In principle, the English courts can pierce the corporate veil to fix the controller of the company with a liability or obligation, but only if there is no other way to provide an adequate remedy, and only if the company has been used by the controller to evade a pre-existing legal obligation or liability. As a result, only in “novel and very rare” situations will the corporate veil be pierced. So held a seven-strong Supreme Court in a case that has laid down for the first time some clear guidelines as to when, if ever, the corporate veil can be pierced.

However, various other legal and equitable principles can, in some circumstances, be invoked to fix the controllers of a company with a liability or obligation that they hoped to avoid by using a limited liability company. For example, although there is a general legal assumption that property held by a company is beneficially owned by the company, if an asset is transferred to a company by its controller, in some circumstances – particularly if only nominal payment is made by the company, or all of the funds for the purchase are provided by the controller, and/or the controller or his family or associates are permitted to use the asset without substantial payment – the court may rule that the property is beneficially owned by the controller and held by the company on trust for him.

In Prest v Petrodel Resources Limited and others [2013] UKSC 34, during the course of a marriage the husband caused seven UK properties, including the matrimonial home, to be transferred to companies controlled by him. In each case, the purchase price was either nominal or all the funds were provided by the husband. (This finding was supported by the fact that the companies were either dormant except for the property holdings or not financially active until after the transfers had taken place.) No rent was paid in respect of the husband and wife’s occupation of the matrimonial home.

The Supreme Court unanimously concluded that, in the circumstances, the properties were beneficially owned by the husband. As a result, they constituted property to which the husband was “entitled, either in possession or reversion”, and hence the court had power under the Matrimonial Causes Act 1973 to order the properties to be transferred to the wife as part of divorce proceedings.

But what is more important for company lawyers is that the wife argued, in the alternative, that the court should pierce the veil of the husband’s companies to find, in effect, that the properties were owned by the husband and should make an order for him to transfer the properties to the wife. The Supreme Court refused to do so. Giving the leading speech, Lord Sumption analysed all the significant cases in which the English courts have purported to pierce the corporate veil, or assumed that it could be pierced. By way of introduction, he said:

““Piercing the corporate veil” is an expression rather indiscriminately used to describe a number of different things. Properly speaking, it means disregarding the separate personality of the company. There is a range of situations in which the law attributes the acts or property of a company to those who control it, without disregarding its separate legal personality. The controller may be personally liable, generally in addition to the company, for something that he has done as its agent or as a joint actor. Property legally vested in a company may belong beneficially to the controller, if the arrangements in relation to the property are such as to make the company its controller’s nominee or trustee for that purpose. For specific statutory purposes, a company’s legal responsibility may be engaged by the acts or business of an associated company. Examples are the provisions of the Companies Acts governing group accounts or the rules governing infringements of competition law by “firms”, which may include groups of companies conducting the relevant business as an economic unit. Equitable remedies, such as an injunction or specific performance may be available to compel the controller whose personal legal responsibility is engaged to exercise his control in a particular way. But 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 v A Salomon and Co Ltd [1897] AC 22, 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.”

He held that, contrary to the view of some commentators, there is a principle of English law that the courts can in some circumstances pierce the corporate veil, but it is very limited and “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.”

But the court will do so only when there is no other legal or equitable way of providing the remedy sought.

In this case, although Mr Prest had acted improperly in many ways, he had not used the companies to evade either a legal obligation owed to his wife or the law relating to the distribution of assets of a marriage upon its dissolution. The corporate veil would therefore not be pierced.

Comment

In reviewing the line of cases in which the corporate veil principle has been discussed, the Supreme Court (and particularly Lord Neuberger) was sceptical as to whether any of the cases should properly be analysed as examples of the courts piercing the corporate veil. In almost all instances, the same result could have been achieved by means of a different legal or equitable principle. However, the Supreme Court accepted that there might be circumstances – albeit very rare – in which piercing the corporate veil would be the only way of achieving justice, so this possibility has been left open.

It remains perfectly legitimate for an individual or company to protect itself against liabilities or obligations that may in future be incurred in pursuing an activity by setting up a separate limited liability company to carry out the activity. For example, if a parent company wishes to carry on an activity that would expose it to the risk of asbestosis claims from employees, it can incorporate a subsidiary that employs the staff and carries out the activity. In most circumstances, this will be an effective means of ring-fencing in the subsidiary the exposure to asbestosis claims. (See, however, our LawNow “Parent company liable for personal injury claim incurred by subsidiary” published on 17 May 2012, about the Chandler v Cape case, for circumstances when the subsidiary’s employees may be able to recover damages from the parent (click here).)

As noted above, there are various routes by which a creditor or other person dealing with a company may be able to bring a claim against its controllers. For example, a controller may be liable for damages if it makes a false or misleading statement to a third party in order to benefit the company (see for example our LawNow “Supreme Court finds that even fraud did not justify piercing the corporate veil” published on 19 February 2013, about VTB Capital plc v Nutritek International Corp and others (click here), or if it unlawfully procures a breach of contract by the company. If a company is wound up on an insolvent basis, the liquidator might persuade the court that the controller acted as a shadow or de facto director of the company and should be liable to return money improperly extracted from the company or, if the company has continued to trade after the directors should have realised that insolvency was inevitable, that the controller should be liable to contribute to the shortfall in the company’s assets. In very broad terms, however, such risks can generally be avoided, or significantly reduced, by ensuring that at all times the parent company treats its subsidiary as a distinct legal entity governed by its own directors, and by taking legal advice on areas of significant risk.

Alice Naylor