The English High Court pierces the corporate veil using the "evasion principle"

In Paul David Wood & Anor v Timothy Darren Baker & Ors, the joint trustees in bankruptcy of the bankrupt's property successfully obtained injunctions freezing the assets and business of the respondents and restraining them from dealing with such assets and business.  This case is an illustration of how the court may apply the "evasion principle", a principle identified in the decision of the Supreme Court in the case of Prest v Petrodel Resources Ltd, in piercing the corporate veil.

Background

The applicants were joint trustees in bankruptcy of a man (the "Bankrupt"). The respondents were the Bankrupt, two other individuals and eight corporate entities related to the Bankrupt and the individuals. Since being made bankrupt on 27 June 2005, the Bankrupt was convicted and sentenced on a number of occasions for fraud-related crimes.

The applicants made the application against the respondents following recent investigations by the HM Revenue and Customs ("HMRC") which led HMRC and the applicants to believe that the defendants had been actively involved in hiding the Bankrupt's assets.

Concerned with the Bankrupt's apparent attempt to hide monies and in fear of alerting the Bankrupt of the recovery action if they applied on notice, the trustees applied to the court for an injunction on a without notice basis seeking to

1. freeze the business and assets, including various bank accounts of, or in the name of, the corporate respondents;
2. restrain the individual respondents from dealing with or dissipating the business and assets of the corporate entitles;
3. restrain all of the respondents from dealing with or dissipating the shares in any of the corporate respondents

The trustees argued that the business and assets of each of the corporate respondents (the "after-acquired property") had been acquired by the Bankrupt after the bankruptcy order in 2005 and were beneficially owned by the Bankrupt. To support this contention, the trustees put forward evidence, including interview records with the two individual respondents and documents showing that the corporate respondents did not have any legitimate freestanding business but were only the vehicles of the Bankrupt to shelter his money. And the trustees further argued the Bankrupt evaded his legal obligation to report to the trustees the after-acquired property under section 333 of the Insolvency Act 1986 (the "Act").

Reasoning and decision of the Court

After looking into the evidence, the High Court held that the trustees had raised a serious triable issue that the bankrupt was effectively the man behind the various corporate respondents, and that they were being used to shelter money, business and assets belonging to the Bankrupt.

The legal ground on which the court pierced the corporate veil in this case was by the application of the "evasion principle", which was identified in Lord Sumption's judgment in Prest v Petrodel Resources Ltd in these terms:

" …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."

The Court concluded the Bankrupt had "demonstrated a way of working which involved interposing front men, or front companies, between his trustees and his business affairs". And by interposing some, or all of the corporate respondents, the court held that his motivation was clearly to evade the legal obligation to report the after-acquired property to the trustees under section 333 of the Act. The Court pierced the corporate veil and treated the after-acquired property of the corporate respondents as belonging to the Bankrupt, and granted the injunction accordingly.

Implications

This case demonstrated the practical application of the "evasion principle" as an exception to the separate legal personality doctrine. The lesson to take away is thus, while the doctrine of separate legal personality of a company is readily upheld and piercing the corporate veil is regarded as a remedy of last resort, the Court will do so where a company has been interposed so as to enable the individual wrongfully to evade or frustrate his existing legal obligations.

If you wish to discuss, please contact Richard Norridge or Joanna Caen of our Private Wealth and Trusts team or your usual Herbert Smith Freehills contact.