Daimler Co., Ltd. v. Continental Tyre and Rubber Co. (Great Britain), Ltd. (1916)

Salomon had settled that a company is a person distinct from its members. Daimler asked the next question: if the company is a person, what is its nationality and character, and can the character of the members ever be attributed to it? The case arose in the first months of the First World War, and the answer it produced is the leading illustration of veil-lifting on grounds of enemy character — the head every syllabus lists first among the judicially developed exceptions.

Read it carefully, because the case is regularly over-stated. The House did not hold that an English company owned by Germans is an alien enemy for all purposes. Every opinion insists on the distinction between the company's place of incorporation and residence on the one hand, and the lawfulness of what is being done through it on the other. And the appeal was ultimately disposed of on a much narrower ground.

The respondent, the Continental Tyre and Rubber Co. (Great Britain), Ltd., was a private company incorporated and registered in England. Its capital was divided into 25,000 shares. Of those, 23,398 were held by a joint stock company incorporated and resident in Hanover — the parent company. Three individuals held 1,600 shares between them, and all three were German subjects resident in Hanover. The remaining two shares were held by the secretary, Hans Frederick Wolter, and the managing director, Paul Scharnhost Brodtmann, both shown in the list of shareholders as having residences in England.

The three directors, excluding the managing director, were also German subjects resident in Hanover. With the exception of the secretary, all the directors and shareholders were German subjects; the secretary was also a German, but had taken out naturalization papers on 1 January 1910.

The business was the manufacture of motor car tyres in Germany and their sale in England and elsewhere. As Earl of Halsbury described the arrangement, before the war "an associated body of Germans availed themselves of our English law to carry on a business", which they were entitled to do.

The company sued the appellant, the Daimler Co., Ltd., on a specially indorsed writ dated 23 October 1914, for £5,605 16s. with interest, being the amount due on three bills of exchange drawn by the respondent and accepted by the appellant. The Daimler company was willing to pay, but on two conditions: that in paying it would not contravene the Trading with the Enemy Act, 1914, and that the respondent company was able to institute the action and to give a good and valid discharge.

Master Macdonell gave the respondent leave to sign final judgment; Scrutton J dismissed the appeal from that order; the Court of Appeal affirmed. The Daimler company appealed to the House of Lords.

One evidential feature governs the whole case. As Lord Atkinson recorded, the minute book of the company, which would have shown from what centre its business was managed and directed, was never given in evidence before any of the three tribunals; the result was that the facts showing in which country lay the real business centre "from which the governing and directing minds of the company or its directors operated" were never disclosed.

1. Would payment of the debt to the respondent company amount to trading with the enemy?
2. Can a company registered in England take an enemy character from the nationality and residence of those who hold its shares and direct its affairs?
3. Was the writ validly issued — that is, had the secretary any authority to institute the action after the outbreak of war?

Appeal allowed. The action was dismissed on the ground that it had been instituted without authority.

The narrow ratio is the third issue. The burden of proving that the secretary had power and authority to institute the action, months after the outbreak of war, rested on the respondent company, and Lord Atkinson was "clearly of opinion that they had not discharged that burden." Authority to raise legal proceedings lay in the directors, who were all Germans, or in a person to whom they had delegated it, and, as Lord Shaw put it, they "did not before the war make such delegation of authority to raise these proceedings." After the outbreak of war it was not competent for enemy directors or shareholders to have anything to do with the management of the company's affairs in England. The secretary's own affidavit, tellingly, said not a syllable about any authorisation.

On the wider question the opinions are not all one way, and an answer that pretends otherwise is wrong.

Earl of Halsbury — look at the object, not the machinery

Halsbury reduced the case to a single proposition: "in our law when the object to be obtained is unlawful the indirectness of the means by which it is to be obtained will not get rid of the unlawfulness". The object here was to enable thousands of pounds to be paid to enemies of the Crown.

He then attacked the idea that incorporation could sterilise that object. A corporation is, he said, "a partnership in all that constitutes a partnership except the names", and "the names and the incorporation were but the machinery" by which the purpose would be accomplished. His image is the one the case is remembered by: to shield the payment behind the corporate form "would be equivalent to inclosing the gold and attempting to excuse it by alleging that the bag containing it was of English manufacture." He answered the Lord Chief Justice's description of a company as a live thing by pointing out that if it were, "it would be capable of loyalty and disloyalty."

His conclusion on limited liability is the sentence to carry into an answer on veil-lifting generally: limited liability was a useful introduction, and there was no reason why foreigners "should not, while dealing honestly with us, partake of the benefits of that institution", but it would be intolerable that for a hostile purpose its forms should be used and enemies of the State allowed to continue trading and to sue in an English court.

Lord Atkinson — residence, and the identification problem

Lord Atkinson approached it through residence. Trading with the most loyal British subject, if resident in Germany, would amount to trading with the enemy, and "The same principle would presumably apply to a trading company resident in an enemy country." Residence of a company, so far as such a fictitious legal entity can have a residence, is determined by where its important affairs are regulated and controlled — the test used for income tax. That, on the pleadings, was never proved: leading counsel for the Daimler company had admitted in the Court of Appeal that the respondent's residence was in England, and the facts that might have contradicted the admission had been shut out.

On identification he was careful and negative. He did not think that "the legal entity the company can be so identified with its shareholders, or the majority of them, as to make their nationality its nationality or their status its status", so completely as to make it an alien enemy because they are alien enemies. He supported that by a passage from Lord Macnaghten about a Transvaal company: "If all its members had been subjects of the British Crown the corporation itself would have been none the less a foreign corporation and none the less in regard to this country an alien." Nationality follows incorporation, not membership.

Lord Shaw — the six propositions

Lord Shaw's opinion is the most useful for revision because it is set out as numbered propositions. In substance:

1. A declaration of war makes all trading with the enemy illegal at common law.
2. The restraint is absolute; it is no defence that the trader acted as the hand of another, or under the agency or orders of a foreign company. "The prohibition against trading is binding in regard to all action direct or indirect, personal or representative."
3. So far as the restraint rests on allegiance and loyalty, its application to a limited company is incongruous; allegiance and loyalty are personal by the nature of the case. A company "is a creation of the law convenient for the purposes of management, of the holding of property, of the association of individuals in business transactions".
4. Nevertheless, trading with the enemy on behalf of a company is as much prohibited as personal trading — not because of the company's allegiance, but because there is no human agency within the realm through which such trading could lawfully be done.
5. A company registered in Britain may have alien enemy shareholders and directors. Their rights are suspended: "alien enemy shareholders cannot vote; alien enemy directors cannot direct; the rights of all these are in complete suspense during the war."
6. Those who are not alien enemies must face the situation and use the machinery of the Companies Acts. No payment of assets, dividends or profits can be made to enemy shareholders, but the property and business of the company may be conserved; "neither loss nor forfeiture is imposed by the law."

From those propositions Lord Shaw drew the conclusion that he saw "much confusion to result" from characterising British registered companies as alien enemies at all: suspend the enemy shareholders' rights and forbid trading with them, and there is no principle that justifies "the incongruity of denominating or regarding the company itself as enemy either in character or in fact." He would have held that the Daimler company's official could have paid the debt safely. He concurred in dismissing the suit only on the point of authority to sue, and thought no costs should be awarded.

A company incorporated in England is an English company, and it does not become an alien enemy merely because its shareholders and directors are alien enemies. But the corporate form cannot be used to accomplish what the law forbids: alien enemy shareholders cannot vote and alien enemy directors cannot direct, so that after the outbreak of war they can confer no authority on anyone to act, sue or give a discharge in the company's name; and payment to a company so controlled may, in substance, be trading with the enemy.

This is a war-time decision on a war-time statute, and the propositions about suspension of members' rights are propositions about enemy status, not about companies generally. Do not carry them across to a peace-time argument that a controller's disqualification passes to the company; for that you need Gilford Motor or Dinshaw Petit, which turn on the use of the form to evade an obligation, not on the character of the members.