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Salomon v Salomon Survives - Prest v Petrodel – The Supreme Court Rejects Attempts to Pierce the Corporate Veil – And Points Out That Attempts to Do So Are Usually Unnecessary Andrew Charman, St. Philips Chambers

  The Supreme Court decision in Prest v Petrodel Resources Limited [2013] UKSC 34 was long awaited, and its delivery was met with wide media coverage.  Most of that media coverage, at least on the day of the decision, was misleading or wrong. 

Broadsheet newspapers rushed to report on their websites and Twitter accounts that the Supreme Court pierced the corporate veil.  It didn’t.  Indeed, the case itself is a fine example of the important general point made by Lord Sumption, that when considering the piercing of the corporate veil, “in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and the controller which will make it unnecessary to pierce the corporate veil.”  

The case was an appeal by a wife who had brought a claim against companies controlled by the husband, seeking to have properties held by the companies transferred her in part satisfaction of an award of financial relief ordered in her favour.  The Court of Appeal had refused to order the transfer.  The Court considered three possible legal bases as to why the fact that the properties were held by the companies and not the husband might not be a bar to their being transferred to the wife:

    • That the case was within the exceptional category of cases where the Court may disregard the corporate veil in order to give her effective relief.

 

    • That Section 24 of the Matrimonial Causes Act 1973 confers a distinct power to disregard (or ‘pierce’) the corporate veil in matrimonial relief cases.

 

  • That in the circumstances of the case, the companies had received and held the properties on trust for the husband

 

The first two, which would have involved the piercing of the corporate veil, were rejected.  The third, which was not really argued but had been pleaded, was successful

     

A seven member Supreme Court considered these questions.  The result was unanimous on all three issues.  The lead judgment was that of Lord Sumption, with whom all six agreed as well as adding some observations of their own on one or more of the questions.  It is lucid and easy to read (for a Supreme Court judgment!) and a majority of it is devoted to the first question. 

The Piercing of the Corporate Veil Under the General Law

Lord Sumption observed that the separate personality and property of a company is fundamental to English law and also to economics, as it is the basis of limited companies, and they in turn have been the principal unit of commercial life for more than a century.

Lord Sumption also noted that the term “piercing the corporate veil” is widely misused and that the decided cases considering it are both confusing and confused; the area is “heavily burdened by authority, much of it characterised by incautious dicta and inadequate reasoning”. No doubt this is at least in part because “most of the statements of principle in the authorities are obiter because the corporate veil was not pierced” and “most cases in which the corporate veil was pierced could have been decided on other grounds”.

Lord Sumption analysed the existing authorities and identified two distinct principles pursuant to which courts had in the past stated that the corporate veil may be pierced; the concealment principle and the evasion principle.

The concealment principle has been applied where there has been the imposition of a company, or several companies, to conceal the real identity of wrongdoers. The court will always identify the real wrongdoers where their real identity is relevant. However, this is not a case of piercing the corporate veil, but merely lifting it. The court does not disregard the “façade” but looks behind it. Accordingly, cases which claim to be or have been regarded as cases where the veil has been ‘pierced’ pursuant to what is in truth the application of the concealment principle, are not cases about the piercing of the veil. The best known of these cases is Gilford Motor Co Ltd v Horne [1933] Ch. 935.

It is the evasion principle which may justify the court piercing the corporate veil. It applies where a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or the enforcement of which, he deliberately frustrates, by interposing a company under his control. As indicated above, where the necessary facts are made out, there will usually be a relationship between the company and its controller which renders the piercing of the veil unnecessary. It was also made clear that it will not be appropriate to pierce the corporate veil in any case where it is not strictly necessary to do so. In Prest the properties in issue were transferred to the companies long before the divorce proceedings, so the test could not be satisfied.

Some of the other judgments were wary of confining the circumstances when the corporate veil could be pierced so narrowly, but all agreed with Lord Sumption and none put forward any other test.

Section 24 Gives No Broader Basis for Piercing the Corporate Veil

The question of whether section 24 of the 1973 Act means that a broader principle may be applied in matrimonial proceedings (the basis of the decision at first instance) was roundly rejected. Lord Sumption met this argument with much the same incredulity as it has generally received from by company and chancery practitioners, and indeed anyone aware of the consequences for ordinary commercial dealings if it were right. Lord Sumption made the clear statement that “Courts exercising family jurisdiction do not occupy a desert island in which general legal concepts are suspended or mean something different. If a right of property exists, it exists in every division of the High Court and in every jurisdiction of the county courts. If it does not exist, it does not exist anywhere.” He could not have made his point clearer.

The Answer On the Facts – Basic Trust Principles and Lots of Adverse Inferences

On the facts of the case, all the justice was on the side of the wife and it was reassuring that the Supreme Court was able to do justice applying well-established trust principles. It found that the circumstances in which the properties were acquired meant that they were held by the companies on trust for the husband. Therefore, the beneficial interest in them was available to meet his obligations to his wife. There was nothing novel or new about this analysis, which is a matter of ordinary well-established trust law. However, the Supreme Court was able to reach such a conclusion because it went further than previous cases in being willing to draw inferences adverse to the husband and to the companies from their failure to put forward evidence, or to respond to the evidence put forward by the wife.

It is this willingness to draw adverse inferences from the deliberate failure to respond to the other side’s case and to put forward evidence contradicting it, that is an extension of the previous law and provides some grounds for excitement for matrimonial lawyers. A consequence of the decision in Prest will be the greater willingness of courts, and family courts in particular, to draw such adverse inferences. This should make it harder for individuals to use their companies to evade their liabilities and responsibilities to their spouses and others.

Conclusion

It is good that the wife was able to have recourse to the properties held by the companies in this case, and reassuring that she was able to do so by reliance on well-established trust principles, leaving the corporate veil fully intact and the circumstances when it can be pierced clarified.

Andrew Charman’s CV can be viewed by clicking here


Restraint of trade & commercial fraud claim. Principles applicable to findings of civil contempt against companies, company directors & individual employees for breach of undertakings given to settle a trial.

http://www.bailii.org/ew/cases/EWHC/QB/2013/1385.html

23 May 2013 

Ed Pepperall QC


Friday, 14 June 2013 00:00

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