The corporate veil can be pierced Prest v. Petrodel Resources

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Posted in:Corporate and Commercial|June 25, 2013 | Join the mailing list

The UK Supreme Court has released a new judgment addressing the ability of judges to "pierce the corporate veil" (connecting companies who as a general rule enjoy separate legal identities).

Prest v Petrodel Resources Ltd, [2013] UKSC 34 ("Prest") follows the same Court’s decision in VTB Capital Plc v Nutritek International Corp, [2013] UKSC 5, representing a significant change in opinion.  Prest answers the question left open
in VTB Capital, namely, whether the jurisdiction to pierce the corporate veil exists.  According to Prest, the corporate veil may be pierced where exceptional circumstances warrant it and establishes the test for doing so.

Prest was the ex-wife of a man who owned a series of related companies.  Throughout the proceedings her ex-husband had failed to comply with the duty to make full disclosure of his finances, which the Supreme Court "characterised by persistent
obstruction, obfuscation and deceit, and a contumelious refusal to comply with rules of court and specific orders".

At trial, Moylan J. awarded in favour of the appellant a £17.5 million lump sum payment and the £4 million matrimonial home.  He also ordered that three of the respondent companies controlled by the ex-husband were to convey certain assets
to Prest in satisfaction of the judgment.  Moylan J. recognised that he would not ordinarily be permitted to pierce the respondents’ corporate veils, however, that a wider jurisdiction to pierce the corporate veil was available under the Matrimonial Causes
Act 1973 (U.K.) than existed at common law.

Moylan J.’s ruling was set aside by the English Court of Appeal, finding there was no evidence suggesting the legal personalities of the respondents had been abused for an improper purpose.

The UK Supreme Court unanimously overturned the Court of Appeal’s judgment.  The Supreme Court agreed that the corporate veils of the respondents should not be pierced at common law, and that there was no wider jurisdiction under the Matrimonial
Causes Act.  However, it ultimately found the respondents could be ordered to convey the properties to the appellant, since they held them on a resulting trust for the ex-husband.  The Court through its judgment discussed in detail the issue of piercing the
corporate veil.

The leading judgment was delivered by Lord Sumption.  In a significant development, Lord Sumption established the jurisdiction to pierce the corporate veil on the idea of avoiding fraudulent conduct.  He then reviewed the English law relating
to the corporate veil concluding that the ability to pierce the veil is "well established" suggesting "the recognition 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".

Lord Sumption’s judgment distinguishes between cases that apply what he terms the "concealment" principle" and the "evasion" principle:

"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 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.  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.  The evasion principle
is different.  It is that 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.  Many cases will fall into both categories, but in some circumstances the difference between them may be critical".

In the end, Lord Sumption proposed the following test for piercing the corporate veil:

"I conclude that there is a limited principle of English law which applies 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.  The court may then 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. …I consider that if it is not necessary to pierce the corporate veil, it is not appropriate to do so, because on that footing there is no public policy imperative which justifies that course".

Although the other Law Lords generally agreed with Lord Sumption, four of the Law Lords questioned whether the jurisdiction to pierce the veil would truly be limited to instances of "evasion" in future cases.  Lady Hale and Lord Wilson doubted
"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".  In their view, "[t]hey 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".

Although decided in the context of a matrimonial dispute, Prest will become a key corporate law judgment.  Lord Sumption states a clear legal test for piercing the corporate veil, limiting them to cases where piercing the veil is the only
way of depriving a company of an advantage they would otherwise obtain from the controlling mind’s use of the company’s legal personality to deliberately evade enforcement of an existing legal obligation or liability.

Further concurring judgments leave room for additional exceptions to be established however, this is "likely to be very rare and that no-one should be encouraged to think that any further exception, in addition to the evasion principle, will
be easy to establish".  In practice veil-piercing will largely be limited to cases based upon Lord Sumption’s evasion principle.

Should you have any concerns regarding your company structure and the varying obligations of individual companies, or seek guidance and advice in relation to existing group company commitments please contact Stephen Foster, Head of
Corporate at
stephenf@berg.co.uk or by telephoning 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice.  No responsibility for article’s accuracy or correctness is assumed by Berg or any of its partners or employees. 
Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.

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