PIERCING THE CORPORATE VEIL – Prest v. Petrodel Resources Ltd & Others. This Article is submitted by Seema Bindal
The principal of company law that is regarded as the most fundamental one is the legal personality which is accorded to a company by statue being distinct from its members. This principle acts as a major building block in shaping our legal and economic structure but is not wholly absolute. There have been instances when the courts have disregarded separate personality by asserting their power. This was done in order to view the company and its controller as one. However, the articulation of the scope and rationale of this power is very rare in the superior courts. This paper mainly focuses on the case of Prest v. Petrodel Resources Ltd & Others and the analysis of piercing the corporate veil.
When grumbling about the lack of internships, the law students often feel that : you wait ages for an internship, then three of four come along together. An analogy can be made between this and how the company lawyers might feel about the principle of piercing the corporate veil. Recently, rare judicial guidance on this issue emerged in England in the form of two decisions after a century of the passing of Salomon v. A Salomon & Co. Ltd. This issue of company law which was seen as notoriously obscure but at the same time turned the judicial spotlight towards it, is greatly welcomed. The most valuable is the detailed and unusual analysis of the issue present in English cases. The opportunity to widen and take stock of the law present in this area is through the new decisions.
In the case of VTB Capital, this doctrine was called into question by the courts as the English lawyers were not fond of lifting the corporate veil. However, the existence of the doctrine was confirmed in the case of Prest and it provided with the rationale behind lifting the corporate veil. The rule of last resort was created in the case of Prest, but, it was never applied in practice. Subsequently, a clear rationale was denied by the Court of Appeal for the doctrine in the case of Gramsci Shipping Corporation Lembergs .
THE EXISTING LAW: LACK OF A COHERENT PRINCIPLE
Piercing or lifting of the corporate veil means disregarding of the company’s separate personality which was accorded on its incorporation by the statue. The main objective for doing so is so that the company and the owner can be treated as one so that any liability of the company would be attached to the owner as well or vice versa. However, this principle claims to be invoked in various other contexts such as in order to avoid or obtain any statutory benefit or obligation.
No coherent single principle is established yet on when the corporate veil may be pierced. But, Lord Sumption through Prest gasped the endeavour and nettle to explain the rationale and rule of the doctrine.
MEANING AND RATIONALE OF VIEL PIERCING
Lord Sumption’s judgement in Prest began with answering what lifting the corporate veil means in a narrow sense. According to him, the usage of the expression should only be limited to the explanation of “true” exceptions regarding the separate property principle. Lord Sumption relies on what he calls the fundamental law assumption for evaluating a rationale concerning piercing the veil principle regarding honest dealings. This is often referred to as those legal relations in normal incidents between persons which are not be respected if their dealings are not honest as fraud unravels every-thing.
The case of Salomon v. Salomon has established that in UK the members of company are not liable to repay company debts beyond what they contributed initially to the company as a company has a separate legal entity to that of its members. However, there have been circumstances in which the court has pierced the corporate veil as it found the members of the liable for company actions. A separate corporate personality works as a shield for the fraud proceeds and also forms a vital component for various frauds. It is a part of the bedrock on which the global economy stands. The process of persuading a court in identifying a fraudulent person with a company which holds the benefit of the fraud resulting in achieving compensation for the fraud victims is called “piercing the corporate veil”.
FACTUAL BACKGROUND OF PREST
A wealthy couple, Mr. and Mrs. Prest were undergoing divorce proceedings who owned a matrimonial home in the UK and another house in Nevis. Mr Prest was the owner of various offshore companies and exercised total managerial control over them. Originally, the business of these companies was limited to owning residential properties which included the matrimonial home. However, the companies were subsequently used in his commodity business. It was contended by Mrs. Prest that properties held by various companies which were wholly controlled and owned by Mr. Prest were owned by him in reality as well and therefore, his wealth vastly exceeded this. These contentions was denied by Mr Prest. Moreover, he refused to disclose his assets as per the orders even though he claimed to be insolvent.
Unable to enforce any personal claim against Mr. Prest, Mrs Prest joined the companies as parties to sought an order of transferring the properties to her. According to Section 24 of the Matrimonial Clauses Act, 1973, the First Instance Judge ordered the transfer of assets to Mrs Prest by giving power to the court to treat the assets of the companies as her husband’s. However, this decision was overturned by an appeal after which Mrs. Prest appealed to the Supreme Court.
- SCOPE OF THE PRINCIPLE
The approach Lord Sumption took in this case was a legal, formal and a technical one. This leads to avoids looking at the economic effects and substance. This approach is seen to be beneficial as it promotes precision and certainty. Moreover, since, the preservation of the will for disregarding SCP was essential to avoid the corporate form from suffering from any kind of abuse. However, one criticism is that despite it being formal and narrow, there exists an absence of clear and articulated procedures which make the evasion principle nonapplicable, except for exceptional and rare situations. Unfortunately, there is no proper explanation of what constitutes as an exceptional and rare situation. This is seen as troubled and contradictory as it challenges the clarity which Lord Sumption had sought to accomplish. On the other hand, if these measures are If rightly framed, they will go a prolonged way in promising steadiness in this tricky area of law. The temptations of metaphor were eschewed like façade and sham were confusing, and so his Lordship’s analysis regarding the decisions for purporting to the application of the doctrine resulted in him proposing two categories which overlapped each other. These were the principles of evasion and concealment. However, piercing the veil would be justified in the strict sense within the evasion principle. On the other hand, those which fell within the concealment principle, would not be justified. Thus, the occurrence of evasion was there.
Thus, it can be said that Prest led us nowhere due to clashing judicial views which eventually led to immobility. Also, there was refusal by the majority regarding Lord Sumption’s attempt to enforce certainty. Academics feel that Prest established inadequacies in regard to the corporate veil, as the judges left various questions unanswered. Further, it is very unclear why evasion of an individual obligation elicits piercing the corporate veil when evasion of the general law doesn’t. Therefore, Prest concluded that lifting the veil should be seen as the last resort for remedy in corporate abuse cases. Thus, it set this as a precedent. Also, it made it very clear that only in the cases of evasion, the provision for lifting the veil would be available readily and spelt out. Therefore, irrespective of one agreeing with the principle of evasion, the jurisdiction for lifting the corporate veil is seen as narrow.
- DOES THE ANALYSIS OF PREST HAVE AN EFFECT ON FRAUD AS A JUSTIFICATION FOR PIERCING THE CORPORATE VEIL?
In a broad sense, fraud was identified by Lord Sumption as the rationale which underpinned the judicial power for lifting the veil on the evasion principle. Evasion is directly attracted by fraud since it is an obvious example of a wrong act. But, at the same time, it does not imply that fraud unravels everything always. That can be seen from the case of VTB Capital, wherein the controller of the company fraudulently denied his control over the company. Due to this, the plaintiff had to enter the contract. Lifting of the veil was declined by the Supreme Court so that, on the contract, the controller is made liable when he wasn’t, and had no intention on being a party to it. On the pure assumption of facts, the plaintiff would have an alternate remedy for fraudulent misrepresentation. The difference in measuring the damages was seen as an insufficient reason for disregarding the persona of the company. Therefore, this case reinforced the last resort power, which is applicable even in fraudulent situations.
The doctrine of lifting the veil was analysed by the court as a general legal principle. It separately considered the argument of the wife that after the term “entitled to property” would be properly interpreted, it is seen wider than it is under the general law. A purposive interpretation was accepted by the High Court as it held that it was sufficient to transfer properties as it was considered practical to procure those companies which made this transfer. This was however, rejected by the Supreme Court for various reasons. One being that, the statue led to bore the general meaning of entitlement of property in line with the principle of interpretative which favoured respect regarding general rights of law. By transferring shares rather than transferring assets of a company, a broader meaning was not necessary and so the entitlement of an ex- spouse could be satisfied. Moreover, the argument made by the wife would result in her being a secured creditor in the Petrodel companies which would eventually reduce the other creditor’s interests.
- STATUTORY RULE/ POWER
This case included applying the statutory power which was transferring assets on the divorce proceedings. The case states that interpreting the legislation is required when a statutory rule is questioned at issue. Even though initially a company, for legislative purposes is to be treated as a separate person, implicitly, a statute might, want to disregard the corporate veil. This is to hold in those cases when for the purpose of the statue, the separate personality factor is not relevant. The determination of the question should be keeping in mind the focus on the enactment which is in question and viewing the near infinity of statutory rules, purposes and contexts. Common law principles for piercing the corporate veil are not to be strictly applied as these have majorly come into development in the private law obligations and rights context, and so it may not take the specific statutory purpose into consideration. In the cases where specially the statutory liability or right is majorly analogous to a liability or right concerning private law, it might be better if a likewise approach is applied. Thus, the case of Prest falls under this category.
- SHOULD THE DOCTRINE OF CORPORATE VEIL ENTIRELY BE ABOLISHED? IS IT A BOON OR A BEAN?
The decision given in Prest is welcomed even though the principle established in Salomon remains a cornerstone of company law in UK which recognises that in certain circumstances the corporate veil is pierced to grant a remedy.
Although the case makes it clear that the piercing of the corporate veil is only appropriate when there exists an evasion of liabilities. However, when no other remedy of law will result in providing an appropriate remedy, the judgement lacks clarity regarding the precise circumstances in which the corporate veil may still be pierced. Moreover, one cynical commentator has argued that it was not possible to pierce the veil in Prest as this meant there was no need to determine the definitive reasons where there might exist the
requirement of the veil to be pierced in the future. Therefore, an unfortunate position exists as even though due to the decision in Prest, the doctrine has been limited by way of being used as a last resort remedy. But at the same time, it requires a future decision to confirm when the doctrine may be exactly applicable. Thus, even though such a principle in Lord Sumption’s view is a necessary one, it does require careful limitation
A more restrictive approach has been embodied by the English law which was found in the case of Prest. This restrictive approach for lifting the corporate veil deals with various senses namely, the phrase’s meaning, the effect it leads to, on the available grounds and in its downgrading of the last resort principle. The new stance will result in placing a larger onus on the judges for identifying and explaining other analysis of cases where there is suspicion of an abuse which deserves a remedy. But at the same time, this new stance will provide benefits regarding the coherence of the law in this particular field. Majorly, because of the absence of any arguments made by the counsel, comparatively, for instance- the courts in Singapore have as a tradition upheld a much wider approach on all these aspects. Therefore, there is still a dire need of scrutinising the extent of impact which would have on the English cases concerning this area of law.
 VTB Capital pic. v. Nutritek International Corpn.  2 W.L.R. 398. 118 (S.C.)
  AC 22
 Prest v. Petrodel Resources Ltd & Others,  UKSC 34
  EWCA Civ 730
 DHN Food Distributors Ltd. v. Tower Hamlets Borough Council  3 All E.R. 462 (C.A.)
 Lazarus Estates Ltd. v. Beasley  1 Q.B. 702 at 712 (C.A.)
  AC 22
 VTB Capital v. Nutritek International Corporation and Others, UKSC 5
 “Peering through the Veil: What’s the Real Impact of Prest v Petrodel?”  Lexology
 “Prest v Petrodel Resources Ltd & Others  UKSC 34”  Law Teacher
 Grantham R, “The Corporate Veil – An Ingenious Device” (2013) 32 Queensland LJ
 Liew A ‘Three Steps Forward, Three Steps Back: Why the Supreme Court decision in Prest v Petrodel Resources Ltd leads us nowhere’  5(2) KSLR
 Lightman D and Hargreaves E, ‘Petrodel Resources Ltd v Prest: where are we now?’  19 (9) p 877 – 888, T&T
 Antonio Gramsci Shipping Corporation & Ors v Recoletos Ltd and Ors  EWCA Civ
730,  4 All E.R. 157 (CA)
 VTB Capital pic. v. Nutritek International Corpn.  2 W.L.R. 398. 118 (S.C.)
 Bull S, “PIERCING THE CORPORATE VEIL—IN ENGLAND AND SINGAPORE”  Singapore Journal of Legal Studies 24
 Roxburgh E, “Prest v Petrodel Resources Ltd: Cold Comfort for Mrs Prest in Scotland” 223
 JHY Chan, ‘Should ‘Reverse Piercing’ of the Corporate Veil be Introduced in English Law’  163
 P Bailey, ‘2013: That Was The Year That Was in Company Law’  2
 S Peppy, ‘Cheat’s Charter Endorsed – Existing Family Division Practice Must Now Cease’  10
- Liew A ‘Three Steps Forward, Three Steps Back: Why the Supreme Court decision in Prest v Petrodel Resources Ltd leads us nowhere’  5(2) KSLR
- “Prest v Petrodel Resources Ltd & Others  UKSC 34”  Law Teacher
- Roxburgh E, “Prest v Petrodel Resources Ltd: Cold Comfort for Mrs Prest in Scotland” 223
- JHY Chan, ‘Should ‘Reverse Piercing’ of the Corporate Veil be Introduced in English Law’  163
- P Bailey, ‘2013: That Was The Year That Was in Company Law’  2
- “Peering through the Veil: What’s the Real Impact of Prest v Petrodel?”  Lexology
- Grantham R, “The Corporate Veil – An Ingenious Device” (2013) 32 Queensland LJ
- Lightman D and Hargreaves E, ‘Petrodel Resources Ltd v Prest: where are we now?’  19 (9) p 877 – 888, T&T
- Bull S, “PIERCING THE CORPORATE VEIL—IN ENGLAND AND SINGAPORE”  Singapore Journal of Legal Studies 24
- VTB Capital pic. v. Nutritek International Corpn.  2 W.L.R. 398. 118 (S.C.)
- Prest v. Petrodel Resources Ltd & Others,  UKSC 34
- Salomon v. Salomon,  AC 22
- Gramsci Shipping Corporation Lembergs  EWCA Civ 730
- DHN Food Distributors Ltd. v. Tower Hamlets Borough Council  3 All E.R. 462 (C.A.)
- Antonio Gramsci Shipping Corporation & Ors v. Recoletos Ltd and Ors  EWCA Civ 730,  4 All E.R. 157 (CA)
- Lazarus Estates Ltd. v. Beasley  1 Q.B. 702 at 712 (C.A.)
- The Companies Act, 2013
Matrimonial Clauses Act, 1973