Page 1 of 37 EDINBURGH LAW SCHOOL Piercing The Corporate Veil Recast As “Evasion” & “Concealment”; A Settled & Enduring Doctrine? [B037765] [9998] Declaration of own work I confirm that all this work is my own except where indicated, and that I have: Clearly referenced/listed all sources as appropriate Yes Referenced and put in inverted commas all quoted text of more than three words (from books, web, etc) Yes Given the sources of all pictures, data etc. that are not my own Yes Not made any use of the essay(s) of any other student(s) either past or present Yes Not submitted for assessment work previously submitted for any other course, degree or qualification Yes Not incorporated any text acquired from external agencies other than extracts from attributed sources(including online facilities) Yes Acknowledged in appropriate places any help that I have received from others (e.g. fellow students, technicians, statisticians, external sources) Yes Complied with any other plagiarism criteria specified in the Course handbook Yes Included an accurate word count above Yes I understand that any false claim for this work will be penalised in accordance with University regulations Yes
Transcript
Page 1 of 37
EDINBURGH LAW SCHOOL
Piercing The Corporate Veil Recast As “Evasion” & “Concealment”;
A Settled & Enduring Doctrine?
[B037765]
[9998]
Declaration of own work
I confirm that all this work is my own except where indicated, and that I have:
Clearly referenced/listed all sources as appropriate Yes
Referenced and put in inverted commas all quoted text of more than three words (from books, web, etc)
Yes
Given the sources of all pictures, data etc. that are not my own Yes
Not made any use of the essay(s) of any other student(s) either past or present
Yes
Not submitted for assessment work previously submitted for any other course, degree or qualification
Yes
Not incorporated any text acquired from external agencies other than extracts from attributed sources(including online facilities)
Yes
Acknowledged in appropriate places any help that I have received from others (e.g. fellow students, technicians, statisticians, external sources)
Yes
Complied with any other plagiarism criteria specified in the Course handbook
Yes
Included an accurate word count above Yes
I understand that any false claim for this work will be penalised in accordance with University regulations
Salomon v A. Salomon & Co Ltd,6 The Unyielding Rock
The corner stone of modern company law begins with the landmark decision
in Salomon, where it was held that a company is “ex hypothesi a distinct legal
persona,”7 that must be treated as “any other independent person with its rights and
liabilities appropriate to itself.”8 It follows that a shareholder or controller has no
interest in any property held by the company.9
However, piercing the corporate veil, hereafter defined as “the doctrine”, was
to become the exception to Salomon, allowing a court to disregard the companies
separate legal personality, identifying it with a person who owns and controls it, by
virtue of that ownership and control.10
The doctrine was envisaged to prevent abuse of the corporate structure.
There remained an obvious tension between the use of the doctrine and the rule in
Salomon, the latter known as the unyielding rock to which complicated arguments
become shipwrecked.11
This tension finally surfaced in the cases of VTB Capital and Prest, where the
Supreme Court was called upon to provide a definitive statement on the doctrines
existence.
PART I: A DOCTRINE UNDER FIRE
This part deals with VTB Capital, which brought doubt as to whether the
doctrine can endure.
1.1. VTB Capital
In VTB Capital, the plaintiff bank sought to pierce the corporate veil of a
Russian company, RAP, holding its controllers, a Mr Malofeev and Mercap, jointly
and severally liable with RAP under a contract for breaches of a facility agreement.
The plaintiff conceded that it had not intended to contract with the alleged controllers.
The respondents argued that the doctrine should not exist as an independent basis
for an action, since it was contrary to high authority, inconsistent with principle, and
unnecessary to achieve justice.12
6 [1897] AC 22. 7 Ibid. per Lord Herscheil at 42; See also R v Arnaud (1846) 9 QB 806. at 818 8 Salomon v A. Salomon & Co Ltd [1897] AC 22 at 30 9 Macaura v Northern Assurance Co Ltd [1925] A.C. 619. at 626, per Lord Buckmaster; see also
Jetivia SA v Bilta (UK) Ltd [2013] EWCA Civ 968. at para 20 10 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 8 11 Lord Templeman, "Company Law Lecture - Forty Years on" (1990) 11 Company Law. at 10 12 VTB Capital plc v Nutritek International Corpn [2013] UKSC 5. at para 126
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1.2. Contrary To High Authority
Mr Lazarus for the defendant, argued that the House of Lords decision in
Salomon rejected an attempt to pierce the corporate veil.13 It was further argued that
on that basis, all subsequent cases wrongly applied the doctrine. Lord Neuberger
PSC in Prest, agreed that the only other House of Lords decision on the doctrine, in
Woolfson v Strathclyde RC,14 assumed the doctrines existence, with Lord Keith’s
comments being obiter dicta only.15
1.3. Inconsistent With Principle
The Judiciary applied the doctrine in an unprincipled and unclear manner,16
consequently “the cases have not worked out what is meant by piercing the
corporate veil.”17
Judgements on the doctrine were awash with “protean terms.” For example,
the company was a mere ‘sham’ or ‘cloak’18, ‘device’19 or ‘façade concealing the true
facts’20.
The doctrine “enabled judges to unleash their inner poet,”21 through use of
pejorative expressions to mask the absence of rational analysis,22and has simply led
to ‘incautious dicta and inadequate reasoning.’23
For these reasons, Lord Neuberger PSC in VTB Capital, thought the
respondent’s arguments were worthy of serious consideration.24
Although his Lordship saw great force in the arguments presented, he did not
think it necessary to address the issue, as it was an interlocutory appeal, and was
persuaded by the defendants second argument. For even if one was to assume the
doctrines existence, the claim brought would represent an unprincipled extension of
the circumstances in which the doctrine may be invoked.25 His Lordship reasoned
13 Ibid. at para 122 14 [1978] S.L.T 159. 15 VTB Capital plc v Nutritek International Corpn [2013] UKSC 5. at para 121 16 VTB Capital plc v Nutritek International Corpn [2013] [2013] UKSC 5 at para 123; See also Briggs v
James Hardie & Co Pty Ltd [1989] 16 N.S.W.L.R. 549. at 567 per Rogers AJA; Moore, “A Temple
Built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon & Co
Ltd” (2006) J.B.L. 180. at 187-189 17 The Tjaskemolen [1997] 2 Lloyd’s Rep. 476 QBD. 18 Gilford Motor Co Ltd v Horne [1933] 1 Ch. 935 CA. at 961, 965 & 969 19 Ibid. at 961; Jones v Lipman [1962] 1 W.L.R. 832 Ch D; [1962] 1 All E.R. 442. at 836. 20 Woolfson v Strathclyde RC [1978] S.C. (H.L.) 90. at 96; Adams v Cape Industries Plc [1990] Ch.
433. at 759 21 P.B. Oh, "Veil-Piercing Unbound." (2013) Boston University Law Review 93.1 at 91 22 VTB Capital plc v Nutritek International Corpn [2013] UKSC 5. at para 124 23 Prest v Petrodel Resources Limited and others [2013] UKSC 34. at para 19 24 VTB Capital plc v Nutritek International Corpn [2013] [2013] UKSC 5 at para 121 25 VTB Capital plc v Nutritek International Corpn [2013] UKSC 5. at para 117
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that to allow the appeal, would lead to a person being held liable upon a contract,
who was not privy to that contract.26
VTB Capital shrouded the doctrine in more uncertainty, from the Supreme
Courts inability to give a definitive answer on whether it existed.
PART II: THE DOCTRINE ENDURES
This part discusses the doctrines resurgence in Prest. It begins with a detailed
discussion of the doctrines existence under the evasion principle, with analysis of its
historical foundations under the “fraud exception”. Furthermore, discussion of the
concealment principle will ensue, referring to its historical underpinnings form
Woolfson v Strathclyde27 and Snook v London and West Riding Investments Ltd.28
2.1. Prest v Petrodel Resources Ltd
Prest involved proceedings for ancillary relief following a divorce. The wife
sought declaration to pierce the corporate veil, identifying corporate assets owned by
the companies within the Petrodel group, as owned by its controller, the husband.
On analysis of the facts, the Supreme Court was unanimous in finding the corporate
properties were held on resulting trust for the husband.
The Supreme Court addressed the issue of the doctrines existence. Lord
Sumption JSC decided that when applying the doctrine, the case law was imprecise
in defining what was a relevant wrongdoing, and that “references to ‘façade’ and
‘sham’ beg too many questions.”29 His Lordship sought to underpin the “protean”
terms with two distinct principles, the concealment and evasion principles. The
doctrine is now confined to instances involving the evasion principle. The following
sections will discuss the principles in more detail.
2.2 The Evasion Principle
Lord Halsbury in Salomon, thought that the motives of the incorporators were
irrelevant in determining the rights and liabilities of a legally incorporated company.
Lord Sumption JSC in Prest firmly rebuked this assertion, in defence of the doctrine,
believing that the authorities show that there are limited occasions when the law will
treat a controllers use of a company as dishonest.30Lord Sumption JSC coined this
dishonest use the evasion principle, which applies:
26 VTB Capital plc v Nutritek International Corpn [2013] UKSC 5. at para 132 27 [1978] S.C. [H.L.] 90. [Woolfson] 28 [1967] 2 QB 786 [CA]. at 802 29 Prest v Petrodel Resources Limited and others [2013] UKSC 34. at para 28 30 Ibid. at para 18
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“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.”31
When a controller uses the corporate structure for the purpose of avoiding a
pre-existing legal obligation, which arises independently32 of the company’s
involvement, the corporate veil may be pierced for the limited purpose of depriving
the company or its controller of the advantage that they would have gained from the
company’s separate legal personality.”33 The latter point is a firm endorsement of
Warrant J’s dicta in Dadourian Group International Inc v Simms.34
Lord Sumption JSC was conscious of the respondent’s argument in VTB
Capital, that the doctrine was inconsistent with principle. His Lordship sought to
dispel of this criticism, by relying on Lord Denning’s dicta in Lazarus Estates Ltd v
Beasley35 to underpin the evasion principle. Specifically, the law defines the
incidents of most legal relationships as honest,36 Where this is not the case,
“no court in this land will allow a person to keep an advantage which he has
obtained by fraud… fraud unravels everything’.37
This legal concept is deeply entrenched, not only in British law, but also in
American jurisprudence dating back to 1865, where an identical statement was
made by Potter J. in the case of Booth v Bunce.38
Lord Sumption JSC believes that there is an impressive consensus on the
doctrines existence, and was thus unwilling to explain such consensus out of
existence.39 His Lordship argued that where an advantage is gained through the
dishonest use of the corporate form, the courts will deprive persons of that
advantage, so as that the “law is not… disarmed in the face of abuse.”40
31 Prest V Petrodel Resources Limited And Others [2013] UKSC 34. at para 35 32 Ibid. at para 28 33 Ibid. at para 35 34 [2006] EWHC 2973 [Ch]. at paras 682 & 683 35 [1956] 1 QB 702, 712. 36 Prest V Petrodel Resources Limited And Others [2013] UKSC 34. at para 9 37 Ibid. at para 9 38 Booth v Bunce Et Al N.Y. 139, 156 [N.Y. 1865]. at 157 39 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 27 40 Ibid.
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2.2.1. Historical Foundation Of The Evasion Principle
The “fraud exception” to the rule in Salomon is not a new development in
British law, for it was well established that the courts would disallow the use of the
corporate form from being used for the purposes of fraud, or as a vehicle to enable
the evasion legal obligations.41
The cases of Gilford and Jones v Lipman42, given by Lord Sumption JSC in
support of the evasion principle, discussed later, were referred to as the “two classic
examples of the fraud exception.”43
In fact, the fraud exception is a well formed concept in foreign
jurisprudence,44 including civil law systems where the juridical basis of the exception
usually derives from the concept of abuse of rights.45
The Irish case of Cummings v. Stewart,46 decided prior to Irish secession from
the United Kingdom over a century ago, also recognised and applied the evasion
principle. Meredith MR thought that:
“It would be strange indeed [if the Companies Act] could be turned into an
engine of destruction of legal obligations and the overthrow of legitimate and
enforceable claims.”47
2.3. The Concealment Principle
The concealment principle is legally ‘banal’48 and does not involve piercing the
corporate veil. It is the:
41 A.J. Boyle & R. Sykes, Gore-Browne on Companies, (44th edn, London: Jordan & Sons, vol. 1) at
para. 1.3.1; See also Re Darby [1911] 1 K.B; S Griffin, Company Law: Fundamental Principles (4 edn,
Longman, Harlow 2006) at 28; See also Adams v Cape Industries plc [1990] Ch 433 at 544;
Kensington International Ltd v Republic of the Congo [2005] EWHC 2684 (Comm) 42 Jones v Lipman [1962] 1 All E.R. 442. [Jones] 43 J. Payne, “Lifting the Corporate Veil: A Reassessment of the Fraud Exception” (1997) The
Cambridge Law Journal, pp 284-290 at 285; See also I. Hameed, "The Doctrine of Limited Liability
and the Piercing of the Corporate Veil in the light of fraud: A Critical Multi-Jurisdictional Study." (2012)
at 16 44 See also Dennis Willcox Pty Ltd v Federal Commissioner of Taxation [1988] 79 ALR 267. per
Jenkinson J. at 272 (Australian Case); U.S. v. Milwaukee Refrigerator Transit Co.145 F. 1007 [1907]
(U.S. Case); China Ocean Shipping Co v Mitrans Shipping Co Ltd [1995] 3 HKC 123 per Bokhary J
(Hong Kong Case) 45 In re Barcelona Traction, Light and Power Co Ltd (Second Phase) (Belgium v Spain) [1970] I.C.J.
Rep. 3 46 [1911]1 IR 236 47 Cummings v Stewart [1911]1 IR 236 48 Prest v Petrodel Resources Limited and others [2013] UKSC 34. at para 28
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“interposition of a company or perhaps several companies so as to conceal
the identity of the real actors will not deter the courts from identifying them,
assuming that their identity is legally relevant.”49
The company’s separate legal personality acts to conceal a liability. The
courts will not be deterred by the company’s legal personality, endeavouring to find
the true facts about a legal relationship, which is what gives rise to a liability.
Under the concealment principle, courts may convert an individual’s personal
liability to a liability of a corporate entity through ordinary principles of tort, agency,
contract or trusts.50 This does not violate or conflict with Salomon, but is simply the
invocation of established conventional legal principles.
2.3.1. Historical Underpinning Of The Concealment Principle
In Woolfson v Strathclyde RC, 51 the House of Lords laid down the “façade”
test for piercing the veil. The doctrine was engaged only if a company is used as a
“façade concealing the true facts.” It is argued that this was a vacuous statement, for
what constitutes the “true facts”?
In Adams v Cape Industries plc,52 the Court of Appeal felt that they were left
with sparse guidance on what principles should guide them when determining
whether a company, or corporate group, was a “façade” within the context of the test
in Woolfson.53
This author thinks it curious that in defining the concealment principle, Lord
Sumption JSC writes, that:
“in these cases the court is not disregarding the “facade”, but only looking
behind it to discover “the facts” which the corporate structure is concealing”54
Use of “façade”, when previously referring to it as “protean” which “beg[s] too many
questions to provide a satisfactory answer,”55 is slightly perplexing.
In Woolfson v Strathclyde RC, Lord Keith writes that:
“it is appropriate to pierce the corporate veil only where special
circumstances exist indicating that it is a mere “façade” concealing the “true
facts”,
49 Ibid. at para 28 50 T.B. Courtney, G.B. Hutchinson, The Law of Companies, (4th Edn, Bloomsbury Professional, 2012)
at 217 51 Woolfson v Strathclyde RC [1978] S.C. [H.L.] 90. 52 Adams v Cape Industries Plc [1990] Ch. 433. 53 Ibid. at 543; D. Prentice, “Some Aspects of the Law Relating to Corporate Groups in the United
Kingdom” (1999) 13 CONN. J. INT L L. 305, 306 54 Woolfson v Strathclyde RC [1978] S.C. [H.L.] 90. At 96 55 Prest v Petrodel Resources Limited and others [2013] UKSC 34. at para 28
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What is the difference between concealment in Prest, and veil piercing in
Woolfson? Prima facie, both statements look substantively similar.
Lord Sumption JSC did not seek to extinguish the pejorative expressions of
“sham” or “façade”, in fact he sought to define them, by giving meaning to what
constitutes the “true facts” as only including a conventional legal relationship which
the company, acting as a “façade”, conceals.56
Lord Sumption JSC in employing the “façade” terminology, did not do so in
oblivion, for it was a calculated intention to redefine the test in Woolfson as
concealment.
Furthermore, support can be found for linking “façade” to the concealment
principle in Snook v London and West Riding Investments Ltd, where Lord Diplock
described “sham” as any acts done or documents executed, which are intended to
give an appearance of creating rights and obligations which are different to the
actual legal rights and obligations.57 An example could be the corporate controllers
projecting the illusion that assets are legally owned by their company, when the “true
facts” would reveal a legal relationship such as agency or trust, thus revealing that
legal title of those assets are not owned beneficially by the company at all. Lord
Diplock’s definition of “sham” embraces the concealment principle.
It is also argued by Hannigan58 that a company is not a “sham” or “façade”
when it is used to defeat a legal liability, for it is a “genuine company, genuinely
incorporated, with a genuine separate legal personality of its own.”59 It is agreed with
her on this point.
It is submitted that when one speaks of a company being a façade, they refer
exclusively to situations where the concealment principle applies, and not the
doctrine.
Part III: Concealment & Evasion Applied
This part will outline the cases used by Lord Sumption JSC for supporting his
evasion & concealment principles.
3.1. Gilford Motor Co. Ltd v Horne
In Gilford, H had been the managing director of the Gilford Motor Co Ltd. H
was under a restrictive covenant not to engage in any competing business after his
employment “either solely or jointly with or as agent for any other person, firm or
56 Ibid. at para 61 per Lord Neuberger 57 Snook v London and West Riding Investments Ltd [1967] 2 QB 786 [CA]. at 802. 58 B. Hannigan, “Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the
one-man company” (2013) Irish Jurist 11 at 5 59 VTB Capital plc v Nutritek International Corpn [2013] UKSC 5 at para 68; See Also Stone & Rolls
Ltd v Moore Stephens [2009] 2 B.C.L.C. 563, at 233 per Lord Mance
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company.”60 After his employment, H set up a company where his wife and business
partner were the only shareholders.
Lord Sumption JSC reasoned that the injunction was against H under the
concealment principle.61 This was done through contractual interpretation, as H
through his control, was a shadow director, and was therefore carrying on the
business.62 The interposition of the company was simply to create a façade or
“pretence that the business was being carried on by others.63 The Court of Appeal in
Gilford was entitled under the concealment principle to look past the façade to obtain
the true facts.
The evasion principle also applied, since H as the controller of the company,
interposed it in order to frustrate his obligation under the restrictive covenant.
3.2 Jones v Lipman
L was under a legal obligation to sell his property to the plaintiff. However, he
reneged and transposed it to a company, A, under his control. L had procured the
property to be conveyed to A “solely for the purpose of defeating the plaintiffs’ rights
to specific performance.”64 Therefore the evasion principle was engaged.
On identifying L as the person behind the corporate façade, the High Court
thought his identity legally relevant as he controlled A. Therefore, the High Court
could compel L to do everything within his power to make sure that the property was
conveyed.65
3.3 Gencor ACP Ltd v Dalby66
In Gencor, D was liable to account for a secret profit which he had made in
breach of his fiduciary duties to G. D had procured the secret profit to a be paid by a
third party, Balfour Beatty, to a company B, of which D had control over.
Rimer J. believed he was piercing the veil, finding that B was “simply... the
alter ego through which D enjoyed the profit which he earned in breach of his
fiduciary.”67 Lord Sumption JSC did not think that the veil was pierced, focussing on
Rimer J’s finding that the company was in substance little other than D’s offshore
bank account held in a nominee name.68 The finding of such a legal relationship,
primarily that B was a nominee, or agent, for the purpose of “receiving and holding a
60 Gilford Motor Co Ltd v Horne [1933] 1 Ch. 935 CA. at 953 61 Prest v Petrodel Resources Limited and others [2013] UKSC 34. at para 29 62 Gilford Motor Co Ltd v Horne [1933] Ch 935 at 939 63 Prest v Petrodel Resources Limited and others [2013] UKSC 34. at para 29 64 Jones v Lipman [1962] 1 All E.R. 442. at 863 65 Prest v Petrodel Resources Limited and others [2013] UKSC 34. at para 73; see also Elliott v H.
Elliott (Builders) Ltd v Pierson [1948] 1 Ch 452 & Wroth v Tyler [1974] Ch 30 66 [2000] 2 BCLC 734 [Gencor] 67 Ibid. at para 26 68 Ibid.
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secret profit”69 would lead to the conclusion that in law D had received the secret
profit through B, and thus had no right to the money as against D.70 Therefore, an
order against D was done under the concealment principle.
Furthermore, D’s knowledge of the G’s prior equitable interest could be
imputed to B,71 thereby allowing the court to make an order against B.
3.4 Trustor AB v Smallbone72
S, a former director of a company T, was alleged to be in breach of his
fiduciary duties, on the footing that he had transferred considerable amounts of T’s
money to a small company I, which was owned and controlled by a trust of which S
was a beneficiary.
Lord Sumption JSC reasoned that the concealment principle applied. The
courts finding that I was simply a vehicle for S for receiving money from T is
significant, as it signals that I was S’s agent. I “received the money on [S’s] behalf”73.
A finding of agency was one of fact, made with regard to other factors such as S’s
control, the source of the receipt, and also the nature of the company’s other
transactions.74
PART IV: CIRCUMVENTING THE VEIL IN PREST?
This part will offer a brief discussion on Prest, specifically the Supreme
Court’s finding of resulting trust. The decision appears incorrect. It is felt that in
response to the now highly constrained doctrine, the relaxed application of trust law
was fuelled by the Supreme Court judges’ desire to provide a remedy for the wife.
4.1. Resulting Trust Analysis
The Supreme Court in Prest decided unanimously that the corporate
properties were held on a resulting trust for the husband. On further inspection, the
result seems dubious.
Nichols argues that a finding of resulting trust is questionable as it was
accepted that Mr Prest had created the corporate structure for the purpose of
pursing legitimate wealth protection and tax avoidance goals, therefore “using a
corporate structure in this way demonstrates no intent on the part of the shareholder
to retain a beneficial interest in corporate assets.”75 He believes that this finding was
69 Prest v Petrodel Resources Limited and others [2013] UKSC 34. at para 31 70 Ibid. 71 Ibid. 72 [2001] 3 All E.R. 987; (No 2) [2001] 1 WLR 1177 73 Prest v Petrodel Resources Limited and others [2013] UKSC 34. At paras 28 & 32 74 Ibid. at para 32 75 M.F. Khimji, & C. Nicholls, “Piercing the Corporate Veil Reframed as Evasion and Concealment”
(2015) 48 University of British Colombia Law Review 401 at 443
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enough to rebut the presumption of a resulting trust which arose from the inference
that the properties had been purchased gratuitously for the companies.
It is agreed with Nichols that “labels such as "agent" and "trust" appear to
have been applied in such cases in a conclusory way that is… analytically
vacuous”76
There is a real danger that in narrowing the piercing doctrine, the courts may
be further inclined to utilise conventional legal principles under the common law, to
covertly pierce the veil, by applying labels such agent and trust in a conclusory ad
hoc manner. Therefore “there is a risk that vague and unprincipled veil-piercing
analysis will simply be replaced by equally vague and unprincipled trust [/agency]
analysis.”77
The next part takes a more detailed look at unprincipled piercing through
agency law.
PART V: “CONCEALED PIERCING” LEAVING THE VEIL IN TATTERS
This part considers whether Gilford can be rationalised, and therefore, support
Lord Sumption JSC’s contention that it is authority supporting the evasion principle. It
is then argued Gilford is best rationalised as “concealed piercing”, a situation where
the judiciary believed it was applying conventional legal principles under the
concealment principle, but was in fact piercing the corporate veil. Concealed piercing
will leave the veil in tatters.
5.1. Gilford Rationalised As Concealment
Lord Neuberger PSC rejected the assertion that Gilford was decided under
the doctrine.78 His Lordship argued that references to “cloak” or “sham” in Lord
Hanworth’s judgement in Gilford, elude to an underlying principal agent
relationship.79 Finding that the “business was actually being carried on by Horne”80
elides from the finding that Mr Horne was carrying on the business “through” the
defendant company.81 The Latin maxim underpinning the law of agency, “Qui facit
per alium facit per se,” he who acts through another, acts for himself, allows one to
infer that if an agent carries on business for a principal, the principal is also deemed
in law to be carrying on that business.
His Lordship believed that this “case was one of concealment”, and there was
nothing in the judgment to suggest that any member of the Court of Appeal thought
that they were invoking the doctrine.82
76 Ibid. at 443 77 Ibid. at 442 78 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 69 79 Ibid. at [72] 80 Ibid. at [70] 81 Gilford Motor Co Ltd v Horne [1933] Ch 935 at 943 & 955 82 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 71
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Lord Neuberger PSC’s rationalisation of Gilford was preferred by Toulson J. in
Yukong Line,83 and Arnold J. in the Court of Appeal in VTB Capital.84 Additionally,
Lord Neuberger JSC’s position is further strengthened by the fact that the plaintiff in
Gilford actually pleaded that the company was acting as Mr Horne’s agent.85
Lord Sumption JSC’s and Lord Neuberger’s PSC’s positions are
irreconcilable. The disagreement on the matter raises questions on whether Gilford
can really be rationalised under the evasion principle, and thus casts doubt over the
sustainability of the evasion principle.
The next section seeks to resolve the dichotomy, arguing that Lord Sumption
JSC’s interpretation of Gilford being rationalised under the piercing doctrine should
triumph.
5.2. Gilford; Concealment or Evasion?
It is submitted that to find H carrying on the business as principal, justifying an
injunction as against the company,86 control is not alone sufficient. There must be
more, as Lord Sumption JSC expressly states, “…. ownership and control… was
only one of those facts, not in itself conclusive [for establishing an agency
relationship].”87
One possible example of “something more,” is to prove that H did not intend
to transfer beneficial ownership of the business, as occurred in Smith, Stone and
Knight.88 This case involved a subsidiary company, which was found to be carrying
on business as agent on behalf of its parent company. Atkinson J. thought it crucial
to first answer “to whom did the business in truth belong?”89 In reaching his
conclusion, in light of all the facts he found that:
“The business was never assigned to the [subsidiary]. There was no
suggestion that anything was done to transfer the beneficial ownership of it to
the [subsidiary] company”90(Emphasis added)
Findings of implied agency can only arise on the most exceptional
facts.91Control is a highly material fact, but is not in itself enough to constitute an
agency relationship. This point was affirmed in Salomon, where the House of Lords
83Yukong Line Ltd. of Korea v Rendsburg Investments Corporation of Liberia and Others (No. 2);
[1998] 4 All E.R. 82 ; [1998] 1 W.L.R. 294 at 308 84[2011] EWHC 3107 (Ch) at para 79 85 Gilford Motor Co Ltd v Horne [1933] 1 Ch. 935 CA at 956. 86 Smith v Hancock [1894] 2 Ch. 377, CA 87Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 32 88 [1939] 4 All ER 116 89 Ibid. at 118; See also Adams v Cape Industries Plc [1990] Ch. 433. at 545 90 Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 at 119 91 JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1989] Ch 72 at 189 – 190.
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firmly rejected the ruling in the Court of Appeal,92 in which it had held that the
company was Aaron Salomon’s agent, by virtue of his control alone.
The court in Gilford was influenced by the fact that H’s wife, a named director
of the company, took no active role in the company, and that H was the “guvnor”.93
This was merely a finding of fact on H’s control. If the court did apply agency
principles on the finding of control alone, as posited by Lord Neuberger PSC, it
would be inconsistent with Salomon. In that respect, the court did pierce the
corporate veil, albeit obliviously. It is submitted that piercing had occurred, which is
best rationalised through Lord Sumption JSC’s evasion principle.
It is agreed with Lord Neuberger PSC, that the Court of Appeal in Gilford did
not believe it was piercing the veil. However, it is submitted that on analysis of the
decision, the Court of Appeal erroneously applied agency law.
Lord Sumption JSC in Prest, argued that Gencor was a case in which Rimer
J. thought he was piercing the veil, but was in fact applying the concealment
principle.94 Why should the converse not be true? Where the courts think they are
applying the concealment principle, but actually piercing the veil. This is how we
must rationalise Gilford.
5.3. The Veil In Tatters
The discussion in Gilford highlights issues for the doctrine in the after math of
Prest, as it demonstrates that it is plausible for courts to apply the concealment
principle, when in reality they are piercing the veil.
Lord Sumption JSC held that control is “not in itself conclusive”95 when
establishing whether there exists an underlying legal relationship. In the recent Court
of Session case of Tartan Army Ltd v Sett Gmbh,96 Lord Glennie echoes these
sentiments, finding that holding a controller jointly liable with a company in delict,
only on the basis of control, without more, would mean “the rule in Salmon,... could
simply be sidestepped” and “the “corporate veil” would not only be pierced; it would
be left in tatters.”97
This issue has indeed arisen numerous times in the after math of Prest, in the
cases of R v Sale,98 Boyle Transport (Northern Ireland) Ltd v R,99 where the
erroneous application of the concealment principle allowed the courts to sidestep the
veil. These cases will be discussed in more detail in the next part.
92 Salomon v Salomon & Co Ltd [1897] A.C. 22 at 51 per Lord Macnaghten; see also Lord Halsbury
at 31 93 Gilford Motor Co Ltd v Horne [1933] Ch 935 at 943 94 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 31 95 Ibid. at para 32 96 [2015] CSOH 141 97 Ibid. at para 35 98 [2013] EWCA Crim 1306 [Sale] 99 [2016] EWCA Crim 19 [Boyle]
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PART VI: CONCEALED PIERCING POST-PREST
This part further discusses concealed piercing, providing examples of cases
where it has emerged post-Prest. It is argued that unprincipled veil piercing endures.
6.1. R v Boyle Transport (Northern Ireland) Ltd
In Boyle the Court of Appeal sought to give guidance on how the concealment
principle is to apply in the context of criminal confiscation.
Boyle involved the illegal amendment of tachograph readings within a haulage
business by its directors. The issue arose as to whether receipts or turnover, taken
by the company, pursuant to those illegal actions, constituted a benefit obtained by
its delinquent directors personally in connection with their impropriety, thus allowing
the receipts to be confiscated under the Proceeds of Crime Act 2002.100 Property
can only be obtained as a benefit under POCCA 2002, where it has been
“…obtained… so as to own it...."101
Defence argued that the receipts were the companies, and not the directors.
Therefore, the receipts could not be subject to a confiscation order. To do otherwise,
is to pierce the veil. There is a "basic legal distinction between the legal entity which
is the company and its shareholders," furthermore "the property of the company is
not the property of its shareholders"102
Defence did not, however, argue that there had been no benefit for the
purpose of POCCA 2002. The directors actual benefit can extend only to the extra
remuneration, dividends, and other benefits or pecuniary advantages accruing to
them personally, as consequence of the enhanced profitability of the company by
reason of their corrupt actions.
The Court of Appeal in Boyle addressed the issue of whether the concealment
principle applied, but first needed to re-interpret the existing case law in light of the
concealment and evasion principles. The starting point was in Jennings v Crown
Prosecution Service,103discussed below.
6.2. Jennings Reframed As Concealment
In Jennings a conspirator J, who was neither a shareholder or director, but an
employee, was alleged by the prosecution to be a “prime mover” in the conspiracy of
carrying out an advance fee fraud through a company.
J sought to use the corporate veil defence, that the benefit obtained from the
impropriety was confined to his salary, and other related payments.
100 Proceeds of Crime Act 2002, Section 76(4) 101 Jennings v Crown Prosecution Service [2008] UKHL 29 per Lord Bingham at para 13 102 R v Seager [2009] EWCA Crim 1303 at para 54 103 [2008] AC 1046
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Jennings, was considered authority for when a company is manipulated by its
defunct controllers for the purposes of fraud, then:
"the corporate veil will be [pierced] for the purpose of ascertaining who was in
control and who "obtained" the benefit."104(Emphasis added)
However, in the aftermath of Prest, it was necessary to rationalise all
corporate piercing cases under the evasion or concealment principles.105 In Boyle,
the Court of Appeal agreed with McDowell & Singh v The Queen106 and Sale that
Jennings was a “classic case” of the concealment principle,107 as the:
“companies in such cases are properly treated as alter egos, or agents, of
their criminal controllers.108
Companies used ostensibly for the purpose of providing a façade, to conceal,
and thus enable criminal impropriety, are to be regarded as agent vehicles of their
conspiring controllers.
For example, where a company is set up to carry on a fruit importing
business, but the true purpose of that business carried on by the company is to allow
its controlling conspirators to smuggle drugs hidden in fruit boxes.109
In Jennings, the company was simply a “sham” instrument, used by its
delinquent controller, to promulgate an advance fee fraud.110
6.3. Concealed Piercing By The Crown Court in Boyle
The Court of Appeal in Boyle again reinforced the point, stated herein ad
infinitum, that for the application of conventional legal principles to be consistent with
Salomon, control is not in itself sufficient. The criminal defendant could not be held to
be principal of an “alter ego”/agent company on the basis of control alone.111
The Court of Appeal rejected the Crown Courts finding, that because the
defenders were the ‘operating minds’ then “the realities of the situation”112
constituted the company their agent. The Court of Appeal disagreed on the basis
that the Crown Court had erred in applying the concealment principle, through
relying solely on its finding of the director’s control.113 The Crown Courts error is an
104 Jennings v Crown Prosecution Service [2008] UKHL at para 16 105 R v Boyle Transport (Northern Ireland) Ltd [2016] EWCA Crim 19 at paras 91 & 92 106 [2015] EWCA Crim 173 107 Ibid at para 40 108 R v Boyle Transport (Northern Ireland) Ltd [2016] EWCA Crim 19 at para 94 109 Ibid. at para 94 110 Ibid. at para 106 & 109 111 Ibid. at para 96 112 Ibid. at para 78 113 Ibid. at para 102
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illustration of concealed piercing. On this issue, the Court of Appeal in Boyle was
further troubled by the decisions in Sale.
6.4. Concealed Piercing By The Court of Appeal In R v Sale114
S advanced multiple bribes to an employee of network rail, who in return
awarded several high value commercial contracts to a company of which S was the
managing director and sole shareholder.
The Court of Appeal considered that because S was sole controller, and S’s
actions and the actions of the company where so close as to be indivisible in
advancing the corrupt actions,115 then the true facts are that S is principal under the
concealment principle, therefore all receipts the company had received under the
contracts, where obtained by it on S’s behalf.
In Boyle the Court of Appeal heavily doubted the decision in Sale, finding that
the Court of Appeal in Sale was unduly influenced by the fact S was sole director
and shareholder when concluding that S had used the company as his agent for the
purpose of committing his crime. Davies LJ. thought:
“it is rather hard to see why such a fact always would, of itself, be conclusive
[in constituting the company as agent] ….”116 (Emphasis added).
On that basis Davies LJ. thought Sale is a case that should be decided on its
own facts.117
It is agreed with the Court of Appeal in Boyle on this point, for it is difficult to
ascertain the principled basis on which the Court of Appeal in Sale was able to apply
the concealment principle. The company was not a “sham” company, utilised for the
sole purpose of concealing S’s impropriety, as was the case in Jennings. In fact, the
Court of Appeal accepted that S’s company carried on a legitimate business.118
Additionally, in applying the concealment principle, the Court of Appeal simply
said:
“accordingly, in so far as the company was involved, what it did served to hide
what the defendant was doing.”119
How interposing the company concealed the fact that S was bribing a network
rail employee remains a mystery. It is agreed with council for the defendant that the
bribes did not involve hiding behind the company to carry out the offences, but where
carried out by S acting on his own behalf.120
114 [2013] EWCA Crim 1306 115 Ibid. at paras 40 – 43 116 Ibid. at para 115 117 Ibid. 118 R v Sale [2013] EWCA Crim 1306 at para 12 119 Ibid. at para 41 120 Ibid. at para 22
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Therefore, it is submitted, that the ad hoc application of conventional legal
principles, through the concealment principle, is another instance of concealed
piercing. The concealment principle can lead to piercing in substance, though not in
form.121 Its prevalence may derive from the Crown Court in Boyle, and Court of
Appeal in Sale, seeking to prevent an “open road and a fast car for crooks seeking to
conceal their real activities.”122
5.1. Concluding
Narrowing of the doctrine has resulted in the lax application of conventional
legal principles, for the purpose of sidestepping the strictures of the evasion
principle. This was illustrated in the Court of Appeals decision in Sale, the Crown
Court in Boyle and the Supreme Court in Prest.123
The intention was that the Judiciary would endeavour in more robust analysis
of conventional legal principles before resorting to the doctrine. This does not seem
to be occurring. The prolific application of the concealment principle on flimsy
justifications such as “directing mind”, “actions were indivisible”, “alter ego”, are less
than concise. This is why Hannigan believes that the concealment principle has
simply shifted the confusion. For there is little confusion applying the doctrine under
the evasion principle, but there does seem to be confusion applying the concealment
principle.124 As consequence unprincipled piercing has not been abolished.
Therefore, it has led some to argue that the concealment principle is not capable of
clear, consistent application.125
PART VII: ISSUES APPLYING THE EVASION PRINCIPLE
This part examines issues with the application of the evasion principle in
Pennyfeathers v Pennyfeathers Property Company Ltd.126
7.1. Pennyfeathers v Pennyfeathers
This case concerned a proposed development of a large plot of land on the
Isle of Wight. C2, C3, D2 and D3 incorporated a company C1, of which they were all
directors.
121 N. Upadhyay, “Piercing the Corporate Veil: An Analysis of Lord Sumption's Attempt to Avail a
Troubled Doctrine” (2015) 21 Auckland U. L. Rev. 114 at 136 122 R v Boyle Transport (Northern Ireland) Ltd [2016] EWCA Crim 19 at para 119 123 See Also Concealed Piercing In McDowell & Singh v The Queen [2015] EWCA Crim 173. 124 B. Hannigan "Wedded to Salomon: Evasion, Concealment and Confusion on Piercing the Veil of
the One-Man Company" (2013) 50 1 11 at 37 125 N. Upadhyay, “Piercing the Corporate Veil: An Analysis of Lord Sumption's Attempt to Avail a
Troubled Doctrine” (2015) 21 Auckland U. L. Rev. 114 at 128 126 [2013] EWHC 3530 (Ch) [Pennyfeathers]
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The dispute arose when D2 and D3 incorporated another company, D1, which
had its own independent board of directors, of which D2 and D3 did not sit on.127 The
shares in D1 were owned by a trust, T, of which D2 and D3 were beneficiaries.
D1 began acquiring options to purchase surrounding lands with the aid of D2
and D3.
C2 and C3 alleged that D2 and D3 were in breach of their fiduciary duties to
C1, by unlawfully diverting the fruits of the development of the land from C1 to D1.
Rose J. found that the concealment principle applied, on the basis that they
have concealed their identities behind D1, so as to avoid liability for breaching their
fiduciary duties.128
Rose J. recognised that the facts of this case were not the same as in
Gencor. Presumably on the grounds that D1 could not be held as an agent or
nominee of D2 and D3. Thus, there could be no question that D1 could be liable for
knowing receipt in the acquisition of the land options.129
7.2. Evasion Principle Applied
The land options acquired by D2 and D3 on D1’s behalf, in breach of their
fiduciary duties, were legally owned by D1.
Rose J. thought that the evasion principle applied, and therefore the land options
were held by D1 on constructive trust for D2 and D3, as if they had been entered into
by D2 and D3 personally.130 Rose J. stated that:
“The interposition [D1] and [T] should not be allowed to defeat [C1’s] rights
against [D2] and [D3] or to frustrate the enforcement of those rights.”131
7.2.1. Evasion Principle Applied Absent A Finding of Control
Rose. J’s reading of Prest is suspect, as she believes that the evasion
principle could apply even where D2 and D3 had no control of D1.132
With respect, this is completely wrong. Lord Sumption JSC defined corporate
piercing as occasions “where a person who owns and controls a company”133 is
identified by virtue of that control. The test is unambiguous in its requirement that a
person who owes the frustrated legal obligation, must control a company which s/he
has interposed. Simply put, how can someone interpose something of which they are
not found to control?
127Pennyfeathers Ltd and Others v Pennyfeathers Property Co Ltd and Others [2013] EWHC 3530
(Ch) at para 15 128 Ibid at para 117 129 Ibid. 130 Ibid. at para 116 131 Ibid. at para 118 132 Ibid. at para 119 133 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 16
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Therefore, it is submitted that Rose J. absent in finding control, should have
been precluded in applying the doctrine.
7.2.2. Evasion Principle Applied With No Independent Right
Lord Sumption JSC in Prest affirmed Munby J’s finding in Ben Hashem v Ali
Shayif134 that for the doctrine to be invoked, the liability which the controller sought to
evade, must exist entirely dehors135 or independent of the interposed company.136
His Lordships analysis of Trustor and Gencor states that the liability which
was attached to the respective controllers of the interposed companies’, under the
concealment principle, only crystallised when the “true facts were that the company
had received the money as their agent or nominee.”137 Therefore they did not evade
a liability that they would otherwise have had.138 The liabilities existence was entirely
dependent on the interposition of the company.
His Lordship distinguished Jones & Gilford on the basis that the liability
existed independently of the company’s involvement.139
Applying this to Pennyfeathers, even if, hypothetically, D1 and D2 had control
of D1, the interposition of the company D1 would give rise to a liability that had not
existed prior to it being interposed. Therefore, the evasion principle could not be
applicable, even if control was present.
7.3. Distinction Between Concealment & Evasion Obliterated?
The confusion seems to arise from Adams v Cape Industries Plc,140 where
Slade LJ. feels that the fraud exception may be invoked where a company is used to
evade a limitation imposed on a person’s conduct by law.141 This would include a
fiduciary duty that a controller seeks to frustrate by interposing a company under
his/her control.142
The distinction between evasion and concealment is immensely slight. The
purpose of the interposed companies in Trustor and Gencor, was to use them as a
shield for its controllers, in order to enable them to frustrate enforcement of a liability
which had arisen from breach of their fiduciary duties, as consequence of that
interposition. In other words, to conceal their liabilities. In that respect the right which
the company was interposed to conceal, in an attempt to frustrate, was not one
134 [2009] 1 F.L.R. 115 135 Ibid. at para 199 136 Prest v Petrodel Resources Limited and others [2013] UKSC. at para 28 137 Prest v Petrodel Resources Limited and others [2013] UKSC. at para 33 138 Ibid. 139 Ibid. 140 Adams v Cape Industries Plc [1990] Ch. 433 141 Adams v Cape Industries Plc [1990] Ch. 433 at 544 142 B. Hannigan, ‘Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the
one-man company’ (2013) Irish Jurist 11. at 3
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which was already in existence, but one which crystallised at the point of
interposition.
Both Trustor and Gencor were cases, similar to Pennyfeathers, in which
companies were interposed to circumvent a fiduciary duty owed by their controllers.
Fundamentally, Lord Sumption JSC expressly precluded the application of the
evasion principle to these cases.
The statements in Prest on the doctrine were strictly obiter. The application of
the evasion principle in Pennyfeathers is binding. Failure to recognise the distinction
between an independent and dependent liability shall, if the decision is followed,
obliterate the fine distinction between the evasion and concealment principles. For
Rose J’s understanding of the evasion principle would embrace Gencor and Trustor,
as the companies in those respective cases were used to frustrate the enforcement
of a fiduciary obligation, as was the case in Pennyfeathers. The decision in
Pennyfeathers is deeply unsettling for the law.
PART VIII: THE EVASION PRINCIPLE & INTENTION
A great deal of uncertainty for when the doctrine may be applied, concerns
whether it is necessary that a company is procured with evasive intent, or is intention
arising at the point of interposing the company sufficient. This part aims to show that
the law on this issue has not been settled.
8.1. The Doctrine & Motive
Motive is a necessary requirement for the evasion principle to apply.143 The
“mental element of the fraud exception… is vital”144. The Court of Appeal in Adams v
Cape Industries plc145 supports this contention by stating that:
“… the motive of the alleged perpetrator must be legally relevant…The
decision in Jones v. Lipman was one case where the proven motive of the
individual defendant clearly had a significant effect on the decision.”146
143 M.F. Khimji, & C. Nicholls, “Piercing the Corporate Veil Reframed as Evasion and Concealment”
(2015) 48 University of British Colombia Law Review 401 at 426; N. Upadhyay, “Piercing the
Corporate Veil: An Analysis of Lord Sumption's Attempt to Avail a Troubled Doctrine” (2015) 21
Auckland U. L. Rev. 114 at 122 144 J. Payne, “Lifting the Corporate Veil: A Reassessment of the Fraud Exception” (1997) The
Cambridge Law Journal, pp 284-290 at 288 145 [1990] Ch. 433 146 Ibid. at 540
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8.2. Evasive Intention Present When Procuring Or Interposing A Company
Hannigan argues that the evasion principles invocation requires motive at the
point of interposing the company 147 Upadhyay, takes an opposing opinion, and
argues that the evasion principle, “seems to require an intention to evade a legal
liability [when] creating the corporate structure”148, or in other words, when it is
procured. It has been suggested that the latter “may prove to be a controversial
limitation upon the evasion principle, as it suggests that it can only apply to a sham
vehicle incorporated for [an evasive] purpose [emphasis added].”149
8.3. Solutions From Case Law?
Prima facie, it would seem the Judiciary requires that the company must be
formed with an intention to frustrate a legal liability. The following cases have been
offered as authority supporting this proposition.
The judgements of Lawrence LJ. and Russel J. in Gilford and Jones
respectively, were approved by Lord Sumption JSC in support of the evasion
principle. In Jones, Lord Sumption JSC highlighted the fact the company was,
“bought off the shelf,”150 solely for the purpose of defeating the plaintiffs’ rights to
specific performance.151 In Gilford the “evasive motive for forming the company”152
was emphasised by his Lordship.
In Sale, the Court of Appeal addressed the issue of motive for procuring the
company, finding that “this was a company which existed long before this corrupt
conduct, and which existed for bona fide trading purposes.”153
The following section will discuss Munby J’s sixth principle, devised in Ben
Hashem v Al Shayif154, and approved in Prest. Prima facie it suggests that the
doctrine may be invoked without motive when procuring the company.
8.4 . Munby J’s Sixth Principle
Lord Sumption JSC, approved of Munby J’s analysis in Ben Hashem of the
principles that derive from piercing cases. The sixth principle states that the:
147B. Hannigan, ‘Wedded to Salomon: evasion, concealment and confusion on piercing the veil of the
one-man company’ (2013) Irish Jurist 11 at 5 148 N. Upadhyay, “Piercing the Corporate Veil: An Analysis of Lord Sumption's Attempt to Avail a
Troubled Doctrine” (2015) 21 Auckland U. L. Rev. 114
at 122 149 "Teasing the Corporate Veil." International Financial Law Review 32.7 (2013): 43-45.at 45 150 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 30 151 Ibid. 152 Ibid at para 29 153 R v Sale [2013] EWCA Crim 1306 at para 39; See also R v Boyle Transport (Northern Ireland) Ltd
[2016] EWCA Crim 19 at para 69 154 [2009] 1 FLR 115
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“Company may be a “facade” even though it was not originally incorporated
with any deceptive intent, provided that it is being used for the purpose of
deception at the time of the relevant transactions.”155 (Emphasis added)
It is therefore paramount to extrapolate whether “façade” refers to instances of
concealment or evasion.
It was previously argued that when one speaks of a company being used as a
“façade” or “sham”, they speak of instances where the concealment principle is
engaged, not the doctrine. Therefore, Munby J’s sixth principle offers no insight on
whether the doctrine requires a company to be procured with deceptive intent, as it
can be construed only as a statement on the concealment principle.
However, Munby J had intended façade to contextualise instances where the
court invoked the doctrine, for that was what “façade” was understood to mean from
the test devised in Woolfson. It would seem that Munby J’s intention was that the
court may pierce the veil even if there is no evasive intent when the company was
incorporated or procured. Unfortunately, Munby J. cites only Trustor156as authority
for his principle, a case which is now rationalized to only concern the concealment
principle.
The next section seeks answers from the case of Creasey v. Breachwood
Motors Ltd,157 where the High Court addresses directly the issue of whether it may
invoke the doctrine when there is no evasive intention present when procuring a
company.
8.5 . Creasey v. Breachwood Motors Ltd158
In Creasey, Richard Southwell QC, sitting as a deputy High Court Judge in
the Queen’s Bench Division, found that for the fraud exception to apply, even if the
controller intends to frustrate his/her liabilities by interposing a company, motive
when incorporating it is highly relevant.
Mr. Creasey, “C”, had pursued an action for wrongful dismissal against
Breachwood Welwyn (BW), of which BW served a defence. However, later BW
informed C that it was insolvent. Another company, Breachwood Motors Ltd (BM)
took over the business, taking all BW’s liabilities except C’s claim. BM had the same
directors and shareholders as BW. The purpose of transferring BW’s business to BM
was to leave C with no recourse to the assets of BW, thus frustrating a legal liability
(albeit this liability was contingent on receiving judgement from a court). C argued
that BM should be held liable. The judge held that the fraud exception did not apply,
and distinguished Gilford and Jones on the basis that the company:
155 Ibid. at para 164 156 Trustor AB v Smallbone 3 All E.R. 987; (No 2) [2001] 1 WLR 1177 at para 16 157 [1993] BCLC 480 [Creasey] 158 Ibid.
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“was already in existence and carrying on its own business….”159
Richard Southwell QC thought that evasive motive for forming the company
was necessary before the court can invoke the fraud exception.
8.5.1 Creasey An Illogical Decision
It is argued that the judge was in error when distinguishing Creasey on this
basis. Although it is true that Jones and Gilford were “sham companies…
incorporated for the purpose of the fraud… this fact was not made a pre-condition of
the lifting of the veil”160. Payne is critical, questioning why it should matter that a
company was a living, breathing entity before the legal obligations existed.161 A fraud
is no less a fraud because a company happened to exist prior to using it to evade a
legal liability, and an intention is no more an intention because a new company did
not have to be incorporated to defeat that liability. 162 She is of the view that an
evasive intention should only be present when the company is interposed, and not
when it is procured.163 To say otherwise is illogical.
Another case on the matter is Coles v Samuel Smith Old Brewery
(Tadcaster),164discussed in the next section, which seems to be powerful support for
the proposition that an intention is necessary when the company is procured for the
doctrine to apply.
8.6. Coles v Samuel Smith Old Brewery (Tadcaster)165
The facts in this case are identical to those in Jones. A company, B, sold
premises to its wholly owned subsidiary company, R, in order to defeat C’s right
under an option to purchase the premises.
Rimer LJ., in the Court of Appeal, ordered specific performance against B to
procure R to transfer the property to the C, as B was in a position to meet its legal
obligation.166 This can now be rationalised under the concealment principle, and is
an identical remedy to that provided in Jones.
However, the Court of Appeal, whilst admitting the facts where similar to
Jones,167 did not follow Jones on the matter of ordering specific performance as
against the company, R.
159 Ibid. at 646 160 J. Payne “Lifting the Corporate Veil: A Reassessment of the Fraud Exception” (1997) The
Cambridge Law Journal, pp 284-290 at 289 161 Ibid. 162 Ibid. at 290 163 Ibid. at 290 164 [2007] EWCA Civ 1461 165 Ibid. 166 Ibid. at para 20 167 Coles v Samuel Smith Old Brewery (Tadcaster) [2007] EWCA Civ at para 19
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The next section will try to deduce why the fraud exception applied as against
the interposed company in Jones, yet not in Coles.
8.6.1. Squaring the Circle
In Coles, the appellant gave notice in 2002 to the respondent to exercise the
option to purchase, thus creating a contractual liability on B.168 B sought to frustrate
this liability by conveying the property to R, which was incorporated in 1989.169 From
1989 the company had carried on a legitimate business of developing and selling
property.170
Conversely, in Jones, the company had no legitimate business at all.171 From
its inception, the motive for procuring the company was evasive.
Rimer LJ. in the Court of Appeal agreed with the District Courts interpretation
of Russel J’s dicta in Jones, on the matter of what constituted a “sham” for the
purpose of piercing the veil, specifically that:
“… [in the case of Jones] Russell J had regarded the establishment of…
Alamed as … a sham [as it was] established exclusively for the purpose of
defeating the plaintiffs’ claim for specific performance.”172 (Emphasis added)
Rimer LJ. further emphasised the fact that R was “a genuine company.”173 It is
submitted that the relief could not be ordered as against company R, which was
allowed in Jones, as the situation in Coles was distinguishable on the grounds that
the company was procured with no evasive intention for the purpose of defeating the
plaintiff’s legal rights.
8.7. Concluding
There is considerable ambiguity on whether a necessary mental
element concerning an evasive motive for procuring a company must exist before
the courts may apply the evasion principle. It appears that the case law pre-Prest
under the fraud exception requires intention to be present at the point of
procurement.
It is clear Munby J’s intention was to embrace the doctrine in his sixth
principle, however, the ambiguity arises as to whether the courts are to interpret his
statement in light of Prest, and thus only a statement on the concealment principle. It
is felt that they should.
168 Ibid. at [4] 169 Ibid. 170 Ibid. 171 Jones v Lipman [1962] 1 All E.R. 442 at 835 172 Coles v Samuel Smith Old Brewery (Tadcaster) [2007] EWCA Civ at para 14 173 Ibid. at [19]
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Case law post-Prest seems also to require intention before procuring a
company. It would not be a difficult leap for courts to interpret the meaning of Prest,
Sale, Gilford and Jones as distinguishable upon the platform of evasive incorporation
or procurement, as was done by Richard Southwell QC in Creasey.
PART VIII: THE NECESSITY PRINCIPLE: CAN THE DOCTRINE ENDURE IF NOT
NECESSARY?
This part discusses the Supreme Court in Prest’s adoption of the necessity
principle, which states that the doctrine should not be invoked where it is not
necessary to do so.174 It is argued that the principle is vital in providing legal
consistency, due to the concealment and evasion principles overlapping. This will
follow with discussion on whether the necessity principle creates doubts over the
doctrines relevance, as the supporting case law for the evasion principle, offered by
Lord Sumption JSC, could have been decided using more conventional legal
remedies.
9.1. Overlap between Concealment and Evasion Principle
Lord Neuberger’s rationalisation of Gilford raises intriguing questions for the
application of the evasion principle. Control is necessary for the evasion principle to
apply, which may occur in the controller’s capacity as agent or principal.
When a person, in their capacity as principal, interposes a company, to evade
a legal restriction s/he is under, then the court may restrain the company under the
doctrine. However, the court may also restrain that company under the common
law.175 On the facts of Gilford, there is arguably a strong case that Mr Horne had not
intended to transfer beneficial ownership, constituting the something extra, rather
than just control, to make him principal. Such facts show that remedies under the
concealment and evasion principle, may not operate on a mutually exclusive basis,
as against a single entity, but apply equally.
This may be what Lord Neuberger PSC eluded to when stating the evasion
principle may be an invocation of a well-established principle, ‘which exists
independently of the doctrine,’ and therefore not a statement about veil piercing, but
based upon agency or trusteeship.176 His Lordship then stated that the evasion
principle may “apply equally to a person who transfers assets to a spouse or civil
partner,” which draws close parallels to the agency case of Smith v Hancock.177
Therefore, it is submitted that the evasion principle overlaps with the law of
agency, which may resort in the corporate entity being liable under both the doctrine,
174 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at [35], [62] & [103] 175 Smith v Hancock [1894] 2 Ch. 377 176 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 83 177 [1894] 2 Ch. 377
Page 29 of 37
and more conventional legal principles, simultaneously. It is for this reason that the
use of the necessity principle is vital, as discussed below.
9.2. The Principle of Necessity; Public Policy & Legal Consistency Considerations
Prest held that piercing may only be invoked where there are no other
available conventional legal remedies.178 Thereby approving Lindsay v
O'Loughnane179 and Warrant J in Dadourian Group International v Simms.180 It is
submitted that the necessity principle’s function is primarily to encourage both
litigants and the judiciary to first look away from the doctrine, so as to exhaust other
conventional legal remedies first. There seems to a public policy imperative built into
this principle to entrench the sanctity of Salomon,181 owing to the fact that the
doctrine has been used as a shortcut to avoid having to fully analyse other, more
established, legal principles.182
In this respect the UK position is similar to the U.S183 and South African law,
illustrated by the South African Supreme Court in the case of Hulse-Reutter v
Godde,184 in which Supreme Court stated that the:
“exceptional nature of the relief which the respondent sought against the
appellants (piercing the corporate veil) required that he should have no other
remedy.”185
With regard to cases that may invoke both the concealment and evasion
principle as against a company, discussed previously, the New Zealand cases of
Official Assignee v Sanctuary Propvest Ltd186 and Official Assignee v 15 Insoll
Avenue Ltd,187 provide the best illustration of the issue. Both cases exhibited
identical facts, however, in the former an order was made against the company
under constructive trust,188 whilst in the latter, the order was made against the
178 Ibid. at paras 62 & 103 179 [2010] EWHC 529 (QB) at para 130 180 [2006] EWHC 2973 at para 686 181 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 35; H. M. Kim, "Piercing
the Corporate Veil as a Last Resort; Prest v Petrodel Resources Ltd" (2014) Singapore Academy of
Law Journal 26.1 at 257; B. Hannigan, “Wedded to Salomon: evasion, concealment and confusion on
piercing the veil of the one-man company” (2013) Irish Jurist 11 at 6 182 Watts, Peter. "Piercing the corporate veil - a device of convenience or a last resort?" (2001) CSLB
93. at 93; and see also Attorney-General v Equiticorp Industries Group Ltd [1996] 1 NZLR 528 (CA) at
541 183 Amfac Foods Inc v International Systems and Controls Corp 294 Or 94; 654 P 2d 1092 (1982) and
Hambleton Brothers Lumber Co v Balkin Enterprises Inc 397 F 3D 1217 at 1225 (9th Cir, 2005) 184 [2001] ZASCA 102; see also Amlin (SA) Pty Ltd v Van Kooij [2007] ZAWCHC 60 at para 23. 185 Hulse-Reutter v Godde [2001] ZASCA 102 at para 23 186 HC Auckland CIV-2009-404-0852, II June 2009 187 Official Assignee v 15 Insoll Avenue Ltd [2001] 2 NZLR 492 (HC). 188 Official Assignee v Sanctuary Propvest Ltd HC Auckland CIV-2009-404-0852, II June 2009 at para
50.
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company using the doctrine. The necessity principle would result in both cases
above being decided under trust law, promoting legal consistency.
9.3. To No A-Veil
Ex-ante Lord Sumption JSC resuscitates the doctrine by offering Gilford and
Jones as authority for its existence. However, by adopting the principle of necessity,
his Lordship has effectively eviscerated those authorities as precedent for the
doctrine ex-post, for they are both cases where other remedies, under the
concealment principle, were available.
Jones was decided under the concealment principle, as L had control, and
was in a position to meet his legal obligations under the contract of sale.
Alternatively, L’s knowledge as director could have been imputed to the company,
thereby putting the company on actual notice of the plaintiff’s contractual interest in
the land. Therefore, the company could be ordered to transfer the property as the
purchaser’s equitable interest would prevail over the company’s legal title.189
In Gilford, Lord Sumption thought that the concealment principle applied
because Mr Horne was liable through breaching his covenant, for the finding of his
control would constitute him a shadow director, and thus carrying on business as
agent for another. Alternatively, the company could have been liable, as H’s
knowledge of the restrictive covenant, given that he was the directing mind and will
of the company, could be imputed to the company. This would make the companies
conduct unconscionable or tortious, justifying a remedy against it.”190
The Supreme Courts inability to offer authority for instances where it might be
necessary to invoke the doctrine is a failure to address the attack made in VTB
Capital that it is unnecessary.
If the there is no conceivable instance where the doctrines invocation is
necessary, then should it not be given its quietus once and for all?
9.4. Post-Prest; Conceivable That The Doctrines Invocation Will Ever Be Necessary?
Can it be said that all instances where the facts allow for the application of the
evasion principle, that it will always be possible to rely upon other more conventional
legal principles? Lord Sumtption JSC states that in:
“almost every case where the [evasion] 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.”191
189 Lord Cooke of Thorndon, Turning Points of the Common Law (Sweet & Maxwell, London, 1997),
Ch 1: ‘‘A Real Thing: Saloman v A Saloman & Co Ltd’’ at 17; N. Campbell & P. Watts, "The
Consequences of Incorporation" in Hare Company Law in New Zealand (LexisNexis, Wellington,
2011) 43 at 90 190 Prest v Petrodel Resources Limited and others [2013] UKSC 34 at para 29 191 Ibid. at para 35
Page 31 of 37
The use of “almost” is critical, as it indicates that Lord Sumption JSC
envisages situations where it will be necessary to pierce the veil.
Lady Hale JSC, with whom Lord Wilson JSC agreed, took an opposite
opinion. The evasion principle only converts a controller’s personal liability into a
liability of the company, the converse is not true. Lady Hale JSC thought that it was
more appropriate to rely on concepts such as agency and attribution in such cases,
than to apply the evasion principle.192 It would seem that she has impliedly resisted
Lord Sumption’s view that the doctrine can ever be necessary.
Some legal scholars agree with the opinion of Lady Hale JSC, arguing that if
the doctrine may only be invoked where another remedy is not present, and there
are no conceivable situations in which another legal remedy could not by utilised,
“then it follows that there are no circumstances in which the doctrine should be
invoked. It is, therefore, obsolete.”193
It is submitted that this issue has been resolved with the judgement in Paul
Wood v Baker194 as it provides authority, in the context of bankruptcy law, where the
doctrines invocation was necessary.
9.5. A Doctrine Entrenched: Wood v Baker195
Wood involved the application of the evasion principle, resulting in a freezing
order being granted over the businesses and assets of several companies.
The trustees in bankruptcy sought declaration that the business and assets of
the corporate respondents were held on trust for the bankrupt. They wished to
thereby invoke section 307 Insolvency Act 1986, which allows the trustee in
bankruptcy to make a claim with respect to the trust assets for the benefit of the
estate. If successful, then once the s 307 notice is served, the corporate assets will
vest in the trustee. However, the trustees feared that there was a real possibility that
the bankrupt would dissipate the corporate assets before the section 307 notice
could be served.
Hodge J. first established whether the bankrupt was in control of the
companies, answering in the affirmative. It was found in evidence gathered by
HMRC, that one of the company directors “had no actual involvement in the
companies”196 and that company bank accounts were controlled solely by the
bankrupt.197 It was found that the named directors of the companies did:
192 Ibid. at para 92 193 N. Upadhyay, “Piercing the Corporate Veil: An Analysis of Lord Sumption's Attempt to Avail a
Troubled Doctrine” (2015) 21 Auckland U. L. Rev. 114 at 139 194Paul David Wood & Anor v Timothy Darren Baker & Ors [2015] EWHC 2536 (Ch) [Wood] 195 [2015] EWHC 2536 (Ch) 196 Ibid. para [19] 197 Ibid. para [19]
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“not appear to have undertaken any functions properly attributable to a
company director… The bankrupt has been pulling the strings behind the
companies.”198
Second, Hodge J. found that there was a long history of concealment and
deception by the bankrupt199which involved “interposing front men, or front
companies, between his trustees and his business affairs.”200 Consequently Hodge
J. believed that the companies were simply interposed by the bankrupt to facilitate
the evasion of his bankruptcy obligations.201 The obligation being owed under
Section 333 of the Insolvency Act 1986, where a bankrupt must disclose after-
acquired property to his trustees. Failure to do so is contempt of court.202
In light of this, the High Court was able to infer that the companies had been
interposed with evasive intent, by considering the defendant’s persistent failures to
co-operate with his trustee in bankruptcy,203 and also the finding that there was no
evidence that the company had any legitimate freestanding business.204
It was clear that the situation was similar to Jones, in that the companies were
merely shells for the sole purpose of enabling its controller to frustrate or evade the
law. Therefore, Hodge J. granted the injunctions against the corporate entities, thus
invoking the doctrine.
This case is a successful example of instances where it is necessary to pierce
the veil. It is for this reason that it may provide the clearest authority for entrenching
the evasion principle, and finally jettisoning any contemplation that the doctrine is
unnecessary, an issue which had lingered post Prest.
CONCLUSION
Prest has been successful in settling the doctrine, by planting a coherent
principle that should better enable unified decision making within the case law.
However, the metaphor, “there is more than one way to skin a cat”, rings true
when describing the judicial treatment of corporate veil piercing. When trying to “get
at” corporate assets, or attach a personal liability to a corporation, the courts often go
to great lengths to achieve this goal.
The courts have relied exclusively upon control to invoke conventional legal
principles, especially in agency, to allow “concealed piercing.” Or curiously, ignoring
control entirely in order to pierce the veil, as seen in Pennyfeathers.
Control is necessary when applying the doctrine, however it is not sufficient
when applying conventional legal principles under the concealment principle, for this
would leave the veil in tatters.
198 Ibid. para [21] 199 Ibid. para [18] 200 Ibid. para [18] 201 Ibid. para [18] 202 Section 333(4) Insolvency Act [1986] 203 Ibid. para [15] 204 Ibid. para [22]
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Furthermore, there have been instances where the courts have
misunderstood the evasion principle entirely, as was the case, again, in
Pennyfeathers, in which the court failed to distinguish between an independent and
dependent liability, allowing it to pierce the veil. This may obliterate the fine
distinction between the evasion and concealment principles devised in Prest, which
is deeply destabilising for the law.
The issue is also compounded by fear that the courts will circumvent the veil,
by engaging in an ad hoc application of conventional legal principles, illustrated in
the Supreme Court’s questionable finding of a resulting trust in Prest.
There are questions over how the doctrine is to apply when a company is not
formed or procured with an evasive intent. It is felt that a fraud is no less a fraud
because a liability pre-existed incorporation. To postulate otherwise, seems prima
facie illogical. However, it would seem the law is taking the “illogical” approach.
The doctrinal earthquake in Prest has caused tremors to permeate through all
divisions of the judiciary, forcing them to reinterpret all existing case law compatible
with the highly technical evasion and concealment principles. The courts are
struggling. The erroneous application of both the concealment and evasion principles
is rife, and therefore indicative of a flustered judicial system struggling to cope. In
that regard, the law is unsettled.
Complicated arguments, apart from the evasion principle, which should
become shipwrecked by Salomon, too often slip through the net. However, with the
dawn of important cases such as Boyle and Prest, more of these arguments should
flounder.
The doctrine, although highly constrained and unsettled, endures.
Page 34 of 37
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