UK: The Corporate Veil And Its Piercing As Clear As…?

Last Updated: 1 April 2014
Article by Simon McLeod

Introduction

The issue of piercing the corporate veil has recently come under the spotlight. However, the recent cases have sometimes been decided in a way that is not entirely consistent and this has caused uncertainty. They can have important application both for individuals in the way that they structure their affairs and companies, particularly international companies, in the way that they are structured and operated.

Corporate Personality- the background

The principle of separate corporate personality, namely that a company is separate from its shareholders and which is illustrated by the 19th century case of Salomon v Salomon is one of the cornerstones of English company law. It is a principle which has been adopted by many common law jurisdictions and has a solid legal and economic justification.

Piercing the corporate veil

The Courts have been reluctant to breach this established principle although since Salomon v Salomon there have been a number of exceptions allowed. The difficulty for legal practitioners is in trying to predict in what circumstances the corporate veil might get pierced and whether, if it appears that the grounds for piercing the corporate veil do not exist, whether other grounds might be found which have a similar result. This has always been an issue but the recent cases have put the issue in stark relief. Given that one of the principal tenets of a fair legal system is that there should be some degree of certainty in the application of rules this is not entirely satisfactory.

The recent cases

In the recent company case of VTB Capital Plc v Nutritek International Corporation a creditor of a company attempted to pierce the veil in such a way that it effectively sought to make a shareholder a party to a contract even though there was no contractual nexus. This was an extreme position to take, for which there was little authority and unsurprisingly, the Courts rejected the application. The position appeared reasonably clear but after that, however, came the much publicised matrimonial case of Prest v Petrodel and, more recently, the competition case of Akzo Nobel v The Competition Commission.

Prest v Petrodel – the commentaries

Prest v Petrodel was finally adjudicated by the Supreme Court. At the time it received a lot of general press comment as well as a lot of legal commentary. The general press comment centred upon the former wife obtaining her "just rewards" whereas the legal commentary focussed on the piercing of the corporate veil. One of the interesting facts about the case is that before the Supreme Court judgement was given, a lot of legal commentators had suggested that the Court of Appeal judgement, which did not find for the former wife, would be upheld. All those commentaries, however, seemed to miss an understanding of the influence of public policy and thought always needs to be given to what a court will decide whatever the strict legal analysis might be. In my view, therefore, it was almost certain that the wife would win but the interesting issue would be on what grounds the Supreme Court would find in her favour. This though is where an element of uncertainty comes in because although the analysis in the judgements is clear they leave open other issues which are likely to cause difficulties.

Prest v Petrodel- the facts

In Prest v Petrodel the husband was a wealthy oil trader who had built up a portfolio of properties; all of which were in the names of various companies. The issue was whether those properties could be brought into the calculation of the matrimonial assets. The husband was not the owner of those companies; indeed, if he had been, the problem would not have arisen because the shares themselves would have been one of the assets to be divided. There was some lack of clarity, caused by the husband's non-compliance in the court proceedings, as to who the companies were owned by although it was likely that ultimately it was a family trust.

Prest v Petrodel – the decisions

At First Instance the Court decided in favour of the wife, seemingly interpreting their powers under the Matrimonial Causes Act 1973 in a very wide-ranging way, effectively piercing the corporate veil and ordering transfers of properties from the companies, who were not parties to the matrimonial proceedings, to the wife as part of the usual division of assets on a divorce.

The companies appealed and the Court of Appeal upheld the appeal, rebuking the Family Division's practice of effectively piercing the corporate veil in circumstances which did not justify it. The Court of Appeal's view was that unless it could be determined that the corporate personality of the companies was being abused or it could be shown that the assets owned by the companies were legally owned in trust for the husband, which the first instance judge had found not to be the case, then the judge should not have made the order in favour of the wife.

The wife appealed to the Supreme Court on a number of grounds including that the corporate veil of the companies should be pierced. The Supreme Court stated that it was not prepared to pierce the corporate veil but found in her favour, principally for the reason that the properties were beneficially owned by the husband which, as mentioned, has been rejected in the lower court.

Piercing the veil- when can it be done?

In the leading judgement of Sumption LJ he reviewed the precedents for piercing the corporate veil. It was his view, adding a degree of uncertainty to the mix, that many of the cases which had been traditionally viewed as evidence for the doctrine of piercing the corporate veil were not that but had in fact been decided on different grounds.

In Sumption LJ's view the principal grounds that justified piercing the veil was where there was a facade or a sham which essentially meant there had been either concealment or evasion. Concealment he regarded as a banal legal concept because all it entailed was the interposition of a company to conceal the identity of the real actors. The evasion principle is somewhat different in that it presupposes that there is a legal right against a person in control of a company which exists independently of the company and where a company is then interposed as a separate legal personality to defeat that legal right. There has been sometimes confusion between the two principles possibly because it can be that certain cases demonstrate facets of both.

The evasion principle is best illustrated by the leading case of Gilford v Horne where the defendant established a company to conduct business, the sole purpose of which was to circumvent a restrictive covenant which he had entered into. The effect of the judgement was that the corporate entity was pierced in order to prevent the breach of the covenant although that did not mean that the shareholder would become liable to creditors of the company.

Why no piercing in Prest v Petrodel?

The Supreme Court did not accept that the facts in Prest v Petrodel justified the piercing of the corporate veil as there had been no sham or facade and there had been no attempt by the husband to avoid any obligation he owed to his wife. Indeed the court at First Instance had decided that the reason for the properties being held in company names was wealth protection and tax minimisation which are often of course one of the predominant motives in the establishment of such structures. Sumption LJ's view is that there will only be exceptional circumstances where the corporate veil will be pierced whereas the other judges in the case did not slam the door on the application of piercing the corporate veil doctrine quite to the same extent and left open the possibility of wider application in the future. Perhaps underlying Sumption LJ's thinking was that there would normally be other grounds to achieve the same results.

Prest v Petrodel – the basis

As mentioned, the Supreme Court determined that the various properties, owned by the various companies were all beneficially owned by the husband. In a sense the court found it easy to find this because there had been such non-participation in the court proceedings by the husband that it was able to draw inferences that he had always regarded the properties as his own and that notwithstanding the fact that the husband was not a beneficial owner of the shares, he had de facto management of the company. The fact that he allegedly treated the assets generally as his own led the court to the conclusion that the properties were beneficially owned by the husband whilst at the same time not allowing the inference that the corporate veil had been pierced.

Prest v Petrodel – the problems caused

One of the difficulties with the Supreme Court's judgement in Prest v Petrodel is there are discrepancies between the judgements and some of the Judges have left open the door to the further use of the doctrine of piercing the corporate veil. For lawyers and other advisers the difficulty is how much confidence you put in Sumption LJ's analysis. Although the judgement did make reference to the possibility of loan or equity subscription, it did not seem to consider the possibility that the husband could have gifted assets to a company or made a capital contribution which could have been an alternative analysis. This latter concept is not utilised a great deal in the UK but is recognised by the Inland Revenue and is a concept well understood in the US. Given that the whole purpose of the structure was wealth protection this was a surprising or convenient omission.

Lord Sumption did make a reference to the fact that structures could be set up. To give an illustration, if the husband, through a family trust, had subscribed for equity in the acquiring company which then bought the properties none of the conditions for finding that the husband was the beneficial owner would have been met and no impropriety could have been said to have occurred so that the corporate veil could not be pierced. However, Lord Sumption drew a distinction where any such structure involved the matrimonial home and he essentially gave a nudge that it would be appropriate to find that such structures were essentially capable of being looked through which appears to show a lack of legal consistency. However, the solidity of this structure could be enhanced by the payment of commercial terms which is often a way of improving one's inheritance tax position but whether that would overcome the Sumption reservations would be open to doubt. The position of third party lending which could complicate matters was not really an issue in this case but, notwithstanding the analysis, a matrimonial lawyer would have to be brave to suggest that establishing company structures, which would defeat the beneficial ownership result, would always prevail.

Akzo Nobel v The Competition Commission

Prest v Petrodel received a lot of publicity but an equally important case involving Akzo Nobel did not seem to garner the same interest from corporate lawyers although competition lawyers have understood the importance of this case which clearly illustrates the difficulties of the subject.

Akzo Novel v The Competition Commission – the facts

Essentially the facts in Akzo Nobel v The Competition Commission were that Akzo Nobel, a Dutch holding company, was seeking to acquire, pursuant to a call option which had previously been entered into, the balance of its stake in an Italian company Metlac Holding. A considerable number of competition authorities had already approved the transaction but the Competition Commission in the UK objected on the basis that there were competition concerns in relation to a particular industry sector. Akzo Nobel appealed to the Competition Appeal Tribunal on the basis, inter alia, that the Competition Commission had no jurisdiction to review the decision because Akzo Nobel itself (rather than the group) did not carry on business in the UK and that was a prerequisite for the Competition Authority having jurisdiction. Akzo Nobel structured itself as is quite usual by having UK subsidiary companies operating the UK businesses.

Akzo Nobel v The Competition Commission- the decision

The Competition Commission and this was confirmed by the Competition Appeal Tribunal, analysed the manner in which Akzo Nobel conducted its business and it was suggested that Akzo Nobel, in a way that is not unusual for international corporations, operated on a divisional basis rather than a strictly subsidiary basis. On that basis, therefore, they judged Akzo Nobel itself was conducting business in the UK rather than just its subsidiaries. This test was satisfied, it was suggested, by the degree of control that Akzo Nobel had over its subsidiaries, the central reporting structures within the group and the limited autonomy that the subsidiaries had.

Akzo Nobel in its arguments had suggested that the Competition Commission had tried to attribute the activities of the subsidiaries to Akzo Nobel which was in effect piercing the corporate veil. The Competition Appeals Tribunal upheld the view that it was not a question of attribution but that it was the activities themselves (notwithstanding that Akzo Nobel had no presence in the UK) and this is one of those situations where what looks like piercing the corporate veil is not regarded as such in that a co-actor or agent can be responsible in its own right.

Akzo Nobel v The Competition Commission – difficulties caused

This decision, however, also looks at odds with the judgement in Adams v Cape Industries, which is one of the leading cases on piercing the veil, which was again a multijurisdictional issue. In that case there was an issue as to whether a company, for the purposes of serving papers on it, was present in America by virtue of its subsidiaries being there. In that case a parent company was adjudged not to be doing business simply because it had subsidiaries but in this case it was found the parent company was doing business because of the nature in which it controlled the business. Given that it is extremely rare for subsidiary companies to be completely independent this is a very fine distinction and causes a degree of uncertainty. The court acknowledged that in deciding the case it could not simply be a question of control over the subsidiary's business because if that was the defining test it would be a breach of the clear principles established in Salomon but the statement that it is a question simply of fact and degree in each case whether the activities of the parent company are such as to be treated as carrying on business activities that are properly attributable to it as a legal person is arguably slightly artificial. Akzo Nobel is an important case and it has been allowed to be appealed to the Court of Appeal and given its ramifications it will be interesting to see what the Court of Appeal decides or whether even that is the final matter.

Conclusions

Whilst both Prest v Petrodel and Akzo Nobel appear to be decided on specific principles it is just as easy to say that they have been decided on fact specific grounds. That can seem however, as a let out for judges who wish to come to a specific conclusion. There can be many instances where injustice or the "wrong result" can be caused by the application of strict doctrines. However, the reverse can also be the case and there may even be situations where people do not follow a decided course of action because of concerns that a court won't like what they have done. Prest v Petrodel raises issues about what structures can be utilised and Akzo Nobel in what structures companies can establish notwithstanding that such structure are common place. As a consequence, clients and advisers have to consider the risks inherent in such structures and whether there are likely to be any unforeseen consequences. There are also issues that need to be addressed by acquirers or funders of companies as they will need to ascertain as best they can whether assets which are in a company's assets can be said to be beneficially owned by someone else. This situation is uncertain and far from ideal but it is unlikely to be changed in the near future.

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.

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