Further Cases Reinforced From Prest V Petrodel Resources Ltd.

There are some legal cases in respect of the piercing the corporate veil following the  case of Prest v Petrodel Resources Ltd.[1] After the Prest v Petrodel Resources Ltd.[2] the general comments are that judges are now more cautious than before in applying this doctrine. The opinion of the last resort principle, which was taken by the judges in the case of Prest v Petrodel Resources Ltd.[3] due to the piercing the corporate veil, continued to be important in the future processes.

Pennyfeathers Ltd. v Pennyfeathers Property Co Ltd[4]

This case is one of the cases in which the principle of concealment and evasion emerged later. The first plaintiff was a company established by the second and third plaintiffs to take advantage of agricultural land development. The second and third plaintiffs also held shares in the first plaintiff company. The second and third defendants wanted to have control of the first claimant company by buying the second and third plaintiff. The legal issue was whether agricultural land was purchased by the second and third plaintiffs, who were shareholders in the first plaintiff company, and whether there was a conflict of interest in the process.  In the case, both evasion and concealment principles were applied to prevent the second and third plaintiffs from hiding behind the first plaintiff. The second and third plaintiffs had breached their fiduciary responsibilities. It meant that the second and third plaintiffs would not be allowed to hide their actions behind the first plaintiff. This case is a good example of facts that lead to the principle of piercing the corporate veil rather than a useful analysis of the law. According to the commentators, Lord Sumption’s evasion principle could not be fully addressed in this case. The principle of concealment also has not been interpreted correctly. It is argued that the second and third defendants were hiding behind the company to buy, not to exploit the opportunity about the farm land.

Antonio Gramsci Shipping Corporation v Lembergs[5]

In this case, the plaintiff wanted to pierce the corporate veil to file a lawsuit against an individual (Mr. Lembergs), accused of interfering with a company to conceal his wrongdoings. Most of the arguments in the case contained the principles of EU law and whether the defendant had consented to the jurisdiction of the English courts. Despite the comments, the Court of Appeal paved the way for a proper interpretation of Prest v Petrodel Resources Ltd.[6] with an explanatory interpretation: It can be said that Lord Sumption’s decision on the abuse of corporate legal personality appears to have some support to justify piercing the corporate veil. However, on the basis of the Supreme Court’s judgment, in the current English law, the corporate veil can be pierced if the individual is under an existing legal responsibility and deliberately obstructs or prevents a company under his control.[7] In the light of the case of VTB Capital Plc v Nutritek International Corporation[8] and Prest v Petrodel Resources Ltd.[9] it was untenable to accept that under these circumstances the corporate veil could be pierced and that Mr. Lembergs had consented to the decision about jurisdiction.

Subsequently, the court continued to explore the possibility of widening the doctrine:[10] with the development of the law, it may be difficult to do so with conventional common law techniques. Based on the concealment and evasion principle by Lord Sumption, Lord Neuberger’s approach, which was partly inconsistent with the adoption of this rule and Lord Walker’s stance that this rule was not just a doctrine, but a label and Lady Hale’s view about the courts as to whether it is possible to classify all cases under this umbrella has not been fully accepted.

Regina v Peter Sale[11]

In the present case, there is an appeal to a confiscation order under Proceeds of Crime Act 2002. The case is interesting as it concerns the interaction between civil law on corporate separation and the approach of criminal courts to separation between individuals and companies. The underlying criminal proceedings result from an illegal payment made by Mr. Sale to a Network Rail employee with the intention of working for his company. When the mentioned employee died before the trial, Mr. Sale was convicted of fraud and corruption due to misrepresentation after it. The trial concerned the question of whether the value of the confiscation order and the benefit of the defendant’s own criminal conduct should be taken into account when considering the benefit of the company. In other words, could the benefit of the company be attributed to the defendant? Lord Justice Treacy, referred from Lord Sumption’s formulation in his decision in the Court of Appeal by saying: Although the debate on piercing the corporate veil in Prest is conducive to a decisive decision, it is clear that the Court of Appeal has dealt with the matter in general and intended to do so. None of the cases mentioned or considered by Lordships were criminal confiscation order cases, but the declared principles also apply to the general.[12]

Applying the formulation of Lord Sumption, the Court of Appeal ruled that this was the first time that the corporate veil is pierced. Although there is no legal obligation, regardless of whether the controller is disposed of with abuse of the corporate veil, the court looks at the back of the corporate veil and concludes that there is concealment to justify the court.[13]

M v M[14]

This case concerned ownership of the properties between the plaintiff wife and the defendant husband, registered to companies which controlled by the husband. Contrary to the previous cases that contradicted Prest v Petrodel Resources Ltd.[15], the court assessed the circumstances in which a private company was an independent legal owner of a property and an occupier of that property owned by a company with an independent usufruct.[16] The Court considers that the presumptions of traditional trust cannot be applied in such cases. Subsequently, the court considers that it should not be exaggerated to prove that the assumptions are contrary, if the company is controlled by the individual. As Lord Sumption said, it can be inferred that there is a spouse who controls the company as the trustee of the property in cases involving matrimonial house. In many cases, it is difficult to prove that this is in the interest of the company if the property of the company is occupied like matrimonial house. Generally, the intention is that the spouse who controls the company wants to have right on the matrimonial house, which does not match the company’s interests. As seen in this case, the husband wanted to control the property over the company and eliminate his wife’s right to share. The court also referred to the principle of evasion and concealment, which Lord Sumption had established in the case from the observations the parties had made during the divorce process regarding the sharing of assets. He mentioned this by saying :“… this husband set up and used corporate structures in order to conceal and evade his obligation to his wife and frustrate the court from carrying out its statutory duty relating to the distribution of assets upon the breakdown of a marriage.”[17]

 Hyde v R.[18]

In the present case, the Court of Appeal considered whether it was appropriate for the trial judge to issue a confiscation of weapons for someone who was collecting firearms lawfully. The company’s controller, which owns weapons, was convicted for collecting firearms in connection with different weapons. The court referred to Lord Sumption’s doctrine about company by saying: “…lawfully operating with true, openly-disclosed and regulated ownership of the Bosnian weapons pre-dating any allegations of wrongdoing related to the present conviction, there is simply no basis for piercing the corporate veil. … [The company] not having been convicted, its property cannot be forfeited as part of the sentence imposed on the [controller of the company].”[19]

Without a complete evasion or concealment analysis; the court, however, refused to lift the corporate veil because it did not fall into the principle of evasion. While this did not help greatly in the development of this new doctrine, the definition of the evasion principle and because of the lack of scope, the courts immediately abandon the arguments in favor of the piercing the corporate veil without going into details when the subject of the case is excluded. Thus, this general approach of the court saves time where it is not appropriate to pierce the corporate veil.

II- Conclusions and Comments on Following Prest v Petrodel Resources Ltd.

Some commentators argue that although the Salomon principle is the cornerstone of UK corporate law;[20] the decision in Prest v Petrodel Resources Ltd.[21] was welcomed.[22] It was also mentioned that the decision in Prest v Petrodel Resources Ltd.[23] would limit the doctrine, since the piercing the corporate veil was considered as a last resort principle. Based on the new approach to the veil piercing process, some commentators who have adopted the last resort principle have proposed a variety of reasons for action based on direct legal relationships between company controllers and plaintiffs, whether in contract, tort, unjust enrichment, agency or access obligation.[24] Others seemed skeptical that traditional private remedies would be effective in all circumstances. It is well known that the solution adopted in the case of Prest v Petrodel Resources Ltd.[25]  (as an alternative to the unsuccessful veil-piercing argument) is helped the court to find out the husband controls and manages the property that the company holds legally in the capacity of as a trustee. It was argued that this would not be sufficient as a viable solution in divorce cases with high compensations and in part the resulting trust analysis would be based on evidence and in fact more information.[26] In addition to the veil piercing practice, most of the comments are both constructive and critical, focusing on Lord Sumption’s veil piercing test and the distinction between concealment and evasion. It has been said that this reformulated test will increase accuracy on behalf of everyone when the company form is used.[27] On the other hand, some of the criticisms are stated for the clarity and consistency of the test. Some authors have described Lord Sumption’s formulation as a basic concept and a recipe for corporate abuse, which may have confusion between certainty and relativity, but with a descriptive and comprehensive re-expression.[28] According to some, it is difficult to determine the line between evasion and concealment objectively and consistently. Because it is emphasized that due to the fact that concealment is in many evasion cases and evasion is usually obtained due to concealment; careful attention should be paid in making this distinction. Looking at cases named Gencor Ltd v Commission[29] and Trustor AB v Smallbone[30]  (cases that may serve as examples of concealment), it was noted that the company wanted to conceal hidden profits / misallocated funds to prevent enforcement measures against the controllers of that company.[31] According to Lord Sumption’s statement on the principle of evasion, it can be said that the veil is pierced to deprive the controller from the illegitimate advantages that the controller would gain by interposing the company. Although there is some assumption of precision, commentators have not fully agreed on whether the test has been formulated correctly in principle.

According to commentators with the case of Prest v Petrodel Resources Ltd.[32], the following should be considered:

The clear difference between corporate and personal obligations identified in the case of Salomon v A Salomon and Co Ltd.[33] was confirmed. However, in case of fraud, the distinction between individual and corporate obligations has become a priority.

It has been found that there has been a mistake in previous court decisions whilst categorizing whether corporate veil is pierced. With this case, distinction was made between lifting and piercing the corporate veil. Lifting the corporate veil occurs when the real actors of the company are concealed under the corporate veil.[34] The best example of this is that although an individual receives funding from an individual, it is shown as an activity on behalf of the company to conceal the fact that it is actually carried out by a person. At the same time piercing the corporate veil is related to situations where there is an existing legal responsibility and where the company is intentionally used as a means to evade such liability.[35] With case of Pennyfeathers Ltd. v Pennyfeathers Property Co Ltd.[36], it was concluded that the actual control of the company was not necessary.

Case of Prest v Petrodel Resources Ltd.[37] brought up the decision that company’s corporate veil can only be pierced in accordance with the last resort principle.[38] In the case of Antonio Gramsci Shipping Corp. & Others v Stepanovs[39], the definition of this doctrine was broadened, as it would be very difficult in practice. Courts have had difficulty in applying this limited definition, but they are likely to continue.

[1] [2013] UKSC 34

[2] Ibid

[3] Ibid

[4] [2013] EWHC 3530 (Ch)

[5] [2013] EWCA Civ 730

[6] [2013] UKSC 34

[7] 2013] EWCA Civ 730, [65]

[8] [2013] UKSC 5

[9] [2013] UKSC 34

[10] [2013] EWCA Civ 730, [66]

[11] [2013] EWCV Civ 1306

[12] R v Peter John Sale [2013] EWCA Crim 1306 , [20]

[13] Ibid, [40]

[14] [2013] EWHC 2534

[15] [2013] UKSC 34

[16] M v M [2013] EWHC 2534; [2014] 1 FLR 439, [204]–[205].

[17] M v M [2013] EWHC 2534; [2014] 1 FLR 439, [169].

[18] [2014] EWCA Crim 713

[19] Ibid, [46]

[20] JHY Chan, Should ‘Reverse Piercing of the Corporate Veil be Introduced in English Law, (Comp Law 35(6) 2014)  163-171

[21] [2013] UKSC 34

[22] E. Roxburgh, Prest v Petrodel Resources Ltd: Cold Comfort for Mrs Prest in Scotland, (SLT, 32, 2013) 223-225

[23] [2013] UKSC 34

[24] William Day, Skirting around the Issue: The Corporate Veil after Prest v Petrodel (LMCLQ, 2014) p. 269

[25] [2013] UKSC 34 at 52

[26] Rob George, The Veil of Incorporation and Post-divorce Financial Remedies, (130 LQR 2014) at 377.

[27] Hans Tjio, “Lifting the Veil on Piercing the Veil” ( LMCLQ 19, 2014) at 23

[28] Francis D Rose, “Raising the Corporate Sail” [2013] LMCLQ 566 at 583.

[29] [1999] ECR II-753

[30] [2001] 3 All ER 987

[31] Brenda Hannigan, Wedded to Salomon: Evasion, Concealment and Confusion on Piercing the Veil of the One-man Company, (Irish Jurist 11, 2013) 50 at 33.

[32] [2013] UKSC 34

[33] [1897] AC 22

[34] Prest v Petrodel Resources Limited [2013] UKSC 34, Lord Sumption at  [28]

[35] Prest v Petrodel Resources Limited [2013] UKSC 34, Lord Sumption at  [35]

[36] [2013] EWHC 3530 (Ch)

[37] [2013] UKSC 34

[38] Prest v Petrodel Resources Limited [2013] UKSC 34, Lord Sumption at  [35],[62],[103]

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