Analysis of Prest v Petrodel Resources Ltd

The relatively short and significant judgment in the Supreme Court case of Prest v Petrodel Resources Ltd has gathered vociferous interest from academics and practitioners. It was of key interest as it was a legal cross over between family law and company law. The legal team representing Prest stated that ‘the decision is of major importance not only for family law and divorcing couples, but also for company law, and it is the most important reviews since Victorian times on the law regarding piercing the corporate veil’.[2] The principles of lifting the corporate veil for the past eight decades seemed to have never been wholly established as judges always contradicted each other and never reached a unanimous decision. There has been extensive discussion as to whether a court can ignore the principle of separate legal personality and treat a company’s property, rights and obligations as belonging to a person who owns and controls the company.[3] The critical points which would be analysed in this essay would be whether Prest has brought us closer to what the principle of lifting the corporate veil can be defined as, what it entails or whether the whole doctrine should be set aside. It will be argued that the law should not be given its quietus as it seems that judges are somewhat getting closer to an answer. Prest narrowed the circumstances in which the doctrine may apply thus, this could show that decision makers are near the end of a long marathon. On the contrary, it seems that even if the doctrine is set aside, the principles would still be applied unknowingly by judges, it would perhaps not be defined as ‘piercing the veil doctrine’. It would possibly be applied in conjunction with other laws which would have the same effect and outcome as piercing the corporate veil.

Lifting the corporate veil has been viewed narrowly to be the process used by the courts to either determine what exactly is going on behind the shell of incorporation. The whole concept of lifting the veil was derived from Salomon v Salomon [4] where corporate veil was established. It was held that a limited company was viewed “like any other independent person with its right and liabilities appropriate to itself”[5] The Salomon principle has been the foundation on which company law and business corporations have thrived on for years.[6] When taking into consideration how the law has developed in this area, Cheung describes that it is evident the House of Lords decision in Woolfson [7] came to be source for guidance in subsequent cases. More importantly, the HL emphasised that “it is only appropriate to pierce the corporate veil where the circumstances indicate that the company is merely a façade concealing true facts. However, despite this important distinction, the courts have always been wary that there must be some limit to the protection afforded by limited liability to ensure that business dealings remain honest. As Lazarus[8] explained “no court will allow a person to keep an advantage which had been obtained by fraud”[9] This principle underpinned all of the early attempts to pierce the veil meaning that the court will not allow a corporate personality to be used to protect individuals from wrongdoing. Similarly, Lord Sumption explains piercing the corporate veil means “disregarding the separate personality of the company”[10] Moreover, as per Lord Keith in Woolfson,[11] he states “it is appropriate to pierce the corporate veil only where special circumstances exist”[12] Consequently, right from the onset, there were conflicting views. The reception which the doctrine received forty years ago is still echoed to this day in Prest. The court reaffirmed in Prest the well-established judicial conservatism approach that the corporate veil could only be pierced in ‘very rare cases’[13] Therefore, despite the doctrine not being clear, it is well established that the doctrine is not be considered in all corporate cases but, ought to be considered only rare ones.

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On the other hand,it can be argued, that the strictness of the approach led to the doctrine existing more as a matter of legal theory than as a feature of legal practice. Prior to Prest, in Lipman,[14]the only way to lift the veil was if the company was regarded as a sham or mere façade. In Smallbone,[15]Sir Morritt brought forward the argument that it is uncertain as to which circumstances a company can be considered as a sham or whether the company need to do something illegal for immorality to suffice.[16] Hence, this suggests that there is no clear structure to be followed. This could create further confusion as to what the doctrine of piercing the corporate veil originally intended to do. Could this perhaps suggest that it is better to abandon the doctrine as a whole rather than to try and figure out what the principle actually proposes to do. This could perhaps create more clarity in the sense that decision makers would know what is not meant to be included in the doctrine. Furthermore, this can be mirrored in Prest where Lady Hale and Lord Wilson doubted whether it is possible to classify all cases “neatly into cases of either concealment or evasion”[17] Therefore, even to this day there are a lot of question marks as to when and how the doctrine is applied; there are still a lot of unanswered questions which have not been dealt with. It seems that the judges only deal with these when and how it comes. It can be contended that the doctrine is there but, no one has yet connected the dots to see the full picture of what it entails. The fact that none of these questions seem to provide a clear picture further creates problems today as for a doctrine to develop or adapt to the new changes, the reasoning’s behind the past decision needs to be understood thus, if one cannot do that then how can the doctrine be established.

Notwithstanding, since Prest, it is no longer sufficient for a company to show that it is ‘a mere façade or a sham’;[18] one must show that control of the company by the wrongdoer was used as a device to conceal the wrongdoing.[19] A new provision on how the doctrine should be established was brought in Prest. Over the past eighty years, there has been many interpretations. Most recently, analysed by Lord Sumption where he identified the concealment and evasion principle. In Prest, Lord Sumption argued for a narrower and clearer approach by restricting the circumstances in which the veil may be pierced. This was because ‘references to a façade or sham beg too many questions to provide a satisfactory answer”[20] He attempted to give an explanation; He stated that the veil would be restricted to two principles: the concealment principle and the evasion principle.[21] The concealment principles is “the interposition of a company or perhaps several companies so as to conceal the real actors”[22] But, he noted that this does not actually involve piercing the veil; the court is simply looking behind the façade to discover the true facts.[23] Contrarily, the evasion principle applies where a person is under an existing legal obligation which he deliberately evades by interposing a company under his control.[24] However, despite the two approaches being somewhat clear; Lord Alcock observes that “care must be taken because none of the other six justices of the Supreme Court agreed with Lord Sumption without some qualifications”[25] He also points out that there is substantial uncertainty surrounding the operation of the evasion principle.[26] Most significantly, Neuberger also found that in cases where piercing the veil was considered, it either did not apply in the facts, or it was applied on the facts but the results could have been arrived at on some other legal basis.[27] On these grounds, this could show that the doctrine does not necessarily need to exist as the same outcome can be arrived on some other legal basis. It can be indicated that the doctrine could perhaps only exist to give reassurance to corporate businesses in order to ensure them that they have a sense of security in case something goes wrong, but in reality, it does not exist and is rarely applied. Undoubtedly, Lord Neuberger drew different conclusions regarding the application of the principle. He argued that there is not much support for the doctrine.[28] He observed that there is no English case which unequivocally underpinned a power to lift the veil[29]; however, recognition is given to a limited power as a valuable judicial tool to undo wrongdoing in cases where no other solution exist’[30] It gives the impression that every judge will come up with a new principle every now and again which would be relied upon but then a couple of years after, a new judge will find criticism in the doctrine. It seems that it is going around in a vicious circle without reaching an end-point.

Additionally, Lord Sumption’s principle brought further opposition. Lord Mance argued that “It is dangerous to seek to foreclose all possible future situations which may arise and I would not wish to do so”[31] Furthermore, it should be considered that Prest only dealt with one specific class of asset which were held by those of corporate entities. The decision shows that an application of company law principles is required when determining the ownership of those assets.[32] Henceforth, this shows that Prest only narrowed only one specific factor in piercing the corporate veil, a factor which cannot be used in all cases. This further shows that we are no closer to an answer of lifting the corporate veil.

Contrarily to the above, despite there not being a set doctrine, it seems that the Lordships all agree on one aspect. In Prest, they all accepted the existence of a general common law veil piercing as being limited to rare and exceptional circumstances.[33] Lord Clarke argued that Sumption’s distinction “the circumstances in which the doctrine apply are rare”[34] This similar reaction has been echoed in the past. It can be thus shown, that not much has changed and the decision makers are still unsure as to when the doctrine can be applied. In 2017, it is very difficult to predict what the future path for the doctrine will take as there are many conflicts on this topic even from the Supreme Court judges. As stated above, Lord Neuberger, Lord Clarke and Lady Hale were not entirely convinced on the validity of the doctrine and seeing it as merely a metaphor which was unclear and inchoherent. This was contrasted with Lord Mance and Lord Walker who are very much in favour of keeping the doctrine. On the other hand, Lord Neuberger who had initially been in favour of giving the doctrine its quietus because it had been misapplied in the eighty years indicates that the obiter by Lord Sumption is very influential and could prove to be important in future cases. Hence, this further indicates that there are still many uncertainties within the doctrine itself.

It can be indicated that if Prest was successful in providing a set answer as to what piercing the corporate veil entails then there would have been many cases which would have pierced the veil post Prest. For some the most helpful case is the decision in Pennyfeathers Limited v Pennyfeathers Property Company Limited.[35] It is said to be a better example of facts for giving rise to the principle of piercing the veil. Provided that the principle was to be properly established then there is one thing that all decision makers would agree upon which would be that “the company was used in an attempt to immunise himself from the liability of wrongdoing”[36] This is consistent in DHN[37] just as much as it is in Gramsci.[38] It seems that in every case that involves piercing the veil, the defendants always argue that there is “no such thing as piercing the corporate veil”[39] thus, could it be that many wrongdoers have been able to escape liabilities simply because the doctrine was not well established. The new approach found in VTB[40]and Prest significantly restrictive approach to piercing the corporate veil which in effect has relegated the doctrine to a principle of last resort.[41] Post Prest cases such as R v McDowell[42] and R v Singh[43] shows that the superior courts exercising restraint in disturbing the principle in Salomon.[44] It therefore appears that where litigants can show that the relevant tests are satisfied, the courts will allow them to obtain judgement against assets that were intentionally placed out of their reach. However, these cases are and will remain exceptional. More recently, in Akzo Nobel[45] in its arguments had suggested that the Competition Commission had tried to attribute the activities of the subsidiaries to Akzo Nobel which was in effect piercing the corporate veil.[46]

It could be considered that an alternative approach would be to put the doctrine on a statutory basis so that the courts would have a guide to follow instead of consistently establishing conflicting views between themselves. However, this could prevent flexibility of the courts whilst it faces complex issues which cannot be foreseen by statute. On the other side of the coin, it would be less harmful than having ambiguous rules. Furthermore, there could be an extension which established distinct body rules for corporate groups such as in Germany. The interest of the whole group both financial and non- financial matters would be recognised. Moreover, another approach could be piercing the veil by removing limited liability towards involuntary creditors, notably tort victims. In Chandler v Cape,[47] it introduced some basis for this approach whilst imposing liability on a parent company by suggesting that the parent company has a duty to the employees of its subsidiary company.

To conclude, it has been suggested by academic commentary that the decision reflects a ‘progressive trend of restricting the doctrine’.[48] However, it can be contemplated that slightly narrowing a doctrine which Supreme Court judges do not agree with does not mean that it is progressive.[49] If one keeps on rebutting every proposal that is brought forward then that is not progressive, it does not feel like any decision makers has tried to find a solution for this problem. It can be disputed that this is a never ending vicious circle. It seems as if it is an entertaining ground for judges to see what new solution can be made this time around. Prest brings a new kind of uncertainty.[50] However, Prest does confirm that the veil would only be pierced in exceptional circumstances. There is one basis which all judges approve which is that the veil is only to be pierced in exceptional circumstances. This could perhaps be a starting point of a well-established doctrine. It can be contended that, even if the doctrine is given is quietus, judges would still apply the principles of piercing the veil unknowingly. This decision can be derived from another legal basis but, it will have the same outcome. Thus, even if it is given its quietus, the doctrine would still be there transparently. It seems that we are at a halt with the long marathon until, a case can fully apply the two provisions in Prest.

Bibliography

Practitioner’s Textbooks

Palmer’s Company Law

Books

A Digman A, John Lowry, Company Law (8th edn OUP Oxford)

Birds J, Boyle Clark B et al, company Law (9th edn, Jordan Publishing)

Dr Wilde C, Smith and Keenan’s Company Law ( 17th edn Pearson)

Lowry J, and Arad Reisberg, Company Law & Corporate Finance (4th Edn, Pearson

Journals

Akansha Dubey et al, ‘Family Law’ (2014) 3(1)

A Alcock ‘piercing the veil- A dodo of a Doctrine (2013) 25 denning LJ 241,243

A Bowden ‘Concealment, Evasion and Piercing the corporate veil: Prest v Peterodel Resources Ltd [2013], Greens Business law, April 2014

Bull S, ‘piercing the corporate veil in England and Singapore’ [2014] Heinonline

C Hare, ‘Piercing the corporate veil in the supreme court (again)’- The Cambridge Law Journal, 72 [2013] 511-515

Chrysthis N Papacleovoulou, “lifting” or “piercing”, ‘the corporate veil in Cyprus: a doctrine under challenge- an analysis of English and Cyprus case Law analysis’ (2016) 27 (4) ICCLR

D Lightman, ‘Petrodel Resources Ltd v Prest: Where are we now?’ – Trust & Trustees (2013) 19 (9):877

J McDonagh, ‘Piercing the corporate veil in the family division: Prest– the latest from the court of appea’l- Trust and Trustees (2013) 19 (2) 137

J Payne ‘Lifting the corporate veil: A reassessment of the fraud exception’ Cambridge law Journal, 56 (2) July 1997

Mujih E, ‘Piercing the corporate veil as a remedy after Prest V Petrodel resources Ltd: Inching towards Abolition’ [2016] Westlaw 17,17

Pey Woan Lee, ‘The Enigma of Veil- Piercing’ (2015) 26 (1) ICCLR 28, 30

Spear’s, ‘Expert analysis of the Prest Judgement’ (Spear’s ,11 June 2013)

Tan Cheng-Han, ‘Veil piecing- a fresh start’ (2015) 1 JBL

Online Articles

Spear’s, ‘Expert analysis of the Prest Judgement (Spear’s ,11 June 2013) <http:///www.spearswms.com/expert-analysis-of-the-Prest-judgment/> accessed 8th March 2017

Simon Mcleod- ‘The Corporate Veil And Its Piercing As Clear As?’

<http://gdknowledge.co.uk/the-corporate-veil-and-its-piercing-as-clear-as/ >accessed 20th February 2017

Cases

Akzo Nobel NV v Competition Commission [2013] CAT 13

Antonio Gramsci Shipping Corp & ors v Aivars Lembergs [2013] EWCA Civ 730

DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852

Lazarus Estates Ltd v Beasley [1956] 1 QB 702

Prest v Petrodel Resources Ltd UKSC 34, [2013]

R v McDowell [2015] EWCA Crim 173

R v Singh [2015] EWCA Crim 173

Salomon v Salomon [1896] UKHL 1

Trustor AB v Smallbone (No 2) [2001] EWHC 703

VTB Capital plc v Nutritek International Corp [2013] UKSC 5

Woolfson v Strathclyde Regional Council [1978] UKHL 5

[1] Prest v Petrodel Resources Ltd UKSC 34, [2013]

[2] Spear’s, ‘Expert analysis of the Prest Judgement (Spear’s ,11 June 2013) <http:///www.spearswms.com/expert-analysis-of-the-Prest-judgment/> accessed 8th March 2017

[3] French D, Mayson S & Ryan C, Company law (31st edn, OUP) 127

[4] Salomon v Salomon [1896] UKHL 1

[5] Lord Halsbury Salomon v Salomon [98]

[6] Lowry J, and Arad Reisberg, Company Law & Corporate Finance (4th Edn, Pearson) 35

[7] Woolfson v Strathclyde Regional Council [1978] UKHL 5

[8] Lazarus Estates Ltd v Beasley [1956] 1 QB 702

[9] Ibid

[10] Prest– Lord Sumption [16]

[11] Woolfson v Strathclyde Regional Council [1978] UKHL 5

[12] Paragraph 90 lord Ketih

[13] Prest [103] Lord Clarke

[14] Jones v Lipman

[15] Trustor AB v Smallbone (No 2) [2001] EWHC 703

[16] Ibid

[17] Ibid [92] Lady Hale

[18] Jones v Lipman [44]

[19] Birds J, Boyle Clark B et al, company Law (9th edn, Jordan Publishing) 60

[20] Prest [28] (lord Sumption)

[21] Pret [28] Lord Sumption

[22] Ibid

[23] Ibid

[24] Ibid [35]

[25] Alistair Alcock ‘piercing the veil- A dodo of a Doctrine (2013) 25 denning LJ 241,243

[26] Pey Woan Lee, ‘The Enigma of Veil- Piercing’ (2015) 26 (1) ICCLR 28, 30

[27] Prest [74] Lord Neuberger

[28] Prest [69] (lord Neuberger) Alistar Alcock (n 18) 250

[29] Ibid

[30] Ibid

[31] Ibid [100] Lord Mance

[32] Piercing the corporate veil in the family division: Prest– the latest from the court of appeal- Trust and Trustees (2013) 19 (2) 137

[33] Piercing the corporate veil in the supreme court (again)- The Cambridge Law Journal, 72 [2013] 511-515

[34] Ibid [103] Lord Clarke

[35] Pennyfeathers limited v Pennyfeathers property company limited [2013] EWHC 3530 (Ch)

[36] Gramsci. Burton J [101]

[37] DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852

[38] Antonio Gramsci Shipping Corp & ors v Aivars Lembergs [2013] EWCA Civ 730

[39] Ibid

[40] VTB Capital plc v Nutritek International Corp [2013] UKSC 5

[41] Bull S, ‘piercing the corporate veil in England and Singapore’ [2014] Heinonline 39,39

[42] R v Singh [2015] EWCA Crim 173

[43] R v McDowell [2015] EWCA Crim 173

[44] Mujih E, ‘Piercing the corporate veil as a remedy after Prest V Petrodel resources Ltd: Inching towards Abolition’ [2016] Westlaw 17,17

[45] Akzo Nobel NV v Competition Commission [2013] CAT 13

[46] Simon McLeod- ‘The Corporate Veil And Its Piercing As Clear As?’

http://gdknowledge.co.uk/the-corporate-veil-and-its-piercing-as-clear-as/ accessed 20th February 2017

[47] Chandler v Cape plc [2012] EWCA Civ 525

[48] Akansha Dubey et al, ‘Family Law’ (2014) 3(1) 214,217

[49] Tan Cheng-Han, ‘Veil piecing- a fresh start’ (2015) 1 JBL 20,21

[50] Chrysthis N Papacleovoulou, “lifting” or “piercing”, ‘the corporate veil in Cyprus: a doctrine under challenge- an analysis of English and Cyprus case Law analysis’ (2016) 27 (4) ICCLR 129,130