Stripping away the veil of deceit

John Wilson QC examines a ground-breaking Supreme Court ruling on the separate identity of a corporate entity.

Prest v Petrodel Resources Ltd & Others [2013] UKSC 34; [2013] All ER (D) 90 (Jun), is a landmark case which is of considerable interest to corporate and insolvency lawyers, as well as family lawyers. It will cited for years to come although, in another way perhaps, it merely burnishes the pedestal of the ground-breaking case of Salomon v A. Salomon & Co Ltd [1897] AC 22. Salomon established the broad inviolability of the separate identity of a corporate entity. This is something we now take for granted, but it was then a far more radical concept. A. Salomon & Co Ltd was not Mr Salomon, even though he was the only shareholder in the company. They stood side by side as separate legal personalities. Mr Salomon did not stand behind A. Salomon & Co Ltd in the eyes of the law.


Mixed metaphors

It was Salome who performed the Dance of the Seven Veils. Is it a coincidence that, as the years went by and lawyers grappled with the consequences of Salomon, the image of the corporate veil (and piercing or lifting it) took hold? The Supreme Court, in Prest, has told us that we must beware graven images in the form, principally, of metaphor. Ironically, to illustrate the dangers of metaphors such as the corporate veil, they cited metaphor: “(Piercing) seems to happen freakishly. Like lightning, it is rare, severe and unprincipled.”

Since the 1930s and Gilford Motor Co Ltd v Horne [1933] Ch 935, there has been talk of “lifting” or “piercing” the corporate veil to assist the supplicant standing next to his enemy, but outside the corporate citadel. One of the most startling conclusions in Prest, as stated by Lord Neuberger, was that there had never actually been a successful or appropriate invocation of “the doctrine” of “piercing the corporate veil” since its invocation in Gilford (para [79]). Indeed, it gave rise to the temptation (not succumbed to) to give “the doctrine” its quietus. “The doctrine” may not even be a doctrine. It is “not a doctrine at all…it is simply a label” (per Lord Walker). It is a metaphor (per Lord Mance). More prosaically (per Lord Sumption), it is pictorial language used to describe the exceptions to the principles set out in Salomon.

The use of words “pierce”, “lift”, “veil”, “mask”, “façade” or “sham” has not assisted. Lord Sumption, at para [28], described the latter two terms as “protean”, meaning, in one dictionary definition, “readily taking on various shapes or forms”. Metaphors can lead the lawyers into mists of doctrinal chaos and enslave them in confusion and muddled thinking.

Lord Sumption undertook a masterly survey of the relevant authorities and, in doing so, sought to eschew metaphor and imprecision and to penetrate through to the nucleus of legal principle that lies at the core of “the doctrine’s” invocation. It is a specific principle that the law defines the incidents of most legal relationships between persons (natural or artificial) on the fundamental assumption that their dealings are honest. The same legal incidents will not necessarily apply if they are not (see para [18]). “Fraud unravels everything”. Although the maxim is primarily applied in cases of contract, it illustrates a broader principle governing cases in which the benefit of some apparently absolute legal principle has been obtained by dishonesty. The authorities show that there are limited circumstances in which the law will treat the use of a company as a means of evading the law as dishonest for the purpose of the maxim.

In Ben Hashem v Al Sharif [2009] 1 FLR 115; [2008] EWHC 2380 (Fam), Munby J formulated six principles underlying the concept of piercing the corporate veil. Control and ownership of a company were not enough, nor was it sufficient to evoke necessity in the interests of justice. There needs to be some “impropriety” which must be “linked to the use of the company structure to avoid or conceal liability”. The company must have been misused as a device or façade to conceal the wrong-doing of the controllers or owners. Even if the “corporate veil” is pierced, such “piercing” should be strictly limited to that which is necessary to provide a remedy for the particular wrong done.

Munby J’s implicit view that “piercing the corporate veil” should only happen when no other remedy was available against the wrongdoer, was not accepted by the Court of Appeal in VTB Capital plc v Nutritek International Corp [2012] 2 Lloyds Rep 313, but confirmed by the Supreme Court ([2013] 1 Lloyds Rep 466).

Concealment principle

Sumption SCJ, drawing perhaps on Munby J’s analysis in Ben Hashem of piercing or lifting the corporate veil, concluded that two distinct principles, the concealment principle and the evasion principle, lay behind the words “façade” and “sham”.

At para [28]: “The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the imposition 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. In these cases the court is not disregarding the ‘façade’ but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be crucial. This may be illustrated by those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil.”

With the concealment principle, the company is a “façade” and, while being wary of metaphor, the court “lifts the corporate veil”. With the evasion principle, the company’s involvement is a “sham” and the court “pierces the corporate veil”. Whether the veil is lifted or pierced, any such violation of separate corporate identity must be limited to the minimum necessary to provide a remedy. Lord Sumption’s analysis of the case law suggested that in most cases, the concealment principle, rather than the evasion principle, was engaged so that there was no question of “piercing the corporate veil”.

Evasion principle

For the evasion principle to be engaged, the “owner” of the company has to use the company’s separate legal personality to evade a liability which would otherwise lie on the owner. Lord Sumption found this to be the case in Gilford and Jones v Lipman [1962] 1 WLR 832. At para [35], he summarised his understanding of the limited place for “piercing the corporate veil”: “I conclude that there is a limited principle of English law which applies 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 then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil. Like Munby J in Ben Hashem, I consider that if it is not necessary to pierce the corporate veil, it is not appropriate to do so, because on that footing there is no public policy imperative which justifies that course.”

Impropriety

To justify piercing the corporate veil, there must be “impropriety”. From Moylan J to the Supreme Court all agreed that there was no “impropriety” in Prest. Mr Prest acted improperly in many ways in relation to the company, but that did not, of itself, allow the courts to disregard the separate legal personality of the company. The fact that Mr Prest had acted improperly in relation to the companies did not mean the courts were entitled to do so. Mr Prest’s improper behaviour was an example of the concealment principle.

The leading judgment in Prest was given by Lord Sumption and, generally, the remaining members of the court agreed with him. However, Lord Neuberger took the view that, even in Gilford and Lipman, only the concealment principle was engaged, so there was no real “piercing” of the corporate veil. The distinction between the concealment principle and the evasion principle was not actually debated during the hearing (Lord Clarke at para [103]) and so, on balance, it was felt that this differential should not be formally adopted until it had been fully argued out in a later case.

Nor was it felt appropriate to consign the “doctrine” of “piercing the corporate veil” to history as, per Lord Neuberger, it represented “a potentially valuable judicial tool to undo wrongdoing in some cases where no other principle is available”, provided it is possible to discern or identify an approach to piercing the corporate veil which accords with normal legal principles, reflects previous judicial reasoning (so far as it can be discerned and reconciled) and presents a practical solution (para [80]). Lady Hale and Lord Wilson expressed some doubt as to whether every case could be classified using the concealment and evasion principles and said these principles may be examples of the broader principle, that the individuals who operate limited companies, should not be allowed to take unconscionable advantage of the people with whom they do business. Lord Mance viewed “piercing” as the “final fall back” and cases where it was likely to be appropriate were likely to be “novel and rare” (para [40]).

The Matrimonial Causes Act 1973

The principal issue before the Court of Appeal was whether Mr Prest was “entitled” to the properties legally owned by the companies for the purposes of s 24(1)(a) of the Matrimonial Causes Act 1973 (MCA 1973). Relying on Nicholas v Nicholas (1984) FLR 285 and Mubarak v Mubarak [2001] 1 FLR 673, Moylan J held that Mr Prest was “entitled” to the properties. The majority of the Court of Appeal disagreed. So did the Supreme Court. To give a meaning to s 24(1)(a), which permitted such an interpretation, would give a special and wider principle in matrimonial proceedings, to the concept of piercing the corporate veil and that was impermissible (see Lord Sumption at paras [37] and [41]). Lord Sumption’s analysis was supported by Lady Hale who conducted a historical analysis of the use of the words in the statute that supported his restrictive interpretation.

The court could consider s 25(2)(a) of MCA 1973, which referred to “financial resources” so that Mr Prest’s ability to extract money from the companies could be taken into account. Similarly, a wife could use s 37 of MCA 1973 to reverse transactions between husband and company designed to thwart her claims. But these provisions were as far as the legislature had been prepared to go. Section 37 provided no assistance to Mrs Prest in this case as any relevant transactions had taken place before the breakdown of the marriage. The courts apply the same law in the Family Division as in other divisions. However, in the Family Division, there is a statutorily imposed duty of full and frank disclosure to the court of a spouse’s financial position. A failure to do so gives the court an entitlement to draw adverse inferences (see J v J [1955] P 215; [1955] 3 WLR 72 and NG v SG (Appeal: Non-Disclosure) [2012] 1 FLR 1211; [2011] EWHC 3270 (Fam); see also Prest at paras [43-45]). Adverse inferences must be properly drawn and reasonable. Mr Prest was subjected to extremely harsh criticism as to his disclosure and co-operation with the court, as were “his” companies. As a result, the Supreme Court found it significantly easier to draw adverse inferences as to the beneficial ownership of the properties nominally owned by the companies. It held that they all belonged to him by operation of resulting trust.

This conclusion surprised many practitioners. Moylan J, while finding that Mr Prest owned the matrimonial home (also held by a company), had not made findings to that effect. Lord Sumption concluded that, if it had been necessary to Moylan J’s reasoning, he would have so found. Adverse inferences could be drawn.

Pyrrhic victory?

Prest is an object lesson in the dangers of not co-operating or properly participating in the court process. If Mr Prest had done so, it would have been far more unlikely that the issue as to ownership would have remained unresolved at first instance and far more difficult for the Supreme Court to intervene.

It was a pyrrhic victory for Mr Prest/ the companies in that the latter’s advocates won most of the legal arguments. Was it a pyrrhic victory for Mrs Prest? Lady Hale expressed concern that the properties to be transferred to her were mortgaged to the hilt. I understand that, at an early stage, injunctive remedies were obtained which significantly limited the companies’ powers to borrow against the properties, so that Mrs Prest obtains properties worth £17.5m with borrowings against them of USD $7m. If that is so, it represents a considerable triumph for her team.

It remains to be seen, however, whether this is a great victory for wives generally. The Supreme Court carried out a specific fact-based analysis of the properties in dispute and the Justices were able to assist Mrs Prest by reason of Mr Prest’s non-co-operation and contumelious behaviour (and that of his companies). Unusually, for a case in the Supreme Court, Prest was decided on its facts. The decision may have been different if:

  • the properties were acquired at a time when the companies had their own resources to do so;
  • the companies were properly described as property investment companies and were acting in the course of business;
  • the properties were outside the jurisdiction of England and Wales;
  • and Mr Prest and the companies had given proper explanatory disclosure in accordance with their obligations.

The case emphasises the importance, when third party interests are engaged, of pleading the case properly. It also suggests that new battlegrounds will be established (eg, the role of the director’s loan account). The importance of Salomon has been reaffirmed and somewhere, Mrs Prest is raising a sparkling glass to common sense and justice.

This is an abridged version of an article that first appeared in Family Law Week.

John Wilson QC, barrister at 1 Hare Court and author of Cohabitation Claims: Law, Practice and Procedure (Lime Legal Ltd). The 2nd edition is due out soon.

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