LLM Postgraduate Business Law Essay (Real Example)
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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
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. One judicial doctrine that has been said to be 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 whether 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. This is more commonly known as ‘piercing the corporate veil’. In Prest v Petrodel Resources Ltd[3], the UK Supreme Court has recently reviewed the English law in this area, concluding that the Court has a distinct but limited power to ignore separate corporate personality but, whilst 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.
There is very little coherence or principle in the jurisprudence of the veil. The Prest case examines the ‘lifting the veil jurisprudence’. Lord Sumption helpfully notes that most of the statements of principle governing the veil jurisprudence are ‘obiter’, because the corporate veil was not pierced. This makes it problematic to establish the exact principles and rules for lifting the corporate veil. 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 the Prest decision , it is important to examine and evaluate the cases that exemplify different explanations offered by the judges that justify the decision to lift the veil.
In the case of Woolfson and Strathclyde, Lord Keith of Kinkel notes that the veil may be lifted in the circumstances where the company is a “mere facade concealing the true facts”[4]. 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”[5]. The later case of Adams v Cape provided a benchmark for the subsequent courts to follow because it considers the situations in which the corporate veil can be lifted. Fraud as a reason for lifting the corporate veil was the accepted argument that received most support in the subsequent cases. A variety of metaphors were used to describe this prevailing argument such as facade, mask, cloak, device and puppet. However, these metaphors have caused “confusion and uncertainty in the law” since they risk assisting moral indignation to triumph over legal principles”[6]. In the Prest case, 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’.[7]
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[8]”.
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”[9]
However, this one circumstance applies only when “all other, more conventional remedies have proved to be of no assistance”[10]
The Prest case confines the veil piercing jurisdiction 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. It is apparent that there must be an evasion of a pre-existing obligation by a party 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[11] 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.[12] Similarly, in Dadourian Group International Inc v Simms[13]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”[14].
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 Plc v Nutritek International Group Plc[15] 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 making a party controlling a company liable for 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.[16] The decision in VTB Capital Plc 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, the 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[17] in VTB Capital Plc 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[18] 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 established a narrow basis for “piercing” the corporate veil whilst the basis for “lifting” the corporate veil 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 submission about it.[19] It would seem that, as the piercing jurisdiction withers into obsolescence, the debate as to the extent of exceptions to the Salomon principle continues with just a change in terminology, the question now being as to the scope of the jurisdiction to lift the corporate veil.
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”[20]. 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 Co Ltd [1897] 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”.[21] In Antonio Gramsci Shipping Corporation v Lembergs[22] 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”.[23]
In conclusion, the decision in Prest v Petrodel Resources Ltd acknowledged that there is a very limited piercing jurisdiction when the English courts are entitled to disregard the separate legal personality established in Salomon and identify a company with its controller. Yet, the recognition of the veil piercing jurisdiction in Prest is by no means a departure from the jurisprudence of lifting the veil because Lord Sumption quite clearly stated that he is unwilling to explain the “consensus out of existence” because the recongnition of a “limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse”.[24] Nevertheless, the piercing veil jurisdiction is very limited and can only be invoked in the exceptional cases involving deliberate evasion and only other more conventional remedies have proved inadequate. This means that piercing jurisdiction will only be applied in very rare and limited cases and in practice “piercing the corporate veil can be expected to wither into obscurity”[25] Lord Sumption’s has formulated a legal test for piercing the veil which gives more certainty to the previously incoherent judicial statements on the jurisprudence of ‘lifting the veil’ and helps to categorise the cases which should theoretically help to identify the circumstances in which the veil piercing jurisdiction may be applied. Nevertheless, the Prest decision is not a “new departure” because it simply leaves a narrow veil piercing jurisdiction and does not explore a line between piercing and some wider jurisdiction to lift the corporate veil. 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”[26].
Bibliography
UK Cases
Adams v Cape Industries Plc [1990] B.C.L.C. 479
Aerostar Maintenance International Ltd v Wilson [2010] EWHC 2032
Alliance Bank JSC v Aquanta Corp [2012] 1 Lloyd's Rep. 181.
Barclay Pharmaceuticals Ltd v Waypharm LP [2012] EWHC 306
Belmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch. 250
Ben Hashem v Ali Shayif [2009] 1 F.L.R. 115
British Thompson-Houston Co Ltd v Sterling Accessories Ltd [1924] 2 Ch. 33
Brumder v Motornet Service & Repairs Ltd [2013] 1 B.C.L.C. 58
Chandler v Cape Plc [2012] 3 All E.R 640
Commercial Solvents Corp v EC Commission [1974] E.C.R. 223
Dadourian Group International Inc v Simms [2006] EWHC 2973
Daimler v Continental Tyre Co [1916] 2 A.C. 307
Firestone Tyre & Rubber Co Ltd v Llewellin (Inspector of Taxes) [1957] 1 All E.R. 561
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.
Macaura v Northern Assurance Co Ltd [1925] A.C. 619
MacDonald Dickens & Macklin v Costello [2012] Q.B. 244 (CA)
Merchandise Transport Ltd v British Transport Commission [1961] 3 All E.R. 495
Ord v Belhaven [1998] 2 B.C.L.C. 447
v Sale [2013] EWCA Crim 1306
v Waya [2012] 3 W.L.R. 1138
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Stone & Rolls Ltd v Moore Stephens [2009] 2 B.C.L.C. 563
Trustor v Smallbone [2001] 2 B.C.L.C. 436
Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638
VTB Capital Plc v Nutritek International Corpn [2012] 2 B.C.L.C. 437
Witting, “Intra-corporate conspiracy an intriguing prospect” (2013) C.L.J. 178
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
Campbell & Armour, “Demystifying the Civil Liability of Corporate Agents” (2003) C.L.J. 290
Davies, “Auditors' Liability: No need to detect fraud” (2010) C.L.J. 505
Ferran, “Corporate Attribution and the directing mind and will” (2011) 127 L.Q.R. 239
Hannigan, “Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company”, (2013), I.J. 50.
Lo, “Liability of directors as joint tortfeasors” (2009) J.B.L. 109
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
Noonan & Watson, “Directors' Tortious Liability--Standard Chartered Bank and the Restoration of Sanity” (2004) J.B.L. 539
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)
- Rawls, A Theory of Justice, (Cambridge MA: The Belknap Press of Harvard University Press, 1971).
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)
Publications & Guides
Department for Business, Innovation and Skills, Transparency & Trust: Enhancing the transparency of UK Company Ownership and increasing trust in UK Business, Discussion Paper, July 2013, BIS/13/959
[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] Prest v Petrodel Resources Ltd [2013] UKSC 34
[4] Woolfson v Strathclyde Regional Council 1978 S.C. (HL) 90 at 96
[5] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Neuberger at [123].
[6] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Neuberger at [124]
[7] 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)
[8] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Sumption at [35] and Lord Neuberger at [81]
[9] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Sumption at [35]
[10] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Neuberger at [63]
[11]Yukong Line v Rendsburg Investment Corp [1998] 2 B.C.L.C. 485.
[12]See Ord v Belhaven Pubs Ltd [1998] 2 B.C.L.C. 447 at 458.
[13]Dadourian Group International Inc v Simms [2006] EWHC 2973.
[14] Dadourian Group International Inc v Simms [2006] EWHC 2973, para.686.
[15] VTB Capital Plc v Nutritek International Group Plc [2013] 1 B.C.L.C. 179.
[16] 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).
[17] VTB Capital Plc v Nutritek International Group Plc [2013] 1 B.C.L.C. 179, paras 118-119.
[18] La Générale des Carrières et des Mines v FG Hemisphere Associates LLC [2013] 1 All E.R. 409 (PC), para.30.
[19] Prest v Petrodel Resources Ltd [2013] 3 W.L.R. 1, para.103.
[20] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Neuberger at [64]
[21] Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Mance at [100] and Lord Clarke at [103]
[22] Antonio Gramsci Shipping Corporation v Lembergs [2013] EWCA Civ 730, LTL 19/6/2013 at [66]
[23] Stephen Mayson, Derek French & Christopher Ryan, Company Law, (30th edition, Oxford University Press, 2013) xxix
[24] Prest v Petrodel Resources Ltd [2013] UKSC 34 p.27
[25] Hannigan, “Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company”, (2013), I.J. 50, 37.
[26] Hannigan, “Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the one-man company”, (2013), I.J. 50, 39.
