UK Supreme Court confirms corporate veil can be pierced in some circumstances

The Supreme Court has confirmed that a court can in very limited circumstances pierce the corporate veil. According to Lord Sumption, the principle applies when a person is under an existing legal obligation or liability or is subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The veil can be pierced only for the purpose of depriving the company or its controller of the advantage they would otherwise have obtained by the company's separate legal personality: Prest v Petrodel Resources Limited & Others [2013] UKSC 34.

There have been a number of cases over the last 80 or so years suggesting the corporate veil can be pierced, but they haven't always been easy to reconcile.  This has led to uncertainty over whether there is such a principle and if so when it applies. In the recent Supreme Court decision in VTB Capital v Nutritek the court declined to give guidance as it was not required for the purposes of determining that case (see post). There are differences of opinion in Petrodel amongst the seven Justices. Lord Walker expresses doubts over the doctrine's existence. Lady Hale (with whom Lord Wilson agrees) is uncertain whether all previous cases come within Lord Sumption's formulation. At the other end of the spectrum Lords Mance and Clarke leave open the possibility of piercing the corporate veil in circumstances beyond those envisaged by Lord Sumption. Lord Neuberger agrees with Lord Sumption but adds his own analysis to his judgment.

What seems clear, however, is that the majority of the Supreme Court acknowledge, albeit obiter, the existence of the doctrine of piercing the corporate veil and that it extends at least as far as the test formulated by Lord Sumption.

Background

The Petrodel case concerned whether the court had the power to order the transfer of properties legally owned by the husband's companies to his wife following their divorce. On the facts, the court decided that there was no need to pierce the corporate veil as it drew the inference that the properties were held on resulting trust for the husband. It therefore had the power under the Matrimonial Causes Act 1973 to order their transfer. The court went on to consider however whether and if so when the corporate veil could be pierced, in other words whether the court can disregard the principle that a company is a legal entity distinct from its shareholders, enshrined in the decision of the House of Lords in Salomon v A Salomon and Co Ltd [1897] AC 22.

Judgments

The leading judgment was given by Lord Sumption. He analysed the previous case law, commenting that most of the statements of principle in the authorities were obiter and that most cases in which the corporate veil was pierced could have been decided on other grounds. That said, the consensus that there are circumstances in which the court may pierce the corporate veil was impressive, in his view, and he wasn't prepared to "explain that consensus out of existence". He also thought the recognition of a limited power to pierce the corporate veil in carefully defined circumstances was necessary if the law was not to be "disarmed in the face of abuse".

In his judgment, the previous cases could be categorised as falling within one of two principles: the concealment principle or the evasion principle. Concealment, in other words interposing a company to conceal the identity of the real actor, does not require the veil to be pierced at all. Imputing the controller's knowledge to the company or applying the principles of principal and agent, trustee and beneficiary or nominee will usually be sufficient without needing to pierce the veil. The evasion principle is different in that if no piercing takes place, the separate legal personality will defeat the right or frustrate its enforcement.

Lord Neuberger, who gave the court's judgment on piercing the corporate veil in VTB Capital, agreed with Lord Sumption that cases fall into two types, concealment and evasion. He also agreed that concealment cases do not involve piercing the corporate veil at all and that piercing should only be considered where other remedies do not assist. Whilst the court's comments would be obiter given the finding on resulting trust, he was persuaded that there was value in deciding whether the doctrine existed and if so in identifying some coherent, practical and principled basis for it. He was "strongly attracted" to finding against a doctrine of piercing the corporate veil but ultimately agreed with Lord Sumption's formulation of the doctrine. He commented that the formulation in fact extends beyond companies – it could be a person interposed rather than a company.

Lord Mance agreed with Lord Sumption and the supplementary comments of Lord Neuberger. He was not prepared however to say the corporate veil could only be pierced in "evasion" cases as he considered it dangerous (as did Lord Clarke) to seek to foreclose all possible future situations which may arise. Although both also stressed that no one should be encouraged to think that any further exception would be easy to establish, if any exists at all.

Lady Hale and Lord Walker were less convinced by Lord Sumption's analysis. Lord Walker considered piercing the corporate veil was simply a label, often used indiscriminately, to describe "the disparate occasions on which some rule of law produces apparent exceptions" to the principle of a company's separate legal personality. Lady Hale (with whom Lord Wilson agreed) was not sure whether it was possible to classify all the previous cases as concealment or evasion cases. She thought they might 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.

Comment

The decision in Petrodel has been eagerly awaited by family practitioners. It seems likely however that Lord Sumption's formulation will have most relevance outside of matrimonial cases, in particular in cases of international fraud where complex offshore structures used by fraudsters are commonplace. On the facts of Petrodel, for example, it would not have been possible to pierce the corporate veil. The properties were vested in the companies long before the marriage break up and the husband was neither concealing nor evading any legal obligation owed to his wife. Nor, more generally, was he concealing or evading the law relating to the distribution of assets upon its dissolution.