Understanding the veil of incorporation
Established in 1897, under the case of Salomon vs A Salomon & Co Ltd, an incorporated company is a legal entity separate from its owners, directors, shareholders etc. This separation is referred to as the ‘veil of incorporation’. The veil may be lifted in court in certain circumstances where a company may have been formed to avoid a legal liability.
“Limited liability” encourages investment within companies because of the separation of company and shareholders. This assumed separation of ownership can give way to directors acting in self-interest instead of in the interest of their company.
In the case of Salomon vs A Salomon & Co Ltd, the company started failing in the early days of start up, and the liquidator claimed Salomon and his company were one single entity which made him liable for the debts incurred by the company. The Supreme Court held that under section 74(2) of the Insolvency Act, a company was a separate legal entity and therefore he could not be held liable for the company’s debt.
Lifting the veil is rare in the UK but there are still circumstances in which the courts will allow a request to lift the veil. This will mostly be when there is an individual or group of people that have tried to use the incorporation of a company to evade a legal obligation or liability.
For example, in the case of Petrodel Resources Ltd and Others v Prest, concerning the divorce of Michael and Yasmin Prest. In the divorce proceedings, Mrs Prest applied for a lump sum of £30m. She also applied for a declaration that the properties were held by the companies on trust for the husband or that he was beneficially entitled to them. Mr Prest, who was resident outside the court’s jurisdiction, offered a package worth a little over £2m. The Family Division judge found that the husband had attempted to conceal the value of his assets, estimated at £37.5m, and that his purpose in vesting the legal interest in the properties was wealth protection and avoidance of tax. The judge held that the properties were effectively his assets despite having been owned by the companies. This contradicts the decision in Salomon v A Salomon & Co Ltd which established the principle of separate corporate identity.