ACCA F4 - Corp and Business Law (ENG)

190 12: Corporations and legal personality  Part D The formation and constitution of business organisations

In Adams v Cape Industries plc 1990, three reasons were put forward for identifying the companies as

one, and lifting the veil of incorporation. They are:

 The subsidiary is acting as agent for the holding company.

 The group is to be treated as a single economic entity because of statutory provision.

 The corporate structure is being used as a facade (or sham) to conceal the truth.

Adams v Cape Industries plc 1990

The facts: Cape, an English company, headed a group which included many wholly-owned subsidiaries.

Some of these mined asbestos in South Africa, and others marketed the asbestos in various countries

including the USA.

Several hundred claimants had been awarded damages by a Texas court for personal injuries suffered as a

result of exposure to asbestos dust. The defendants in Texas included one of Cape's subsidiaries, NAAC.

The courts also considered the position of AMC, another subsidiary, and CPC, a company linked to Cape

Industries.

Decision: The judgement would not be enforced against the English holding company, either on the basis

that Cape had been 'present' in the US through its local subsidiaries or because it had carried on business

in the US through the agency of NAAC. Slade LJ commented in giving the judgement that English law 'for

better or worse recognises the creation of subsidiary companies ... which would fail to be treated as

separate legal entities, with all the rights and liabilities which would normally be attached to separate legal

entities'.

Whether desirable or not, English law allowed a group structure to be used so that legal liability fell on an

individual member of a group rather than the group as a whole.

Lifting the veil in group situations is easily forgotten. Ensure you know the Cape Industries case and the

three reasons for lifting the veil in groups which it sets out.

6.4 Summary of situations in which the veil can be lifted

The instances in which the veil will be lifted are as follows.

Lifting the veil by statute to

enforce the law

 Liability for trading without a trading certificate

 Fraudulent and wrongful trading

 Disqualified directors

 Abuse of company names

Evasion of obligations  Evasion of legal obligations

 Public interest

 Evasion of liabilities

 Evasion of taxation

 Quasi-partnership

Group situations  Subsidiary acting as agent for the holding company

 The group is to be treated as a single economic entity

 The corporate structure is being used as a sham

6.5 Lifting the veil and limited liability

The above examples of lifting the veil include examples of where, if they have broken the law, directors

can be made personally liable for a company's debts. This is very rare. If those directors are also

members, then limited liability does not apply. This is the only time that limited liability is overridden and

that the member becomes personally liable for the company's debts due to their actions as a director.

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