Prest v Petrodel Resources 2013] UKSC 34: UK Supreme Court, Company Law, piercing the corporate veil.

June 18, 2013 |

In Prest v Petrodel Resources 2013] UKSC 34 the UK Supreme Court considered when it was appropriate to pierce the corporate veil of companies. It is a very significant decision which may be influential in Australia.

 FACTS

The appeal relates to ancillary relief sought by the respondent following divorce proceedings.  The Appellant, the wife, sought recovery under the Matrimonial Causes Act or orders which would permit the court to pierce the corporate veil of a number of companies which were wholly owned and controlled by the the husband.  At first instance the trial judge found there was no general principle which entitled him to reach the companies assets by piercing the corporate veil [6].  The wife was unsuccessful on appeal to the Court of Appeal.

DECISION

The wife was successful on the basis, the court found, that the husband, and not the companies, had originally provided the funds for the properties in dispute to be bought.  Trust law principles were applied and the court found that the companies held the properties in trust for him.  As he was ‘entitled’ to them the court could transfer them to the wife.

While the Appellant was unsuccessful in her appeal seeking order to pierce the corporate veil  the judgment was most significant in its consideration of the principle as to when the corporate veil may be pierced and the limitations on the doctrine.

LORD SUMPTION

His Lordship commenced his analysis by discussing what piercing the corporate veil actually means and, critically, what it doesn’t mean. As to its meaning he said “..properly speaking, it means disregarding the separate personality of the company…” where “.. a person who owns and controls a company is said in certain circumstances to be identified with it in law by virtue of that ownership and control [16].” he drew a distinction between those circumstances and where the law attributes the acts or property of the company to those who control including:

  1. where the controller may be personally liable, generally in addition to the company, for something that he has done as its agent or as a joint actor [16].
  2. where property legally vested in a company may belong beneficially to the controller, if the arrangements in relation to the property are such as to make the company its controller’s nominee or trustee for that purpose [16];
  3. equitable remedies, such as an injunction or specific performance may be available to compel the controller whose personal legal responsibility is engaged to exercise his control in a particular way[16].

As a starting point in the analysis, at [18], His Honour relied on the question of honest dealings.  He described the principle in the following terms:

“.. that the law defines the incidents of most legal relationships between persons (natural or artificial) on the fundamental assumption that their dealings are honest. The same legal incidents will not necessarily apply if they are not.”

and

“..there are limited circumstances in which the law treats the use of a company as a means of evading the law as dishonest for this purpose.”

His Lordship found, after reviewing the authorities, that the corporate veil may be piercedl “.. if a company’s separate legal personality is being abused for the purpose of some relevant wrongdoing”[27].  In more substantive terms he said, at [28], such action can occur when

“..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.

After reviewing particular cases involving the application of this principle his Lordship described the broader principle as:

“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 a 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. On the contrary, that is what incorporation is all about. “

(Emphasis added)

and, importantly, at [35]:

“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. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil. ..  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. ..For all of these reasons, the principle has been recognised far more often than it has been applied. But the recognition of a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company is, I believe, consistent with authority and with long-standing principles of legal policy.”

(Emphasis added)

However, Lord Sumption found that this principle did not apply in this proceeding  because the husband did not evade or frustrate any legal obligation to his wife. He also rejected the argument that a broader principle applies in matrimonial law by virtue of s 24(1)(a) of the Matrimonial Causes Act 1973.

LORD NEUBERGER

His Lordship reviewed the authorities in United Kingdom, United States and other common law jurisdictions (including Australia) and found there was significant confusion as it the concept and its application in practice, stating, at [75]:

The lack of any coherent principle in the application of the doctrine has been commented on judicially in many of the major common law jurisdictions. In this country, Clarke J in The Tjaskemolen [1997] 2 Lloyd’s Rep 465, 471 said that “[t]he cases have not worked out what is meant by ‘piercing the corporate veil'”. In Australia, in Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549, 567, Rogers AJA in the New South Wales Court of Appeal observed that “there is no common, unifying principle, which underlies the occasional decision of courts to pierce the corporate veil”, and that “there is no principled approach to be derived from the authorities”. In Constitution Insurance Co of Canada v Kosmopoulos [1987] 1 SCR 2, 10, Justice Wilson in the Supreme Court of Canada said that “[t]he law on when a court may … ‘[lift] the corporate veil’ … follows no consistent principle”. The New Zealand Court of Appeal in Attorney-General v Equiticorp Industries Group Ltd (In Statutory Management) [1996] 1 NZLR 528, 541, said that “‘to lift the corporate veil’ … is not a principle. It describes the process, but provides no guidance as to when it can be used.” In the South African Supreme Court decision, Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd 1995 (4) SA 790 (A), 802-803, Smalberger JA observed that “[t]he law is far from settled with regard to the circumstances in which it would be permissible to pierce the corporate veil”.

(Emphasis added)

He found it was important to maintain the doctrine but that it should only be invoked in the circumstances set out by Lord Sumption. He also found that the corporate veil should only be pierced when all other remedies were of no assistance.  At [83] he stated that the doctrine is not limited to piercing the corporate veil in that it is based on “fraud unravels everything”.  In that context his Lordship found the statement was based “..on a well-established principle, which exists independently of the doctrine.” Such a doctrine would apply as well to

“..a person who transfers assets to a spouse or civil partner, rather than to a company. Further, at least in some cases where it may be relied on, it could probably be analysed as being based on agency or trusteeship especially in the light of the words “under his control”. However, if either or both those points were correct, it would not undermine Lord Sumption’s characterisation of the doctrine: it would, if anything, serve to confirm the existence of the doctrine, albeit as an aspect of a more conventional principle.”

His Lordship sounded a note of caution finding that if the formulation is intended to go wider than the application of “fraud unravels everything” such a step would be a matter for the legislature [83].

LADY HALE

Her Lordship agreed with the conclusion reached by Lord Sumption however formulated a basis upon which the corporate veil could be pierced as being, [92]:

“..that the individuals who operate limited companies should not be allowed to take unconscionable advantage of the people with whom they do business. But what the cases do have in common is that the separate legal personality is being disregarded in order to obtain a remedy against someone other than the company in respect of a liability which would otherwise be that of the company alone (if it existed at all). In the converse case, where it is sought to convert the personal liability of the owner or controller into a liability of the company, it is usually more appropriate to rely upon the concepts of agency and of the “directing mind”.

LORDS MANCE, CLARKE and WALKER upheld the appeal on the grounds set out by Lord Sumption

ISSUE

 This judgement provides clarity as to when the common law will permit the corporate veil to be pierced. Lord Sumption’s detailed analysis provides a workable formulation of the doctrine and its limitations.  That analysis was accepted by their Lordships with some caution being injected by Lord Neuberger and a slight disagreement in the process of analysis but not the result by Lady Hale.  The use of the doctrine will be rare, as their Lordships noted, but in cases involving fraud or blatant evasion of legitimate processes through the use of corporate entities it may be used to good effect. It is persuasive authority.  The extent to which it will become part of the common law in Australia is a matter ultimately for the High Court.

Leave a Reply