Piercing the Corporate Veil

United Kingdom

A recent case (Trustor AB v Smallbone & ors, NLD, 16 March 2001) has considered the circumstances in which it might be appropriate to pierce the corporate veil, that is, to disregard the separate legal identity of a company and to look behind it to the actions and possible liability of its directors or members.

In this case, the question was whether the court was entitled to pierce the corporate veil in order to regard the receipt of money by a sham company as receipt by its director.

Mr Smallbone was a director of the claimant company. Without the consent of the board of directors, he transferred money directly to himself and to the account of a company controlled by him (Introcom). Money from Introcom's account was applied for the benefit of Mr Smallbone and others.

On the basis of knowing receipt, the director was found to be jointly and severally liable with Introcom for the money transferred from Intercom's account to himself, and then on appeal, the question arose as to whether he was also liable for money paid out of that account to other persons.

The claimant company argued that because Introcom was a sham company under the sole control of Mr Smallbone, the court was justified in "piercing the corporate veil" and recognising the receipt of money by Introcom as receipt by Mr Smallbone. The claimant argued that three propositions applied to determine where such a course was justified: first, where the company was shown to be a facade or sham with no unconnected third party involved; secondly, where the company was involved in some impropriety; thirdly, where it was necessary to do so in the interests of justice and no unconnected third party was involved.

It was held that the court was entitled to pierce the corporate veil but that the third proposition was incorrect: it had previously been found (Adams v Cape Industries plc [1990] 1 Ch 433) that it was not appropriate to pierce the corporate veil merely because legal technicalities produced injustice. In this case the court was entitled to pierce the corporate veil and recognise receipt by the company as a receipt by the individuals in control of it if the company was used as a device or a facade to conceal the true facts, thereby avoiding or concealing any liability of those individuals.

For further information, please contact Ruth Pedley by e-mail at ruth.pedley@cms-cmck.com or by telephone on +44 (0)20 7367 2098.