The Last Word on Piercing the Corporate Veil

piercing the corporate veil, D&O insurance, directors and officers, English law, Yasmin Prest, Prest v Petrodel Resources Limited and others

On 12 June 2013, The Supreme Court handed down a judgment in a matrimonial case, Prest v Petrodel Resources Limited and others, which clarifies English law on the extent to which, and circumstances in which, a Court may be prepared to lift the corporate veil in order to fix liability on those (usually the owners of companies) who seek shelter from their personal liability. The issue in this case was whether the Court had the power, as part of the divorce settlement, to transfer to Yasmin Prest title in seven properties owned by companies which in turn were owned or controlled by her former husband.

The Leading Judgment was delivered by the recently elevated Lord Sumption, the first English judge to be appointed straight from the Bar to the highest court in the land. Lord Sumption began by affirming the classic rule of English company law to the effect that:

“Subject to very limited exceptions, most of which are statutory, a company is a legal entity distinct from its shareholders. It has rights and liabilities of its own which are distinct from those of its shareholders. Its property is its own, and not that of its shareholders. In Salomon v A Salomon and Co Ltd [1897] AC 22, the House of Lords held that these principles applied as much to a company that was wholly owned and controlled by one man as to any other company.”

Piercing the Corporate Veil Explained

Lord Sumption then pointed out that:

“Piercing the corporate veil” is an expression rather indiscriminately used to describe a number of different things. Properly speaking, it means disregarding the separate personality of the company. There is a range of situations in which the law attributes the acts or property of a company to those who control it, without disregarding its separate legal personality… For specific statutory purposes, a company’s legal responsibility may be engaged by the acts or business of an associated company. Examples are the provisions of the Companies Acts governing group accounts or the rules governing infringements of competition law by “firms”, which may include groups of companies conducting the relevant business as an economic unit….But when we speak of piercing the corporate veil, we are not, or should not be, speaking of any of these situations.”

He then conducted a detailed review of the main English authorities on the circumstances in which corporate veil can be lifted before concluding: “In my view, the principle that the court may be justified in piercing the corporate veil if a company’s separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities. “ He then arrives at the nub of the issue which is how a Court should go about establishing “relevant wrongdoing”. In this case the evidence was that Mr Prest had not originally placed the seven properties into corporate ownership to prevent his wife from gaining ownership of them in any subsequent divorce proceedings or otherwise. Instead the evidence was that he had done so for “wealth creation and tax avoidance”. ( link to my other recent blog on this issue). There was therefore no “relevant wrongdoing”.

There was, however, evidence to suggest that Mr. Prest was using the companies to conceal the true position and to frustrate attempts by the courts to establish the truth. That did not mean the Court could not look behind the corporate structure to understand the position. But it did mean that the Court could not draw back the corporate veil so as to disregard the existence of the companies. In order to do that, the facts would have had to have shown that Mr Prest had deliberately sought to evade an existing legal obligation or liability by seeking to interpose a company under his control. This distinction is absolutely central to the principle of lifting the corporate veil.

Had Lord Sumption stopped there, Yasmin Prest would undoubtedly have lost her case. In fact she won! How was that achieved? The answer is that the Court resorted to principles of trust law as opposed to company law. These principles allow an English court in particular circumstances to look behind the legal owner of an asset in order to conclude that such owner is holding the asset in trust for someone else. In a matrimonial case such as this, where the evidence was that Mr Prest was seeking to conceal the true position from the Court, it was also open to the Court to draw adverse inferences to, in effect, any gaps in the evidence as to the true ownership of the assets in question. On this basis Lord Sumption concluded, and all of the other Supreme Court Judges agreed, that all seven disputed properties owned by his companies were held on trust for Mr Prest and could accordingly be transferred to his former wife.

The Final Word

It is perhaps strange that it took a matrimonial case to shine a clear and strong light on some 80 years of sometimes opaque English case law on the extent to which the principle of piercing the corporate veil properly forms part of English law as an exception to the overriding principle of separate corporate personality. The last word on the extent of this principle must be left to Lord Sumption who spells it out very clearly 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.”

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Directors & Officers, Executive Risk

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