Caneland v. Dolphin a misfit in contemporary piercing of corporate veil jurisprudence

Walter Ochieng Khobe, Bar Candidate, the Kenya School of Law

In Caneland v Dolphin Holdings Limited and another (Civil Case 1135 of 2000) the Kenyan High Court considered whether shares held in a bank by a wholly owned subsidiary company of a judgment debtor could be attached in order to settle a judgment debt payable by the judgment debtor. The judgment creditor, Caneland Limited, claimed that shares in Delphis Bank Limited were beneficially held by the judgment debtor, Dolphin Holdings Limited, through its subsidiary company, Driscoll Investments Limited.

Caneland claimed that Dolphin Holdings, as Driscoll Investment’s parent company, was the ultimate beneficiary of the shares in the bank and therefore that the court should allow the shares to be attached. In its defence, Dolphin Holdings relied on the following legal principles: First, Dolphin Holdings, as a mere shareholder of Driscoll Investments, had no proprietary interests or rights over Driscoll Investments’ assets; Second, the liability of Dolphin Holdings could not be enforced against Driscoll Investments, which had a separate legal identity in law; and lastly, there was no agency relationship between Dolphin Holdings and Driscoll Investments, and neither company could transact business on behalf of the other.

Dolphin Holdings cited and relied on case of Salomon v Salomon & Co. (1897) AC 22 that underscored the difference between a company and its subscribers. The court in Caneland case confirmed that the separation of a company and its members has never been in doubt, but that each case must be examined individually to determine whether, in the particular circumstances, the corporate veil ought to be pierced. The court further held that it would refuse to permit the logic of the principle laid down in Salomon v Salomon to apply “where it is too flagrantly opposed to justice and will disregard the principle of corporate personality if justice warrants it”. The court additionally stated that “equity will not permit a statute, or indeed the law, to be a cloak for fraud”, and that the corporate veil should be pierced in this case, as it would otherwise allow a debtor “to hide behind the cloak of corporate identity to avoid meeting its legal obligations.”

Based on the facts appearing in the ruling, the court arguably stretched the principles for piercing the corporate veil too far. The existence of fraud is recognised as one of the main circumstances in which the corporate veil should be pierced. However, the issue of fraud and which facts constituting fraud were relied upon in the case were not addressed in the ruling. The case involved a simple non-payment of a judgment debt thus arguably erodes the basic principle that a company is a separate legal entity from its subscribers.

It is true that at one point of time the view held by some academics and judges (including Lord Denning) was that the corporate veil could be cast aside whenever the interest of justice required it. This view can be gleaned from cases such as Smith, Stone and Knight v Birmingham Corporation [1938] 4 ALL ER 116; Re FG (Films) Ltd [1955] 1 WLR 483; and Firestone Tyre

& Rubber Co. Llwelyn [1937] 1 WLR 464. Professor Gower in his Principles of Modern Company Law, 2 edn, at page 205 that was heavily relied on by the court in the Caneland case also adopted this view.

However, a careful look at the contemporary cases shows that the view expressed by the court in Caneland case and by Professor Gower in earlier editions of his work no longer prevails. Indeed the 7th edn of Gower’s work no longer canvasses the earlier opinion quoted by the court in the Caneland case. The relevant passage of the mentioned Gower’s 7th edn is at page 184 and reads as follows:

“Challenges to the doctrines of separate legal personality and limited liability at common law tend to raise more fundamental challenges to these doctrines, because they are formulated on the basis of general reasons for not applying them, such as fraud, the company being a ‘sham’ or ‘facade’, that the company is the agent of the shareholder, that the ‘interests of justice’ require this result. However, the courts seem, if anything, more reluctant to accept such general argument against the doctrines than arguments based on particular statutes or the terms of particular contracts.”

The editor of the 7th edn cites Adams v Cape Industries Plc [1990] Ch 433 as the leading case on the subject and says this (referring to the judgment of the English Court of Appeal in that case):

“Moreover the court declared that it did not accept that: as a matter of law the court is entitled to lift the corporate veil as against a defendant company which is the member of a corporate group, merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law.”

And in a later passage the learned author goes on to say this under the heading “Interests of justice”:

“Although the interests of justice may provide the policy impetus for creating exceptions to the doctrines of separate legal personality and limited liability, as an exception in itself it suffers from the defect of being inherently vague and providing to neither courts not those engaged in business any clear guidance as to when the normal company law rules should be displaced. Consequently, it is difficult to find cases in which ‘the interests of justice’ have represented more than simply a way of referring to the grounds identified above in which the veil of incorporation has been pierced.”

I may add that the liberal view expressed by Lord Denning MR in such cases as DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 can no longer be sustained. In that case, the Master of Rolls had opined that in cases in where a group of

companies are treated together for the purpose of general accounts, balance sheet and profit and loss account. They are treated as one concern. In Woolfton v Strathclyde Regional Council [1978] SLT 159 Lord Keith in whose speech the other members of the House of Lords concurred said of the decision of the English Court of Appeal in the DHN case: “I have some doubts whether the in this respect the Court of Appeal properly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that is a mere facade concealing the true facts.”

In light of more recent authorities such as Adams v Cape Industries Plc, it was not appropriate for the court in the Caneland case to rely on the 2edition of Professor Gower’s work as the premise for its decision without juxtaposing the same with recent decisions on the subject. It is not open to courts to disregard the corporate veil purely on the ground that it is in the interest of justice to do so. It is also my respectful view that the special circumstances to which Lord Keith referred include cases where there is either actual fraud at common law or some inequitable or unconscionable conduct amounting to fraud in equity.

The former, that is to say, actual fraud, was expressly recognised to be an exception to the doctrine of corporate personality by Lord Halsbury in his speech in Salomon v. Salomon, the seminal case on the subject. A good illustration of equitable fraud as a ground for piercing or disregarding the corporate veil can be found in J Jones v Lipman [1962] 1 ALL ER 442. Where the first defendant after agreeing to sell his property to the plaintiffs, sold and transferred the property to a company where he and his solicitors’ clerk were shareholders and directors. Russel J (later Lord Russel of Killowen) said: “The defendant company is the creature of the defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity…an equitable remedy is rightly to be granted directly against the creature in such circumstances.”

In sum, in the Caneland case, there were no special circumstances indicating that Driscoll Investments was a mere facade concealing true facts. Nor was a case of actual or equitable fraud raised or disclosed in the case. It was therefore of no avail to the court to say without more that this is a case for piercing the corporate veil. There was no evidential foundation to support that finding. On the basis of current authority, there is therefore no justification whatsoever in law that warranted the piercing of the corporate veil in the Caneland case.