Petrodel v Prest: Lord Sumption’s Masterly Analysis of the Corporate Veil

When
the history of the corporate veil is written, the year 2013 will perhaps be
given as much prominence as the year 1897. Today, the UK Supreme Court allowed
Mrs Prest’s appeal
against the judgment of the Court of Appeal that seven
properties in London owned by the Petrodel group of companies are not
properties to which the sole controller of the group is ‘entitled, in
possession or reversion’. The judgment of Lord Sumption contains a masterly
analysis of this difficult area of law and is likely to become the definitive
authority on the corporate veil in the years ahead. Along with (and perhaps even more than) 
VTB
Capital v Nutritek Corporation
, this is the most
important judicial analysis of the corporate veil in recent times. We have
commented on the decisions in VTB (Court
of Appeal
and Supreme
Court
) and Petrodel,
to which readers may refer for an account of the facts and the background. In
short, after Mr and Mrs Prest divorced, Moylan J. awarded Mrs Prest a sum of
£17.5 million as a fair division of Mr Prest’s assets. In part satisfaction of
this sum, the judge ordered three Petrodel group companies to transfer the
seven properties in question to Mrs Prest. It was established, inter alia, that Mr Prest was the
controller and sole person interested in the Petrodel companies and that he had
used the assets of the company to defray personal expenses. The question was
whether the court was empowered to grant this order.

At
an early stage of his judgment (para 9), Lord Sumption identifies three (and no
other) possible bases on which such an order can be validly made against the
corporate defendants: (1) ‘piercing
the corporate veil’ in order to give effective relief; (2) section 24(1)(a) of the Matrimonial Causes Act, 1973
and (3) the Petrodel companies hold
the London properties on trust for the husband (not simply because he is the
controller). Our interest here is (1)
but we note in passing that Lord Sumption (correctly, it is submitted) rejected
the proposition that section 24(1)(a) authorises the court to ignore the
corporate entity simply to make a fairer distribution of assets.

Lord
Sumption’s analysis of the corporate veil contains so many important
propositions of law that it is best to summarise them, and then consider two or
three of them in more detail:

  1. The
    corporate veil has been described as a fiction but it is a fiction which
    is the whole foundation of the English law of company and insolvency. It
    also clearly accords with the commercial understanding of companies
    although, as Goff LJ rightly said, the courts are here “concerned not with economics but with
    law
    ” (para 8);
  2. In
    some cases, some rule of law has the effect of attributing to the
    controller the knowledge of the company, or in some other way treating
    (without ignoring the separate legal entity of the company) as the act of
    the company an act of some other person. These are not, and should not be,
    considered as instances of piercing the corporate veil. That is done only
    when the corporate personality of the company is disregarded (para 16);
  3. Most
    advanced legal systems recognise corporate personality but adopt different
    ways of introducing some limits to its logical consequences. The civil law
    countries use the doctrine of ‘abuse of rights’ but the common law knows
    no such general principle: instead, “it
    has a variety of specific principles which achieve the same result in some
    cases
    ”, one of which is that the law, in defining the incidents of a
    legal relationship, assumes that persons who engage it deal honestly with
    each other: if not, the same incidents may not necessarily apply (para 18);
  4. Much
    of the case law on the corporate veil “is
    characterised by incautious dicta and inadequate reasoning
    ”. Many of
    these cases attribute the doctrine of piercing the veil to the fact that
    the company is a ‘sham’ or a ‘façade’ but these expressions beg more
    questions than they answer. In recent times, the law has crystallised
    around the six principles formulated by Munby J. in Ben
    Hashem v Shayif
    , of which the most important is that there must be
    ‘relevant impropriety’, that is, impropriety in the use of the corporate structure to avoid liability. The one
    modification made to this by the Court of Appeal in VTB (that the corporate veil can be pierced even if other
    remedies are available to the claimant) is wrong (para 25);
  5. Although
    the recognition of the veil was obiter
    in many of these cases, and those in which it was not can be explained
    by conventional legal principles, the existence of the doctrine is
    well-established in the authorities: “I
    would not for my part be willing to explain that consensus out of
    existence
    ” (para 27);
  6. Much
    of the confusion in the case law has arisen from a failure to distinguish
    between “the concealment principle
    and the “evasion principle
    (para 28);
    1. The
      concealment principle is, in fact, not an instance of piercing the
      veil
      but is the principle that “the
      interposition of a company…so as to conceal the identity of the real
      actors will not deter the courts from identifying them, assuming their
      identity is legally relevant
      ”.
    2. The
      evasion principle is the only real instance of piercing the veil. This is
      done if “there is a legal right
      against the person in control of the company 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
      ”.
  7. Lord
    Sumption illustrates the difference between the concealment principle and
    the evasion principle by comparing, on the one hand, Gilford Motor Co v Horne
    [1933] Ch. 935 and Jones v Lipman [1962] 1 WLR 832 with, on the other, Genco ACP v Dalby [2000] 2 BCLC 734
    and Trustor AB v Smallbone (No 2) [2001]
    1 WLR 1177). In Trustor and Genco,
    at the risk of over-simplification, a claim was made that a former
    director of the claimant was liable in knowing receipt by reason of the
    receipt by a company under his control of funds belonging to the claimant
    which the controller had procured the company to receive. In both cases,
    the claimant succeeded apparently on the basis that the veil was pierced
    so that it could be said that the former director had received the money.
    Lord Sumption explains that this is a wrong analysis of the cases:
    correctly analysed, both cases are instances of the concealment
    principle
    , not the evasion principle. This is because there was
    no legal right or liability on the part of the director independently of
    the company’s interposition: by attributing his knowledge to the company,
    the company became directly liable to the claimant, but without losing
    its corporate personality
    . As Lord Sumption puts it, the result would
    have been the same if Mr Dalby had caused his uncle to receive the funds
    with prior knowledge, instead of the company, and there would have been no
    doubt about his uncle’s separate existence. On the other hand, the order
    of injunction made against JM Horne & Co can be explained only on the
    basis that the company was created by Mr Horne for the purpose of
    defeating the right that his former employers had against him. That
    liability existed independently of the company (paras 29-33).
  8. This
    distinction explains why the veil could not be pierced in VTB Capital and indeed in Prest: in VTB, there was no legal right against or liability of Mr
    Malofeev that existed independently of the role of Nutritek and the other
    companies. In Prest, there was
    certainly impropriety, but it had nothing to do with Mr Prest’s obligation
    to Mrs Prest. This suggests that the result might have been different if
    Mr Prest had transferred his
    assets to the companies (beneficially owned by the companies) after the order was made, in order
    to defeat it (paras 34-36).
  9. The
    principle is best stated in the words of Lord Sumption, at para 35:
35. 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.
There
are three important points that arise out of this judgment. First, the point left open by the
Supreme Court in VTB—whether at all
the court has the power to pierce the veil—has now been decided, although Lord
Neuberger appears to have done so with some reluctance, considering (rightly)
that the doctrine is anomalous. He demonstrates (para 74) that in some eighty years of its existence, the doctrine
of piercing the veil has not been successfully and correctly invoked even once.
Secondly, Lord Neuberger (para 62) and Lord Sumption (para 35) agree that there is a ‘necessity’
threshold to cross before the veil can be pierced: that is, contrary to what
the Court of Appeal decided in VTB
Capital
, the veil should not be pierced even where the evasion principle
applies, if other appropriate remedies are available to the claimant. Thirdly, Lord Neuberger and Lord
Sumption differ in their treatment of
the important cases of Gilford Motor Co v
Horne
and Jones v Lipman. To Lord
Sumption, these cases illustrate the evasion principle insofar as an order was
made against the company; to Lord Neuberger (para 70), these cases wrongly invoked the doctrine of piercing the
veil and the order made against the company can be explained on the basis of
agency.

It
is evident, especially after Petrodel
Resources
, that the law in India could not be more different: the courts pierce
the veil more readily, and do not insist that the fraud or impropriety must be
concerned with the use of the
corporate structure. However, since the Supreme Court is yet to closely examine
this question in the light of recent developments, the scope of the corporate
veil remains an open question in India.

About the author

V. Niranjan

4 comments

  • Reading paragraphs 28 and 35 together, it would appear that the evasion principle not only entails: i)the existence of a legal right and ii) the interposition of a company defeating such legal right, but also iii) an intention to defeat 'that' right. Therefore, even where the company was interposed to avoid another legal obligation (such as tax, in the instant case), the Court shall not pierce the veil. Is this not too narrow an interpretation?

  • To one's mind, rather it is one's longstanding conviction that,the controversies still being repeatedly raised, discussed and debated are,if were to go to the root of the matter,are unwarranted; would pale into insignificance. That could happen provided the fundamental fallacy in the thinking /belief that the so called,- 'avoidance' and
    'evasion' are not two entirely different concepts but are one and the same. For an appreciation in proper light, suggest to read mindfully the very illuminating article of the renowned legal luminary of our times, N A Palkhivala, titled
    "Tax Avidance Is Legal"
    (Source: Book, We, the Nation THE LOST DECADES). Also,his other equally and forcefully enlightening articles/speeches on this or other related topics.

    It is a national tragedy that, even after the SC and High Courts have shown as to what should be the right approach,attempt to keep the frivolous controversy alive; and do so by barging into and seizing every instance or occasion, with no rhyme or reason, much less 'logic',- being the only useful tool /touch stone for testing what is profoundly right or better view.

    For more, the personal Blog @
    http://vswaminathan-swamilook.blogspot.in/2013/05/vodafone-what-is-right-or-not-so-wrong.html may be looked up.

    Likely to be contd.

  • To share more: What is imperative and needs to be realized, in the very interests of a proper administration, so also adjudication, are these:- “Avoidance” and “evasion”, in the context of fiscal laws, are two distinct rather distinguishable concepts. And that it is so, howsoever thin or thick the line of distinction is considered or imagined to be. Once that distinction is the premise to proceed with, then it becomes a matter for a final adjudication by quasi -and judicial authorities; that is, to decide , by taking an objective and balanced view, as to whether a given case is one of ‘avoidance’, hence is not caught within the mischief of ‘evasion’ or vice versa.

    Anyone is sure to find and be satisfied that the clues and guidance eminently provided in decided cases, also by the apex court, that too in great/minute details, are quite illuminating; and must be regarded to be more than adequate for reducing the rigor of , even if not eliminating, the on-going controversy,of course to the best of human intellect or endeavors.

    In short, otherwise, the inevitable consequence can only be what has been impliedly foreseen / prophesied by the learned writer in the concluding part of his write-up,

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