PIERCING THE CORPORATE VEIL POST
PREST - V- PETRODEL RESOURCES
LIMITED
3rd December 2013
Simon Rainey QC and Robert Thomas QC,
www.quadrantchambers.com
Prest v Petrodel Resources Ltd
Where are we now?
What does it mean?
Prest v Petrodel Resources Ltd
Uncertain:
Obiter
Lack of unanimity between the Judges
Prest v Petrodel Resources Ltd
Evasion Principle
Lord Sumption’s formulation endorsed by Lords Neuberger
and Mance
Some others unwilling to commit once and for all
And others sceptical that there is a principle at all
Prest v Petrodel Resources Ltd
Concealment Principle
Nothing to do with piercing the corporate veil
Described by Lord Sumption as “legally banal” and to
be “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”.
Prest v Petrodel Resources Ltd
Concealment Principle
A new unifying or over-arching principle?
If so, what are its scope and limits?
Prest v Petrodel Resources Ltd
Concealment Principle
Little Guidance Provided:
The device of introducing a company “is insufficient to
prevent equity’s eye” from identifying it with the person
behind the company [Gencor v Dalby]
The company was “a device and sham” held before his
face “in an attempt to avoid recognition by the eye of
equity” [Jones v Lipman]
Prest v Petrodel Resources Ltd
Concealment Principle
Finding of impropriety not necessary
No requirement of necessity
Prest v Petrodel Resources Ltd
Evasion Principle
Is it of any practical use?
Prest v Petrodel Resources Ltd
Evasion Principle
Only to be used to prevent the abuse of corporate legal
personality
And only to the extent necessary to “deprive the
company or its controller of the advantage which they
would otherwise have obtained by the company’s
separate legal personality”
Cannot create a new liability that would not otherwise
exist
Prest v Petrodel Resources Ltd
Evasion Principle
Lord Neuberger - a “valuable means of doing [justice]”
But all of the cases are:
1. Decisions in which it was assumed that the doctrine existed but
it was rightly concluded that it did not apply on the facts;
2. Decisions in which it was assumed the doctrine existed and it
was wrongly concluded that it applied to the facts;
3. Decisions in which it assumed that the doctrine existed and it
was applied to the facts but where the result could have been
arrived at on some other, conventional basis and therefore it was
wrongly concluded that it applied.
Prest v Petrodel Resources Ltd
Evasion Principle
The necessity principle – Ben Hashem [2009] 1 FLR
115
Gilford and Jones – piercing the corporate veil not
necessary?
Prest v Petrodel Resources Ltd
Evasion Principle
When will it apply?
The landscape post Petrodel
The landscape post Petrodel
R v Sale [2013] EWCA Crim 1306
Antonio Gramsci Shipping v Lembergs [2013] EWCA
Civ 730
The first application of Petrodel: R. v Sale
Piercing the corporate veil in the Crown Court
Asset confiscation proceedings under the Proceeds of Crime
Act 2002
The court's task is to assess whether the Defendant has
"benefited from his particular criminal conduct". : see Section
6(4)(c) POCA
Extensive jurisprudence at Court of Appeal (Criminal Division):
largely ignored by civil practitioners
The first application of Petrodel: R. v Sale
See the Court of Appeal’s decisions in, for example, Dimsey
and Allen [2000] 1 Cr App D (S) 497; R v Bassam Omar [2005]
1 Cr App (S) 86; R v Seager and Blatch [2010] 1 WLR 815.
Cited in Gramsci (Round 1 before Burton J.)
In Seager and Blatch (at [76]):
"In the context of criminal cases the courts have identified at least three situations
when the corporate veil can be pierced. First, if an offender attempts to shelter
behind a corporate façade, or veil to hide his crime and his benefits from it…
secondly, where an offender does acts in the name of a company which (with the
necessary mens rea) constitute a criminal offence which leads to the offender's
conviction, then "the veil of incorporation is not so much pierced as rudely torn
away. Thirdly, where the transaction or business structures constitute a "device",
"cloak" or "sham", i.e. an attempt to disguise the true nature of the transaction or
structure so as to deceive third parties or the courts…"
R. v Sale [2013] EWCA Crim 1306
Decision on Appeal from Woolwich Crown Court: 25th July
2013
D pleaded guilty to corruption offences:
D operated an air con / electrical company which he set up in
2004; had turnover of £9M, large staff and trading ‘book’
2006-2008 offered gifts to employee of Network Rail to secure
commercial favours and an introduction to Network Rail
Company received three high value contracts, replacing existing
suppliers due to the employee’s efforts. Contracts were properly
performed.
Company received about £1.9M (gross) in billed work
R. v Sale [2013] EWCA Crim 1306
The court's task under POCA is to assess whether the
Defendant has "benefited from his particular criminal conduct".
Crown Court made a confiscation order which represented the
total sum paid to the company by Network Rail (i.e. £1.85 £1.9 million).
The prosecution's case before the judge was that, although
those payments were never made to the Defendant, the court
should lift the veil of incorporation and declare the total
benefit of the Defendant to be in that sum received by the
company
R. v Sale : The arguments on the appeal
Accepted as common ground that Petrodel applied.
Appellant’s contentions:
This was not a case where Lord Sumption's "evasion principle"
could apply since the Appellant had not interposed the company
so as to frustrate or evade the enforcement of an existing legal
obligation.
The "concealment principle" did not apply either because the
Appellant's position, and that of the company, was always open
and public.
In the circumstances the court should concentrate on the
Appellant's personal benefit without reference to the company's
financial position.
R. v Sale : The decision of the Court of Appeal
Appeal dismissed.
CA accepted that the case was not an evasion case [39]:
“We are not persuaded that this is a case coming within the evasion
principle referred to at paragraph 28 of Prest.
This is because in this case there was no legal obligation or liability
which was evaded or frustrated by the interposition of the company in
this case whereby the interposition of the company would mean that
the separate legal personality of the company would defeat the right or
frustrate its enforcement. This was a company which existed long
before this corrupt conduct, and which existed for bona fide trading
purposes: there was no interposition of the sort described.”
R. v Sale : The decision of the Court of Appeal
But held that the case was a concealment case [40-41]:
“In the circumstances of this case, where the Appellant was the sole
controller of the company, and where there was a very close interrelationship between the corrupt actions of the Appellant and steps
taken by the company in advancing those corrupt acts and intentions,
the reality is that the activities of both the Appellant and the company
are so interlinked as to be indivisible. Both entities are acting together
in the corruption.”
“Accordingly, insofar as the company was involved, what it did served
to hide what the Appellant was doing. ”
But … the CA went on to decouple the POCA jurisdiction from
“veil piercing” and to rephrase Seager as a pure POCA test!
Antonio Gramsci (Round 3): Article 23
Antonio Gramsci (Round 3): Article 23
Following VTB v Nutritek, the attempt to hold Lembergs to the
jurisdiction clause on contract grounds necessarily failed.
But in both Gramsci Rounds 1 and 2 as a second string, the
Claimants argued that as a matter of EU law, even if the result
of lifting the veil was not to make the controller of the
corporate body party to the contract in English law, the alter
ego could still be considered to have “consented” to English
jurisdiction under Article 23 of the Brussels Regulation.
The “consensus” necessary to establish jurisdiction under
Article 23 is an autonomous EU concept and has to be applied
following EU jurisprudence.
Antonio Gramsci v Lembergs [2013] EWCA Civ 730
The argument:
(1) The ECJ recognises deemed consent where no actual
consent given, in appropriate cases: Powell Duffryn Plc v
Petereit [1992] ILPr 300
(2) Where the facts sufficed to pierce the veil in English law,
that was an appropriate case to deem consent
(3) That gave effect to the doctrine of good faith applied by
the ECJ : Berghoefer GmbH v ASA SA [1986] 1 CMLR 13
(4) On policy grounds, deeming of consent was appropriate
and necessary.
Antonio Gramsci v Lembergs [2013] EWCA Civ 730
The arguments failed but on the policy argument the Court
accepted that “There is undoubted force in this submission”.
But expansion of the law post Petrodel would be difficult [66].
“As to further development of the law, doing so by classical common law
techniques may not be easy. … Lord Neuberger was of the view (at [75] that
there is a “lack of any coherent principle in the application of the doctrine of
“piercing the corporate veil”, and Lord Walker’s view (at [106]) was that it is not
a doctrine in the sense of a coherent principle or rule of law but a label. Lady
Hale (at [92]) was “not sure whether it is possible to classify all of the cases in
which the courts have been or should be prepared to disregard the separate
legal personality of a company neatly into cases of either concealment or
evasion”. Absent a principle, further development of the law will be difficult for
the courts because development of common law and equity is incremental and
often by analogical reasoning.”
Thank you for your attention