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Supreme Court issues guidance on "Piercing the corporate veil"

09 July 2013

In what has been described as a “landmark ruling”, in Petrodel Resources Ltd v Prest [2013] UKSC 34 the Supreme Court has, for the second time this year, considered the question of “piercing the corporate veil”, this time in the context of matrimonial proceedings for ancillary relief.

Its relevance to divorce lawyers is self-evident, but the detailed judicial analysis dedicated to the question of whether the principle of “piercing the corporate veil” does and should exist is of general interest, as are the court’s views on what are its limitations and whether it has ever been appropriately applied.

Background

Subject to very limited exceptions (often statutory), it is a fundamental tenet of English law that a company has a separate legal personality from its shareholders. 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.

In matrimonial divorce proceedings for ancillary relief in the Family Division of the High Court, Moylan J ordered Michael Prest (MP), inter alia, to make a lump sum payment of GBP 17.5 million to his ex-wife, Yasmin Prest (YP). By way of partial satisfaction of that payment, the court directed MP to procure that certain companies in the Petrodel Group (the Companies) transfer seven UK properties (the Properties) to YP on the basis that the Companies were wholly-owned and controlled by MP and were, in essence, "[MP’s] money box which he use[d] at will". In making this order Moylan J relied on s24(1)(a) of the Matrimonial Causes Act 1973 (s24), which he said conferred a special jurisdiction on the court in matrimonial cases to "pierce the corporate veil". However, Moylan J concluded that there was no general principle of law entitling him to "pierce the corporate veil" to access the Companies assets because there was no relevant impropriety that would justify the Companies’ independent legal personalities being disregarded. MP appealed to the Court of Appeal which, by a majority of two to one, reversed Moylan J’s judgment and held that the court had had no jurisdiction to order the Companies to convey the Properties to YP in satisfaction of MP’s judgment debt. YP appealed the decision to the Supreme Court.

In the Supreme Court

The leading judgment was delivered by Lord Sumption, with whose reasoning the remaining six Law Lords broadly agreed. Against the backdrop of the founding legal principle of a company’s legal independence from its shareholders, Lord Sumption explained that there were three possible bases on which the court might access the Properties to satisfy the order against MP: (i) by the court’s general power to pierce the corporate veil; (ii) by a special power under s24 to pierce the corporate veil; or (iii) by virtue of MP’s beneficial ownership of the Properties in the specific circumstances of this case. The Supreme Court unanimously allowed YP’s appeal under (iii) based on the way in which the Properties were purchased, together with inferences drawn from the failure of one of MP’s witnesses to give evidence. However, the Supreme Court dismissed YP’s appeal insofar as it relied on piercing the corporate veil. The various Lords’ discussions on the "corporate veil" doctrine comprised the majority of the Supreme Court’s judgment and an analysis of where their views diverge and overlap forms the focus of this article.

"Unyielding rock" of company law: Salomon v A Salomon & Co Ltd

Each of the Law Lords took as their starting point for discussion the century-old principle of the "separate juristic personality of a body corporate", as laid down unanimously by the House of Lords in Salomon v A Salomon and Co Ltd [1897] AC 22. Out of this case was born, in the words of Lady Hale, "the legal structure of modern business." Lord Neuberger referred to academic analysis of it being the "unyielding rock" of corporate law. However, against this background, what (if anything) was the "corporate veil" doctrine, and when (if at all) should the court have the power to "pierce" it in the absence of statutory authority?

Doctrine, metaphor or label?

With the exception of Lords Mance and Walker (who respectively referred to "piercing the corporate veil" as a "metaphor" or "label" rather than a "doctrine"), the Law Lords broadly agreed that the law was incoherent and unclear but considered that it was a doctrine under English law. This was despite the fact that Lord Neuberger was initially "strongly attracted" by the prospect of giving the doctrine its "quietus" in part on the basis that he considered that it had not once been correctly or successfully applied in its supposed 80 years of existence since Gilford Motor Co Ltd v Horne [1933] Ch 1935. Lord Neuberger concluded that, despite receiving criticism from judicial and academic circles, it would be wrong to discard the doctrine because it represented a "potentially valuable judicial tool to undo wrongdoing in some cases, where no other principle is available". Similarly, Lord Sumption held that "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."

Where no other principle is available

The requirement that no other relief be available was another point on which all the Law Lords were largely in agreement, with Lords Sumption, Neuberger and Clarke each endorsing Munby J’s judgment in Ben Hashem v Al Shayif [2009] 1 FLR 115, to the extent that it held that if the court had the power to pierce the corporate veil, it could only do so when all other, more conventional, remedies had proved to be of no assistance. In this regard they disagreed with the Court of Appeal in VTB Capital v Nutritek plc [2012] 2 Lloyd’s Rep 313, which had suggested otherwise. This limited scope of the doctrine was supported by Lords Clarke and Mance, who thought that the cases in which the doctrine could be genuinely invoked would be "novel" and "very rare". Even Lord Walker, who did not agree that there was in fact a doctrine at all, acknowledged that the "metaphor" would operate only in a "small residual category" of cases.
 

Concealment or evasion?

In attempting to isolate the scope of the principle and nature of the wrongdoing that might justify piercing the corporate veil, Lord Sumption reviewed the case law and proposed (Lord Neuberger agreeing) that there were two types of case in which judges have (often incorrectly) described their decisions as being based on "lifting" or "piercing" the veil: (i) the "concealment principle" (where the "corporate veil" principle is not invoked at all because the court merely looks behind a corporate "façade" to discover what facts the corporate structure is concealing), and (ii) the "evasion principle" (where the principle is invoked in situations where there is a legal right against the person in control of a company (such right existing independently of the company’s involvement) and the company being interposed so that its separate legal personality will defeat the enforcement of that right). Lady Hale (with whom Lord Wilson agreed) was, however, dubious that all the cases could be classified neatly into cases of either concealment or evasion. Similarly, Lord Mance (with whom Lord Clarke agreed) did not wish to "foreclose all possible future situations which may arise" and was reluctant for a court to adopt this distinction unless and until it had heard detailed submissions on the matter.

Lord Sumption’s analysis of the authorities concluded with the following formulation: "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." Lord Neuberger agreed.

Comment:

The decision confirms that a court can disregard a company’s independent legal personality but that this will only be justified in very limited situations, and specifically where there is no other means of achieving justice so as to provide the public policy imperative for doing so. In this respect this decision is aligned with the Supreme Court’s decision in the case of VTB Capital plc v Nutritek International Corp & ors [2013] UKSC 5 (covered in the February 2013 edition of this Review) in which the Supreme Court refused to pierce the corporate veil in order to hold a non-contracting controlling party liable for its company’s contractual obligations.

It is also interesting to note Lord Neuberger’s comments that Lord Sumption’s formulation may not in fact be limited to piercing the corporate veil and that it would presumably apply equally to a person transferring assets to a spouse rather than a company.

To the extent that it is based on agency or Lord Denning’s 1956 dictum that "fraud unravels everything", it may in fact be just an aspect, or invocation of, a more conventional or well-established principle.

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.