Canada: The Second Opinion: Presto! The UK Supreme Court Holds The Corporate Veil Can Disappear In Prest v. Petrodel Resources

Last Updated: June 18 2013
Article by Brandon Kain

Most Read Contributor in Canada, September 2018

The UK Supreme Court has released an important new judgment addressing the ability of judges to "pierce the corporate veil": Prest v Petrodel Resources Ltd, [2013] UKSC 34.  The ruling in Prest follows on the heels of the same Court's decision a few months ago in VTB Capital Plc v Nutritek International Corp, [2013] UKSC 5, which we discussed extensively in previous posts  here, here and here.  In an interesting turn of events, the Court in Prest answers a question that it left open in VTB Capital, namely, whether the jurisdiction to pierce the corporate veil exists at all.  According to Prest, the corporate veil may indeed be pierced where exceptional circumstances warrant it.  The Court also sets out a new test for doing so that is likely to influence future jurisprudence in both Canada and abroad.

Background

The Prest litigation arose out of proceedings for ancillary relief following a divorce. The appellant Prest was the ex-wife of a man who owned and controlled a number of related companies, including the respondents. Her ex-husband had repeatedly failed to comply with the duty to make full disclosure of his finances, through a course of conduct which the Supreme Court "characterised by persistent obstruction, obfuscation and deceit, and a contumelious refusal to comply with rules of court and specific orders". (para. 4)

At trial, Moylan J. made a significant award in favour of the appellant, including a £17.5 million lump sum payment and the £4 million matrimonial home.  He also ordered that three of the respondent companies controlled by the ex-husband convey various assets to her in satisfaction of the judgment.  In doing so, Moylan J. recognized that he would not ordinarily be permitted to pierce the respondents' corporate veils, since this may only be done where the legal personality of a company has been abused for an improper purpose, which was not the case here.  Nonetheless, Moylan J. found that a wider jurisdiction to pierce the corporate veil than existed at common law was available under the Matrimonial Causes Act 1973 (U.K.).

Moylan J.'s ruling was set aside by the English Court of Appeal. The majority held that there was no greater ability to pierce the corporate veil in family law cases than in any other context.  Since there was no evidence that the legal personalities of the respondents had been abused for an improper purpose, nor a finding that they held the relevant properties on trust for the ex-husband, the respondents could not be ordered to convey the properties to the appellant.

The Prest Decision

A seven-member panel of the UK Supreme Court unanimously overturned the Court of Appeal's judgment.  The Supreme Court agreed that the corporate veils of the respondents should not be pierced at common law, and that there was no wider jurisdiction to do so under the Matrimonial Causes Act 1973.  However, it ultimately found the respondents could be ordered to convey the properties to the appellant, since they held them on a resulting trust for the ex-husband.  In the course of its decision, the Court devoted considerable attention to the issue of piercing the corporate veil.

The leading judgment was delivered by Lord Sumption.  He began by observing that while "[t]he separate personality and property of a company is sometimes described as a fiction...the fiction is the whole foundation of English company and insolvency law". (para. 8) Further, he noted that the expression "piercing the corporate veil" is often indiscriminately applied to a range of situations in which the law attributes the acts or property of a corporation to those who control it, but without disregarding its separate legal personality (e.g., joint liability, trust law, equitable remedies, or in certain statutory contexts).  According to Lord Sumption, "when we speak of piercing the corporate veil, we are not (or should not be) speaking of any of these situations, but only of those cases which are true exceptions to the rule in Salomon... i.e. where a person who owns and controls a company is said in certain circumstances to be identified with it in law by virtue of that ownership and control". (para. 16)

In an important doctrinal development, Lord Sumption founded this jurisdiction to pierce the corporate veil upon the general judicial aversion to fraudulent conduct.  He gave several examples of this basic tendency, such as the vitiation of contracts or judgments founded on fraud, and the refusal of courts to permit frauds upon a statute.  He then reviewed the English corporate veil jurisprudence, and concluded that the ability to pierce the veil is "well established", even though most of the cases which recognized this power did so in obiter, and those which applied it could have been decided on other grounds.  In Lord Sumption's estimation, "the recognition of a limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse", and "it is consistent with the general approach of English law to the problems raised by the use of legal concepts to defeat mandatory rules of law". (para. 27)

One of the most interesting aspects of Lord Sumption's judgment is the distinction he proceeded to draw between cases that apply what he terms the "concealment" principle" and the "evasion" principle:

... The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the 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. 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. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical. ... (para. 28)

He then held that "the corporate veil may be pierced only to prevent the abuse of corporate legal personality". (para. 34)  Lord Sumption defined such abuse as including attempts to "evade the law or to frustrate its enforcement" through use of the corporate personality.  It does not include cases where one "cause[s] a legal liability to be incurred by the company in the first place" or relies "upon the fact (if it is a fact) that a liability is not the controller's because it is the company's", since "that is what incorporation is all about". (Ibid) According to Lord Sumption, this explained the result in VTB Capital, where the Court held that piercing the corporate veil could not enable a company's contractual obligations to be imposed directly upon its controlling mind, since in such a case "the principle was being invoked so as to create a new liability that would not otherwise exist". (Ibid)

In the end, Lord Sumption proposed the following test for piercing the corporate veil:

I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality. ...I consider that if it is not necessary to pierce the corporate veil, it is not appropriate to do so, because on that footing there is no public policy imperative which justifies that course. ... (para. 35)

Turning to the facts of Prest itself, Lord Sumption held this test was not met by the appellant.  Although the ex-husband had behaved improperly by misapplying the respondents' assets for his own benefit, "he was neither concealing nor evading any legal obligation owed to his wife" nor "concealing or evading the law relating to the distribution of assets of a marriage upon its dissolution". (para. 36) Further, while he used the respondents' corporate structure to deny being an owner of the properties, that at most engaged the "concealment" principle, which meant only that the Court should ascertain the true facts (which were that the legal interest in the properties had been vested in the respondents for wealth protection and tax planning purposes long before the marriage dissolved, not to defeat the appellant's claim).  In the result, Lord Sumption held that "the piercing of the corporate veil cannot be justified in this case by reference to any general principle of law". (Ibid)

The remaining six members of the Court largely agreed with Lord Sumption's treatment of the corporate veil.  However, four of the Law Lords questioned whether the jurisdiction to pierce the veil would truly be limited to instances of "evasion" in future cases.

Thus, Lady Hale and Lord Wilson doubted "whether it is possible to classify all of the cases in which the courts have been or should be prepared to disregard the separate legal personality of a company neatly into cases of either concealment or evasion". (para. 92) In their view, "[t]hey may simply be examples of the principle that the individuals who operate limited companies should not be allowed to take unconscionable advantage of the people with whom they do business". (Ibid)

Similarly, Lord Mance stated that it is "dangerous to seek to foreclose all possible future situations which may arise and I would not wish to do so". (para. 100) Lord Clarke also made the following remarks:

... Lord Sumption may be right to say that it will only be done in a case of evasion, as opposed to concealment, where it is not necessary. However, this was not a distinction that was discussed in the course of the argument and, to my mind, should not be definitively adopted unless and until the court has heard detailed submissions upon it. I agree with Lord Mance that it is often dangerous to seek to foreclose all possible future situations which may arise and, like him, I would not wish to do so. ... (para. 103)

Significance

Although decided in the context of a matrimonial dispute, Prest seems destined to rank among the most important corporate law judgments since Salomon v. A. Salomon & Co. Ltd., [1897] A.C. 22 (H.L.).  First, it marks the only time that the United Kingdom's highest court has squarely recognized the jurisdiction to pierce the corporate veil.  Second, Lord Sumption articulates a clear legal test for this, which is limited to cases where piercing the veil is the only way to deprive a company or its controlling mind of an advantage they would otherwise obtain from the latter's use of the former's legal personality to deliberately evade or frustrate enforcement of the existing legal obligations, liabilities or restrictions of the controlling mind, as opposed to those of the company itself.  Third, Lord Sumption draws an important distinction between piercing the corporate veil to prevent such evasion, and merely looking behind the corporate veil to prevent  "concealment" of the real facts.

It is true that the concurring judgments of Lady Hale and Lords Wilson, Mance and Clarke leave room for additional exceptions to be grafted onto Lord Sumption's test in the future.  However, their reasons also suggest that this is "likely to be very rare and that no-one should be encouraged to think that any further exception, in addition to the evasion principle, will be easy to establish". (para. 103) In practice, future applications of the veil-piercing jurisdiction in England should largely be limited to cases which engage Lord Sumption's evasion principle.

It is to be hoped that the  Canadian courts will follow a similar path.  In Constitution Insurance Co of Canada v. Kosmopoulos, [1987] 1 S.C.R. 2 at 10, Wilson J. famously remarked that "[t]he law on when a court may ... '[lift] the corporate veil' ... follows no consistent principle".  This has led Canadian courts to adopt  a number of different tests for veil-piercing, some of which are so open-ended as to amount to no test at all (e.g., where not piercing the veil would lead to a result "too flagrantly opposed to justice, convenience or the interests of the Revenue", the approach proposed in Kosmopoulos itself).  With the articulation of the evasion test in Prest, the elusive "consistent principle" sought in Kosmopoulos may have finally emerged.

To view the original article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions