Directors and officers: piercing the corporate veil

It is settled law that a lawfully incorporated company has a ‘separate legal personality’ from its shareholders and directors, as laid down by the House of Lords inSalomon v Salomon [1896]. The result is that the obligations of a company are the company’s alone. There is a veil separating the corporate legal entity and the people running it, which prevents the latter from being responsible for the company’s liabilities.

Exceptions to this rule are made where a company becomes insolvent, in which case the veil can be lifted in certain circumstances. Aside from insolvency, if the company has been used as a sham or a façade, in the sense of being used as a device to circumvent liability, then a court will pierce the veil. However, it will only do so as far as is necessary to provide a remedy for the particular wrong which those controlling the company have committed. The court cannot, for example, pierce the corporate veil merely because it is thought to be necessary in the interests of justice.

Campbell v Gordon

In this Scottish case, Mr Campbell suffered a personal injury at work which was excluded from his company’s employers’ liability cover.

The company’s failure to have in place appropriate insurance was in breach of its obligations under the Employers’ Liability (Compulsory Insurance) Act 1969. Section 5 of the 1969 Act creates a criminal offence where an employer fails to appropriately insure an employee. Under s.5, directors may also commit a criminal offence if the failure was committed with their consent, connivance or facilitated by their neglect. However, this is not a direct responsibility, instead a director is “deemed to be guilty” of the offence committed by the company.

The company went into liquidation and Mr Campbell sought civil damages from the sole director of the company, Mr Gordon. The issue was whether civil liability attached to Mr Gordon for his personal failure to effect appropriate cover.

At first instance, the judge held that it would be too narrow a reading of the 1969 Act to determine that there was no obligation on a director to ensure that the employer had the relevant insurance in force. In addition, there was no reason to consider that a breach of that duty should not give rise to civil liability. This was overturned on appeal, on the basis the 1969 Act clearly imposed a duty to insure, which had to be seen as being for the benefit of a particular group, but that duty was imposed on the employer and not its directors.

Decision

In a split 3:2 verdict, the majority of the Supreme Court held that the 1969 Act did not impose a duty to insure on a director or officer, and the duty instead rested with the corporate employer. Parliament had recognised that a director could bear some responsibility for the failure to insure, but had dealt with it in the 1969 Act by imposing a specific criminal penalty linked to the criminal liability of the company. Lord Carnwath stated:

“There is no basis in the case law for looking through the corporate veil to the directors or other individuals through whom the company acts. That can only be done if expressly or impliedly justified by the statute.”

In addition, as a general rule, where a statute imposed a criminal penalty for failure to comply with an obligation, there was no civil liability.

Lord Toulson and Lady Hale, dissenting, held that the purpose of the 1969 Act is for a company’s employees to have protection in the event of injury arising from their employment for which the company is liable. Lord Toulson said:

“the pool of those bearing legal responsibility for seeing that such protection is in place is not confined to the company itself.”

He commented that a formalistic approach was preferred by the majority. However, in his view that approach did not reflect the basic objectives of the statute and, on a criminal basis, the director is in law as guilty as the company of failing to insure.

Implications

It is recognised that the courts will intervene to pierce the corporate veil where a company is used primarily as a vehicle of fraud or as a means of escaping pre-existing legal obligations.

However, it is clear that the circumstances in which the courts are prepared to pierce the veil are limited. The Supreme Court was not prepared to extend them on this occasion, despite it arguably being in the interests of justice to do so to protect an employee who would not otherwise receive compensation.

This follows a similar Supreme Court decision in VTB Capital plc v Nutritek International Corp and others [2013]. In that case, it was held that the corporate veil could not be pierced in order to hold a non-contracting controlling party liable for its controlled company’s contractual obligations. As in Campbell v Gordon, the court could find no authority for the proposition that a person could be made indirectly liable for breach of an obligation imposed by statute on another.

This latest decision is therefore good news for directors and their insurers. It confirms that, as a general principle, directors are not personally liable for their company’s actions.

Read other items in Professions and Financial Lines Brief - October 2016