Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34 (12 June 2013)

March 22, 2018/in Company /by Vivek Khanna LLB, LLM, Barrister at Law

This article will critically evaluate the significance of the Prest v Petrodel Resources Ltd[1] decision in light of the corporate veil doctrine. This essay will argue the decision has done little to fault the Salomon principle. It will present the view the Law Lords had of the “doctrine” to show it was not clear. It will then look at how the Supreme Court saw the origins of the “doctrine”. It will examine the concealment and evasion principle espoused by Lord Sumption. It will then examine how the old corporate veil cases have been reconciled. Then a concluding remark will be made about what the other judges thought.

Concept of separateness

In order to understand the circumstances where the court will pierce/lift the corporate veil it is essential to have a firm grasp of the concept of “the veil” itself. The concept of the corporate veil, also known as the Salomon Principle, separate legal personality amongst other names,[2] was established in Salomon v Salomon[3]. Here the House of Lords held that a company was effectively separate from Mr Salomon. Therefore Mr Salomon was not liable (personally) for the debts that Salomon Ltd had incurred. Lord Herschell said of the doctrine of separateness “does not in point of law…render the shareholders liable to indemnify the company against the debts which it incurs”.[4] Lord Macnaghten explained: “The company is at law a different person altogether from the subscribers…”.[5] With this in mind, to pierce or lift the veil of incorporation would be to find the shareholders liable. The question of when the courts will be prepared to “pierce the corporate veil” and disregard Salomon has quizzed judges, lawyers and academics. Therefore when Prest came before the Supreme Court this was an opportunity for the Law Lords to clarify this precise question although it was not wholly relevant in deciding the case.

Piercing the corporate veil – No Such Doctrine

Surprisingly Lord Neuberger said[6] that there never existed a clear invocation “of the doctrine” of “piercing the corporate veil” in 80 years since it was thought-out in Gilford Motor Co Ltd v Horne[7]. This has why the doctrine has faced so much criticism.[8] Perhaps it can be argued that this is not even a doctrine, but a thing that all have struggled to categorise. Lord Sumption[9] also refers to the “piercing the corporate veil” as an exception to the age old principle laid down in Salomon v A Salomon & Co Ltd [10] at the same time Lord Neuberger and Lord Clarke make reference to it being a “doctrine”. It is described by Lord Mance as “a metaphor”[11] while Lord Walker said “it is not a doctrine at all, in the sense of a coherent principle or rule of law. It is simply a label – often as Lord Sumption observes, used indiscriminately – to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a body corporate reaffirmed by the House of Lords inSalomon v A Salomon and Co Ltd”.[12]

The use of terms such as “veil”, “mask”, “façade” and “sham” are terms that have failed to provide certainty. Lord Sumption[13] described “façade” and “sham” as “protean” terms. What they are trying to present is a view that “piercing the corporate veil” can take on so many shapes and forms. Lord Neuberger cited C Mitchell, in “Lifting the Corporate Veil in the English Courts: An Empirical Study”[14] observes that “courts have often used conclusory terms to express their decisions on the point, which for all their vividness tell us nothing about the reasoning which underpins these decisions.”

The Origins of the principle

Lord Sumption in the Supreme Court embarked upon a survey of the cases in this area in order to avoid the uncertainty and to discover the principle that underpins the “doctrine’s” invocation. He pointing out that there exists an array of principles that achieve the same result and one of these is “the law defines the incidents of most legal relationships between persons (natural or artificial) on the fundamental assumption that their dealings are honest.” [15] He cites Lord Denning in Lazarus Estates Ltd v Beasley [16] who states: “Fraud unravels everything”. The decisions Lord Sumption highlighted illustrated a broader principle that “governs cases in which the benefit of some apparently absolute legal principle has been obtained by dishonesty”. Lord Sumption felt that the authorities showed that there was a set of circumstances in which the company was used as a vehicle of evading the law as dishonest for the purpose.

Munby J surveyed non-family and family cases on “piercing the corporate veil” in the case ofBen Hashem v Al Sharif [17] and from there articulated six principles to be applied in “piercing the corporate veil” type cases.[18] The court would then be minded to “pierce the corporate veil” in exceptional circumstances for the purposes of providing a remedy for the improper act that those controlling the company had done. It is important that the above six articulated principles, which result in the “piercing of the corporate veil”, only be used where all other, more traditional, were not suitable in the circumstances. The Court of Appeal in VTB Capital v Nutritek International Corpn[19] adopted the above six articulated principles. But they disagreed that it should be used as a last resort remedy. Lord Neuberger expressed his views of this, “I agree that, if the court has power to pierce the corporate veil, Munby J was correct in Ben Hashem v Al Shayif [20] to suggest that it could only do so in favour of a party when all other, more conventional, remedies have proved to be of no assistance (and therefore I disagree with the Court of Appeal in VTB,[21] who suggested otherwise.”[22] Moreover the court of Appeal when adopting the above six articulated principles stated: “the relevant wrongdoing must be in the nature of an independent wrong that involves the fraudulent or dishonest misuse of the corporate personality of the company for the purpose of concealing the true facts.”[23]

Concealment and Evasion

Lord Sumption felt the principle of concealment was commonplace “legally banal” and did not require piercing or disturbing the principle set down in Salomon. Thus concealment was only used when the controllers of a company were concealing their identity and the court was quite ready to look behind the “façade”, to discover the truth. Thus cconcealment is where the company is a “façade” and warrants as Ottolenghi[24] describes is merely “‘Peeping behind the Veil’, or lifting the veil is where the court temporarily suspends the Salomon Principle to determine who is behind it, who controls the company. Ottolenghi describes this as merely an”act of curiosity”, which is the “least offensive to the separate entity theory”. This poses the least problems for the Salmon principle. The evasion principle on the other hand was when the people behind the company were using it separateness to evade a legal responsibility they themselves had personally. By using the corporate structure and its separate legal personality they were trying to defeat their personal obligation. This in turn allowed the court to disregard or pierce the corporate veil. The evasion principle is where the company is involved in a sham and calls for piercing the veil. This is very different. Rather than simply putting the principle to one side temporarily, the court denies the Salomon principle, altogether. It is not clear sometimes which principle is at play and Lord Sumption felt many cases fell into both concealment and evasion. However, the distinction between them both remains crucial because it will ultimately lead to the court to “rightly or wrongly”, to pierce the corporate veil.[25] However it was contended by Lord Clarke that the distinction between evasion, and concealment should not be adopted until such time until it was discoursed in the course of the argument. In his words the distinction should not be “definitively adopted unless and until the court has heard detailed submissions upon it.”[26]

Reconciling Corporate Veil cases

When Lord Sumption analysed Gilford Motor Co v Horne[27]he contended that relief against Mr Horne the controller of the company under the concealment principle. Thus momentarily suspending the separateness of the corporate structure to see what was happening behind the company, an “act of curiosity”. However, when relief was granted against the company this occurred under the evasion principle, and the corporate veil pierced. This was explained by Lord Sumption where he stated: “Mr Horne’s personal creditors would not, for example, have been entitled simply by virtue of the facts found by Farwell J, to enforce their claims against the assets of the company.”[28] In the case of Jones v Lipman[29]similarly, the judge decreed specific performance against both Mr Lipman against Mr Lipman on the concealment principle. On the other hand the company Alamed Ltd was also a party to the specific performance on the evasion principle, and reference was made to the decision in Horne.

In all of the case that Lord Sumption considered his view was that the correct consideration was that relief in all cases was being provided by the courts under the concealment principle and not the evasion principle. Therefore the issue of “piercing the corporate veil” never arose, even if the court wrongly proceeded this is in fact was happening. In order for the evasion principle to come into play the controller of the company had to use the characteristics of the company’s separateness to evade a personal liability. In both Lipman and Horne the controllers of the companies had both accrued personal liability which was distinct from the company’s. But by involving the company’s separateness they have effectively to evade responsibility evokes the evasion principle and thus leads to the “piercing the corporate veil”. “These considerations reflect the broader principle that the corporate veil may be pierced only to prevent the abuse of corporate legal personality. It may be an abuse of the separate legal personality of the company to use it to evade the law or to frustrate its enforcement. It is not an 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.”[30] Lord Sumption endorsed Munby J in Ben Hashem v Al Sharif and then stated that the “piercing the corporate veil” doctrine is an important although has a limited place in English law.[31]

The Other Law Lords

The other Lords generally agreed with Lord Sumption. Lord Neuberger took the view that in both Horne and Lipman only the concealment principle came into play, so there was no requirement to “pierce the corporate veil.” Lord Lord Neuberger felt this was a useful tool for the judiciary. The doctrine was a “potentially valuable judicial tool to undo wrongdoing in some cases where no other principle is available”, provided that there was a coherent approach that courts could follow. For him it was important to be able to reconcile old decision and use the doctrine as a “practical solution”.[32] Lady Hale was doubtful if the “doctrine” could be encapsulated into a neat distinction of concealment and evasion, but that these form part of a broader principle to act with honestly in business. For Lord Mance this distinction was too narrow for all problems. He regarded the “piercing the corporate veil” as “a final fall-back” solution which would infrequently arise.[33] Lastly Lord Clarke was of the view that the distinction had not been the subject of submissions and it would have to be before it was fully adopted.

Bibliography

Easterbrook and Fischel, “Limited Liability and the Corporation” (1985) 52 Univ Chicago L Rev 89

Farrar, “Fraud, Fairness and Piercing the Corporate Veil” (1990) 16 Can Bus LJ 474

C Mitchell, in “Lifting the Corporate Veil in the English Courts: An Empirical Study” (1999) 3 Co Fin & Ins LR 15

Ireland, P., ‘The Triumph of the Company Legal Form, 1856-1914’, in Adams, J., (ed), Essays for Clive Schmitthoff, (1983), p.30

Neyers “Canadian Corporate Law, Veil-Piercing, and the Private Law Model Corporation” (2000) 50 Univ Toronto LJ 173

Michael “To Know a Veil” (2000) 26 J Corp Law 41

Payne, J., ‘Lifting the corporate veil: a reassessment of the fraud exception’, [1997], Cambridge Law Journal, 284

Ottolenghi, S., ‘From Peeping behind the corporate veil to ignoring it completely’, [1990] 53 MLR 338

Ramsay and Noakes, “Piercing the Corporate Veil in Australia” (2001) 19 C & SLJ 250

[1] [2013] UKSC 34

[2] Ireland, P., ‘The Triumph of the Company Legal Form, 1856-1914’, in Adams, J., (ed), Essays for

Clive Schmitthoff, (1983), p.30

[3] [1897] AC 22

[4] [1897] AC 22 at p.43

[5] [1897] AC 22 at p.51

[6] [ 2013] UKSC 34, see paragraph 79

[7] [1933] Ch 935

[8] Easterbrook and Fischel, “Limited Liability and the Corporation” (1985) 52 Univ Chicago L Rev 89; Farrar, “Fraud, Fairness and Piercing the Corporate Veil” (1990) 16 Can Bus LJ 474; C Mitchell, in “Lifting the Corporate Veil in the English Courts: An Empirical Study” (1999) 3 Co Fin & Ins LR 15; Neyers “Canadian Corporate Law, Veil-Piercing, and the Private Law Model Corporation” (2000) 50 Univ Toronto LJ 173; D Michael in “To Know a Veil” (2000) 26 J Corp Law 41; and Ramsay and Noakes, “Piercing the Corporate Veil in Australia” (2001) 19 C & SLJ 250

[9] [ 2013] UKSC 34, see paragraph 16

[10] [1897] AC 22

[11] [ 2013] UKSC 34, see paragraph 98

[12] [2013] UKSC 34, see paragraph 106

[13] [2013] UKSC 34, see paragraph 28

[14] (1999) 3 Co Fin & Ins LR 15, p.16

[15] [2013] UKSC 34, see paragraph 18

[16] [1956] 1 QB 702 at 712

[17] [2009] 1 FLR 115

[18] “(i) Ownership and control of a company were not enough to justify piercing the corporate veil; (ii) The court cannot pierce the corporate veil, even in the absence of third party interests in the company, merely because it is thought to be necessary in the interests of justice; (iii) The corporate veil can be pierced only if there is some impropriety; (iv) The impropriety in question must…be linked to the use of the company structure to avoid or conceal liability; (v) To justify piercing the corporate veil, there must be both control of the company by the wrongdoer(s) and impropriety, that is (mis)use of the company by them as a device or façade to conceal their wrongdoing; and (vi) The company may be a façade even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions.”

[19] [2012] 2 Lloyds Rep 313

[20] [2009] 1 FLR 115

[21] [2012] 2 Lloyd’s Rep 313, para 79,

[22] [2013] UKSC 34, see paragraph 62

[23] [2012] 2 Lloyds Rep 313, see paras 79—80

[24] Ottolenghi, S., ‘From Peeping behind the corporate veil to ignoring it completely’, [1990] 53 MLR 338

[25] [2013] UKSC 34, see paragraph 28

[26] [2013] UKSC 34, see paragraph 103

[27] [1933] Ch 935

[28] [2013] UKSC 34, see paragraph 29

[29] [1962] 1 WLR 832

[30] [2013] UKSC 34, see paragraph 34

[31] [2013] UKSC 34, see paragraph 35

[32] [2013] UKSC 34, see paragraph 80

[33] [2013] UKSC 34, see paragraph 100


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