PIERCING THE CORPORATE VEIL AS A LAST RESORT
|(2014) 26 SAcLJ 249
|01 December 2014
|01 December 2014
This case summary discusses the UK Supreme Court case of (Fam) held that the corporate veil should only be pierced where it was necessary to do so. However, there are authorities which suggest that the requirement for necessity does not equate with the requirement that the remedy be one of last resort.; ; in which the majority held that the corporate veil should only be pierced where all other remedies were not available. There is perhaps some room to question whether the authorities cited by the Supreme Court in support this position.
1 Michael and Yasmin Prest were married in 1993. The wife, Yasmin Prest, petitioned for divorce in March 2008 and a decree absolute was granted in November 2011. The husband, Michael Prest, who was a wealthy man, wholly owned and controlled (directly or through intermediate entities) a number of companies belonging to a group known as the Petrodel Group.
2 Of the companies in the Petrodel Group, Petrodel Resources Ltd (“PRL”) was the legal owner of five residential properties in the UK and Vermont Petroleum Ltd (“Vermont”) was the legal owner of two more. The question before the Supreme Court was whether the court had power to order the transfer of these seven properties to the wife given that the properties legally belonged not to the husband but to his companies.
3 In proceedings for ancillary relief following the divorce,1 Moylan J concluded that there was no general principle of law which entitled him to reach the companies' assets by piercing the corporate veil. However, he concluded that a wider jurisdiction to pierce the corporate veil was available under s 24 of the English Matrimonial Causes Act 19732 (“MCA”). In the circumstances, Moylan J ordered, inter alia, the husband to procure the transfer of the seven UK properties legally owned by PRL and Vermont to the wife in partial satisfaction of the lump sum order of £17.5m. Moreover, in awarding costs to the wife, Moylan J directed that PRL, Vermont and another of the husband's companies in the Petrodel Group, Petrodel Upstream Ltd (“Upstream”), should be jointly and severally liable with the husband for 10% of those costs.
4 The three respondent companies, PRL, Upstream and Vermont, challenged the orders made against them in the Court of Appeal.3 They argued that there was no jurisdiction to order their property to be conveyed to the wife in satisfaction of the husband's judgment debt.
5 The majority of the Court of Appeal allowed the appeal. Rimer LJ noted that Moylan J had made no primary findings justifying any conclusion other than that the properties were part of the assets of, and belonged beneficially to, the companies that owned them.4 In the circumstances, Moylan J had no jurisdiction under s 24(1)(a) of the MCA to make the orders he did in relation to them. In so far as Moylan J was suggesting that s 24(1)(a) of the MCA enabled the court to treat a company's property as belonging to its 100% owner, Rimer LJ held that he was wrong.5
6 On further appeal to the Supreme Court,6 Lord Sumption, who gave the leading judgment, noted that there were three possible legal bases on which the assets of PRL, Upstream and Vermont might be available to satisfy the lump sum order against the husband, namely:7
(a) It might be said that this was a case in which, exceptionally, a court was at liberty to disregard the corporate veil in order to give effective relief to the wife.
(b) Section 24 of the MCA might be regarded as conferring a distinct power to the courts to disregard the corporate veil in matrimonial cases.
(c) The companies might be regarded as holding the properties on trust for the husband, not by virtue of his status as their sole shareholder and controller, but in the particular circumstances of the case.
7 Turning to the first possible legal basis identified by Lord Sumption, the majority of the Supreme Court refused to pierce the corporate veil on this basis. Lord Sumption held that there was a limited principle of English law which applied when a person was under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evaded or whose enforcement he deliberately frustrated by interposing a company under his control.8 Lord Sumption declined to pierce the corporate veil, inter alia, because the husband was not concealing or evading the law relating to the distribution of assets of a marriage upon its dissolution. There was no evidence that the husband was seeking to avoid any obligation which was relevant in the proceedings and the legal interests in the properties were vested in the companies long before the marriage broke up.
8 In relation to the second legal basis identified by Lord Sumption, the Supreme Court held that there was no special and wider principle of lifting the corporate veil which applied in matrimonial proceedings by virtue of s 24(1)(a) of the MCA.
9 The Supreme Court allowed the appeal on the third legal basis. It held that the properties in question were held by the respondent companies on trust for the husband. The companies could therefore be ordered to transfer the seven properties to the wife under s 24(1)(a) of the MCA in partial satisfaction of the lump sum order. Accordingly, the order of Moylan J, in so far as it required PRL and Vermont to transfer the seven properties to the wife, was restored.9
10 Of interest in this case note is the position of the majority of the Supreme Court that the court only has the power to pierce the corporate veil when all other remedies prove to be of no assistance.
11 In 10 (“ ”), Lloyd LJ accepted the principles on piercing the corporate veil set out by Munby J in 11 (“ ”) with one qualification. Lloyd LJ held that it did not follow that a piercing of the veil would be available only if there was no other remedy available against the wrongdoers for the wrong they had committed.12 However, Lord Sumption13 and Lord Neuberger14 disagreed with Lloyd LJ's holding in in this regard. Further, Lord Neuberger,15 Lord Mance16 and Lord Clarke17 used the language of last resort when dealing with the availability of the remedy of piercing the corporate veil. The other three law lords, Lady Hale, Lord Wilson and Lord Walker, did not address this specific issue.
12 Lord Sumption relied on 18in rejecting Lloyd LJ's holding in that it did not follow that a piercing of the veil would be available only if there was no other remedy available against the wrongdoers. He held that:
Like Munby J in, 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. I therefore disagree with the Court of Appeal in who suggested otherwise at para 79.
This begs the question whetherstands for the proposition that piercing the corporate veil is available only when there is no other remedy available.
13 In 19, Munby J held:
Finally, and flowing from all this, a company can be a façade even though it was not originally incorporated with any deceptive intent.The question is whether it is being used as a façade at the time of the relevant transaction(s). And the court will pierce the veil only so far as is necessary to provide a remedy for the particular wrong which those controlling the company have done. In other words, the fact that the court pierces the veil for one purpose does not mean that it will necessarily be pierced for all purposes. [emphasis added]
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