The Protection of Limited Liability Companies (“the Corporate Veil”) and the Sole Shareholder

A company is a legal entity separate and distinct from its shareholders and directors. It is treated as a “legal person” with contractual capacity and accountability for its conduct and actions. The great benefit of this structure is the limited liability for its shareholders. Many will be familiar with the term “corporate veil” which is a legal fiction coined to describe this advantage.

A company is a legal entity separate and distinct from its shareholders and directors.

Successfully piercing the corporate veil is rare and in a recent case before Scotland's Court of Session, Tartan Army Limited ("TAL"), attempted to do just that. TAL is the owner of a number of trademarks for the "Tartan Army," a name given to fans of the Scottish national football team. TAL claimed that Alba Football Fans Limited ("Alba") and its owner, Mr Emmerson, had infringed a number of its rights. The alleged infringement included, publishing a magazine known as "The Famous Tartan Army magazine" and offering other services using the "Tartan Army" mark. Although it was Alba who carried out the alleged infringement, TAL claimed Mr Emmerson was also personally liable.

TAL's entire case rested on the fact that Alba was a one man company. TAL pointed out that Mr Emmerson, being the sole director and shareholder, was the "controlling mind" of Alba and had incorporated Alba for the purpose of using it as a "vehicle" to carry out the alleged infringements. TAL took issue that there were no board minutes available nor had Alba filed any accounts and claimed this served to highlight that there was "an absence of any attempt to separate governance and operational responsibilities."

Mr Emmerson's argument was simple. He claimed that he was not in any way liable personally for the alleged infringing acts and to the extent that they were carried out at all, they were carried out by Alba.

The court agreed with Mr Emmerson and found that TAL's case against him personally was "bound to fail." It was reiterated that a company is distinct from its shareholders although there are "limited situations" where the court "may look behind, beyond or through" the corporate veil. However, it was stressed that this was only where there was no other remedy available to "prevent abuse of the corporate personality." In this case the court took issue with TAL's focus on Alba being a one man company. It is clear that the court felt this was dangerous territory which had the potential to open up all shareholders of one man companies to personal liability. Accordingly, "the corporate veil would not only be pierced; it would be left in tatters."

From a practical point of view it is clear that the distinction between a company and its shareholders can easily become blurred, especially in the case of a one man company. The difficulty in undertaking proper board meetings or producing formal minutes is one of the realities of a one man company and it should not be a barrier to individuals taking advantage of the corporate structure. Whilst the protection of the corporate veil may be frustrating for some it is clear that there must be more than "the absence of board meetings or other formalities of corporate governance" to find the individual personally liable. So once again the corporate veil remains intact (for now).

For more information please contact Jessica Chappell at [email protected]