Adams vs. Cape Industries plc (1990) - can a parent company arrange its group so that legal liability lands on some other company in the group, and not on itself? The Court of Appeal said yes, and refused to lift the corporate veil. Company law notes on LawEasy:
https://www.thelaweasy.com/corporate-law-one-shot
This video explains Adams v. Cape Industries plc step by step: the single economic unit argument, the facade argument, the agency argument, and why all three failed.
THE CASE
Adams v. Cape Industries plc
Court of Appeal of England and Wales | 1990 | Reported as [1990] Ch 433
FACTS
Cape Industries plc was a company registered in England. Its business was mining asbestos in South Africa, and its products were marketed in the United States - not directly, but through a network of subsidiaries and associated companies. A number of factory workers in the United States inhaled asbestos dust and contracted disease. They brought class actions in an American court and obtained judgment against Cape, the holding company at the head of the group. The workers then tried to enforce that American judgment against Cape in the English courts, and there they failed.
ISSUE
Was Cape "present" in the United States through its subsidiaries, so that the American judgment could be enforced against it in England? In other words, could the English court look behind the group structure and treat the whole group as one?
THE TEST FOR PRESENCE ABROAD
An English trading company is treated as present in a foreign country only if two conditions are met:
1. It has established a fixed place of business in that country at its own cost, and
2. It, or its representative, has carried on business there for more than a minimal period of time.
THE THREE ARGUMENTS - AND WHY EACH FAILED
1. Single economic unit: that Cape and its subsidiaries were in reality one economic unit and should be treated as one. Rejected - business reality alone is not a ground to lift the veil.
2. Facade or sham: that the corporate form was a mere facade concealing the true facts. Rejected - there was no fraud or improper concealment here.
3. Agency: that the subsidiaries were merely agents making contracts for their principal, the holding company. Rejected on the facts.
DECISION
Cape was held not to have been present in the United States, so the American judgments were unenforceable in England. The Court of Appeal held that it was not entitled to lift the corporate veil against a member of a corporate group merely because the group had been structured so that liability for future activities would fall on another company in the group.
PRINCIPLE
A company that is a member of a corporate group remains a separate legal person. The court will not lift the corporate veil merely because the group was deliberately arranged to place liability elsewhere, and it will not lift the veil merely because, in business reality, the group operates as one single economic entity. In practice the veil is pierced only where the corporate form is a facade concealing the true situation - broadly, where there is bad faith.
THE BACKGROUND
Before Adams, the law was pulled in two directions. In DHN Food Distributors v. Tower Hamlets LBC, Lord Denning looked at the reality of the group and lifted the veil so the trading company could recover compensation for premises owned by its wholly owned subsidiary. In Woolfson v. Strathclyde Regional Council the House of Lords distinguished DHN and cast doubt on it, saying the veil may be pierced only where special circumstances show it to be a mere facade. Adams settled the argument in favour of the strict Salomon line, and Trustor AB v. Smallbone later confirmed it.
CHAPTERS
00:00 Can a group be arranged so that liability falls elsewhere?
01:00 Salomon and separate corporate personality
02:13 Macaura: shares are not company property
02:44 What "lifting the corporate veil" means
03:30 The case: Cape Industries and its group structure
04:13 The asbestos workers and the American judgment
04:45 The test for presence abroad
05:29 The three arguments: single economic unit, facade, agency
06:16 Why all three arguments failed
07:58 Was Adams a good decision for companies?
08:34 The law before Adams: DHN Food Distributors
10:21 Lord Denning and Woolfson v. Strathclyde
13:19 Trustor v. Smallbone and the modern position
14:05 Evaluation: both sides of the decision
17:11 Single economic entity and agency today
18:50 Conclusion
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