Discussion on the Doctrine of Piercing of Corporate Veil

corporate hand

In our previous blogs, it was established that piercing corporate veil is itself very confusing in its application after the process of non HK company registration or HK company registration and definite grounds in certainty of its applications are still undiscovered. So, here we will try to understand the situations where this can be applied by referring to observations and verdicts of courts in different cases of such category.

Case # 1

Following the case of Gilford Motors Co case which was a non company formation Hong Kong, Mr. Horne was the managing director of the company, named Gilford motors co who deals in the selling and servicing of vehicles and their spare parts. As per Horne’s agreement, he was not allowed to undergo any business similar to the one, he is currently serving in, nor was he entitled to join any other company, within the range of some geographical vicinity and for some period of time. This was just to make sure that no customer of Gilford motor be disturbed. Later on, Horne resigned from the company and incorporated a business, dealing in selling of vehicles and spare parts. Mr. Howard and Horne’s wife were the only shareholders and directors of company. Mr. Howard was the former employee of the Gilford Motors and Horne’s wife did not have any role in the business operations of the company, so, Horne himself was running the business. English court of Appeal restricted company, not to breach the restriction imposed on Horne through the contractual restriction he was in, with Gilford Motors. Although company was not subject of the restriction imposed on the Horne but still, Piercing of Corporate Veil on the operations of company was invoked, because of Horne’s personal obligations to the company.

Case # 2

During the prosecution of Jones, who his company was also a non company formation Hong Kong, the vendor wanted to keep his self away from the legal obligations in transferring house to the plaintiff, under the contract. Russell J stated: as vendor was the controller of the company and the company was acquired solely, to defeat the plaintiff, he further elaborated his view by saying that: “Company was used as a sham by the vendor to avoid the recognition in terms of equity.”

As the decision of both these cases infers that piercing of corporate veil exposed the fraudulency, set of belief also suggests that such orders can even be given without invoking piercing of corporate veil. The criticism states its arguments by referring to the decisions of above two cases, for example, in the case of Gilford Motor v Horne, Court can order the company to refrain from interfering in the contractual relationship between the Gilford Motors and Horne without piercing corporate veil. Same goes in for the court’s decision in the case of Jones v Lipman, court could refrain from invoking pierce of corporate veil by regarding company as a holder of property on the basis that it received the property before the equitable interest of the plaintiff.

Case # 3

Hong Kong’s court entertained this case which is a company formation Hong Kong case, where a company named “Hung Tak”, went into agreement with Mr. Liu Hon Ying, business model constituted of a delivery system where, delivery of government forms between Hong Kong and Shenzhen was to happen and as per the contract, plaintiff was liable to receive 38 % of the company’s profit. Hung Tak paid the profit for one year only, and after than Hung Tak got its business transferred to a company, he incorporated himself. The newly established company had the name, Hua Xin State Enterprise (Hong Kong) Ltd. Court established that Hua Xin is liable for the debts of Hung Tak, because of him being the common controller of his former and present company’s and thus invoked Piercing of Corporate veil as court believes that corporate structure cannot be made to obscure legal obligations.

Case # 4

Ever heard of the situation, where debts of one company allowed to rise intentionally? Don’t be so shock, yes this is corporate world and all that speaks, and act is Monetary Facilitation. It was found during the prosecution of Lee Sow Keng v Kelly Mckenzie Ltd, circumstances showed that plaintiff owed judgment of debt to its former employer named Linkwaters Investment but Linkwater was acquired by Kelly Mckenzie Ltd later and the debts of Linkwater was allowed to remain unpaid and so plaintiff sought  legal help and Court then, uphold the decision of Trial Court and communicated that: Concealment of legal liabilities of company is prohibited and thus piercing of corporate veil be must held as well as all defendants will stand responsible for the debts of company.

It is very much clear from the above decisions that there is consensus on considering transferee liable for the transferor’s debts because there is possibility exists that, it may be possible that to acquire corporate entity and to cover up corporate fraud, debts may allow to inflate. However, English Law thinks contrast to it, they don’t consider one company liable for the debts of second even in the case, where there is established that controller of both these companies is same. Don’t believe this? Let’s get you astonished by referring to the case of Creasey v Breachwood Motors Ltd and Ord v Belhaven, in the former- court held transferor liable for transferee debts but English Court of Appeal overruled it in the latter’s case and found facts to be insufficient to invoke piercing of corporate veil.

Case # 5

There is the unique stance took by the court in Linsen International Ltd v Humpuss Sea Transport Pte Ltd, Flaux J communicated that: Instead of making children company liable to the debts of its parent company, it would be more appropriate to state the transfer of business ineffective and held it to be null and void.

That seems quite favourable and similar verdict was also given by Flauz J in Ord v Belhaven and he stated that: Belhaven can not be regarded liable to pay for the claims of Ord and thus no need to consider piercing of corporate veil.

Contrast in English and Hong Kong courts perspective

In reference to our above discussion, contradiction in Hong Kong’s and English judicial system is quite visible, English courts considers transferee not liable for the debts of transferor whereas Hong Kong’s legal system takes the position totally opposite to this stance and they impose personal liabilities to the companies.