REVISITING THE ALTER EGO EXCEPTION IN CORPORATE VEIL PIERCING

• Date: 01 December 2015
• Published date: 01 December 2015
• Author: YEO Hwee Ying Llb (singapore), Llm (london); Associate Professor, Faculty of Law, National University of Singapore. Ruth YEO LLM (NYU), LLB (Hons) (NUS).

The seminal decision of the UK Supreme Court in Prest v Petrodel Resources Ltd[2013]3 WLR 1 (“Prest”) has clarified the law on corporate veil piercing by (a) jettisoning vague phrases such as “justice of the case” and metaphors such as “sham” or “façade” that had hitherto characterised English jurisprudence in this area; and (b) re-categorising earlier English cases under two underlying principles — the concealment principle and the evasion principle. In the aftermath of Prest, the question that ought to be raised in Singapore is whether the local jurisprudence on corporate veil piercing should likewise be re-examined since the earlier Singapore cases have also relied heavily on metaphors and platitudinous phrases; in particular, there is a need to confront the problem of apparently inconsistent judicial statements that seem to categorise the alter ego doctrine as a separate ground for corporate veil piercing. To the extent that this is so, the post-Prest English position and the Singapore position as set out in the decision of the Court of Appeal in Alwie Handoyo v Tjong Very Sumito[2013] 4 SLR 308 (which did not have the opportunity to consider the decision in Prest) appear to be divergent. This article discusses four alternative ways that this perceived inconsistency may be resolved. Moving forward, it is suggested that metaphors such as “sham” or “façade” be eschewed and the principled approach espoused in Prest be adopted instead.

I. Introduction

1 The concept of the company's separate legal personality is the bedrock of company law. Although “the separate personality and

property of a company is sometimes described as a fiction”,1 this apparent “fiction is the whole foundation of English company … law”2 and, correspondingly, Singapore's company law, “so much so that it has even been said that it cannot be disregarded on the mere justification that ‘justice so requires’”.3

2 Section 19(5) of the Companies Act4 allows a company to be reified and made a corporate entity. The classic case of Salomon v A Salomon & Co Ltd5 (“Salomon”) represents judicial confirmation of the separate entity of the company with its own separate legal personality,6 allowing for affirmative asset partitioning of the company's assets which are shielded from the reach of external creditors. This separate entity feature also allows for the election of limited liability incorporation7 which completes the shield of protection for shareholder investors (as the limited liability feature provides for defensive asset partitioning by reserving shareholders' individual assets primarily for their personal creditors).8

3 The privileges accorded to companies must operate in accordance with the terms upon which they were granted. The doctrine of corporate veil piercing is premised on the basis that such privileges should work hand in glove with responsibility in order to avoid the possibility of abuse or exploitation. When there is a fracture in the proper operating parameters, the court may ascertain the realities of the situation by removing the corporate shield or veil in order to make the controller behind the company personally liable as if the company were not present.

4 The underlying issue that arises here is the difficulty of determining when the use of the artificial construct falls within the proper bounds of the law and when it infringes upon the standards of fairness and legitimacy. Indeed, corporate history abounds with examples of corporate abuse cases where the external creditors were left high and dry when businesses failed. It is thus little wonder that judges

have historically been under tremendous pressure to sidestep the Salomon principle in order to produce results which are more just. As such, the courts must address the vexing question of how to identify when the controllers' dealings through the company reach the threshold where they may rightly be considered opportunistic so as to warrant the removal of the shield privilege. This is what should properly be called corporate veil piercing.

5 This area of corporate veil piercing has hitherto been fraught with conflicting guidelines. Prior to the decisions in Adams v Cape Industries plc9 (“Adams”) and Prest v Petrodel Resources Ltd10 (“Prest”), there was little judicial pronouncement properly delineating the scope of corporate veil piercing. It has even been said that there is no common unifying principle either in the UK or across the common law jurisdictions explaining the occasional court decisions to pierce the corporate veil.11 The difficulty lies in the fact that the courts have not adhered to a coherent principled approach but opted instead for loosely unhelpful terms (such as “mere cloak or sham”12 and “façade concealing the real facts”)13 or platitudinous phrases with little content (such as “justice of the case”).14 The use of such protean phrases was strongly viewed with disfavour by the UK Supreme Court; in England, matters are not helped by the fact that language has been used rather ambivalently such that one wonders whether some of the appellations are meant to be taken in the loose sense or even have any technical or defined meaning in the first place. American courts have similarly been cautioned against the loose use of metaphors:15

The whole problem of the relation between the parent and subsidiary corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the parent corporation operates

a business through a subsidiary which is characterised as an ‘alias' or a ‘dummy’. All this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation. [emphasis added]

While corporate veil piercing has always sounded attractively catchy as a tag line, it often rings hollow in practice due to the looseness in language and uncertainty surrounding its application. However, the recent seminal decision of the UK Supreme Court in Prest has sought to streamline and clarify the law on corporate veil piercing. All related English decisions now have to be revisited. Indeed, Prest is such a seminal decision that the Singapore courts will also have to contend with it in future cases on similar issues.

II. Developments in the UK

6 Dignam and Lowry have noticed a historical trend of judicial vacillation16 between an interventionist attitude (where judges were more willing to pierce the corporate veil) and the orthodox position (where judges upheld the foundational principle expounded in Salomon). The prevailing current position is the orthodox one as heralded by Adams which, prior to Prest, was the seminal English decision that attempted to rein in all the conflicting and amorphous principles in the doctrine of corporate veil piercing.

7 The review of earlier cases in Adams led the English Court of Appeal to conclude that corporate veil piercing was not a well-developed concept:17

From the authorities cited to us we are left with rather sparse guidance as to the principles which should guide the court in determining whether or not the arrangements of a corporate group involve a façade within the meaning of that word as used by the House of Lords in

Woolfson… We will not attempt a comprehensive definition of those principles.

The appellate court also found that there appeared to be three categories of corporate veil piercing based on (a) single economic entity; (b) agency; and (c) sham or façade. Of these, the appellate court identified only the third category as a genuine form of corporate veil piercing. The other two categories of single economic entity and agency were explained away by the appellate court: the former could be rationalised as turning on statutory interpretation whilst the latter was to be dealt with entirely under agency principles (which in turn were pivoted on there being consent or agreement for the agent to act on the principal's behalf).

8 Adopting Lord Keith's dictum in Woolfson v Strathclyde Regional Council18 (“Woolfson”), the appellate court in Adams held that the corporate veil could be disregarded only where “special circumstances exist indicating that it is a mere façade concealing the true facts”.19 Apart from such exceptional situations involving deliberate dishonesty where intervention might be allowed, the appellate court maintained that the principle in Salomon should be treated as sacrosanct and the orthodox position ought to be upheld in the interest of commercial certainty:20

The court is not free to disregard the principle of Salomon… merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities.

9 The significance of Prest21 lies in the UK Supreme Court's refinement and re-rationalisation of the position in Adams. As pointed out in Prest, corporate veil piercing is essentially concerned with the separate personality of the company being disregarded by the court whereas the other techniques like agency have nothing to do with corporate veil piercing and should not have been categorised as such. Developing further from Adams, Prest clarified the position further by jettisoning vague phrases such as “justice of the case”22 and metaphors such as “sham” or “façade” which do not in themselves offer cogent and

structured justification for the special circumstances when the separate personality of the company ought to be disregarded.

10 After analysing in Prest the earlier decisions, Lord Sumption held that there is a principle of...