Introduction been performed by a company, which is

Introduction to
separate personality and piercing the corporate veil principles

 

            Since the 1897 case
of Salomon v Salomon1
, the long standing principle of companies having a separate legal personality
to its members has been well practiced and entrenched into company law in the
United Kingdom.  Companies having a separate
personality to its members makes the appeal of becoming a member/investor in a
company far more appealing because it ensures security by making it so that
members can only be held liable for the amount of their initial financial
contribution and not for the debts the company has incurred itself. Due to the
apparent abuse of the separate personality of a company over time the courts
have introduced the concept of piercing the corporate veil, in an attempt to
achieve justice by getting around or disregarding the separate personality
principle. Piercing the corporate veil pertains to situations where the court
may see it necessary to “ignore the fact that an act has been performed by a
company, which is a distinct legal person, and instead holding that any human
beings involved should be personally liable as though there had not been a
company there”2.  Specifically, in the case of Prest v Petrodel Resources Limited and
others3
the court was concerned with making sure that in cases of divorcing spouses and
single-man companies, that separate personality could not be used as a means to
evade liability or to conceal assets. It is important to note that part II of
the Matrimonial Causes Act 19734
does bestow the courts with vast powers in Sections 23 to 25 but to be aware
that even though it includes provisions such as one party of a marriage
transferring property to another that said property would have to actually
belong to that individuals legal person and not to the separate personality of
a company. That being said, Section 24 is often used to allow the use of the
piercing the corporate veil doctrine “Section 24 of the Matrimonial Causes Act
1973 might be regarded as conferring a distinct power to disregard the
corporate veil in matrimonial cases”5.
 “The sanctity of separate legal personality following effective
incorporation generates effects that may jar with our sense of what is ‘really
going on’ as well as our notions of fairness, responsibility and good
sense.  These effects have also, at times, had an impact on the judiciary,
resulting in a rich but confused body of case law”6.
As stated above the body of case law that has developed regarding piercing the
corporate veil post Salomon v Salomon has been
extremely rich and confusing. The purpose of this piece is to see whether or
not the judgement in Prest v Petrodel
Resources Ltd 2013 UKSC 34 has introduced clarity to the doctrine of
piercing the veil of incorporation. In order to do so, the judgement of Prest v Petrodel Resources Ltd 2013
UKSC 34 will be looked at, as well as the concealment and evasion principles
and various cases that have been decided pre-Prest as well as post Prest.

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Judgement:    Prest
v Petrodel Resources Ltd 2013UKSC 34

 

            This case as stated in the
introduction was involving Mr. and Mrs. Prests’ matrimonial proceedings where
it was said that although it seemed like the husband’s only assets available in
the divorce were the matrimonial home and a 2nd home in Nevis, his
wealth vastly exceeded this as there were 7 properties held by several
companies that Mr. Prest wholly owned and controlled. Meaning that Mr. Prest
was using these companies as a front to hide and make his assets untouchable.  In its final stages, this case was presented
in the Supreme Court before Lord Neuberger (President), Lord Walker, Lady Hale,
Lord Mance, Lord Clarke, Lord Wilson, and Lord Sumption.  As a consensus (although not ignoring their
separate explanations), the judges generally seemed to have understood there to
be a need for a limited power in order to pierce the corporate veil in certain
circumstances in order to achieve justice. Lord Sumption goes into a deep
analysis of the case and the principles it concerns and although his is an
obiter judgement it is essential to deciding whether or not the judgement presented
in this case gave any clarity to piercing the veil of incorporation. Noticing
the reoccurring requirement for dishonesty his Lordship acknowledges Adams v
Cape Industries7
where the position was held that dishonesty from the company member is a
requirement in order to use the doctrine of piercing the veil of incorporation
and that the doctrine cannot be used as a tool to achiever justice in just
about any case, meaning that it should be looked at as a last resort if there
are no other remedies available.8
Lord Sumption then goes on to bring to the attention the fact that this
principle where dishonesty is a requirement has been affrimed as well in
Trustor AB v Smallbone (No 2)9
except it was said that the dishonesty has to involve the company member using
company law as a sham or façade to conceal the true ownership of property. In
an attempt to aid in clarification of the law in this area Lord Sumption goes
into depth about terms specifically used when explaining ‘piercing the veil’
and throughout his analysis he asserts that the subcategories of ‘sham’ and
‘façade’ should be replaced with the terms evasion and concealment (although
some do say that these terms are interchangeable).

 

Concealment and Evasion Labels

 

            Lady Hale, although
in agreement with the need for a limited power is not in agreement with the
particular categorisation suggested by Lord Sumption. In Prest v Petrodel Resources Ltd 2013 UKSC 34 at paragraph 92 Lady
Hale states, “I am not sure whether it is possible to classify all of the cases
in which the courts have been or should be prepared to disregard the separate
legal personality of a company neatly into cases of either concealment or
evasion. They may simply be examples of the principle that the individuals who
operate limited companies should not be allowed to take unconscionable
advantage of the people with whom they do business.”10

 

            Concealment and
Evasion are two distinct labels; in fact although they both fall under the
doctrine of piercing the corporate veil concealment simply requires the veil to
be lifted. Lord Sumption stated, “The concealment principle is legally banal
and does not involve piercing the corporate veil at all. It is that the
interposition of a company or perhaps of several companies so as to conceal the
identity of the real actors will not deter the courts from identifying them,
assuming that their identity is legally relevant.”11
This label does not require piercing the veil of incorporation and only
required to lift it because it does not fully disregard the façade/separate
legal personality of the company, it simply requires looking behind the veil to
see if there are any facts that the company and its member(s) are concealing.
The evasion label on the other hand is where the courts may actually disregard
the separate personality. As per Sumption’s explanation on evasion, he
describes it as the instances where “the court may disregard the corporate veil
if there is a legal right against the person in control of it which exists
independently of the company’s involvement, and a company is interposed so that
the separate legal personality of the company will defeat the right or
frustrate its enforcement.”12  Lord Neuberger agrees with Lord Sumption on
this note and observes that LJ Staughton in Atlas
Maritime Co SA v Avalon Maritime Ltd (No 1) 1991 4 All ER 779G13
(quoted in VTB Capital plc v Nutritek
International Corpn 2013 UKSC 5; 2013 2 WLR 378, para 118) classified the types of cases between
“lifting” and “piercing” the corporate veil. Given the case law pre- Prest
there were decisions all over the place however if failing to distinguish
between “lifting”/concealment and “piercing”/evasion truly was behind the lack
of clarity that has plagued this area of law then looking back at a couple of
cases in each category should bring about sound judgements. In order to test
out his labels, Sumption LJ, does into an extensive analysis of many cases such
as Trustor AB v Smallbone (No 2)14, Ben Hashem v Al Shayif 15,
VTB Capital plc v Nutritek International Corpn16,
Gilford Motor Co Ltd v Home17,
Jones v Lipman18,
as well as Gencor ACP Ltd v Dalby19.
In both Trustor AB v Smallbone (No 2)20 and Gencor
ACP Ltd v Dalby21
we are presented with
scenarios that could be placed under the category of concealment. At an earlier
stage of the litigation in Trustor AB v
Smallbone (No 2)22,

 

  “it had been found that the company Introcom
was “simply a vehicle Mr. Smallbone used for receiving money from Trustor” and
that the company was a “device or façade” for concealing that fact. On that
footing, the company received money on behalf of Mr. Smallbone’s behalf. This
conclusion did not involve piercing the corporate veil, and did not depend on any
finding of impropriety.”23
 Then yet again concealment makes an
appearance in Gencor ACP Ltd v Dalby24
where the “courts refused to be deterred by the legal personality of the
company from finding the true facts about its legal relationship with Mr.
Dalby. It held that the nature of their dealings gave rise to equitable claims
against both.”25
In both of the cases mentioned above we see the label/principle of concealment
at work because neither Mr. Dalby or Mr. Smallbone abused the law (of separate
legal personality) for the purpose of evading a liability they had.

 

On the other hand Gilford
Motor Co Ltd v Home26
and Jones v Lipman27
demonstrate instances in which the corporate veil is actually pierced due
to the company member(s) in question having a pre-existing liability or one
that comes about independent of the involvement of the company. In both of
these cases, the real actors hiding behind the companies, Mr. Horne and Mr.
Lipman were doing exactly that.28
 There are indeed cases that may fall
into both categories but in cases like the ones mentioned above it could be
said that these are examples of where it is crucial to have the labels of concealment
and evasion in order to differentiate and not make the mistake of thinking that
the veil is being pierced when it is not as that causes for unsound judgements
and a lot of confusing case law.

 

It is of the utmost importance for clarity in this area of law
because if the doctrine in used innapropriately it will undermine the
precedence set in Salomon v Salomon29
(separate legal personality) which is fundamental to UK company law. Lord
Neuberger in VTB Capital plc v Nutritek
Internatinal Corpn30
seemingly adopting the view of Munby J as well as the court in stating the
reasoning that “any doctrine permitting the court to pierce the corporate veil
must be limited to cases where there was a relevant impropriety”31.  In VTB
Capital plc v Nutritek Internatinal Corpn32
the argument being presented was that the “corporate veil should be pierced
to make the controllers of a company jointly and severely liable on the
company’s contract, the fundamental objection to the argument was that the
principle was being invoked so as to create a new liability that would not
otherwise exist.”33  Allowing the piercing of the corporate veil
in this instance would’ve been a grave mistake as it would go against the base
of company law, incorporation and separate legal personality. As Lord Sumption
states “It is not abuse to cause a legal liability to be incurred by the
company in the first place. It is not an abuse to rely upon the fact (if it is
a fact) that a liability is not the controller’s because it is the company’s.”34

 

 

 

The Way Forward &
Conclusion

 

“It is also true that most cases in which the corporate veil was
pierced could have been decided on other grounds”35.  Although Lord Sumption is clearly an advocate
for the piercing the corporate veil doctrine he does recognize what others may
call its redundancy. Reading that quote and looking at the cases mentioned in
this piece it may seem as though there then would be no use for this doctrine. The
judgement in Prest v Petrodel Resources
Ltd36
has brought more clarity to exactly what piercing the corporate veil is and
has made it clear that the differentiation between ‘lifting’/concealment and
‘piercing’/piercing was necessary. If kept, the doctrine would have to be used
as an absolute last resort. However, with that clarity it has become apparent
that the doctrine in practice has been grossly misused and that it may not ever
be necessary to pierce the corporate veil, disregarding the fundamental
principle of separate legal personality, if the same decisions can be made on
other grounds. Additionally, had many of the cases analysed in Prest v Petrodel Resources Ltd37
post-Prest there would be much
ambiguity as to whether the veil was being pierced or not.  The incorrect use of the
principle of piercing the corporate veil, particularly evasion, when thought of
critically can be seen as a threat to the integrity of the foundations of
company law itself. Thus I propose the doctrine is either abolished or modified
so that it becomes ‘lifting the corporate veil’ and only includes concealment
since the terms are quite interchangeable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography

Primary Legal Sources

 

Cases:

 

Prest v Petrodel Resources
Ltd 2013 UKSC 34

VTB Capital plc v Nutritek
Internatinal Corpn 2012 2 Lloyds Rep 313

Ben Hashem v Al Shayif 2009 1 FLR 115

 

Trustor AB v Smallbone (No 2) 2001 1
WLR 1177

 

Gencor ACP Ltd v Dalby 2000 2 BCLC 734

 

Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) 1991 4 All ER 779

 

Adams
v Cape Industries Plc 1990 Ch 433

 

Jones v Lipman 1962 1 WLR 832

 

Gilford Motor Co Ltd v Home 1933 Ch
935

 

Salomon
v Salomon 1897 AC 22

 

 

Legislation:

 

 

Matrimonial Causes Act 1973 (MCA)

 

Secondary sources

 

Alastair Hudson, Understanding Company Law

D Kershaw, Company Law in Context: Text and Materials (2nd edn,
OUP)

 

J.S Liptrap, “A World Without
Prest in Criminal Confiscation Proceedings?”, R.V Powell and Westwood
2017 Comp. Law. 28 (12), 382-385

A a
a a a aliable as though there had no

1 Salomon v Salomon 1897 AC 22

2  Alastair Hudson, Understanding Company Law (p 28)

3  Prest v Petrodel Resources Ltd 2013 (UKSC) 34.

4 Matrimonial
Causes Act 1973 (MCA)

5 Prest v Petrodel Resources Ltd 2013 (UKSC) 34
(Per Lord Sumption at
para 9)

6 D Kershaw, Company Law in Context: Text and Materials
(2nd edn, OUP) 46

7 Adams v Cape Industries Plc 1990 Ch 433

8 Adams v Cape Industries Plc 1990 Ch 433 (per Slade LJ at 536)

9 Trustor AB v Smallbone (No 2) 2001 1 WLR 1177

10 Prest v Petrodel Resources
Ltd 2013UKSC 34 (Per Lady Hale at para 92)

11 Prest v Petrodel Resources
Ltd 2013UKSC 34 (Per Lady Hale at para 28)

 

12 Prest v Petrodel Resources
Ltd 2013UKSC 34 (Per Lady Hale at para 28)

 

13 Atlas Maritime Co SA v Avalon
Maritime Ltd (No 1) 1991 4 All ER 779

14 Trustor AB v Smallbone (No 2)
2001 1 WLR 1177

15 Ben Hashem v Al Shayif 2009
1 FLR 115

16 VTB Capital plc v Nutritek
Internatinal Corpn 2012 2 Lloyds Rep 313

17 Gilford Motor Co Ltd v Home 1933
Ch 935

18 Jones v Lipman 1962 1 WLR 832

19 Gencor ACP Ltd v Dalby 2000
2 BCLC 734

20 Trustor AB v Smallbone (No 2)
2001 1 WLR 1177

21 Gencor ACP Ltd v Dalby 2000
2 BCLC 734

22 Trustor AB v Smallbone (No 2)
2001 1 WLR 1177

23 Prest v Petrodel Resources
Ltd 2013UKSC 34 (at para 32)

24 Gencor ACP Ltd v Dalby 2000
2 BCLC 734

25 Prest v Petrodel Resources
Ltd 2013UKSC 34 (at para 31)

26 Gilford Motor Co Ltd v Home 1933
Ch 935

27 Jones v Lipman 1962 1 WLR 832

28 Prest v Petrodel Resources
Ltd 2013UKSC 34 (at para 33

29 Salomon v Salomon 1897 AC 22

30 VTB Capital plc v Nutritek
Internatinal Corpn 2012 2 Lloyds Rep 313

31 Prest v Petrodel Resources
Ltd 2013UKSC 34 (at para 26)

32 VTB Capital plc v Nutritek
Internatinal Corpn 2012 2 Lloyds Rep 313

33 Prest v Petrodel Resources
Ltd 2013UKSC 34 (at para 34)

34 Prest v Petrodel Resources
Ltd 2013UKSC 34 (at para 34)

35 Prest v Petrodel Resources
Ltd 2013UKSC 34 (at para 27)

36 Prest v Petrodel Resources
Ltd 2013UKSC 34

37 Prest v Petrodel Resources
Ltd 2013UKSC 34