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Recent Decisions Avail to Clarify 'Piercing the Corporate Veil'

About The Author

Thomas Horton (Former Writer)

Thomas studied Law at the University of Birmingham, and graduated with a 2:1 in July 2013. In the elapsed time, Thomas has worked for law firm HowardKennedyFsi LLP as a paralegal in the property department. Thomas has also been awarded a Major Scholarship by the Honourable Society of the Inner Temple and will begin the BPTC with City Law School in September 2014.

Company Law students, once having understood the basic formation and functioning of a company (and being shocked at the length of the Companies Act 2006) will learn the fundamental principle of company liability, as Lord Macnaghten summarized in Salomon v Salomon 1896 AC 22:

The company is at law a different person altogether a different person from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are the managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in manner provided by the Act.

The company, therefore, creates a separate legal entity that will be held accountable for its debts and liabilities. However, there are circumstances where litigants argue to “pierce the corporate veil” that a company can create in order to hold its shareholders to account. Accordingly, and following recent developments, it is necessary to answer the following question:

Is there a need for the corporate veil to be lifted, and for the persons or group of companies standing behind the veil to be answerable for the debts and liabilities that would normally be accountable to the company?

The beginning is usually a safe place to begin. Gilford Motor Company Ltd. v Horne [1933] Ch. 935 demonstrated that the court would go behind the legal entity of a company where it was being used as a ‘mere cloak or sham’ (Lord Hanworth MR). The company in that case had been established to allow the defendant to sidestep a restriction that had been imposed upon his future employment. The House of Lords provided the development of the modern doctrine in the decision of Woolfson v Strathclyde. Lord Keith held that the corporate veil should only be pierced, and the principle established in Salomon circumvented, when ‘special circumstances exist indicating that [the company] is a mere façade concealing the true facts.’

The difficulty of application and unwillingness of the courts to pierce the corporate veil occurs where a claimant is submitting the principle in order to have a greater claim in damages. For example, Lord Slade stated in Adams v Cape Industries Plc. [1990] Ch 43:

… [I]f a company chooses to arrange the affairs of its group in such a way that the business carried on in a particular foreign country is the business of its subsidiary and not its own, it is, in our judgment, entitled to do so. Neither in this class of case nor in any other class of case it open to this court to disregard the principle of Salomon… merely because it considers it just to do so.

The position thus explored leaves one uncertain as to when, if ever, the corporate veil will be pierced and upon what basis it would be a requirement to do so. Correspondingly, following the UK Supreme Court’s decision earlier this year in VTB Capital Plc. v Nutritek an understanding of the position of piercing the corporate veil, and of what can be expected in the future has been provided.

Firstly, Lord Neuberger PSC defined the position of the Supreme Court on the principle of piercing the corporate veil following counsel’s reliance upon Lord Keith’s obiter comments stated above:

The most that can be said about Woolfson from the perspective of VTB is that the House [of Lords] was prepared to assume that the power existed.

In consideration of the contortion of the doctrine of piercing the corporate veil that Lord Neuberger explores from a plethora of authorities, the Supreme Court agreed that it is unnecessary to decide ‘an issue of such general importance’ on this particular appeal (see paragraph 146 for the technicality that made the principle unnecessary to apply). As a matter of principle, however, Lord Neuberger demonstrated the cautiousness that courts should exert when considering the availability to pierce the corporate veil to remove the façade:

as they risk assisting moral indignation to triumph over legal principle, and, while they may enable the court arrive at a result which seems fair in the case in question, they can also risk causing confusion and uncertainty in the law.

The ability for the court to disregard the separate legal personality of the company would consequently undermine the legal status of being a registered company. Yet, when considering the recent reference by Lord Sumption JSC in Prest v Petrodel Resources Ltd to Denning LJ (as he then was) in Lazarus Estates v Beasley [1956] 1 QB 702, the principle of preventing fraud is a persuasive argument for developing the doctrine of piercing the corporate veil; ‘fraud unravels everything’. Accordingly, the heterogeneity of reasoning present in the development of the doctrine of lifting the corporate veil required demystification to facilitate the applicability of the principle.

Lord Sumption’s decision in Prest has furthered the reasoning of Lord Neuberger in VTB; by bringing a degree of clarity to the principle, Lord Sumption has been able to make do and mend the recognized and theorized doctrine. His Lordship divided the doctrine into two categories:

They can conveniently be called 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. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil.

In summary Lord Sumption then went on to state:

... [T]here 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… [T]he principle has been recognized 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.

Lord Neuberger, also delivering a judgment in Prest, brought a sense of circularity to this year’s appearances of the doctrine in the Supreme Court by accepting Lord Sumption’s view. Interestingly, and in light of considerable concern about the availability of the doctrine and the evident confusion it can create, Lord Neuberger stated that ‘the formulation is not, on analysis, a statement about piercing the corporate veil at all.’ The emphasis by Lord Neuberger in highlighting the prevention of fraud (Denning LJ’s decision in Lazarus) has provided a taxonomical vehicle to prevent companies being used as a façade and concurrently to demonstrate a respect for the fundamental principles of company law. Deductively, this approach appears to coincide with the approach originally taken in Gilford where the Court of Appeal’s decision was based upon the prevention of the deceitful use of a company to cover the actions of the owner of the company, or as Lawrence LJ more succinctly put it:

… [T]he defendant company was a mere channel used by the defendant Horne for the purpose of enabling him, for his own benefit, to obtain the advantage of the customers of the plaintiff company, and that therefore the defendant company ought to be restrained as well as the defendant Horne.

Clarification has been provided, and the availability for the court to be able to go behind the legal personality of the company has been established. In answer to my question posited at the beginning of this article: when a company is willingly utilized to evade a legal obligation or restriction, those utilizing the company for that purpose will not receive the liability benefits enjoyed by the separate legal entity of a company.

Nevertheless, as Lord Mance JSC stirred at the possibility of the doctrine being discussed further in his decision in VTB, his Lordship similarly stirs in Prest:

…[O]ne would wish to hear further argument on this or any other suggested exception [to the Salomon principle], in a case where it is directly relevant.

It remains to be seen how the principle would be applied in a case directly concerned with the piercing of the corporate veil. Until such a time, it is too soon to confirm whether the Supreme Court have provided a definitive application of the doctrine.

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Tagged: Commercial Law, Company Law, Supreme Court

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