The corporate veil
Date: 17 October 2009
Authors: Victoria von Wachter
Issue: Vol 157, Issue 7281
Categories: Features, Employment
Since the 19th century ruling in Salomon v Salomon [1874] AC 22 which stated companies were legal entities and a court had no business peering beneath the veil of incorporation to see what was happening there, the rule has been revisited and reinforced over the decades in cases such as Adams v Cape Industries plc [1990] 1 Ch 443, [1991] 1 All ER 929 and in the more recent past. However, the sanctity of the legal integrity and identity of companies has been protected with vigour by the courts which have a strong disinclination for anyone, let alone them, peering under the skirts of a company to examine its linen (dirty or otherwise). In Adams the Court of Appeal expressly declined to “pierce the veil of incorporation” even when it was alleged that the corporate structures with respect to a subsidiary had been created purely to place liability most advantageously for the parent company.
In Allen v Amalgamated Construction Co Ltd: C-234/98 [1999] ECR I-8643, [2000] All ER (EC) 97 the European Court of Justice showed itself willing to have a poke around in the internal workings of a company to the extent that it was acceptable to investigate whether transfers between subsidiaries were capable of being a transfer within the meaning of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (SI 1981/1794) (the TUPE regulations).
In Pirelli Cable Holding NV v IRC [2006] UKHL 4, [2006] 2 All ER 81 the House of Lords denied that a case, which involved the payment of corporation tax, required it to lift the veil to examine the workings of parent and subsidiary companies. While vigorously making these denials, the House of Lords availed itself of a jolly good rummage around the internal workings of the parent and subsidiary companies on the grounds that it was examining the factual basis for the tax payments without necessarily piercing the corporate veil.
It seems that the courts will go to great lengths to avoid any obvious penetration of the corporate veil, while still making the sort of inquiries that would be satisfied by just such a process—a little like Bill Clinton’s definition of having sex.
MILLAM v PRINT FACTORY (LONDON)
Even where there is a suggestion that the corporate structure has been created for purposes that do not bear close inspection it appears that the courts will find a way to get at the information they need without obviously piercing the veil of incorporation.
This is exactly what happened in Millam v Print Factory (London) 1991 Ltd [2007] EWCA Civ 322, [2007] All ER (D) 132 (Apr), where the question was raised of whether or not a transfer within the meaning of TUPE had occurred, as opposed to a share sale.
Case law states that a mere share transfer cannot give rise to a transfer within the meaning of the TUPE regulations as the identity of the company does not change. It must be remembered that TUPE is all about people, not shares, and the statutory instrument deals only with situations that arise where an organised grouping of employees, which forms an identifiable unit with objectives and visible coherent group activity and aims (the Spiijkers test), transfers from one company to another.
SIDESTEPPING TUPE?
The TUPE regulations were never intended to cover situations where one company just buys a shed load of shares from another, thus gaining control. The buyer then leaves the newly acquired company alone to get on with business as before. In effect there is no change of identity and therefore no transfer within the meaning of reg 3 of the TUPE regulations. This was the situation in Brookes v Borough Care Services and CLS Care Services Ltd [1998] ICR 1198, [1998] IRLR 636, where the purchase of shares was argued to be a device to sidestep TUPE provisions. Sadly for the claimants in that case, the court held that, as there was no change of identity of the employer (a necessary prerequisite of TUPE), the protection afforded by the TUPE regulations was not engaged.
In Millam this subject was revisited. There had been a share sale of company X to company Y. Company Y maintained that the identity of company X remained intact—as is the norm with share sales—but muddied the waters by informing employees of X that they were protected by TUPE and that it was company Y’s intention to take over some of company X’s business. Although both companies were separately registered, it was clear from the outset that company Y controlled company X. There were further staff and business movements between the companies until both went into administration in 2005. Before this, company Y had transferred business to company X to make it a more attractive sales proposition. Company X was then bought from administrators by the respondent. Employees then brought proceedings against the respondent, claiming that they were protected by the TUPE regulations.
Two established principles of law are involved here. First, a share sale is not of itself sufficient to create a transfer (see Brookes). Further, just because one company is the parent of another, or two companies are part of the same group, this does not necessarily mean that one company controls the business of the other (see Allen).
The employment tribunal at first instance held that, because the activities of company Y were far more intrusive that those expected in the event of a mere share sale, that there had in effect been a transfer within the meaning of the TUPE regulations.
The Employment Appeal Tribunal (EAT) rejected this stance [2006] UKEAT 0253/06, not because it was wrong, but because it held that the employment tribunal had no right to pierce the veil of incorporation. There had been no suggestion of a sham transaction and therefore the tribunal should have left it at that.
The Court of Appeal disagreed, stating that there had been no piercing of the corporate veil but merely an examination of the facts visible to all. Lord Justice Moses put it rather well when he said:
“There will often be little to distinguish between the case of transfer of control on acquisition by a new parent and transfer of the business to a new parent. Faced with such difficulties, the Employment Tribunal is not entitled to indulge in the industrial equivalent of a Gallic shrug.”
The Court of Appeal said this is a difficult situation but one that must be decided and can be decided without having to disembowel the corporate structure. It does seem, however, that a bit of keyhole surgery is permissible if it brings the matter to a head—just be careful not to call it “piercing the corporate veil”.
The moral of the story is—if you want there not to be a transfer then just buy your shares and enjoy the time spent gloating over the certificates rather than interfering in the detail of how the company is run.
An interesting question for those of us with no private lives is when does a share sale stop being a share sale and become a transfer; which activity is the one that tips the situation over into a transfer of undertaking? Answers on a very small postcard please.
HYND v ARMSTRONG
The second case to hit the TUPE headlines recently was Hynd v Armstrong [2007] CSIH 16, [2007] IRLR 338. This case was heard in the notoriously pro-employee Scottish courts and related to the 1981 TUPE regulations, although the 2006 regulations (SI 2006/246) would not have changed the situation.
Under old reg 8 (new reg 7) it is automatically unfair to dismiss an employee by the sole or principal reason of the transfer. This rule is softened by the provision of reg 8(2) in that where there is an economic, technical or organisational (ETO) reason for the dismissal, then this is potentially fair. What tends to happen is that there is a transfer within the meaning of the regulations followed by a blood-letting session where superfluous employees are made redundant for ETO reasons.
What happened in Hynd was that an employee was dismissed by the transferor firm before the transfer—based on the future needs of the transferee business. The employee, a solicitor, found himself in the position where his current employer decided to dissolve its partnership and split into two separate firms in different cities. It had a reduced need for a lawyer practising in the area in which the claimant was expert. Accordingly, the transferor firm, before it performed the split, dismissed the employee in anticipation of a reduced need in the new firm.
At the tribunal it was argued that the dismissal was for an ETO reason, albeit that the reason had not yet come into being. In effect the transferor company was dismissing at the behest of the yet to be formed transferee company. The original firm—no longer in existence by now—and the new firm were both asserting that although the dismissal was automatically unfair under reg 8(1), this was disapplied by reg 8(2) because it was for an ETO reason.
ACQUIRED RIGHTS DIRECTIVE
The Court of Sessions had lots of fun with this one and spent plenty of time rooting around in the Acquired Rights Directive 2001/23/EC confident that this would produce an answer. Sadly, the European legislators had not thought of this one either and so it fell to the court to opine that it was “reasonably clear” that Art 4(1) of the Directive did not permit such dismissals. Article 4(1) only allows dismissals of the transferor’s own workforce—the claimant no longer being one of those. More importantly, and taking a purposive approach, it could not be right that transferors were allowed to legitimately dismiss for the transferee’s ETO reason and
at the transferee’s request as this would be an excellent way of avoiding the protection afforded by the TUPE regulations. Case law already supports the view that moves made with the express intention of avoiding TUPE are unlawful ab initio and often result in a transfer being implied whether or not anyone wants one (see ECM (Vehicle Delivery Service) v Cox [1999] IRLR 559, [1999] 4 All ER 669).
MASSAGING THE LEGISLATION
Finally, Power v Regent Security Services Ltd [2007] UKEAT/499/06, [2007] All ER (D) 262 (Jan) gives hope to the ability of the higher courts to massage the legislation and case law to give a fair result. Power had a contractual retirement age of 60, when he was transferred over to a new company under TUPE. Although this new company had a normal retirement age of 65 it still forcibly retired Power on grounds that his transferred contract had the lower retirement age.
Power did not want to retire and took his case to the employment tribunal and the EAT where it was held that the key case Daddy’s Dance Hall A/S: 324/86 [1988] ECR 739, [1988] IRLR 315 served not to crystallise the terms and conditions existing at the time of the transfer, but acted to protect the transferring employee from detriment, thus allowing him to benefit from the best of both. The case seems to be saying that employees can now cherry-pick from the basket of terms and conditions on offer from both the previous and the new employer—what joy for hard-pressed human resources advisers.
It is heart-warming to know that the introduction of the new TUPE regulations has done little if anything to clarify this pea soup of a legal area. Many mortgages rely on this.
Victoria von Wachter is a barrister at 5 Essex Court
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