The foundation of modern company law lies in the principle of separate legal personality, as established in the seminal case of Salomon v Salomon & Co Ltd [1897]. In that case, the House of Lords held that a company is a distinct legal entity, separate from its shareholders, directors, or controllers, regardless of the extent of control one individual may exercise over it. This ruling ensures that a company’s liabilities remain its own, providing a vital shield to shareholders. However, this principle has often raised ethical and practical concerns when applied to corporate groups, particularly where the structure is used to avoid liability.
The concept of a “veil of incorporation” thus emerged—a protective shield that distinguishes the company from its controllers. In specific, exceptional circumstances, courts have been willing to pierce or lift the corporate veil to reveal the true nature of a company’s operations and impose liability on those who control it. Cases such as Macaura v Northern Assurance Co [1925] illustrate the harsh realities of strict adherence to this principle, while decisions like DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] suggested a more flexible approach.
The landmark case of Adams v Cape Industries plc [1990] was a pivotal decision that reaffirmed the principle of separate legal personality and clarified its application in corporate group structures. This article examines the facts, legal arguments, judgement, and significance of the case within the broader context of UK company law.
The Facts of Adams v Cape Industries plc
Cape Industries plc was a UK-incorporated company and the parent of a group of subsidiaries involved in asbestos mining and sales. The asbestos was mined in South Africa and subsequently sold in the United States through a series of subsidiaries, including NAAC (North American Asbestos Corporation). Employees in the United States were exposed to asbestos dust, leading to severe illnesses such as asbestosis.
A class action lawsuit was brought by affected workers against Cape Industries and its subsidiaries in a Texas court. Despite Cape’s arguments challenging jurisdiction, the Texas court found against Cape Industries and awarded damages to the workers. The claimants then sought to enforce the US judgement in the English courts, which required Cape to be treated as having a presence in the United States.
To succeed, the claimants argued that:
- Cape Industries and its subsidiaries constituted a single economic unit;
- The corporate veil should be pierced, as the subsidiaries were mere facades;
- The subsidiaries acted as agents for Cape Industries.
Issue
The central question for the Court of Appeal in Adams v Cape Industries plc was whether Cape could be held liable for the actions of its subsidiaries and whether the US judgement could be enforced in the UK.
The Arguments and Judgement in Adams v Cape Industries plc
The Court of Appeal, consisting of Slade LJ, Mustill LJ, and Ralph Gibson LJ, rejected all three arguments advanced by the claimants.
Single Economic Unit
The claimants contended that Cape and its subsidiaries operated as a single economic unit, making Cape liable for the actions of its subsidiaries. This argument relied on earlier cases such as DHN Food Distributors v Tower Hamlets [1976], where Lord Denning had looked beyond the formal corporate structure to assess the economic reality of a corporate group.
However, the Court of Appeal in Adams rejected this approach, reaffirming the principle established in Salomon. The judges emphasised that courts cannot disregard separate legal personality merely because a group of companies operates as a single economic entity. Unless specific statutory provisions or contractual terms suggest otherwise, each company in a group retains its distinct legal identity.
Slade LJ noted:
“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.”
This strict application of the Salomon principle meant that Cape could not be held liable simply because it controlled its subsidiaries.
Piercing the Corporate Veil: Facade Argument
The claimants argued that the corporate structure employed by Cape was a mere facade designed to shield the parent company from liability. This doctrine allows the courts to disregard the corporate veil where a company is used as a sham or cloak to evade existing legal obligations (Jones v Lipman [1962]).
The Court of Appeal acknowledged that the corporate veil can be pierced where a company is set up to avoid existing obligations, but it rejected its application in Adams. The court emphasised that the motive behind Cape’s structure was to avoid future or hypothetical liabilities, which did not justify piercing the veil. Slade LJ explained that there was nothing illegal in Cape arranging its affairs to minimise liability:
“The right to use a corporate structure in this manner is inherent in our corporate law.”
While one subsidiary (incorporated in Liechtenstein) was found to be a facade, it was not considered material enough to attribute liability to Cape Industries.
Agency Argument
The claimants also argued that Cape’s subsidiaries acted as agents for Cape Industries, meaning Cape should bear responsibility for their actions. Under agency principles, a parent company can be held liable if a subsidiary acts on its behalf.
The Court of Appeal found no evidence of an agency relationship. The subsidiaries operated as independent entities, and their activities were not controlled to a degree that justified attributing their actions to Cape. The court reiterated that:
“A subsidiary is not to be regarded as an agent merely because it is controlled by the parent company.”
Conclusion
The case of Adams v Cape Industries plc remains a cornerstone of UK company law, reaffirming the principle of separate legal personality established in Salomon v Salomon. While the decision protected corporate autonomy, it also exposed the limitations of the law in addressing group liability, particularly for tort victims. Subsequent developments in tort law have mitigated these issues by holding parent companies directly accountable for foreseeable harm.
Adams illustrates the balance courts must strike between upholding legal principles and delivering justice. While the corporate veil remains largely intact, the evolution of tort law ensures that corporate groups cannot entirely escape accountability.
