DHN Food Distributors v Tower Hamlets LBC [1976]: Summary

Case name & citation: DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 (CA)

Court and jurisdiction: The Court of Appeal, England & Wales

Decided on: 4 March 1976

The bench of judges: Lord Denning MR, Goff LJ and Shaw LJ

Area of law: Corporate veil

What is the case about?

DHN Food Distributors v Tower Hamlets [1976] is a UK company law case wherein the courts decided to pierce the corporate veil and treated a group of companies as a single entity.

Facts of the case (DHN Food Distributors Ltd v Tower Hamlets LBC)

In a group of three companies, DHN served as the holding company. The two subsidiaries were wholly owned by DHN. One subsidiary owned land that was utilized and occupied by DHN, while the other owned vehicles that were used by DHN. The land was going to be purchased by the government through compulsory acquisition, and DHN wanted compensation for the disruption to their operations.

The parent company argued that the Court of Appeal ought to “pierce the corporate veil” in order to treat the companies as being the same legal entity and to make it possible for compensation to be paid.

The issue that arose

Could DHN be granted compensation even though the premises being compulsorily acquired were owned by its subsidiary?

Judgment of the Court in DHN Food Distributors v Tower Hamlets

The Court of Appeal decided in the case of DHN Food Distributors Ltd to award compensation to the group for the reason that it believed it was appropriate to pierce the corporate veil.

In finding that “the three companies should, for present purposes, be treated as one,” Lord Denning disregarded the view that the parent company and each of its subsidiaries have their own separate legal personality. He said: the group of companies is a partnership in which all the “companies are partners”.

The fact that the parent company held total control over each of its subsidiaries provided sufficient justification for the piercing. As a result, the compensation that the parent company had been demanding was granted.

In the context of company group structures, the other two judges of the court, Goff and Shaw LJJ, found that there was no general jurisdiction to pierce the corporate veil. On the other hand, Goff and Shaw LJJ decided, based on the facts presented, that the companies could all be treated as one entity because of the level of control exercised by the parent company over the subsidiaries. The subsidiaries did not perform any distinct functions and shared the same board of directors as the parent company.

Further, in this case, the claimants did not rely solely on the doctrine of piercing the corporate veil; rather, they also relied on other grounds. For instance, the Court determined that DHN had a sufficient interest in the land to warrant compensation for disturbance. Because the subsidiary held the property on trust for DHN, it had an irrevocable license to occupy the land as well as an equitable interest in the property.

A critical view

The decision in DHN Food Distributors v Tower Hamlets was soon criticized. The House of Lords overturned Lord Denning’s view in the Woolfson v Strathclyde Regional Council [1978] case and instead gave precedence to the Salomon principle. The court decided not to lift the “corporate veil” and instead considered each company and the plaintiff himself to be separate legal entities. As a result, the court did not award compensation for the disruption of business.

In this case, their Lordships sought to put restrictions on the application of the doctrine of piercing the corporate veil with Lord Keith stating that the veil should be pierced “only where special circumstances exist indicating that it is a mere façade concealing the true facts”. This establishes fraud as a primary basis for piercing the veil that corporations hide behind.

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Re Darby, ex parte Brougham (1911): Case Summary

Case name & citation: Re Darby, ex parte Brougham [1911] 1 KB 95

Court and jurisdiction: High Court, UK

Year of the case: 1911

The learned judge: Phillimore J

Area of law: Corporate veil

What is the case about?

This is a UK company law case showing that courts lift the corporate veil where fraud is committed taking the shelter of a company.

Here, two directors had established a company through fraudulent means in order to pocket money that belonged to the general public, and as a result, the courts held those directors responsible for returning all of the money that had been fraudulently obtained.

Facts of the case (Re Darby, ex parte Brougham)

Mr. Gyde and Mr. Darby were fraudsters. They established company A. A then contracted to purchase a license to operate a Welsh slate quarry for a nominal amount of money (£3500). A new company B was formed and A sold (for £18,000) the recently acquired license to B, which was subsequently renamed Welsh Slate Quarries Limited.

The funding that was necessary for B to make this acquisition came from the sale of debentures to subscribers who had been convinced to participate as a result of the representations that had been made by A.

A served in both capacities as the promoter and the vendor for the event. After the funds from the subscribers had been transferred to A, B ran out of money and went into insolvency. This is something that may not come as a surprise perhaps. Later, Gyde and Darby were both found guilty of fraud and were declared bankrupt. The estate of Darby had a considerable amount of assets.

On liquidation of B, the liquidator laid claim to the secret profit that Darby had made while acting as a promoter. Darby expressed his disagreement with the contention that the company “A”, and not he, was the promoter.

Judgment of the Court in Re Darby, ex parte Brougham

Phillimore J rejected the contention. And the liquidator recovered the secret profit that has been fraudulently derived.

Company “A” was merely a name under which Gyde and Darby conducted their business. They had it in their minds to commit a very massive fraud.

Simply put, the company was nothing more than a facade for the two fraudsters who were behind the fraudulent scheme, and the entire series of transactions was a part of it. What they did through the company, they did themselves, and then they pretended that it was something the company did. This is how the fraud was committed.

Summing up the case

This case can be summarised as follows:

Two undischarged bankrupts initiated a company that made hidden profits from the sale of assets that were grossly overvalued to another company that the company promoted.

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Gilford Motor Co Ltd v Horne (1933): Case Brief

Case name & citation: Gilford Motor Co Ltd v Horne [1933] All ER 109, [1933] Ch 935

Court and jurisdiction: Court of Appeal, England and Wales

Year of the case: 1933

The bench of judges: Lord Hanworth MR, Lawrence and Romer LJJ

Area of law: Corporate veil

What is the case about?

Gilford Motor Co Ltd v Horne [1933] is a case that pertains to company law provisions in the United Kingdom and deals with piercing the corporate veil.

Facts of the case (Gilford Motor Co Ltd v Horne)

Mr. Horne was employed as the managing director of Gilford Motor. Horne was given the position of managing director of Gilford Motor Company on the condition that he would not attempt to solicit the customers of the company either while he held the position of managing director of the company or after he left it. After he resigned, he attempted to circumvent this obligation (of non-complete clause) by forming a company to conduct the solicitation. He established a rival business to Gilford Motor, in which the sole shareholders were Mr. Horne’s wife and one of his business associates.

Only Horne himself was subject to any legal restrictions imposed by Gilford; the new company itself was not.

Proceedings were initiated by Gilford Motor alleging Horne to have breached the contract.

Gilford Motor argued that the Court should look through the corporate veil of the new company to determine that Mr. Horne was the person behind it and that the non-compete clause in the employment contract should be interpreted as binding not only on Mr. Horne personally but also on the new company.

Issue that arose

Had Horne violated his non-compete clause by establishing a competing business?

Judgment of the Court in Gilford Motor Co Ltd v Horne

In this particular case, the Court found that the company in question had been established with the sole or primary intention of evading the non-compete clause. It was willing to consider both Mr. Horne and the company to be legally obligated to comply with it.

It was decided that the company that Horne started was nothing more than a mere cloak or sham in order to provide him with the opportunity to violate the terms of his agreement prohibiting solicitation.

The Court granted injunctive relief both against Mr. Horne and the new company.

As a result, the company was prohibited from attempting to take customers away from Gilford Motor Company.

Reasoning behind the decision

The corporate veil must be lifted up in cases where a company is incorporated as a device or strategy with the intention of concealing the identity of the person who is the perpetrator of the fraud. If a person forms a company with the intention of evading specific performance of his contracts, the Court will order specific performance to be carried out by the company.

In other words, the formation of a company by an individual in an effort to avoid specific performance of his contracts will not prevent the Court from ordering that the contracts be performed in their entirety.

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A Case Summary of Jones v Lipman (1962)

Case name & citation: Jones v Lipman [1962] 1 W.L.R. 832

Court and jurisdiction: Chancery Division, United Kingdom

Year of the case: 1962

The learned judge: Russell J

Area of law: Corporate veil

What is the case about?

When it appears that fraudulent activity is being committed or could be committed behind the veil of a corporation, the Courts are more than willing to pierce that veil. Jones v Lipman (1962) is a good example of this point.

Facts of the case (Jones v Lipman)

In the given case, Lipman came to an agreement with Jones to sell some land to him for the price of £5,250. He ultimately changed his mind, and in order to get out of the obligation to fulfill the terms of the contract, he sold it to a company that had been established specifically for that reason. The sale was made for £3,000.

This sale was financed by a bank loan of £1,564 obtained by the company, while the rest of the purchase price remained owing to Lipman. Only Lipman and a clerk of his solicitors were members of the company when it first started.

Jones brought an action for the specific performance against Lipman and the company. Lipman then claimed that he no longer owned the land and could not comply with the contract.

Issue

Was Lipman’s company an attempt to circumvent a previous commitment to meet a legal obligation?

Judgment of the Court in Jones v Lipman

The Court made the order against both Lipman and the company.

Lipman’s strategy failed.

The judge decided to issue an order for specific performance after it was discovered that the company that had been formed was nothing more than a sham or a facade.

The Court took into consideration the actual circumstances, disregarded the transfer, and issued an order requiring the company to hand over ownership of the land to Jones.

Lifting of the corporate veil

When a company is formed with the intention of breaking the law or defeating it, cheating creditors, or evading legal obligations, the Courts will not uphold the separate existence of the company as a legal entity.

There is no set rule for governing the doctrine of “piercing the corporate veil”, which is mostly based on the facts and circumstances of each case. When decisions are made, the seriousness of the issues at stake in each case is taken into account.

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