as a single economic entity or to attribute separate personality principle to individual companies within an MCG.

(B) Corporate Groups in UK Case Law

In the previous section, the concepts of limited liability and separate legal personality were analysed in order to determine the extent to which these principles can be applied in the context of MCGs. In light of the Court of Appeal’s decision in Adams v Cape Industries Plc,42 this section examines the relationship between a parent company and its subsidiaries.

Adams involved the liability within a group of companies where the claimant, Adams, sought to ignore the separate legal personality of a parent (Cape) and its subsidiary company and to hold the parent liable for the obligations of the subsidiary. The Court held that, for a group of companies, the essential principle is that each company within the group is a separate legal entity. However, in certain circumstances, the courts can disregard this principle and treat several companies as a single entity. These circumstances include where there is agency agreement, where there is evidence of single economic unit and where there is fraud.43

Prior to Adams, there was an attempt to move away from the Salomon principle towards a more pragmatic approach in the treatment of MCGs. In this regard, Gower posited that ‘there is evidence of a general tendency to ignore the separate legal entities of various companies within a group and to look instead at the economic reality of the whole group’.44 Supporting this view, Lord Denning noted in the DHN Food Distributors45 case that this is especially common when a parent company owns all of the shares of the subsidiaries, to the extent that

42Adams (n 37).

43Adams (n 37) ; Muzaffer Eroglu, Multinational Enterprises and Tort Liabilities An Interdisciplinary and Comparative Examination (Edward Elgar 2008) 148, 153.

44L.C.B Gower, Modern Company Law (3ed, K. W. Wedderbun, O. Weaver and A.E.W Park 1969) 29.

45DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852.

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it controls every activity of the subsidiaries.46 Thus, Lord Denning MR noted further that

‘these subsidiaries are bound hand and foot to the parent company and must do just what the parent company says…’47

However, Gower's view is not very clear because what constitutes the ‘economic unit’ of the entire group is not well defined. This is because the courts have often considered a number of factors, such as whether the companies’ directors are the same, whether the companies have a common account and whether the substantial decisions are made by the parent company.48

Therefore, it is proposed that the courts should look at other factors in order to determine when an MCG could be considered a single entity through application of the economic entity notion.

A careful examination of Lord Denning's views reveals that all the companies in an MCG could be treated as one economic entity provided that the parent company owns all of the shares of the subsidiaries.49 Moreover, Lord Denning pointed out that for accounting and tax purposes, the law sometimes treats the companies of the same group as one economic entity.50 However, a major challenge is that the proposition assumes that when a parent company owns all of the shares of its subsidiaries then it controls the subsidiaries. This assumption is not absolutely accurate because sometimes a parent company owns all of the

46ibid para 860 per Lord Denning.

47ibid, Courts have used various metaphors to lifting the veil and make the parent liable for the debts of its subsidiary, for instance, the subsidiary was a device a mask a puppet a nominee a sham a façade and little hut of the parent, e.g. Lord Denning in Wallersteiner v Moir [1974] 1 WLR 991: ‘I will assume too that they were distinct legal entities. Even so, I am quite clear that they were just puppets of Dr .Wallersteiner. He controlled their every behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures for those doings he should be, and is responsible for’.

48Woolfson v Strathclyde Regional Council [1978] UKH 5; [1979] 38 PCR 521, Wallersteiner v Moir; DHN Foods Distribution (n 46).

49DHN Foods Distribution (n 45) 860.

50ibid; see also Daniel Prentice, ‘Some Aspects of the Law Relating to Corporate Groups in the United Kingdom’ (1999) 13 Connecticut Journal of International Law 305.

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shares of the subsidiaries but the subsidiaries may still be independent, as there may be no direct influence from the parent company.

Furthermore, it is unclear how much control is sufficient to infer that the parent company actually influences its subsidiaries to a degree that should make it liable for their debts.51

However, Adams and the subsequent case law removed all doubts and reaffirmed the applicability of the Salomon principle for individual companies as well as group structures. In this case, the Court of Appeal, in reaching their decision on whether to lift the veil or not, revisited the three exceptions to the Salomon principle.52 Specifically, these three exceptions are that it must be established that there was fraud between the parent company and the subsidiary,53 that the subsidiary was acting as the agent of the parent company,54 or that there is a statutory or contractual relationship which makes the parent company liable for the debt of its subsidiary. All three exceptions were examined, but the Court of Appeal concluded that none of the exceptions provided convincing evidence, in this case, that allowed the court to lift the veil and extend liability to Cape.

The importance of reaffirming the Salomon principle in Adams is that, as regards MCGs, the principle remains that individual companies within a group are treated as separate legal entities.55 Thus, members of a company limited by shares who are part of an MCG are not liable for any of the company’s debts or the debts of other subsidiaries within the group other

51David Milman, Groups of Companies: the Path Towards Discrete Regulation in Civil and Commercial Law Review (Law Press 2002) 231; Peter Muchlinski, ‘Holding Multinationals to Account: Recent Developments in

English Litigation and the Company Law Review’ (2002) 23 Company Lawyer168.

52Harry Rajak, ‘Corporate Groups and Cross-Border Bankruptcy’ (2009) 44 Texas International Law Journal

53For cases in this regard based on ‘fraud’ see Gilford Motor Co Ltd v Horne [1933] Ch 935; re FG (Films) Ltd

(1953) 1 AII E R 615; Re Bugle Press Ltd (1961) Ch 270.

54For cases of disregard based on ‘agency’ see Gramophone and Typewriter Ltd v Stanley [1908] 3 K B 89; IRC v Sanson [1921] 2 KB 492; Rainham Chemical Works Ltd v Blevedere Fish Guano Co [1921] 2 AC 465.

55Arpad Karasz, ‘Corporate World Today: Courts Respond to Limited Liability and Board’s Decision Making – A Fight for a Justice or Rather Prosperity at Stake?’ (2009/2010) The Common Law Review 24-29.

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than the amount (if any) on any unpaid shares.56 This is a great incentive for investors, as it guarantees the safety of their investments regardless of the indebtedness of the company in which they own shares.57 Thus, Adams overruled the former decision of the Court of Appeal in Re a Company58 when it noted that:

…save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v Salomon & Co Ltd59 merely because it considers that justice so requires.60

However, it needs to be highlighted that the Court did not reject the idea of lifting the veil if one of the three exceptions (agreement, agency, or fraud)61 was fulfilled. Nevertheless, the court established in the Re Polly Peck62 case that the veil of incorporation is not to be lifted simply because justice so demands. Consequently, there is still no clear-cut principle dictating when the courts should lift the corporate veil. Thus, in the Briggs63 case, the court held that:

…there is no common unifying principle, which underlines the occasional decision of courts to lift the corporate veil, although an ad hoc explanation may be offered by the court which so decides, there is no principled approach to be derived from the authorities.64

56See s74(2) Insolvency Act 1986.

57Karasz (n 55) 24.

58Re a Company [1985] BCLC 94, CA at 337-338 per Cumming-Bruce LJ.

59Salomon (n 36) at 51 per Lord McNaghten

60Adams (n 37) at 513.

61Adams (n 37).

62Re Polly Peck International Plc (No. 3) [1996] 1 BCLC 428.

63Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549.

64ibid 567.

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