The Court of Appeal's judgment in Costello & Anor v MacDonald & others [2011] EWCA Civ 930 is a timely reminder of the difficulties associated with 'piercing the corporate veil' and attempting to recover debts owed by a company from the individuals behind that company. The English legal system regards companies as legal personalities separate both from the individuals behind them and from parent or group companies, and accordingly consideration should always be given to obtaining security from directors, or shareholders, for the liabilities of their companies.

Mr and Mrs Costello were the sole shareholders and directors of a company, Oakwood, through which they contracted with builders to develop land they owned. Oakwood, which had no significant assets, failed to pay some of the builders' invoices and the builders sought to recover those debts from the Costellos personally by means of a claim for 'unjust enrichment'. The builders argued that it would be unjust for the Costellos to hide behind Oakwood while benefiting from the improvements that the builders had made to their property.

The Court of Appeal followed a line of previous judgments and found against the builders for policy reasons. It decided that allowing the builders' claim would undermine the contract between them and Oakwood, in which the parties had effectively agreed how the risks in the transaction were to be allocated, ie that Oakwood, and not the Costellos, was responsible for paying the builders' invoices. In essence, the court's view was that it had been open to the builders to contract with the Costellos on different terms, and to allow the claim to succeed would effectively interfere with the terms of the contract between the builders and Oakwood.

Plainly, these policy considerations would have been irrelevant if the Costellos had been expressly liable under the contract with the builders for Oakwood's debts, or if the Costellos had provided a separate guarantee or security for Oakwood's debts.

In some foreign jurisdictions, including the USA, the position can be more fluid and the courts may be less likely than the English courts to uphold either the separation between companies and the individuals behind them, or the primacy of commercial contracts. Company directors should therefore take particular care, and seek advice, when entering into contracts which are governed by the laws of other jurisdictions.