How to Write a Masters LLM Law Essay (Post Graduate)
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‘Legal commentators have suggested that the UK Supreme Court’s decision in Prest v Petrodel Resources Limited adds nothing to the jurisprudence of “lifting the veil” but they are wrong. It is a new departure masquerading behind “the specific facts of the case”. ’
Critically evaluate this observation
In this essay I will consider the veil piercing jurisdiction in the background of the principle of separate legal personality of a company. Firstly, this essay will explore the pre-Prest legal position and the uncertainty and incoherence in relation to the veil piercing jurisdiction. Secondly, this essay will analyse the treatment of the veil piercing jurisdiction in the case of Prest by the judges and whether the recognition of the principle of piercing the veil does in fact constitute a departure for the purpose of the question. Thirdly, this essay will discuss the principles of concealment and evasion which give rise to piercing and lifting the veil principle and will evaluate whether this new distinction does in fact constitute a development of the veil piercing jurisprudence. Fourthly, this essay will assess the post-Prest decision and its effect on the future of the veil piercing jurisdiction.
The corporate veil is a fundamental principle of English law that a company has a distinct and separate legal identity from that of its owner and is enshrined in Salomon v A Salomon and Co Ltd[1] which establishes that “once the company is legally incorporate[d] it must be treated like any other independent person with its rights and liabilities appropriate to itself”[2]. The underlying idea of company law is that a company is a separate legal entity which takes an existence of its own: it can be a party to contracts, own property and have its own legal rights and obligations[3]. One judicial doctrine that develops as an exception to this rule is that of "piercing the corporate veil", by which a court disregards the separate legal personality of a company, typically in order to access its assets.
There has been extensive debate over situations which the court can ignore this separate legal personality and treat the company’s property, rights and obligations as belonging to the owner or the controller of the company.
In Prest v Petrodel Resources Ltd[4], the UK Supreme Court recently reviewed the scope of this judicial power and concluded that the courts has a distinct but limited power to disregard the corporate veil. In highlighting the very significant limits to that power, the Supreme Court pointed out that many other English law doctrines can be used to similar effect.
Traditionally, this is a contentious area of law as represented by the line of Court of Appeal cases decided by Lord Denning[5] and the landmark ruling in Adams v Cape Industries[6]. In recent years, more litigation ensued whereby the law have ingeniously developed solutions outside the remit of corporate veil-lifting, notably the pursuit of a negligence claim.[7]
The Prest case extensively reviews existing jurisprudence of case laws in defining the precise boundaries of the judicial veil-lifting power. Lord Sumption noted that most of the statements of principle governing the veil jurisprudence are ‘obiter’, because the corporate veil was not pierced. This makes it difficult to establish clear principles and rules for lifting the corporate veil.[8] Nevertheless, Lord Sumption recognises that there are rules of law governing the lifting the veil jurisprudence albeit not very coherent ones. The multiplicity of judicial statements is evidence that there is a “clear consensus that there are circumstances in which the court may pierce the corporate veil”. In order to understand the ‘lifting the veil’ jurisprudence and evaluate its development in the light of Prest, it is important to examine the cases that exemplifying different explanations offered by the judges that justify the decision to lift the veil.
In Woolfson v Strathclyde, Lord Keith noted that the veil may be lifted in the circumstances where the company is a “mere facade concealing the true facts”[9]. This indicates that the ‘lifting the veil’ jurisprudence exists but there is no precise basis or a set of rules for lifting the veil since “the precise nature, basis and meaning of the principle are all somewhat obscure”[10].
Slade LJ’s ruling in Adams v Cape provided a benchmark for subsequent courts to follow because it sets out three situations in which the corporate veil can be lifted.[11] The fraud category was the most developed exception to veil lifting in subsequent cases. A variety of metaphors were used to describe this prevailing argument such as facade, mask, cloak, device and puppet[12]. However, these metaphors have caused “confusion and uncertainty in the law since they risk assisting moral indignation to triumph over legal principles”[13]. In Prest, Lord Sumption recognises that such metaphors “beg too many questions to provide a satisfactory answer”. Lord Sumption identified two distinct principles behind these “protean terms”, the ‘concealment principle’ and the ‘evasion principle’.[14]
The “concealment principle” does not involve piercing the corporate veil and can be invoked to lift the corporate veil in the instance of
“interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming their identity is legally relevant. In these cases the court is not disregarding the ‘facade’, but only looking behind it to discover the facts which the corporate structure is concealing”.
Whereas the “evasion principle” allows the court to disregard the corporate veil when
“a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control
In this circumstance, the court may apply, what Lord Sumption calls the “evasion principle” to
“pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality”
However, this one circumstance applies only when “all other, more conventional remedies have proved to be of no assistance”
Consistent with the earlier decision in VTB Capital plc v Nutritek International Corp[18], Lord Sumption held that veil-lifting is limited to “evasion” cases where the separate legal personality of the interposed company will defeat or frustrate a right or liability which exists independently of the company.[19] Achieving coherence with the statement of principle in Woolfson, Lord Sumption identified that the real basis for veil-lifting is narrowed to situations of impropriety which commonly refers to fraud.
Hence, there must be an evasion of a pre-existing obligation by a party[21] and piercing must not be used as a means to hold that party liable for what in truth is an obligation of the company.
For example, in Yukong Line v Rendsburg Investment Corp a company wrongly repudiated a charterparty and on the same day, the director and controller transferred the assets of the repudiating company to another company. The veil piercing argument was rejected in this case because a controller of a company cannot be held liable for the company’s debts (company is an independent person, see the rule in Salomon). Furthermore, the requirement to exhaust all other alternative remedies underscores the restrictive effect of the veil piercing jurisdiction and consigns the authorities on veil piercing to legal history since these cases would now be decided on alternative remedies.
For example, Yukong Line would be decided on the basis of the Insolvency Act 1986 to challenge asset transfers between companies and conduct of controllers in allowing the transfer.[25] Similarly, in Dadourian Group International Inc v Simms[26] the company was liable to claimants for breach of contract because the company made fraudulent misrepresentations to conceal the identities of A and B, who were the controllers of the company. The argument to pierce the veil was rejected because
“The Claimants have their remedy … in the form of an action for fraudulent misrepresentation. There is simply no need, in order to give the Claimants redress for that misrepresentation, to lift the veil at all: indeed, to do so would achieve nothing in relation to that wrong”[27].
Despite the distinction between the “concealment” and “evasion” cases, substantively there is little difference since both distinctions relate to the “real actors” and there is somewhat a blurred distinction between the qualifying conditions of “legally relevant [identity]” and “evasion of rights or frustration of enforcement”. A clear-cut distinction would only exist if the controllers of a company became liable for the company’s obligations.
However, in VTB Capital, it was rejected that puppeteers (controllers) may be made a party to the puppet’s (company’s) contracts and thus liable. It was established that the veil piercing jurisdiction does not extend to make a party controlling a company liable for the company’s actions. Lord Sumption opined that the fundamental objection in this case was that piercing the corporate veil was being invoked so as to create a new liability that would not otherwise have existed.[28] The decision in VTB Capital establishes that the contractual obligations of the company cannot be extended to its controllers which lends less support to piercing the veil jurisdiction and protects the principle in Salomon.
Despite drawing a distinction between lifting and piercing, and evasion and concealment, in practice, there remains much difficulty in applying these distinctions consistently and objectively. Concealment is present in many evasion cases and similarly evasion is often achieved through concealment. Likewise, the language of piercing and lifting is applied interchangeably[29] in VTB Capital which suggests that in reality there is very little difference between “piercing” and “lifting” the corporate veil. This position is accepted in La Générale des Carrières et des Mines v FG Hemisphere Associates LLC[30] where it is considered whether it “would be appropriate to look through or past the entity to the state, lifting the veil of incorporation”. Substantively, the underlying rationale and effect for lifting and piercing the corporate veil is to deprive a person of an advantage otherwise to be derived from corporate personality (typically fraud).
The Prest decision has narrowed the scope for “piercing” the corporate veil whilst the basis for doing so is not given much discussion and the exact test for its application remains relatively nebulous. Perhaps it is prudent to proceed on the premise suggested by Lord Clarke that the distinction between evasion and concealment cases and the confinement of piercing to evasion cases until the court has heard detailed submissions about it.[31] It would seem that, as the veil-lifting jurisdiction withers into obsolescence, the debate as to the extent of exceptions to the Salomon principle continues with just a change in terminology, whilst the precise situations that the courts will lift the corporate veil continues to be a source of future legal debate.
Notwithstanding the above, it is vital to note that whilst in principle, there are limited circumstances in which the corporate veil may be pierced, “there is not a single instance in this jurisdiction where the doctrine has been invoked properly and successfully”[32]. This goes to show that that whilst the courts may apply the “evasion principle” in theory, “the strength of the principle in Salomon v Salomon and the number of other tools which the law has available mean that, if there are other situations in which piercing the veil may be relevant as a final fall-back, they are likely to be novel and very rare”.[33] In Antonio Gramsci Shipping Corporation v Lembergs[34] Beatson LJ doubted whether the law can be developed in this direction due to the lack of underlying principle for piercing the corporate veil and would crystallise into an “anomaly incapable of further development”.[35]
In conclusion, the decision in Prest represents a valuable addition to the modern jurisprudence on corporate veil lifting in three respects. Firstly, its clear statement of principle has restored much-needed certainty in the law and reaffirmed the spirit of Slade LJ’s decision in Adams. Lord Sumption emphasised that although the courts do retain the discretion to lift the veil, it will only be in cases of evasion where other more conventional remedies have been exhausted instead of sham cases.
Secondly, it firmly rejects any attempts by the parties to widen the scope of the veil-lifting jurisdiction. Thirdly, it creates a coherent link with previous Court of Appeal cases whereby the parties are encouraged to pursue alternative causes of action such as claims of negligence, trusts and agency law. In this sense, corporate veil-lifting acts as a remedy of last resort where all else have failed. As demonstrated on the facts of Prest itself, the resulting trust principle was used to achieve justice for the parties.[36] This means that veil-lifting will only be applied in very limited cases. Therefore, “piercing the corporate veil can be expected to wither into obscurity”[37]
Nevertheless, the Prest decision is not a “new departure” because it simply leaves a narrow veil-piercing jurisdiction and does not juridically explore the wider basis of veil-lifting. Whilst the distinction between concealment and evasion cases seems logical on its face, it is hardly helpful in practice because the effect remains the same. Thus, it is worthy to note that the more conventional remedies may prove “much more destructive of the corporate barrier than any doctrine of piercing or indeed lifting the corporate veil”[38]. Whilst this judgment shows a step in the right direction by the English Courts, the road ahead is still very long and winded since the veil lifting principle will need to be put to practice into order for the veil lifting principle to gain a legal meaning.
Bibliography
UK Cases
Adams v Cape Industries Plc [1990] B.C.L.C. 479
Ben Hashem v Ali Shayif [2009] 1 F.L.R. 115
Chandler v Cape Plc [2012] 3 All E.R 640
Creasey v Breachwood Motors Ltd. [1992] 10 ACLC 3052
Dadourian Group International Inc v Simms [2006] EWHC 2973
Daimler v Continental Tyre Co [1916] 2 A.C. 307
DHN Food Distributors Ltd. v. Tower Hamlets London Borough Council [1976] 1 WLR 852
Gilford Motor Co v Horne [1939] Ch. 935
Gramsci Shipping Corp v Stepanovs [2012] 1 B.C.L.C. 561
Jones v Lipman [1962] 1 W.L.R. 832; (1962) 106 S.J. 531.
Littlewoods Mail Order Stores v IRC [1969] 1 WLR 1214
MacDonald Dickens & Macklin v Costello [2012] Q.B. 244 (CA)
Ord v Belhaven [1998] 2 B.C.L.C. 447
Stone & Rolls Ltd v Moore Stephens [2009] 2 B.C.L.C. 563
The Coral Rose (No. 1) [1991] 4 All E.R. 769, 779)
Trustor v Smallbone [2001] 2 B.C.L.C. 436
VTB Capital Plc v Nutritek International Corpn [2012] 2 B.C.L.C. 437
Williams v Natural Life Health Foods Ltd [1998] UKHL 17
Yukong Line Ltd of Korea v Rendsburg Investments Corp of Liberia [1998] 2 B.C.L.C. 485
UK Statutes (Acts of Parliament)
Insolvency Act 1986
Matrimonial Causes Act 1973 s.24(1)(a).
Secondary Sources
Journal Articles
Brenda Hannigan, ‘Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company’ (2013) 50 Irish Jurist 11
Daniel Lightman and Emma Hargreaves, ‘Petrodel Resources Ltd v Prest: where are we now?’(2013) 19 Trusts & Trustees 877
Ernest Lim, ‘Salomon reigns’ (2013) 129 Law Quarterly Review 480
Hannigan, “Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company”, (2013), I.J. 50.
Moore, “A Temple Built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon & Co Ltd ” (2006) J.B.L. 180
Ottolenghi, “From Peeping Behind the Corporate Veil to Ignoring it Completely” (1990) 53 M.L.R. 338
Books
Hannigan, Company Law, 3rd edn (Oxford: Oxford University Press, 2012)
Len Sealy & Sarah Worthington, Sealy & Worthington’s Cases and Materials in Company Law, (10th edition, Oxford University Press, England 2013)
Stephen Mayson, Derek French & Christopher Ryan, Company Law, (30th edition, Oxford University Press, England 2013)
[1] Salomon v A Salomon and Co Ltd [1897] AC 22: century-old principle of the "separate juristic personality of a body corporate".
[2] Lord Halsbury LC in Salomon v A Salomon and Co Ltd [1897] AC 22 p. 30.
[3] Moore, “A Temple Built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon & Co Ltd ” (2006) J.B.L. 180
[4] Prest v Petrodel Resources Ltd [2013] UKSC 34
[5] Littlewoods Mail Order Stores v IRC [1969] 1 WLR 1214; DHN Food Distributors Ltd. v. Tower Hamlets London Borough Council [1976] 1 WLR 852
[6] [1990] Ch 433
[7] Williams v Natural Life Health Foods Ltd [1998] UKHL 17; Chandler v Cape plc [2012] EWCA Civ 525
[8] For example, in the family law case of Ben Hashem v Shayif [2008] EWHC 2380, Munby J first highlighted the inaccurate basis in which the veil was pierced in Trustor v Smallbone. This was adopted and approved by Lord Sumption in Prest.
[9] Woolfson v Strathclyde Regional Council 1978 S.C. (HL) 90 at 96
[10] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Neuberger at [123].
[11] This being the agency situation, the ‘single economic entity’ concept narrowed down and the fraud exception, which is termed in Woolfson as ‘a mere façade concealing the true facts’.
[12] Ottolenghi, “From Peeping Behind the Corporate Veil to Ignoring it Completely” (1990) 53 M.L.R. 338
[13] Prest v Petrodel Resources Ltd [2013] UKSC 34, per Lord Neuberger at [124]
[14] Lord Neuberger applied the alternative labels of “lifting” and “piercing” the corporate veil to Lord Sumption’s “evasion” and “concealment” principles: The Coral Rose (No. 1) [1991] 4 All E.R. 769, 779)
[15] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Sumption at [35] and Lord Neuberger at [81]
[16] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Sumption at [35]
[17] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Neuberger at [63]
[18] [2013] UKSC 5
[19] see for example, Jones v Lipman [1962] 1 WLR 832 and Gilford Motor Co Ltd. v Horne [1933] Ch 935
[20] see Ernest Lim, ‘Salomon reigns’ (2013) 129 Law Quarterly Review 480
[21] see also the interesting facts of Creasey v Breachwood Motors Ltd. [1992] 10 ACLC 3052
[22] see for example the facts of Trustor AB v Smallbone (No 2) [2001]. 1 WLR 1177 concerning the fraudulent act of siphoning company funds by a director.
[23]Yukong Line v Rendsburg Investment Corp [1998] 2 B.C.L.C. 485.
[24] The rationale of this point was explained in detail by Brenda Hannigan, ‘Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company’ (2013) 50 Irish Jurist 11
[25]See Ord v Belhaven Pubs Ltd [1998] 2 B.C.L.C. 447 at 458.
[26]Dadourian Group International Inc v Simms [2006] EWHC 2973.
[27] Dadourian Group International Inc v Simms [2006] EWHC 2973, para.686.
[28] VTB Capital Plc v Nutritek International Group Plc [2013] 3 W.L.R. 1, para.34. See also, MacDonald Dickens & Macklin v Costello [2012] Q.B. 244 (CA) (there was no basis for providing a remedy in restitution directly against the shareholders of a company because of the company's breach of contract).
[29] VTB Capital Plc v Nutritek International Group Plc [2013] 1 B.C.L.C. 179, paras 118-119.
[30] La Générale des Carrières et des Mines v FG Hemisphere Associates LLC [2013] 1 All E.R. 409 (PC), para.30.
[31] Prest v Petrodel Resources Ltd [2013] 3 W.L.R. 1, para.103.
[32] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Neuberger at [64]
[33] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Mance at [100] and Lord Clarke at [103]
[34] Antonio Gramsci Shipping Corporation v Lembergs [2013] EWCA Civ 730, LTL 19/6/2013 at [66]
[35] Stephen Mayson, Derek French & Christopher Ryan, Company Law, (30th edition, Oxford University Press, 2013) xxix
[36] see the clear explanation in Daniel Lightman and Emma Hargreaves, ‘Petrodel Resources Ltd v Prest: where are we now?’(2013) 19 Trusts & Trustees 877
[37] ibid. 22 , 37.
[38] ibid. 22, 39.
