Lord Sumption’s Evasion and Concealment Principles In Decision

Understanding the Evasion and Concealment Principles

Before the case of Prest v Petrodel Resources Ltd.,[1] the ground to pierce the corporate veil in United Kingdom was based on the agency, single economic entity, sham or the façade.[2] These reasons were subject to change after the Prest v Petrodel Resources Ltd. decision.[3] The court took the old decisions, which included the decisions that pierced the corporate veil and put them altogether under the umbrella of concealment and evasion of existing liabilities. It was decided that the principle of concealment was legally banal in the case and did not provide a containment regarding the piercing the corporate veil. It was recalled that the court should not be subject to any obstruction for learning the real actors behind the company.[4] In English law, however, the courts pierced the corporate veil and determine who the company’s actual actors were.

When looking at the two principles set forth by Lord Sumption, these are concealment and evasion.

Concealment Principle: It means the use of company structure to conceal the identities of real actors. Looking under this structure and finding out who the real actors are, does not mean ignoring the principle of separate legal entity.[5] When this principle is applied, it does not seek to find any impropriety. This principle shall apply where a company acts as an agent or a nominee for an individual and acquires property on its behalf. The most common example is a director who establishes a limited liability company to make a secret profit from out of it. In such a case, compensation that can be claimed against both the company and the individual will be raised. This principle is also seen when an individual abuses the corporate entity of the company in order to conceal its aims and actions. The emergence of a legal relationship between the individual and the company makes it easier to obtain information about the case. However, in the comments that against this principle, it is stated that the scope of this principle is very wide and there is no limit. When it is easy to determine the nature of the action in cases where a company is taking money on behalf of an individual and is used to conceal certain situations, it is difficult to apply the principle without abusing it.

Lord Sumption cited the principle of concealment and referred to the case of Gencor Ltd v Commission[6] and Trustor AB v Smallbone[7]  In these two cases, the improper and dishonest financial gains of the controller who concealed the identity for their own benefit were discussed. For Lord Sumption, these cases were not for the piercing the corporate veil, because the responsibility of the controller was on equitable principles against both the company and the controller.[8] Therefore, these problems could be solved with equitable solutions compared to piercing the corporate veil. In other words, as a result of formulating the principle of concealment, the process of piercing the corporate veil could be abolished.[9] Liew mentioned that the principle of concealment and evasion could be used interchangeably and this would lead to the same consequences hence that definition was unnecessary and not entirely satisfactory.[10] Hannigan complained that the Supreme Court did not provide the necessary explanation for lifting and piercing the veil. He also pointed out that the thin line between concealment and evasion is ambiguous and inconsistent and therefore a duality arises.[11] This confusion also appeared in the case of Gilford Motor Co Ltd. v Horne.[12]  Lord Sumption said that this case was in line with an evasion principle, while Lord Neuberger mentioned that it was a principle of concealment.

Evasion Principle:  It means that a company’s separate legal entity waives a right against another person or prohibits the exercise of a right. In such cases, the court may pierce the corporate veil of the company if there is a legal right against the person who controls it, regardless of the company’s personality. This is the only situation where the protection of limited liability can actually be pierced. It is an abuse of using the corporate personality in order to avoid a liability. The best example of this is in the case of Jones v Lipman[13]  given by Lord Sumption. In the case it is seen that the individual made a contract before changing his mind for the sale of the property. In order to avoid specific performance specified in the contract, individual has sold the property to a company that he has purchased. The term “evasion of existing liabilities” comes at the moment when a company is used or created to be between a real person and his debts, obligations. In other words, as a result of the company having a separate legal entity, the real person is using this concept as a tool to avoid his current debts.[14] Therefore, the controller shall not be held responsible due to the actively controlling of the company. In such a case, the court can only pierce the corporate veil in order to prevent or stop the benefit provided by the controller.[15] Another example of the evasion principle is the the case of Gilford Motor Co Ltd. v Horne.[16] In the case, he stated that there was a veil piercing against the company. This is due to prevent and stop Horne’s acts to benefit he is having from the Salomon principle.

The subtle distinction between veil piercing, concealment, and evasion principle were certainly not a qualification initially favored by other members of the Supreme Court. According to the Supreme Court this new approach as a source of suspicion brought very narrow interpretations of corporate abuses, creating unnecessary uncertainty about discretion.

Court’s Findings Regarding to the Lord Sumption’s Principles

With this decision, Lord Sumption said that the separate legal entity of a company provides opportunities to implement the principle of piercing the corporate veil in case of wrongdoing by a wrongdoer. However, he added that piercing the corporate veil would only take place if no other remedy could be proposed. Afterwards, he contributed the principles of concealment and evasion to the legal literature by standing against the traditional approach and terminology. Lord Sumption also stated that piercing the corporate veil can only be in cases where wrongdoing is an evasion. Even if the corporate veil is used to hide a person, it does not have to be pierced, but it is enough to look under the veil and understand what is actually happening and who the real actors are. However, he added new concepts and clarified the misuse of this concept by saying in most cases where the corporate veil was pierced, only some of them were indeed pierced.

If the facts of the case are to be continued, the court stated that there was not enough ground for piercing the corporate veil and disregarding the principle of separate legal entity. The companies were founded much earlier than the Prests’ marriage, and it was stated that it was founded to protect wealth and avoidance of tax, not with any misleading intent, such as concealment of property due to divorce.[17] It would be wrong for the court to make the same mistake and to ignore this principle, even though Mr.Prest ignored the separate legal entity of his companies and treated their bank accounts as their own. This principle could not be ignored by the court just because Mr. Prest made this mistake.[18]

Another argument is that Mrs. Prest said it to the court that court has wide discretion coming from Matrimonial Causes Act 1973 for piercing the corporate veil. However, Lord Sumption rejected the proposition and stated that the family courts had no such jurisdiction.[19] The law authorizes family courts to take into account the assets in the spouses’ companies and take actions under the name of calculation, but does not grant them the right to dispose of them. He stated that if courts have taken such actions before, they had been wrong.

In spite of the failure of Mrs. Prest’s first two arguments, the court made the transfer of the property she had mentioned on her behalf. This is because the higher court has found another alternative rather than piercing the corporate veil. Mr. Prest, together with the financial situation he provided to buy that mentioned property, done the process only for the legal title of the ownership rather than to benefit. In other words, the properties owned by the company were held by Mr. Prest as a trustee. The court decided to transfer the title of the legal ownership to Mrs. Prest for divorce proceedings. Lord Sumption stated that this was not a piercing of the corporate veil. The court looked at the relationship between the trustee and beneficial owner.

Lord Sumption stated that the jurisdiction in which the corporate veil could be pierced came from the legal theory applied by the court to special circumstances. Therefore, these comments are not binding just as in the case of Prest v Petrodel Resources Ltd.,[20] it has not established a binding practice that concerns the piercing the corporate veil. It served as an example only for the lower courts not to pierce corporate veil under the same conditions.

[1] [2013] UKSC 34

[2] Ying HY & Ying R ‗Revisiting the Alter-ego exception in corporate veil piercing, (27 Singapore Academy of Law Journal, 2015) p.177

[3] Prest v Petrodel Resources Limited [2013] UKSC 34, [28]

[4] Ibid

[5] Prest v Petrodel Resources Limited [2013] UKSC 34, [31]

[6] [1999] ECR II-753

[7] [2001] 3 All ER 987

[8] Pey Woan Lee, The Enigma of veil-piercing, Case Comment, (International Company and Commercial Law Review, 2015), p. 04

[9] Pey Woan Lee, The Enigma of veil-piercing, Case Comment, (International Company and Commercial Law Review, 2015), p. 05

[10] Liew, Adam, Three Steps Forwards, three steps back: why the Supreme Court decision in Prest v Petrodel Resources Ltd, leads us nowhere,  (The King’s Student Law Review, vol. 5, issue no. 2, 2014) p.68

[11] Brenda Hannigan, Wedded to Salomon: evasion, concealment, and confusion on piercing the veil of the one-man company, (Irish Jurist (2013), p. 11

[12] [1933] Ch 935

[13] [1962] 1 All ER 442

[14] Wilson J & Rogers A Piercing the corporate veil: Ramifications of the Supreme Court decision in Prest v Petrodel Resources Limited. p.24

[15] Prest v Petrodel Resources Limited [2013] UKSC 34, [35]

[16] [1933] Ch 935

[17]  Prest v Petrodel Resources Limited [2013] UKSC 34, Lord Sumption at [36]

[18] Ibid

[19] Prest v Petrodel Resources Limited [2013] UKSC 34, Lord Sumption at  [37]

[20] [2013] UKSC 34