PIERCING THE CORPORATE VEIL:
RAMIFICATIONS OF THE SC DECISION IN
PREST v PETRODEL RESOURCES LIMITED
Julian Wilson / Amy Rogers
WHY PREST MATTERS
•Authoritative statement of the law on piercing
the veil and separate corporate personality
•HC Judge had departed from basic company law
principles; CA had split on Chancery/Family lines
•Potentially wide ramifications for small
companies, family offices, wealth management
and tax structures, asset tracing and fraud actions
THE FACTS
•Proceedings for financial remedies following a
divorce – “big money”
•Valuable property assets held by Petrodel
corporate structure – co/s in IoM, Nigeria & Nevis
•Husband in breach of disclosure orders / evasive
•Ultimate ownership unclear but husband
effective owner and controller
FIRST INSTANCE
MOYLAN J AT FIRST INSTANCE
• Veil was NOT pierced at common law
•Applied test in Ben Hashem v Al Shayif
•No relevant impropriety in use of co/s
MOYLAN J AT FIRST INSTANCE
Ben Hashem v Al Shayif
• to enable to enable a court to pierce the veil of
a corporation necessary to show not only
control of the company by wrongdoers but
also impropriety
• i.e. misuse of company by wrongdoers as
device or façade to conceal some wrongdoing
that existed entirely outside company
MOYLAN J AT FIRST INSTANCE
No relevant impropriety in husband’s use of co/s
• Company structure set up and used for
conventional wealth protection and tax
avoidance reasons.
• Breach of company law as husband treated
companies as money box and their assets as at
his will, but not relevant impropriety
MOYLAN J AT FIRST INSTANCE
• But veil pierced by STATUTE
•s24(1)(a) MCA 1973
•an order that a party to the marriage shall
transfer to the other party … property to which
the first mentioned party is entitled, either in
possession or reversion
MOYLAN J AT FIRST INSTANCE
• Petrodel companies were separate legal
entities but w/in scope of s.24 as a result of
the complete nature of the husband’s control
•As husband had complete control could deal as
he wished with co. assets – and so was the
beneficial owner and “entitled” to them for s.24
•Wife awarded a lump sum by way of an order
transferring to her properties held by co/s
controlled by her husband
THE COURT OF APPEAL
THE COURT OF APPEAL: THE MAJORITY
CA HELD BY MAJORITY THAT:
• s24 MCA could not be used to make an order
in respect of co. property unless there were
legitimate grounds to pierce the corporate veil
• The principles in Salomon v Salomon applied
to all jurisdictions of the English Court: legal
personality had to be respected
RIMER LJ
• No primary findings justifying finding
other than that the properties part of
the assets of, and belonged beneficially
to, the companies
RIMER LJ
• Shareholders have no interest in / entitlement
to co. assets – even 100% one-man owner
does not have unlimited power to procure co.
to deal as he would wish with the co. assets
• Even one-man company constrained by capital
maintenance provisions limiting wholesale
disposals – cannot lawfully procure the making
of distributions save out if distributable profits
and, if he does, will be unlawful & void
RIMER LJ
• Distinction between legal personalities, rights
and liabilities of co. and shareholders as valid
today as in Salomon in 1897 and applies in all
proceedings, incl. matrimonial ancillary relief
• Not open to Judges to lift the veil where
‘justice requires’
PATTEN LJ
• s24(1)(a) does not give the Court power to
disapply the established principles of legal and
beneficial ownership or of company law
THE COURT OF APPEAL: THE DISSENT
THORPE LJ (ex-Family Division):
• Would not complicate the approach that a
Family Division Judge can legitimately adopt by
reference to co. law authority on “lifting or
piercing the corporate veil”
• Simple question is whether individual entitled
to property within the meaning of s24
THE COURT OF APPEAL: THE DISSENT
• Co/s milked for so long as marriage lasted to
fund extravagant lifestyle. Only possible b/c
wholly owned and controlled by the husband
and no 3rd party interests.
• Invocation of company law one of husband’s
array of strategies to deprive wife of assets to
achieve “irresponsible and selfish ends”. If the
law permits that, defeats Judge’s duty to
achieve a fair result.
THE SUPREME COURT
THE SUPREME COURT
• Court could not disregard corporate veil by
using s24(1)(a) MCA 1973
• BUT on the facts, the Petrodel properties
were held on resulting trust for the
husband and therefore available to satisfy
financial provision ordered for the wife
LORD SUMPTION
• Piercing the veil meant disregarding separate
personality
• Limited power in carefully defined
circumstances and when no other remedy to
ensure not disarmed when legal personality
abused for the purpose of wrongdoing
• “Façade” / “sham” test begs too many qns
LORD SUMPTION
• Concealment Principle
•Evasion Principle
LORD SUMPTION
CONCEALMENT PRINCIPLE
Interposition of co/s to
conceal identity of real
actors will not deter the
Courts
Not piercing the veil –
looking behind it to
discover the facts that
corporate structure
concealing
CONCEALMENT PRINCIPLE - EXAMPLE
•
•
Receipt of money by co. counted as receipt by
shareholder if the co. received it as agent or
nominee, rather than in its own right
Gencor ACP Ltd v Dalby [2000] 2 BCLC 734: secret
profit to director from payment to BVI co. … co.
received it as director’s nominee only so director
held it and liable to account for its receipt … and
director’s knowledge imputed to company so
company independently liable to account
•
Trustor [2001] 1 WLR 1177 - similar
LORD SUMPTION
EVASION PRINCIPLE
Disregard the corporate veil where…
Legal right against the
person in control which
existed independently of
the co’s involvement
Co. interposed so that
separate legal personality
would defeat the right or
frustrate enforcement
EVASION PRINCIPLE
• So, where a person used the co’s separate
legal personality to evade a liability that he
would otherwise have had, the court could
disregard the veil
EVASION PRINCIPLE - EXAMPLES
• Where a person bound by a non-compete
covenant established and used a co. he
controlled to work in competition (Gilford
Motor Company v Horne [1933] Ch 935)
• Where a person reneged on a contract for
sale and conveyed to a creature co. to avoid
an order for specific performance (Jones v
Lipman [1962] 1 WLR 832)
WHY THE PROPERTIES WERE THE HUSBAND’S
Husband not co/s had funded purchases
AND
Companies used to conceal:
•
3 transferred to PRL for nominal consideration
• 2 transferred to PRL for substantial consideration
but funded by H
• 2 acquired by Vermont for substantial
consideration but funded by PRL and ultimately H
• PRL was oil trading company and little reason of
own to buy London residential properties
• So properties held by co/s on resulting trust for H
SUPREME COURT – OTHER JUDGMENTS
• Lord Neuberger: agreed that doctrine
should be limited to evasion principle
• Lady Hale/Lord Wilson: not clear that
concealment or evasion analysis was robust
• Lord Mance/Lord Clarke: disagreed that
piercing ought necessarily to be limited in
future to evasion cases
THE PREST TEST
• 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 pierce the corporate
veil for the purpose, and only for the purpose,
of depriving the co. or its controller of the
advantage that they would otherwise have
obtained by the co’s separate legal personality
THE PREST TEST – ELEMENTS
• Use of a company’s separate legal
personality to evade a liability that the
wrongdoer would otherwise have had,
being a liability which arose independently
of the involvement of the company
• Role of company is not to conceal fact that
wrongdoer is true actor but to evade the
law or to frustrate its enforcement
THE PREST TEST – EXAMPLES
Gilford Motor Company v Horne [1933] Ch 935
Pre-existing and independent legal obligation of
Horne not to compete with GMC evaded by
interpositioning of company
Jones v Lipman [1962] 1 WLR 832
Seller’s pre-existing obligation to perform contract
for sale evaded by interpositioning of company as
fictitious purchase to prevent specific
performance
PIERCING THE VEIL: ALTERNATIVE REMEDIES?
• Resulting trust analysis
• Agency analysis
• Accessory liability by imputation of
knowledge
• s423 IA 1986: setting aside transactions to
defeat creditors
• Proprietary claim: co. not a BFPFVWN
ALTERNATIVE REMEDIES? RESULTING TRUST
• A makes voluntary payment to B or pays
wholly or partly for property vested in B or A/B
jointly, presumption that A did not intend to
make a gift and property treated as held on
trust for A
Westdeutsche Landesbank, Lord Browne-Wilkinson
ALTERNATIVE REMEDIES? RESULTING TRUST
WARNING
Family Offices and wealth managers should
beware resulting trust analyses
Concealment principle means assets held in
names of co/s may be treated as assets of
individual behind co. if:
• transfer to co. funded by individual; and/or
• asset unrelated to co’s business
ALTERNATIVE REMEDIES? AGENCY ANALYSIS
Co. is agent for wrongdoer and not true principal
• Accessory liability of company by imputation
• Knowledge of wrongdoer imputed to the
company he controls so as to make the latter’s
conduct unconscionable or tortious:
• Knowing assistance/knowing receipt
• Common design torts
ALTERNATIVE REMEDIES? s423
s.423 Insolvency Act 1986
• Power to set aside a transaction entered
into at an undervalue
• Makes adequate provision for dealing with
transactional impropriety: Ord v Bellhaven
Pubs [1998] 2 BCLC 447 over-ruling Creasey
v Breachwood Motors
ALTERNATIVE REMEDIES? s423
A transaction is entered into at an undervalue if (a) Gift or no consideration terms
•
...
(c) Consideration less than the value of the consideration provided by himself.
the court may, if satisfied that it was entered into by him for the purpose
(a) of putting assets beyond the reach of a person who is making, or may at some
time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim
which he is making or may make.
make such order as it thinks fit for (a) restoring the position to what it would have been if the transaction had not been
entered into, and
(b) protecting the interests of persons who are victims of the transaction.
ALTERNATIVE REMEDIES? s423
Note width of Court’s discretion
•
Even a transaction designed to protect assets from
the reach of future unknown creditors falls within
the section: Midland Bank v Wyatt
• Motive to defeat creditors may not be the
dominant purpose of the transaction as opposed
to a purpose of the transaction
•
Purpose may co-exist with the motive to secure
family protection: Inland Revenue v Hashmi
ALTERNATIVE REMEDIES? PROPRIETARY CLAIMS
Proprietary claim against the co. because the
company will not be a BFPFVWN
•
A beneficiary of a trust is entitled to a continuing
beneficial interest not merely in the trust property
but in its traceable proceeds and his interest binds
everyone who takes the property or its traceable
proceeds except a bona fide purchaser for value
without notice of the breach of trust (BFPFVWN):
Foskett v McKeown [2001] 1 AC 102 at 127
THE CMS / ULTRAFRAME PROBLEM AFTER PREST
•
CMS Simonet v Dolphin [2001] 2 BCLC 704: a defaulting
fiduciary is liable to account for profits made by a co. to
which he diverted business opportunities where there is
no effective remedy against that co. b/c it is insolvent
•
Doubted in Ultraframe at [1565 -1576]: where the
fiduciary can show that the profits were received into a
co. and he has not received any benefit, then only the co.
and not the individual can be held to account
•
Post-Prest: if co. established to evade a liability that the
fiduciary would otherwise have had, veil may be pierced
and fiduciary held accountable for the profits of the co.
REAFFIRMATION OF CO. LAW FUNDAMENTALS
• Separate entity
• Separate property
• Distribution only by remuneration, dividend
or in a solvent winding-up
• Capital maintenance affirmed
• Ratification: Sumption - shareholders could
never validly consent to their own
appropriation of the company’s assets for
purposes which were not the company’s
REAFFIRMATION OF CO. LAW FUNDAMENTALS
1. A company is a legal entity distinct from its
shareholders
2. It has rights and liabilities of its own which are
distinct from those of its shareholders
3. Its property is its own, and not that of its
shareholders
• These principles apply as much to a company
that is wholly owned and controlled by one
man as to any other company: Salomon v A
Salomon and Co Ltd [1897] AC 22
REAFFIRMATION OF CO. LAW FUNDAMENTALS
•
The sole owner and controller of a company does
not even have an insurable interest in property of
the company, although economically he is liable to
suffer by its destruction: Macaura v Northern
Assurance Co Ltd [1925] AC 619
“no shareholder has any right to any item of property
owned by the company, for he has no legal or
equitable interest therein. He is entitled to a share in
the profits while the company continues to carry on
business and a share in the distribution of the surplus
assets when the company is wound up”
CO. LAW FUNDAMENTALS: RATIFICATION
The sole shareholder or the whole body of
shareholders cannot validly consent to their
own appropriation of the company’s assets for
purposes which are not the company’s
•
•
Belmont Finance Corpn Ltd v Williams Furniture Ltd
[1979] Ch 250, 261 (Buckley LJ)
• AG’s Reference (No 2 of 1982) [1984] QB 624
DPP v Gomez [1993] AC 442, 496-497 (Lord BrowneWilkinson)
CO. LAW FUNDAMENTALS: CAPITAL MAINTENANCE
• The statutory schemes of company and
insolvency law include elaborate provisions
regulating the repayment of capital to
shareholders and other forms of reduction of
capital, and for the recovery in an insolvency of
improper dispositions of the co. assets
• These schemes are essential for the protection
of those dealing with a company
THE END
PIERCING THE CORPORATE VEIL:
RAMIFICATIONS OF THE SC DECISION IN
PREST v PETRODEL RESOURCES LIMITED
Julian Wilson / Amy Rogers