Piercing the Corporate Veil: Lessons From Adams v Cape Industries for Business Liability

When a person is under an existing legal obligation or liability, or subject to an existing legal restriction, which they deliberately evade or whose enforcement they deliberately frustrate by interposing a company under their control (Adams v Cape Industries plc)

The evasion principle

Adams v Cape Industries plc is a landmark legal case that established the principle of corporate veil piercing in relation to the use of separate legal entities for tax avoidance and other non-commercial purposes. The case involved a UK company, Cape Industries, which had subsidiaries in several jurisdictions including South Africa. The claimant, Mr. Adams, was a former employee of one of the South African subsidiaries who had contracted asbestosis as a result of his work. He sought to hold Cape Industries directly liable for his injuries, arguing that the company had deliberately interposed a subsidiary to evade liability.

The court held that Cape Industries could indeed be held liable for Mr Adams’s injuries due to the principle of corporate veil piercing. This principle allows the courts to look beyond the separate legal personality of a company and treat it as a mere agent or alter ego of its controlling shareholders or directors when there has been deliberate avoidance or evasion of legal obligations or liabilities.

The key takeaway from the Adams v Cape Industries case is that the corporate veil is not an absolute shield against legal liability. If a company is used for illegitimate purposes, such as to evade taxes, defraud creditors or avoid legal obligations, the courts may be willing to pierce the corporate veil and hold the controlling shareholders or directors personally liable for the company’s actions. It is important for businesses to understand the boundaries of the corporate veil and ensure that their use of separate legal entities is legitimate and transparent.

More Answers: