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Martin KenneyManaging Partner at Martin Kenney & Co., Solicitors
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To Pierce or not to Pierce ?

July 01, 2013 by Martin Kenney 1 Comment

 

   

That was the question before the U.K. Supreme Court in the case of Prest v Petrodel Resources Limited & Others and answered in the negative in the much awaited and by now heavily analysed judgment issued in June of this year and reported at [2013] UKSC 34.  In the end the Supreme Court used trust law rather than company law to hold that seven disputed properties in matrimonial proceedings were in the particular circumstances of the case, held on trust for the husband (even though held in fact by his companies).  While the Court did not resort to piercing the company veil it did provide some useful guidance on the circumstances in which this remedy will be appropriate.   

 

 The concept of “piercing” the corporate veil can in effect trace its roots back to the English case of Gilford Motor Co. v. Horne [1933] 1 Ch 935 where Lord Hanworth MR referred to the company as having been "formed as a device, a stratagem, in order to mask the effective carrying on of the business of Mr E B Horne." He went on to describe the company as "a mere cloak or a sham", adopting, as did both Lawrence LJ and Romer LJ the phrase used by Lindley LJ in Smith v Hancock [1894] 2 Ch 377 at page 385.

    

 The terminology used in various cases of „piercing“ however has often given rise to confusion.  Some judges prefer to draw the curtain or lift the facade or draw back the veil.  Lord Sumption in the Supreme Court described the terms "façade" or "sham" as having a "protean" meaning, "readily taking on various shapes or forms".  Lord Walker expressed the view that the doctrine:    

 

 "…is not a doctrine at all, in the sense of a coherent principle or rule of law.  It is simply a label – often as Lord Sumption observes, used indiscriminately – to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a body corporate reaffirmed by the House of Lords in Salomon v A Salomon and Co Ltd [1897] AC 22" 

     

 Their Lordship had the benefit of some relatively recent pronouncements on ths topic.  In Ben Hashem v Ali Shayif  (2008) EWHC 2380 the Court laid out the principles which are deduced from the authorities:     

       Ownership and control of a company are not of themselves sufficient to justify piercing the veil.     

       The court cannot pierce the corporate veil, even where there is no unconnected third party involved, merely because it is thought to be necessary in the interests of justice.     

       The corporate veil can be pierced only if there is some "impropriety"     

       Above notwithstanding, the court cannot pierce the corporate veil merely because the company is involved in some impropriety. The impropriety must be linked to the use of the company structure to avoid or conceal liability.     

       If the court is to pierce the veil it is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is, (mis)use of the company by them as a device or façade to conceal their wrongdoing.     

       The question is whether a company is being used as a façade at the time of the relevant transaction(s).       

 

 As a matter of law, control of a company (even if established,) is not sufficient to permit a court to pierce the corporate veil. There has to be some relevant form of impropriety, that is, some impropriety or wrongdoing by an individual in which the company structure is being used by the wrongdoer so as to avoid personal liability for his wrongdoing.  

       

  In Hashem the court found that while the husband was "heavily involved" and the "dominant" director, it did not show the Company to have been, or to be, the husband's alter ego, any more than it shows the other directors to have been his stooges or mere ciphers.          

 

  “The common theme running through all the cases in which the court has been willing to pierce the veil is that the company was being used by its controller in an attempt to immunise himself from liability for some wrongdoing which existed entirely dehors the company. It is therefore necessary to identify the relevant wrongdoing”

      

 In VTB Capital plc v Nutritek International Corp [2012] EWCA Civ 808 the Court of Appeal approved, with one alteration, the principles on which the court may pierce the corporate veil, as set out in Hashem v Shayif.     

  

 In Hashem, it was held that the court will pierce the veil only so far as is necessary to provide a remedy for the particular wrong which the puppeteers have done.  The Court of Appeal agreed that the veil may be pierced even where there are other remedies available against the wrongdoers for the wrong they have committed. The Court also agreed that the relevant wrongdoing must be an independent wrong which involves the fraudulent or dishonest misuse of the company’s corporate personality for the purpose of concealing the true facts (para 80).  Perhaps most importantly the Court confirmed that there was no exception simply in the interests of justice.   

 

 Lord Sumption in Petrodel  summarised the limit of the principle of "piercing the corporate veil" at paragraph 35 of the judgment as follows:    

 

 "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.  Like Munby J in Ben Hashem, 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."    

 

 Lord Sumption appears to conclude that in a case of concealment it is not necessary to “pierce” because in his view the “concealment principle is legally banal and does not involve piercing the corporate veil at all.   It is the imposition 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 "façade" but only looking behind it to discover the facts which the corporate structure is concealing.  The evasion principle is different.” So in a case of concealment the court is just “looking behind the facade” whereas in a case of evasion, they are piercing the veil.  In this regard it is It is worth noting that Lord Clarke said that he agreed:   

 

 "that the court only has power to pierce the corporate veil when all other more conventional remedies have proved to be of no assistance. It is thus likely to be deployed in a very rare case. Lord Sumption may be right to say that it will only be done in a case of evasion, as opposed to concealment, where it is not necessary. However, this was not a distinction that was discussed in the course of the argument and, to my mind, should not be definitively adopted unless and until the court has heard detailed submissions upon it. I agree with Lord Mance that it is often dangerous to seek to foreclose all possible future situations which may arise and, like him, I would not wish to do so." 

 

While it appears that the Supreme Court has limited the doctrine considerably, justice was nonetheless achieved albeit via a different route. The judgment does however represent a return to the unquestioning respect for the principle of separate corporate personality school of thought, a welcome development for many who may not have the best intentions.   

    

 

  

   

  

 

 

  

 

 

 

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1 COMMENTS

  • PMG
    By PMGon Tuesday, August 6, 2013 4:38:05 AM

    Martin FYI Lord Sumption was clear that concealment is not a ground upon which the corporate veil could be lifted. Only the evasion principle was endorsed by Lord Sumption. Paul McGrath QC

      Replies(2)
      • Martin Kenney

        Dear Paul, further to reply above I see that some of my post didn't make it in, I wanted to refer to Lord Clarke's judgment where he said that he agreed: "that the court only has power to pierce the corporate veil when all other more conventional remedies have proved to be of no assistance. It is thus likely to be deployed in a very rare case. Lord Sumption may be right to say that it will only be done in a case of evasion, as opposed to concealment, where it is not necessary. However, this was not a distinction that was discussed in the course of the argument and, to my mind, should not be definitively adopted unless and until the court has heard detailed submissions upon it. I agree with Lord Mance that it is often dangerous to seek to foreclose all possible future situations which may arise and, like him, I would not wish to do so." I have edited the original post, thank you for pointing that out!

        • Martin Kenney

          Thank you Paul, I have to admit I did find the manner which Lord Sumption reasoned his conclusion somewhat confusing, I think I am not alone there. Lord Sumption appears to conclude that in a case of concelament it is not necessary to “pierce” because in his view the “concealment principle is legally banal and does not involve piercing the corporate veil at all. It is the imposition 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 "façade" but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different.” So in a case of concealment the court is just “looking behind the facade” whereas in a case of evasion, they are piercing the veil. The end result is arguably the same however, thus my confusion. Lord Sumption summarises at paragraph 35: "…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." It is worth pointing out that Lord Clarke said that he agreed: "that the court only has power to pierce the corporate veil when all other more conventional remedies ha

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