It is a principle of English law that a validly incorporated company has a separate legal identity, which is distinct from its directors and shareholders. The protection which this affords to the directors and shareholders is known as the corporate veil. However, in cases where the company has been considered to be a 'mere façade' or an alter ego, this corporate veil has been pierced by the Court.
Last year this principle was examined in a number of cases by the Supreme Court.
In VTB v Nutritek1 the Claimants had attempted to pierce the corporate veil in order to bring litigants into the jurisdiction. The argument employed was that the Respondents were caught by a jurisdiction clause contained within a loan agreement, which granted a loan to a corporate entity. The jurisdiction clause provided that the loan agreement was governed by English law. The Claimants contended that the Respondents were bound by this jurisdiction clause as they had used this corporate entity to commit fraud.
In the Supreme Court decision handed down in February 2013, Lord Neuberger, giving the lead judgment in relation to this element, acknowledged that the concept of piercing the corporate veil existed (in response to submissions to the contrary) but did not expand on the principle and confirmed there was no justification for the principle to be extended in this manner in this particular case. The contractual liabilities of a corporation could not be attributed to its controllers. This would contradict the concept of the corporation and the controller being distinct legal entities.
Similarly, in June 2013, the Supreme Court ruled that the corporate veil could not be pierced in Petrodel Resources Limited v Prest,2 but nonetheless provided the relief sought by alternative means. The parties were divorcing and Mrs Prest sought financial relief. At first instance, Mrs Prest had been awarded £17.5 million and her former husband had been ordered to procure the transfer of properties owned by corporate entities to her.
These corporate entities applied to the Court of Appeal on the basis that the Court could not order that assets held by them be used to satisfy Mr Prest's liability to Mrs Prest, due to the existence of the corporate veil. The Court of Appeal agreed and overturned the order made at first instance.
The Supreme Court then considered the matter. It overturned the order of the Court of Appeal, but applied a different reasoning and found that there was no basis to pierce the corporate veil in this instance. It ruled that the assets were Mr Prest's beneficially in any event and held on trust for him. As such, the veil did not need to be pierced. The Court did however provide useful commentary on the situations where this could be achieved.
The Court made reference to both a 'concealment' and an 'evasion' principle and confirmed that where a person was under an existing obligation or liability, which they had deliberately evaded by interposing a company under their control, in an attempt to defeat or frustrate that obligation or liability, the Court could look behind this façade and take steps to deprive the controller of the advantage obtained as a result of this separate legal personality.
In this instance, Mr Prest owned 100% of and controlled the relevant companies and used their assets as his own but he was not considered to be evading a legal obligation and the assets in question had been owned by the various companies long before the demise of his marriage. There was no evidence
this corporate structure had been designed to avoid any obligation to his wife and as such the veil would not be pierced.
The Court further commented that, as had been the case here, where there was any other remedy available the corporate veil would not be lifted.
The situations where the Court will look beyond the Corporate structure are extremely limited and unlikely to be expanded upon. It would seem that avoidance and/or concealment of a liability through a corporate structure, by a controlling individual, which had been deliberately constructed to defeat that liability and act as a façade, at the relevant point, may succeed but applicants are strongly advised to seek alternative methods.
Footnotes
1 [2013] UKSC 5.
2 [2013] UKSC 34, [2013]2 A.C. 415
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