Present

Adams v Cape Industries Plc (1990)

The Adams v Cape Industries case is a landmark decision in English corporate

law, reaffirming the corporate separateness established in Salomon v A
Salamon & Co Ltd (1897) while significantly narrowing the circumstances under
which courts may “lift the corporate veil”. The case discussed on whether an
English parent company (Cape) should be subject for U.S. jurisdiction (and thus
liable for U.S. judgements) through its subsidiaries. The Court of Appeals
analysis clarified and restricted the exceptions to the Solomon principle,
emphasizing the sanctity of separate legal personality.

Key Issues and Reasoning:

1. Single Economic Unit Argument:

The claimants argued that Cape and its subsidiaries formed a “single
economic unit,” justifying veil-lifting. The court rejected this, holding that
group structures are not automatically treated as a single entity unless:

A statute or contractual document expressly requires such as interpretation

Earlier cases (e.g., DHN Food Distributors v Tower Hamlets (1976) allowing
veil-lifting for justice were distinguished as statute interpretation exercises

2. Facade/Concealment Exception:
The court acknowledged the exception where a subsidiary is a mere facade
concealing the true facts (per Jones v Lipan (1962) and Woolfson v
Strathclyde (1978) However:

Motive vs Illegality: While Capes subsidiaries were structured to minimize

U.S. liability, the court found no evidence of fraud or improper concealment.
Avoiding liability through lawful corporate structuring was deemed
permissible.
Ambiguity: The judgment in introduced uncertainty by contrasting *Jones v
Lipman* (where veil lifting was justified despite lawful incorporation) with
Cape’s case. The court failed to clarify when “moral disapproval” of motives
might override legal permissibility, leaving the facade exception reliant on
judicial discretion.
3. Agency Argument:
The claimants contented that Cape’s subsidiaries acted as its agents. The
court applied strict agency principles: if the parent company fully controls
the subsidiary day to day actions (like giving orders). Here, Capes
subsidiaries acted intendedly. The parent didn’t manage them

Implications of the Decision:

Narrowing of Veil-Lifting Exceptions;

Post Adams, veil-lifting is confined to three scenarios;
Statutory Interpretation: Where legislation or contracts ambiguously
imply group liability.
Facade: Limited to cases involving deliberate abuse (e.g., evasion of
existing obligations) rather than prospective liability management.
Agency: Required clear evidence of authority, rendering it rarely
applicable.

Criticism: Some argue this protects big companies at the expense of

victims. But the law values predictability—business need clear rules to
operate.

In short, Adams v Cape made it very hard to hold parent companies

responsible for their subsidiaries. Unless there's a fraud, a clear law
violation or total control, courts won’t “pierce the veil.’ This case is a big
deal for corporate law. It protects companies but can leave victims with
fewer options.

Creasey v Breachwood Motors Ltd (1993)

Background and Facts:

The case involved two companies, Breachwood Welwyn Ltd and
Breachwood Motors Ltd, with same directors and shareholders. After Mr.
Creasy was wrongfully dismissed by Company A, he obtained a default
judgemnet againt Company A for 53,835 pounds. However, Company A
trasnferred its assets to Company B, paid off creditors, and dissolved,
leaving no assets to satisfy Creasy’s claim. Mr. Creasy asked the court to
make Company B pay instead, since Company A was gone. The first judge
agreed but Company B appealed.

Legal Reasoning at First Instance:

The trail judge, Mr. Richard Southwell QC, pierced the corporate veil
holding Comapny B liable for Company A debts. His reasoning deviated
from the restrictive approach in Adams v Cape Industries (1990), which
limits veil piercing to situations where a company structure is a “facade”
to evade existing legal obligations. instead, Southwell focused on:

1. Breach of Directors Duties: The directors (common to both

companies) transferred Company A assets to Company B, ignoring
their fiduciary duties to Company A and its creditors
 2. Disregards for Separate Legal Personality: The directors deliberate
failure to maintain Company A ability to meet its judgement debt was
deemed an abuse of corporate structure

The judge implied that a breach of directors duties alone justified lifting the veil, without
requiring ottof of a sham or fruadulent motive

Critism and Controvery:

The decsion combine breach of directors' duties with the facade exception. Tradionally,
veil-piercing required evidence of a company being used to evade existing liabilities, not
merely poor governance or breachers of duties. The judgement blurred the line between
personal liability of directors (e.g. for wrongful trading under insolvency law) and
corporate liability.

Southwell suggested that directors breacher of duty (e.g., transferring assets to other
companies) could themselves justify veil-piercing, even without a fraudulent motive

The case could have been resolved using established doctrines, such as fraudulent
conveyance (transferring assets to defraud creditors) or wrongful trading (under the
Insolvency Act 1986)

Court of Appeal overruling:

The decision was overruled, reaffirming the strict approach in Adam. Key principle
upheld:

1. Separate Legal Personality: Companies remain distinct entities unless facade

or evasion is proven
2. Motive Centric Test: Veil-piercing requires evidence of a deliberate attempt to
abuse corporate structure to evade existing obligations, not merely poor
management or breaches of duty
3. Directors' liability vs Corporate Liability: Breach of fiduciary duties by
directors does not automatically render another company liable; personal
claims against the directors or insolvency remedies are the appropriate
recourse.
Significance:

This case shows courts usually protect the legal separation of companies. Even if
director act unfairly, the law focuses on punishing them, not their other companies. But
is a company is set up purely to cheat people, courts can “pierce the veil” (ignore the
separation). This case doesn’t meet that high standard

In Simple Terms, if you own someone money, you can't just move your money to
another company you own to avoid paying. But the law won’t blame the other company
unless you created it just to cheat it.

Ord v Belhaven Pubs Ltd (1998) and Veil-Piercing Doctrine:

The case of Ord v Belhaven Pubs Ltd (1998) underscores the judiciary’s cautions
approach to lifting the corporate veil, emphazing the distinction between legitimate
corporate restructuring and abusive attempts to evade liability. This analysis examines
the principles of veil-piercing, contrast key cases, and highlights the evolving judicial
stance on corporate separateness.

Key Legal Principles:

1. Corporate Veil Doctrine:

The presumption of corporate sepratness shield shareholders (including parent
companies) from liability for a subsidiary's companies. Courts may pierce the
only in exceptional circumstances, such as fraud, evasion of existing obligations
or where the corporate structure is a mere “facade”. (Adam v Cape Industries,
1990)
2. Facade Exception:
Courts may disregard separateness if a company’s structures manipulated
dishonesty to conceal wrongdoing or avoid pre-existing liabilities. Motive and
transactional legitimacy are critical factors.
Case Analysis *Ord v Belhaven Pubs Ltd*

Facts:
Belhaven’s parent company restructured during litigation, leaving Belhaven
assetless. Ord sought to substitute the parent as defendant to enforce a
potential judgement.
Court Decisions:
High Court: Allowed substitution, suggesting the restructuring undermined
justice.
Court of Appeal: Reversed, ruling the restructuring was a legitimate response to
financial crisis. Assets were transferred at full value, and no facade existed. The
courts overruled *Creast v Breachwood Motors (1993(, which had permitted veil-
piercing based on liability avoidance alone
Judicial Reasoning:
The restructuring was done for a good reason (financial Crisis), not to cheat
anyone. The assets were transferred at fair value, so it wasn’t a sham. The court
followed a strict rule: the veil can only be pierced if there’s clear evidence of
dishonesty or abuse

Comparison with Other Cases:

1. Creasey v Breachwood Motors (1993):

In this case, the court pierced the veil because a subsidiary was closed to
avoid debts, and the parent company took over the business.
Ord overruled this case, saying liability avoidance alone isn’t enough to
pierce the veil. There must be dishonesty or abuse.

2. Kensington International Ltd v Congo (2006):

Here, the court pierced the veil because a company transferred assets
dishonestly to avoid paying debts. This shows the exception: if a company
acts dishonestly to avoid debts, the veil can be pierced.

Significance and Implications:

Motives Matters:
The court looked at why the parent company restructured. If the main reason
was to solve financial problems (not to cheat), the veil won’t be pierced.
Avoiding liability as a side effect isn’t enough.
 Courts Are Cautions:
Courts don’t easily pierce the veil. They only do it in clear cases of dishonesty
or abuse. This protects companies right to manage their affairs.

Practical Lesson:
Companies can restructure to manage debts, as long as they do it honesty
and fairly. If they try to cheat, courts can hold the parent company
responsible

Conclusion:
Ord v Belhaven show that courts are careful about piercing the corporate
veil. They will only do it if there's clear evidence of dishonesty r abuse. The
case makes it clear that avoiding liability alone isn’t enough. There must be
something more like fraud or sham transactions. The decision helps balance
the rights of creditors and the freedom of companies to manage their affairs.

Trustor AB v Smallbone (2001)

The case of Trustor AB v Smallbone (No2) 2001 provides an important

exploration of the circumstances under which courts may pierce the corporate
veil, particularly in cases involving impropriety and the use of a company as a
facade to conceal wrongdoing.

Key Legal Principles in Trustor AB v Smallbone

1. Impropriety and the Corporate Veil:

The court in Trustor emphasized that the mere existence of impropriety is
now sufficient to justify piercing the corporate veil. Instead, there must be a
clear connection between the impropriety and the use of the corporate
structure as a device or facade to conceal liability or avoid legal obligations.
This aligns with the principle established in Salomon v Salomon & Co Ltd
1897, which upholds the separate legal personality of a company. However,
Trustor clarifies that when a company is used as a facade to mask
wrongdoing, the court may disregard the corporate veil and attribute liability
to the individuals controlling the company.
2. The Facade Exception:
The court applied the facade exception which allows the corporate veil to be
lifted when a company is used as a sham or device to conceal the true facts
or evade liability. This principle was also evident in Jones v Lipman (1962),
where the court pierced the veil because the company was a mere facade for
the defendant improper conduct. The Trustor case reinforces that the facade
exception requires a deliberate misuse of the corporate structure, not just
incidental impropriety.

3. Adams v Cape Industries (1990):

The court reconciled earlier tensions by prioritizing Adams, which upheld
corporate separateness unless the structure itself is abused to evade
liability.

Expansive Developments:

Raja v Van Hoogstraten 2006 expanded the facade concept, allowing veil-
piercing where companies were dishonestly structured to conceal assets,
even for unanticipated liabilities. Scholarly commentary (e.g., Png, 1999)
suggested veil-piercing could apply to companies later becoming facade, not
just those initially illegitimates.

Shists in Judicial Approach:

Single Economic Entity: Soms courts revived Lord Denning’s single
economic entity theory as seen in

Becett Investment Managment Group Ltd v Hall (2007): rejecting a purist view
of separateness.

Chandler v Cape Plc 2011; Imposing tortious liability on a parent company

for subsidiary actions.

Contradictory Trends: Cases like Milliam (2008), Ben Hashem (2008) and
Linsen (2011) reaffirmed strict separateness, rejecting group liability without
explicit fraud.

Current Uncertainty:
The law remains unsettled between strict adherence to Salomon v Salomon
(corporate separateness) and contextual flexibility where justice requires
veil-piercing. Factors influencing outcomes include if someone uses a
company like a mask to hide their cheating or stealing, courts can tear off the
mask top hold them irresponsible. But if the company is real and just makes
a mistake, the owner is usually safe. The law is still figuring out when to apply
this rule.

Tortious Liability:

It addresses the challenge of tortious liability in cases involving involuntary

creditors, such as employees or the public, who suffer personal injuries due
to corporate actions. Unlike voluntary creditors, these individuals cannot
mitigate risks through contractual safeguarded. Limited liability often shields
parent companies from accountability leading victims uncompensated. The
Company Law Review Steering Group (CLRSG) acknowledged this issue but,
influenced by judicial reluctance (e.g.,. The Adams case), concluded
no legal reforms were necessary. The CLRSG omitted the topic from its Final
Report, despite high-profile cases during its deliberations. Scholar Mushinski
critiques this approach, arguing the CLRSG prioritized shareholder interests
and pro-business efficiency over justice for tort victim, particularly n
multinational enterprises where subsidiaries operate abroad.

Analysis:
The tension between limited liability's economic rationale and ethical
accounting is central. Limited liability encourages investment by shielding
shareholders, but it creates more hazards when subsidiaries cause harm.
For example, if a factory is owned by subsidiary, poisons workers, the parent
company might not have to pay, even though it controls the subsidiary.
Mushinski's critique underscores a systemic bias: prioritizing corporate
interests over human rights. By dismissing reforms, the CLRSG ignored the
growing need to hold parent companies accountable for overseas
subsidiaries actions, especially in jurisdictions with weaker regulations. For
example, if a UK company’s foreign subsidiary causes harm (like a factory
accident), the parent company might avoid responsibility because of weak
laws in other countries. The problem is bigger with global companies. Victims
often can’t sue parent companies in their home country, and subsidiaries in
poor countries might not have enough money to pay compensation. Critics
argue the law should balance business needs with fairness to victims.
Solutions could include:

1. Changing laws to hold parent companies responsible for subsidiarise

harm
2. Letting courts “ignore” the legal separation between parent and
subsidiary in serious cases.

The CLRSG’s decision shows a focus on profit over people. To fix this, laws
need to protect victims better, especially when companies operate in
multiple countries.

Parent company personal injury tortious liability:

Cases:

1. Connelly v RTZ Corporations Plc (1998)

A Namibian miner employed by an RTZ subsidiary sued the UK parent for
cancer linked to unsafe places
House of Lords: Permitted the case in London, citing Namibia's inability
to handle the complex case (cost expertise). Lord Hoffmann dissented
warning, against undermining the Salomon principle (separate corporate
entities)
High Court: later acknowledged RTZ’s potential duty of care due to
health/safety oversight but dismissed the claims as time-barred under
the Limitation Act 1980
Significance: Opened the door to UK- based parent liability for overseas
subsidiaries, contingent on control and duty of care.

2. Lubbe v Cape Industries Plc (2000)

Over 3000 South African claimants sued the UK parent for asbestos-
related injuries from a subsidiary mine.
House of Lords allows the case in London, ruling South Africa lacked
legal resources (funding, expert evidence, risking denial for justice. The
case later settled for 21 million pounds.
Significance: Reinforced forum flexibility for multinationals, prioritizing
access to justice over subsidiary location.

3. Chandler v Cape Plc (2011)

A subsidiary employee with asbestos injuries sued the parent after the
subsidiary dissolved.
Court held Cape liable due to its direct control over the subsidy's
health/safety policies, creating a ‘special relationship’ and duty of care.
 Significance: Established that parent companies can own duties to
subsidy employees if they assume responsibility for safety, even without
day-to-day control.

Analysis of Parent Company Liability Cases:

These cases show how courts sometimes hold big companies (parent)
legally responsible for harm caused by their subsidiaries in other countries.
Normally, parent and subsidiary companies are treated as separate legal
entities (the Salomon principle). But in cases of serious harm (like unsafe
working conditions), courts can pierce the corporate veil and blame the
parent company.

Ket Reasons for Parent Liability:

1. Control Over Safety:

If the parent company controls the subsidiary health and safety rules
(e.g., setting unsafe policies); courts may say the parent owes a duty of
care to workers.

Example: in Chandler v Caper (2011), the UK parent company was liable

because it managed safety at its subsidiary’s asbestos mine, even though
the subsidiary no longer existed.

2. Justice for Victims:

Courts allow lawsuits in the UK if victims can’t get fair trial abroad
Example: Lubbe v Cape (2000) South African miners sued the UK parent
in London because South Africa lacked lawyers and money to handle the
case

3. Knowledge of Risks:
Parent companies with expertise (e.g., knowing asbestos is dangerous)
must ensure their subsidiaries act safely.

Criticism and Challenges:

Judicial Overreach?
Critics argue that these decisions blur corporate boundaries, exposing
parents to unpredictable liabilities.
Practical Enforcment:
While Lubbe and Chandler led to settlements, litigating against MNCs
remains costly and time-consuming. Victims often rely on NGOs or legal
aid, which may not always be available.

Future Directions:

Expansion to Human Rights and Environmental Torts:

The reasoning in these cases has influenced newer litigation against
MNCs for human rights abuses and environmental damage. Laws might
change to clarify when parent companies are responsible.

Conclusion:

The cases mark a significant shift towards accountability for

multinational enterprises, prioritizing victim compensation over rigid
corporate formalities. While the Salomon principle remains intact, courts
now emphasise substances over form, scrutinizing parent companies'
roles in creating or mitigating risk. This trend aligns with global demands
for corporate social responsibility but raises challenges for balancing
business interest with equitable justice.

Commercial Tort:

Key Principles in Commercial Torts:

1. Negligent Misstatement & Personal Responsibility:

In Williams v Natural Life Health Foods Ltd (1998), the House of Lords
reinforced the Salomon principle, shielding directors from personal
liability unless a “special relationship” exists where they assumed
personal responsibility. The claimant had no direct dealings with the
director, so no liability arose.

2. Joint Tortfeasor ship

In MCA Records Inc v Charly Records Ltd (2003), the Courts of Appeal
held directors liable if their actions exceeded constitutional control
 (e.g., direct involvement in copyright infringement). This relaxed
approach emphasizes substantive conduct over formal roles.
3. Limits of Liability:
Courts often dismiss claims against directors if they acted purely on
the behalf of company (Noel v Poland (2001)) unless evidence shows
personal assumption of. risks or ulterior motives (e.g.., liability of
costs)

Contrast with Personal Injury Torts:

Jurisdictional Inconsistencies:

In Adams v Cape Industries (1990), UK courts refused to hold a parent

liable for a US subsidiary’s asbestos harms, citing the Salomon
principle. However, in Lubbe v Cape Industries (2000), involving an
underdeveloped jurisdiction, the veil was lifted to prevent “denial of
justice”.
Chandler v Cape plc (2011) further complicated matters by imposing
liability on a parent company for subsidiary actions due to operational
control, exposing doctrinal inconsistencies.

While commercial torts focus on personal assumption of

responsibility and direct wrongdoing, personal injury cases reveal
jurisdictions and control-based inconsistencies.

Costs and Benefits of Limited Liability:

Benefits of Limited Liability:

1. Encourages Investment and Risk-Taking

By capping shareholders liability to their investment, limited

liability reduces personal risk, fostering investment and enabling
management to pursue innovative strategies without exposing
shareholders to total loss

2. Facilitates Liquid Share Markets:

Share prices under limited liability are standardized and based on
company performance, not shareholder wealth. This avoids
complexities where shares would otherwise very in value
 depending on a buyer’s personal assets, ensuring a transparent
and tradable market.
3. Asset Partitioning:
Protect shareholders personal assets from business creditors and
vice vera.

Cost and Criticism:

1. Risk Shift to Creditors:

Creditors, particularly small trade and involuntary creditors (e.g.,
tort victims), bear undue risk as they lack mechanism like secured
lending or board representation to mitigate exposure. In
insolvency, secured creditors (e.g., Banks) often prioritize claims,
leaving vulnerable creditors uncompensated.

2. Corporate Group Exploitation:

Parent companies can structure operations through subsidiaries
to insulate themselves from liability. For examples, if a subsidiary
(e.g., Y Ltd) fails, creditors cannot pursue the parent (M Ltd0 or its
subsidiaries (N Ltd, C Ltd), enabling repeated risk-taking without
accountability.

3. Judicial Reliance on Solomon Principle:

Judges usually treat parent companies and subsidiaries as
separate, even it seems unfair. For example, in Germany, courts
question whether parent companies should get limited liability. In
the UK/US, its mostly allowed.

Key Example:

The Y Ltd case illustrates how subsidiaries can absorb liabilities

while parent companies evade responsibility perpetuating moral
hazard

In Barings Plc v Vooper & Lybrand, a parent company could not

claim losses from a subsidiary, highlighting how separateness can
sometimes disadvantage parent firms

Conclusion:
Limited liability helps business grow, attracts investors and simplifies
trading but it shifts the risks to weaker group (small creditors, employees)
and lets big companies avoid paying debts through complex structures.
In short, limited liability supports the economy but can be unfair to those
who can't protect themselves