31st August 2017

Understanding the veil of incorporation

Salomon vs A Salomon & Co. Ltd.

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.

In a situation where a company may have been formed to avoid a legal liability, the veil of incorporation may be lifted.

“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.

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. He could therefore not be held liable for the company’s debt.

Petrodel Resources Ltd and Others v Prest

Lifting the veil of incorporation is rare in the UK. However, there are still circumstances in which the courts will allow a request to lift the veil. This will mostly be when people have tried to use the incorporation to evade a legal obligation or liability.

For example, in the case of Petrodel Resources Ltd and Others v Prest. This case was in regards to the divorce of Michael and Yasmin Prest.

Mrs Prest applied for a lump sum of £30m and a declaration that the properties were held by the companies.  This was on the basis that the properties were heldon trust for the husband. 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. Despite having been owned by the companies, the judge ruled the properties were effectively his assets . This contradicts the decision in Salomon v A Salomon & Co Ltd which established the principle of separate corporate identity.