Adams v Cape Industries plc
Encyclopedia
Adams v Cape Industries plc [1990] Ch 433 is the leading UK company law case on separate legal personality and limited liability
of shareholders. The case also addressed long-standing issues under the English conflict of laws
as to when a company
would be resident in a foreign jurisdiction such that the English courts would recognise the foreign court's jurisdiction over the company.
was a UK company, head of a group. Its subsidiaries mined asbestos
in South Africa. They shipped it to Texas
, where a marketing subsidiary, NAAC, supplied the asbestos to another company in Texas. The employees of that Texas company, NAAC, became ill, with asbestosis
. They sued Cape and its subsidiaries in a New York Court. Cape was joined, who argued there was no jurisdiction to hear the case. Judgment was still entered against Cape for breach of a duty of care in negligence
to the employees. The tort victims tried to enforce the judgment in the UK courts. The requirement, under conflict of laws
rules, was either that Cape had consented to be subject to New York jurisdiction (which was clearly not the case) or that it was present in the US. So the question was whether, through the Texas subsidiary, NAAC, Cape Industries plc was ‘present’. For that purpose the claimants had to show in the UK Court of Appeal that the veil of incorporation could be lifted
and the two companies be treated as one.
. A company must be set up to avoid existing obligations, not future and hypothetical obligations which have not yet arisen. The court held that one of Cape's subsidiaries (a special purpose vehicle incorporated in Liechtenstein
) was in fact a façade, but on the facts this was not a material subsidiary such as to attribute liability to Cape. Cases like Holdsworth, Scottish Coop and DHN were distinguishable on the basis of particular words on the relevant statutory provisions. It noted that DHN was doubted in Woolfson.
The court separately had to consider whether Cape had established a presence within the United States such that the English court should recognise the jurisdiction of the United States over Cape, and enforce a U.S. judgment against it (one of the criticisms made of the decision by U.S. lawyers is that the Court of Appeal fundamentally misunderstood the nature of the Federal
system in the U.S.A., but that misunderstanding does not affect the general principles laid down by the court). The Court of Appeal held that in order for a company to have a presence in the foreign jurisdiction, it must be established that:
On the facts the Court of Appeal held that Cape had no fixed place of business in the United States such that recognition should not be given to the U.S. judgment awarded against it.
(2) if a company is a "mere façade" concealing the true facts, or (3) when a subsidiary company was acting as an authorised agent of its parent, and apparently not so just because "justice requires" or to treat a group of companies as a single economic unit, in the case of tort victims, the House of Lords suggested a remedy would in fact be available. In Lubbe v Cape plc
Lord Bingham held that the question of proving a duty of care being owed between a parent company and the tort victims of a subsidiary would be answered merely according to standard principles of negligence law: generally whether harm was reasonably foreseeable.
Limited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
of shareholders. The case also addressed long-standing issues under the English conflict of laws
Conflict of laws
Conflict of laws is a set of procedural rules that determines which legal system and which jurisdiction's applies to a given dispute...
as to when a company
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
would be resident in a foreign jurisdiction such that the English courts would recognise the foreign court's jurisdiction over the company.
Facts
Cape Industries plcCape plc
Cape plc is a United Kingdom energy services company based in Uxbridge, West London. It is a constituent of the FTSE 250 Index.- History :The company was founded in 1893 as the Cape Asbestos Company with the objective of mining asbestos in the Orange Free State and importing it into European...
was a UK company, head of a group. Its subsidiaries mined asbestos
Asbestos
Asbestos is a set of six naturally occurring silicate minerals used commercially for their desirable physical properties. They all have in common their eponymous, asbestiform habit: long, thin fibrous crystals...
in South Africa. They shipped it to Texas
Texas
Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
, where a marketing subsidiary, NAAC, supplied the asbestos to another company in Texas. The employees of that Texas company, NAAC, became ill, with asbestosis
Asbestosis
Asbestosis is a chronic inflammatory and fibrotic medical condition affecting the parenchymal tissue of the lungs caused by the inhalation and retention of asbestos fibers...
. They sued Cape and its subsidiaries in a New York Court. Cape was joined, who argued there was no jurisdiction to hear the case. Judgment was still entered against Cape for breach of a duty of care in negligence
Negligence
Negligence is a failure to exercise the care that a reasonably prudent person would exercise in like circumstances. The area of tort law known as negligence involves harm caused by carelessness, not intentional harm.According to Jay M...
to the employees. The tort victims tried to enforce the judgment in the UK courts. The requirement, under conflict of laws
Conflict of laws
Conflict of laws is a set of procedural rules that determines which legal system and which jurisdiction's applies to a given dispute...
rules, was either that Cape had consented to be subject to New York jurisdiction (which was clearly not the case) or that it was present in the US. So the question was whether, through the Texas subsidiary, NAAC, Cape Industries plc was ‘present’. For that purpose the claimants had to show in the UK Court of Appeal that the veil of incorporation could be lifted
Piercing the corporate veil
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it...
and the two companies be treated as one.
Judgment
The Court of Appeal unanimously rejected (1) that Cape should be part of a single economic unit (2) that the subsidiaries were a façade (3) any agency relationship existed on the facts. Slade LJ (for Mustill LJ and Ralph Gibson LJ) began by noting that to ‘the layman at least the distinction between the case where a company itself trades in a foreign country and the case where it trades in a foreign country through a subsidiary, whose activities it has full power to control, may seem a slender one…’ But approving Sir Godfray’s argument, ‘save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon… merely because it considers that justice so requires.’ On the test of the ‘mere façade’, it was emphasised that the motive was relevant whenever such a sham or cloak is alleged, as in Jones v LipmanJones v Lipman
Jones v Lipman [1962] 1 WLR 832 is a UK company law case concerning piercing the corporate veil. It exemplifies the principal case in which the veil will be lifted, that is, when a company is used as a "mere facade" concealing the "true facts", which essentially means it is formed to avoid a...
. A company must be set up to avoid existing obligations, not future and hypothetical obligations which have not yet arisen. The court held that one of Cape's subsidiaries (a special purpose vehicle incorporated in Liechtenstein
Liechtenstein
The Principality of Liechtenstein is a doubly landlocked alpine country in Central Europe, bordered by Switzerland to the west and south and by Austria to the east. Its area is just over , and it has an estimated population of 35,000. Its capital is Vaduz. The biggest town is Schaan...
) was in fact a façade, but on the facts this was not a material subsidiary such as to attribute liability to Cape. Cases like Holdsworth, Scottish Coop and DHN were distinguishable on the basis of particular words on the relevant statutory provisions. It noted that DHN was doubted in Woolfson.
The court separately had to consider whether Cape had established a presence within the United States such that the English court should recognise the jurisdiction of the United States over Cape, and enforce a U.S. judgment against it (one of the criticisms made of the decision by U.S. lawyers is that the Court of Appeal fundamentally misunderstood the nature of the Federal
Federation
A federation , also known as a federal state, is a type of sovereign state characterized by a union of partially self-governing states or regions united by a central government...
system in the U.S.A., but that misunderstanding does not affect the general principles laid down by the court). The Court of Appeal held that in order for a company to have a presence in the foreign jurisdiction, it must be established that:
- the company had its own fixed place of business (a branch office) in the jurisdiction from which it has carried on its own business for more than a minimal time; and
- the company's business is transacted from that fixed place of business.
On the facts the Court of Appeal held that Cape had no fixed place of business in the United States such that recognition should not be given to the U.S. judgment awarded against it.
Significance
Although subsequent to the decision (which has been followed), English law has suggested a court can only lift the corporate veil when (1) construing a statute, contract or other document;(2) if a company is a "mere façade" concealing the true facts, or (3) when a subsidiary company was acting as an authorised agent of its parent, and apparently not so just because "justice requires" or to treat a group of companies as a single economic unit, in the case of tort victims, the House of Lords suggested a remedy would in fact be available. In Lubbe v Cape plc
Lubbe v Cape Plc
Lubbe v Cape Plc [2000] is a conflict of laws case, which is also highly significant for the question of lifting the corporate veil in relation to tort victims...
Lord Bingham held that the question of proving a duty of care being owed between a parent company and the tort victims of a subsidiary would be answered merely according to standard principles of negligence law: generally whether harm was reasonably foreseeable.
See also
- UK company law and US corporate law
- Lubbe v Cape PlcLubbe v Cape PlcLubbe v Cape Plc [2000] is a conflict of laws case, which is also highly significant for the question of lifting the corporate veil in relation to tort victims...
[2000] 1 WLR 1545 - Berkey v. Third Avenue RailwayBerkey v. Third Avenue RailwayBerkey v. Third Avenue Railway Co 244 N.Y. 602 is a classic veil piercing case by Judge Benjamin N. Cardozo in corporation law.-Facts:...
244 N.Y. 602, 155 N.E. 914 (1927) a well known corporate veil case in US corporate law, concerning tort victims
- Texas Business Corporation Act of 1997, art 2.21(2) says that a veil cannot be lifted unless a shareholder has perpetrated "an actual fraud on the obligee primarily for the direct personal benefit of the holder" or (3) a failure to comply with requirements of the Act.