The corporate veil: Tough as old boots
Date:
15 February 2013
As a personal aside I've always though that the phrase 'corporate veil' is a bit archaic. It reminds me of the scene in the Wizard of Oz where the Wizard is revealed as an old bloke controlling a sound and light show from behind a curtain, which is then pulled aside by Toto the dog. If the concept was being developed these days we'd no doubt have 'the corporate firewall' or something equally snappy, but 'corporate veil' is the phrase that's stuck.
Not surprisingly it was Lord Denning who was prepared to pierce the corporate veil when he felt that justice required it, but generally speaking it's only been pierced by the court in quite specific and limited circumstances. (I've always had a soft spot for Lord Denning because in 1988, when he was just short of his 90th birthday and I wasn't quite 21, he gave me a polite but memorable dressing down for breaching etiquette while I was dining at The Inner Temple in London, but that's another story).
The effect of the virtually impenetrable veil is that companies, and groups of companies, can be used for the purposes of limiting liability, protecting assets, giving business certainty and generally allowing commerce to flourish. If the veil was leaky (or should that be 'threadbare') company assets would be dribbling out all over the place and businesses would have no idea who owned what, who was entitled to what, and there'd be a bit of a free-for-all.
The UK Supreme Court last week seemed to re-affirm the durability of the corporate veil in the case of VTB Capital -v- Nutritek. However, I suspect it's only coincidence that the Court's judgement came at the same time as a couple of new instructions that I've received to look at re-structuring groups of companies in order to take advantage of the corporate veil. Briefly, the clients have both asked me to set up group company structures so that they can diversify and grow their businesses via a new trading company sitting underneath a non-trading holding company. It means that if the new business doesn't take off, or even crashes, the existing business is unaffected as it's sitting in the original trading company, nicely shielded behind the corporate veil. It's a common enough structure, tried and tested over many years, but if the corporate veil stopped working there'd be a lot of head-scratching.
The statutory draftsmen of the Limited Liability Act 1855 and the Joint Stock Companies Act 1856 would be very proud to know that the principles that they set out, although overhauled various times in the last 150 years, are effectively the same as they were then, and that limited companies today dominate economic life in all developed countries and in the global economy.
