THE NEW ERA OF CORPORATE VEIL-PIERCING

• Date: 01 December 2016
• Author: TAN Zhong Xing LLB (Hons) (National University of Singapore); Advocate and Solicitor (Singapore); Sheridan Fellow, Faculty of Law, National University of Singapore.
• Published date: 01 December 2016

Concealed Cracks and Evaded Issues?

The purpose of this article is to conduct a critical re-assessment of the framework for corporate veil-piercing articulated by Lord Sumption in Prest v Petrodel Resources Ltd[2013] 3 WLR 1 (“Petrodel”) in the light of recent English and Singapore case law and, in particular, to interrogate the notion of veil-piercing as a remedy of last resort, as well as the concealment and evasion principles which demarcate the boundary lines of the veil-piercing doctrine. Moreover, three other important issues raised in the aftermath of Petrodel are discussed with a view towards clarifying the scope of veil-piercing: the single economic entity doctrine, statutory veil-piercing and the doctrine of corporate attribution. It is hoped that this analysis will enable the veil-piercing doctrine to re-emerge with greater clarity, consistency and robustness in the limited situations where it is necessitated to tackle abuses of the corporate form.

I. Introduction

1 It has been more than two years since the Supreme Court decision in Prest v Petrodel Resources Ltd1 (“Petrodel”) recast the doctrine of corporate veil-piercing. In its immediate aftermath, the decision invited much critical commentary on its various aspects, in particular Lord Sumption's leading restatement which relegates veilpiercing to a remedy of last resort and distinguishes between the evasion and concealment principles, the former which constitutes true veilpiercing but not the latter.2

2 Since then, however, there has been little analysis of the English and Singapore case law considering and applying Petrodel. This article seeks to fill this gap in the literature. It conducts a critical re-assessment of the framework for corporate veil-piercing in the light of recent case law, both with a view to examining whether these cases have tracked Petrodel closely, as well as to see if their application of Petrodel's principles have demonstrated any latent cracks in the original framework. Furthermore, in demarcating the external boundaries of the veil-piercing doctrine, three related issues touched upon more peripherally in Petrodel, and which have invited much recent litigation, are discussed: the single economic entity doctrine, statutory veilpiercing and the doctrine of corporate attribution.

3 This article proceeds as follows. Part II3 reviews Lord Sumption's test for veil-piercing and the views of the other judges in Petrodel in this regard. Part III4 examines the commentary following Petrodel with a view to identifying some of the fracture points in the veil-piercing framework identified early on by commentators. Part IV5 examines the “last resort”, “concealment” and “evasion” principles in light of recent decisions. Importantly, it is found that the framework has not been rigorously applied in some cases; moreover, it may not be sufficiently robust to accommodate the various ways in which corporate controllers might misuse the corporate form. It is argued that this may warrant an extension of the veil-piercing doctrine in limited circumstances. Part V6 looks beyond the immediate Petrodel framework to examine its interaction with the single economic entity doctrine, statutory veilpiercing and corporate attribution. Part VI7 concludes.

II. The impact of Petrodel

A. Lord Sumption's test for veil-piercing

4 The facts of Petrodel are well known. For the purposes of this article, it will be recalled that the case concerned a dispute over the division of matrimonial assets where the wife sought a transfer of

various properties held by offshore companies of which the husband was the sole owner. The Supreme Court upheld the Court of Appeal's decision not to lift the corporate veil and treat the company's property as the husband's property for the purposes of the statutory provisions governing the distribution of assets on divorce.8 On the issue of veilpiercing, Lord Sumption delivered the leading judgment in which he reformulated the test for veil-piercing as follows:9

[T]here 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.

5 Lord Sumption's formulation was important for a number of reasons. Firstly, it relegated veil-piercing to a remedy of last resort, not to be invoked unless other orthodox private law remedies (such as those in tort, agency or accessorial liability) were unavailable. As Lord Sumption noted:10

… 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 … if it is not necessary to pierce the corporate veil, it is not appropriate to do so.

6 Secondly, in rationalising the prior case law on veil-piercing which had frequently invoked ambiguous references to corporate “shams” or “facades”,11 Lord Sumption made the distinction between what he saw as “two distinct principles” of concealment and evasion.12 While the latter did involve true veil-piercing, the former did not. Under the concealment principle, where a company is interposed so as to conceal the identity of the real actors, the court may look behind the veil to discover the facts which the corporate structure is concealing without actually disregarding the corporate structure altogether. In contrast, under the evasion principle, the court indeed disregards the veil if a company is interposed so that its separate legal personality will defeat or frustrate the enforcement of a legal right against the controller which exists independently of the company's involvement.13 Given that both situations involve the interposition of companies, and that many cases

fall into both the concealment and evasion principles, the critical distinction between the concepts is best illustrated by the cases referred to by Lord Sumption.

7 The first set of cases involve situations which engage both the concealment and evasion principles. In the well-known decisions of Gilford Motor Co Ltd v Horne14 (“Gilford”) and Jones v Lipman15 (“Jones”), corporate controllers had interposed the corporate vehicles in question for illegitimate purposes. In the former, Horne had formed the company to enable business to be carried on under his control but without incurring liability for breaching a non-competition covenant in his previous contract of employment. In the latter, Lipman had bought a shelf company and conveyed to it a piece of property which he had already sold to the plaintiffs in order to make it impossible for the plaintiffs to obtain specific performance.

8 According to Lord Sumption, as against the actual corporate controllers (Horne in Gilford and Lipman in Jones), the respective remedies of injunctive relief and specific performance were granted on the basis of the concealment principle as they simply involved identifying the persons in control of the corporate vehicles.16 In contrast, as against the companies interposed in each case, the similar remedies granted by the courts were imposed on the basis of the evasion principle —viz, Horne's “evasive motive”17 for forming the company to obtain the customers of the plaintiff, and Lipman's attempt to evade his obligation of specific performance by conveying the property to the shelf company.18 The corporate vehicles were used in both these cases to defeat or frustrate the enforcement of a legal right against the controllers, which existed independently of the interposed company's involvement: in Gilford, the plaintiff's right to a non-competition obligation; and in Jones, the plaintiff's right to the conveyance of property.

9 To further clarify the evasion/concealment distinction, Lord Sumption referred to a second set of cases where only the concealment principle but not the evasion principle was engaged. In Gencor ACP Ltd v Dalby19 (“Gencor”), the plaintiff's claim against its former director Dalby concerned a secret profit which Dalby had procured to be paid to a British Virgin Islands company under his control (“Burnstead”). Though the court in Gencor had used the

language of veil-piercing when ordering an account against both Dalby and Burnstead, Lord Sumption rationalised this decision “in reality” as applying the “concealment principle”,20 in that Burnstead was Dalby's nominee for the purpose of receiving and holding the secret profit, which led to the conclusion that Dalby was accountable for the money received by Burnstead. Burnstead's liability rested on the fact that it concealed and hence was identified in law with Dalby himself. The court would simply not be deterred by the legal personality of Burnstead from finding the true facts as to its relationship with Dalby.21

10 Similarly, in Trustor AB v Smallbone (No 2)22 (“Trustor”) Smallbone as the former managing director of Trustor AB (“Trustor”) had improperly procured unauthorised payments to be paid to a company called Introcom Ltd (“Intracom”), which was owned and controlled by a Liechtenstein trust of which Smallbone was a beneficiary. Lord Sumption emphasised that the basis for judgment against Smallbone himself was the concealment principle: it had been already found at an earlier stage of the litigation that Intracom was simply a vehicle which Smallbone used for receiving money from Trustor, and that the company was used to conceal that fact.23 As such, no veil-piercing was required as the company was not interposed to evade an independent liability in a way akin to Gilford and Jones. The court was simply applying the principle that receipt by a company would count as receipt by the...