Adams v Cape Industries plc [1990] Ch 433
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.
Facts
Cape ndustries plc was a UK company, head of a group. ts 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 ndustries 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.
Judgment
The Court of Appeal unanimously rejected (1) that Cape should be part of a single
economic unit (2) that the subsidiaries were a faade (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 faade', it was emphasised that the motive was relevant whenever such a
sham or cloak is alleged, as in Jones v Lipman. 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 inLiechtenstein) was in fact a faade, but on the facts this was
not a material subsidiary such as to attribute liability to Cape. Cases
like oldsworth, Scottish Coop and D were distinguishable on the basis of
particular words on the relevant statutory provisions. t noted that D was doubted
in oolfson.
' Whether or not this is desirable, the right to use a corporate structure in this manner
is inherent in our corporate law. ... in our judgement Cape was in law entitled to
organise the group's aIIairs in that manner...
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 theFederal 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:
1. 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
2. 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 faade" 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.
WIIIe LIere Iuve been some noLubIe depurLures Irom LIe CourL oI AppeuI`s vIew In
Adums (see Creoseg o Breochuood Motors Ltd |1qqz| BCC 68, overruIed
byrd o Belhooen Pubs Ltd |1qq8| z BCC qq;), LIe CourL oI AppeuI`s
InLerpreLuLIon In Adums oI wIen veII IIILIng cun occur Ius domInuLed judIcIuI
LIInkIng up unLII very recenLIy. TIere ure now sIgns LIe courLs seem Lo be reIuxIng
LIe sLrIcL upproucI Luken In Adums (see #otiu oConuog (zoooJ 1 All
E# ;1 und $omengo-Turner o J&H Morsh & McLennon (SeroicesJ
Ltdzoo;) z AII ER (Comm) 81).
