NEW TRENDS IN PIERCING THE CORPORATE VEIL
(CONSERVATIVE V LIBERAL APPROACHES)
3 DECEMBER 2013
Dr Aleka Mandaraka – Sheppard
Arbitrator
LSLC – Maritime Business Forum
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NEW TRENDS IN PIERCING THE CORPORATE VEIL
(CONSERVATIVE V LIBERAL APPROACHES)
Under
English law
Under South
Africa
associated
ship arrest
Under USA
Rule B
attachment
Under French
law
Under Greek
law
SC case
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ENGLISH LAW
THE UNYIELDING ROCK OF CORPORATE VEIL
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• Salomon v A Salomon (1897): a century old principle:
Corporate
• Separate juristic personality
• Separate rights, responsibilities, and assets from shareholders
• Provides way of limiting liability
• encourages business development by non-interventionism
•
NOT ALLOWED BY LAW TO PIERCE THE VEIL, EXCEPT IN SPECIAL
CIRCUMSTANCES
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HOW STRONG IS THE ROCK OF SALOMON?
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• Most advanced legal systems abide by the principle
• But no international uniformity
• When the law permits exception to the rule, the effect of piercing
is drastic:
• disregard of corporate personality
• Depriving company or its controllers of advantages they would
have obtained by company’s separate personality
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QUESTIONS EXAMINED BY ENGLISH COURTS:
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Would piercing corporate veil be applicable:
• For interests of justice?
• To what impropriety of controllers?
• If there are other remedies in law?
• To hold controllers liable under corporate’s contract?
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LIFTING OR PIERCING VEIL
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• Lifting (ordering evidence to peep behind veil for certain legal
purpose)
• is distinguished from piercing (ultimate result – sanction - remedy)
• See Coral Rose (1991) per Staughton LJ
• But these terms are confusingly used indiscriminately in many cases
• Now ‘Concealment’ cases are equated to lifting – not piercing:
(per Lord Sumption – in Petrodel) court is looking behind the veil
to discover true facts
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PIERCING VEIL – HISTORICAL OVERVIEW
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• 1897 to 1966, HL could not overrule itself during this period
• Salomon rule applied faithfully
• Gilford Motor v Horne (1933) and Jones v Lipman (1962) had
been considered (on their facts) classic cases for piercing
• In former, a solicitor set up a company to avoid a covenant by
previous employers (injunction obtained to prevent him)
• In latter, Lipman set up a company to avoid a conveyance
transaction and transferred land to company (specific
performance granted) – equitable remedies
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PIERCING VEIL – HISTORICAL OVERVIEW
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• In 1969 Lord Denning MR – encouraged lifting of veil
• (Littlewoods Mail Order v IRC) and 1976 (DHN Food Distributors v
Tower Hamlets)
• for interests of justice –
• basis: corporate structure one economic unity
• brought uncertainty to safety of corporations
• Interventionist years until early 1980s
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PIERCING VEIL – HISTORICAL OVERVIEW
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In 1978 Lord Keith disapproved of the Denning decisions in Woolfson
v Stratclyde
• Reaffirmed Salomon
• Stated (obiter): ‘appropriate to pierce corporate veil only where special
circumstances exist indicating that it is a mere façade concealing the true
facts (meaning a deliberate dishonest purpose)
• Decision had strong and persuasive influence
• In Re Company (1985) CA allowed piercing for interest of justice: but
corporate structure used by controller to divert assets to avoid liabilities
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PIERCING VEIL – OVERVIEW
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• In 1988 Lord Donaldson MR in Evpo Agnic crystallised legitimacy of
one-ship companies (SA jurisdiction undermines it)
• In 1989 Adam v Cape CA:
• further support of non-intervention with corporate structures
• rejected piercing on basis of one economic unity and interest
of justice
• may be one entity for economic purposes but not one unit for
legal purposes
• Cape had used corporate form legitimately
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PIERCING VEIL – OVERVIEW
• Freezing injunctions obtained e.g Kensington International v
Congo (2005) against Vitol and controllers of company
• In Linsen v Humpuss (2011) evidence of abuse of corporate
structure – good arguable case that
• purported sales of vessels to 3rd def were shams to render
enforcement of judgment against 1st def more difficult
• But Flaux J discharged the freezing injunction – 3rd def not liable
under underlying contract for chartered hire
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PIERCING VEIL – OVERVIEW
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• In family division judges followed less rigid approach: on basis of
‘what is just and necessary to protect families after divorce
• But Munby J in A v A said (2007):
• there is not one law of ‘sham’ in the Chancery division and
another in the Family division – there is only one law of ‘sham’ to
be applied by all courts
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NEW TREND-LIMITATIONS? PETRODEL V PREST (2013)
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• ‘sham’ or ‘façade’ considered by Lord Sumption in
Petrodel as begging too many questions
• Don’t give answer to what is relevant
‘wrongdoing’ by controllers
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NEW TREND – WHAT IMPROPRIETY?
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• Petrodel: If piercing the veil has any role to play,
• There must be both control by shareholder and impropriety
• The impropriety is in relation to deliberate evasion of existing
and independent liabilities of the controller
• whose enforcement the controller deliberately frustrates by
interposing the company’s personality
• No piercing of veil if there is another remedy in law – no justice
imperative
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NEW TREND – LIMITATION - VTB CAPITAL V NUTRITEK
• Question: how far the scope of exception to Salomon be
extended?
• Could controllers become parties to company’s contract?
• Burton J held in Gramsci v Stepanovs (2011):arguable case to
pierce veil to permit an action against controllers under
jurisdiction cl of contact
• Disapproved of by CA and indirectly overruled by SC in VTB
Capital (2013):
• Held: no direct contractual right to jurisdiction
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NEW TREND – LIMITATIONS TO PIERCING VEIL
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• VTB Capital: no extension of scope of piercing veil to hold
controllers contractually liable to claimant for debt of company
• Principle could not be invoked to create new liability
• Declined to pierce veil when there are other remedies available
e.g. tort of deceit or equitable remedies
• Flaux J had held same in Lindsay v O’Loughnane (2010) and Warren
J in Dadourian v Simms (2006)
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NEW TREND – LIMITATIONS TO PIERCING VEIL
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Lord Neuberger in VTB Capital and in Petrodel:
• ‘piercing veil is a potentially valuable tool to undo wrongdoing in
some cases, where there is no other remedy available’ (narrow
rule)
Lord Sumption in Petrodel:
• ‘the recognition of a limited power to pierce veil in carefully
defined circumstances is necessary if the law is not to be
disarmed in the face of abuse’ (perhaps broader rule?)
• WHAT DOES IT MEAN? Over to Simon and Robert
• THANK YOU
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