Developments After The Case Of Prest V Petrodel Resources Ltd.

The principle in the case of Salomon v A Salomon and Co Ltd.[1] is that the company has a separate legal entity from its shareholders and members. This principle encourages shareholders to invest in companies.[2] In addition to this, directors, managers of the company can benefit from this veil of legal personality and they can hide their transactions under this veil.

Piercing the corporate veil designed to prevent misuse of a limited liability to conduct fraud or other misconduct and it only applies to members of the company that actually make the situation. In English law, provisions of the piercing the corporate veil came into being when there is no other appropriate remedy. With this, it is aimed to prevent the abuse of legal personality.[3] From the case of Adams v Cape Industries Plc.[4] it has come to the agenda that the corporate veil can only be pierced in case of fraud or a façade. In such cases, the court is able to perceive the unlawfulness made by looking behind the corporate veil and depart from the Salomon principle.[5]

In Prest v Petrodel Resources Ltd.,[6]   the issue of transferring the properties of the Petrodel Group which owned and controlled by Mr.Prest was raised in the high court. The question about this appeal is whether the court is authorized to order the transfer of these properties, which are legally owned by the company and not by the husband. The disputed properties gained in the companies by Mr.Prest as a Trustee. Instead of directly piercing the veil the trust approach was applied. Lord Sumption said that piercing the veil could be brought up in an act of evasion of responsibility, or because there was no other traditional remedy, and in general he reiterated that the primary purpose of the veil-piercing is to prevent abuse of the legal entity.[7] After that Supreme Court had the opportunity to revise and reconsider this issue.

When looking at the outcome of the case of Prest v Petrodel Resources Ltd.[8] again; which is important in respect of limited liability, veil-piercing and its impact on a separate legal entity; an ambiguous and narrow interpretation was put forward with the two new concepts called concealment and evasion principle. The decision taken in the case of Prest v Petrodel Resources Ltd.,[9] was in fact intended to redefine the veil-piercing doctrine and redraw its boundaries. The limitations made by Lord Sumption rendered the veil piercing doctrine practically dysfunctional. The distinction between the principle of concealment and the evasion principle is not as clear as it seems in theory. It is a problem that this formulation is open to misunderstanding in the legal framework. A more fundamental issue, however, is that the distinction between concealment and evasion is blurred because they produce similar results. This difficulty seems difficult to solve for the time being due to the inadequate definition of the Supreme Court’s concealment principle. While the evasion principle for piercing the veil still creates a legal ground that can be used, it is practically difficult to determine its limits and determine where evasion happens. There are also other remedies based on the principle of concealment, which occurs when the company is used to prevent third parties from exercising their rights.

If the previous cases with regard to veil-piercing are analyzed, it is clear that most of the same will be decided if Lord Sumption’s formula is used. But aside from the above challenges, even Lord Sumption’s formulation seems to have its own uncertainties and create confusion. As a result, it is doubtful whether the adoption of the new formulation significantly advances the doctrine. It should be noted, however, that the application of Lord Sumption’s doctrine at the same time stems from a narrow and unlikely issue. Although Hannigan criticizes the narrow formulation of the evasion principle, the principle allows the courts to immediately refuse to pierce the corporate veil in cases where the principle of evasion is excluded.[10] Thus, the principle and interests of the separate legal entity that have come from the Salomon principle to the present day are preserved. The principle of evasion also prevents judges from using the doctrine as a shortcut to defending their decisions in light of other legal principles. Thus, Lord Sumption’s test gave the doctrine a bit more clarity than before. However Lord Sumption does not go into much detail beyond this point. The lack of definition encourages judges to resort to other traditional legal practices. It pushes them to follow a conventional path such as agency, trust, tort law by adapting these in corporate law.[11] When the cases related to legal personality abuse before Prest v Petrodel Resources Ltd.[12] examined, it is seen that they have been decided with traditional remedies. Hence Lord Walker has the right to say: “…simply a label […] to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a body corporate reaffirmed by the House of Lords in Salomon v A Salomon and Co Ltd [1897] AC 22.”[13] As such, defining new principles and updating the doctrine caused confusion. While Lady Hale doubted whether the new definition of principles would be in accordance with the future jurisprudence; Lord Wilson criticized the principles of Lord Sumption because of lack reasoning. Also according to Lord Neuberger, this is already present in the existing laws and therefore does not need to be repeated with different names.[14] Lord Mance[15] and Lord Clarke[16], on the other hand, did not want to prevent the veil piercing from being applied outside the principle of evasion.

Although the new definition has tried to change the legal ground in the veil piercing doctrine to provide more convenience and comprehensibility for future cases, these principles have attracted many criticisms and confused judges when applying them to cases.[17] The case did not fully resolve the problems at all points. In the case of VTB Capital Plc v Nutritek International Corporation[18], for example, Lord Neuberger considered that piercing the veil should be also dealt within companies in foreign jurisdictions. However, Lord Sumption did not address this problem. In addition, Lord Neuberger states that there is no English case law where this doctrine is successfully executed.[19] To this point, the deficiency of Lord Sumption’s arguments was that he did not fully deal with the abuse of legal personality. On the one hand, the new doctrine makes difficult to make the right decision on legal entity abuses due to melting all the activities that occur abuse of legal entity in the same pot, at the same it aims to minimize the abuse. Although the use of the company structure in fraudulent activities is a very broad concept, it is difficult to define each act individually. Therefore, instead of combining all of them under one doctrine, it may be healthier to deal with the situation and find remedy according to the each individual and each case. This doctrine of Lord Sumption did not fully answer every question, but there is also no proper guidance for judges to reject this new principle and follow the old ones.[20]

IV- Recommendation

In general, this doctrine put forward by Lord Sumption; is important since no formulation has been made about veil-piercing. Previously, the fact that a company’s legal personality was ignored and have recourse to an individual for the company’s debts depended on many factors such as agency, single economic entity, sham or the façade.[21] The judges used their discretion to decide case by case and decided without adhering to a formula or form. Lord Sumption wanted to tackle this narrow subject in corporate law that has never been so focused on before. He has created this new doctrine alternative to the old conventional ones with the principle of evasion and concealment.[22] Whilst he was partially successful with this; he could not form a doctrine that included every aspect and circumstance. It is difficult for judges to make a decision by referring to him in future cases in accordance with Lord Sumption’s principles. Therefore, the judges do not fully understand which remedy they should apply and when and how this doctrine is to be applied and they are again turning to the conventional concepts such as agency, trust, tort law by adapting them in corporate law.[23]  The doctrine of veil-piercing is not a concept that can be fully measured and delineated. Because the emergence of this act can be realized by the court however the way in which it is formed constitutes a very wide area. Adding to the doctrine, the situation that reveals each veil-piercing situation creates problems in terms of time and practicality. So it can be said that a doctrine cannot be based on a criterion that cannot be measured precisely. Since there is no criterion for measuring abuse of the corporate veil, common legal doctrines and conventional remedies are simpler and more practical in this respect.

For these reasons, although the principle of evasion and concealment is not fully sufficient; it is open to expansion and development. However just like the veil-piercing doctrine introduced in the case of Adams v Cape Industries Plc.[24] has been developed and in the case of Antonio Gramsci Shipping Corp. & Others v Stepanovs[25] it broadened with the new decisions and cases and came to its current position; it can also happen to Lord Sumption’s new doctrine. His efforts and devotion to further formulate this issue can be made more comprehensive, more understandable and more practical by making references and additions by judges to the principles of evasion and concealment in future cases.

[1] [1897] AC 22

[2] Rian Matthews, Clarification of the doctrine of Piercing the Corporate Veil, (Journal of International Banking Law and Regulation,2013) p. 01

[3] Mandaraka-Sheppard A New trends in piercing the corporate veil  the conservative versus the liberal approaches, (Maritime Business Forum 1-28.)

[4] [1990] Ch 433 (CA)

[5] Cyril Kinsky Q.C., Piercing the corporate veil, Case Comment, (Private Client Business 2014), p. 01

[6] [2013] UKSC 34

[7] Fang Ma, Company Law, (2nd Ed., Pearson, 2016) p.30

[8] [2013] UKSC 34

[9] [2013] UKSC 34

[10] Brenda Hannigan, Wedded to Salomon: Evasion, Concealment and Confusion on Piercing the Veil of the One-Man Company (2013) 50 1 11 at 30

[11] Brenda Hannigan, Company law, (Oxford, 2016) p. 57

[12] [2013] UKSC 34

[13] Prest v Petrodel Resources Limited [2013] UKSC 34, Lord Sumption at  [106]

[14] Cyril Kinsky Q.C., Piercing the corporate veil, (Case Comment, Private Client Business 2014), p. 09

[15] Prest v Petrodel Resources Limited [2013] UKSC 34, Lord Sumption at  [100]

[16] Ibid  at  [103]

[17] Rian Matthews, Clarification of the doctrine of Piercing the Corporate Veil, (Journal of International Banking Law and Regulation 2013), p.06

[18] [2013] UKSC 5

[19] Mujih, Dr. Edwin C., Piercing the corporate veil as a remedy of last resort after Prest v Petrodel Resources Ltd: Inching towards abolition’, (Company Lawyer, 2016) p.4

[20] Pey Woan Lee, The Enigma of veil-piercing, Case Comment, (International Company and Commercial Law Review, 2015), p. 06

[21] HY Ying & R Ying, Revisiting the Alter-ego exception in corporate veil piecing, (27 Singapore Academy of Law Journal, 2015) at 177

[22] Prest v Petrodel Resources Limited [2013] UKSC 34, Lord Sumption at  [29]

[23] Brenda Hannigan, Company law, (Oxford 2016) p. 57

[24] [1990] Ch 433 (CA)

[25] Antonio Gramsci Shipping Corp v Stepanovs [2011] EWHC 333 (Comm)