prest v petrodel resources limited and others evasion principle

Where litigants can show that the relevant test is satisfied, the courts will allow them to obtain judgment against assets that were intentionally placed out of their reach. Lord Sumption distinguished the concealment and evasion principle: “The concealment principle is legally banal and does not involve piercing the corporate veil at all. Lord Sumption in the Supreme Court embarked upon a survey of the cases in this area in order to avoid the uncertainty and to discover the principle that underpins the “doctrine’s” invocation. The Judge went on to say that “exceptionally…this is a case where there are no contemporaneous documents whatsoever to support the assertions made by [the Guarantor], whereas the contemporaneous documents which emanate from the [the Guarantor] himself are completely to the contrary…”. He regarded the “piercing the corporate veil” as “a final fall-back” solution which would infrequently arise. What they are trying to present is a view that “piercing the corporate veil” can take on so many shapes and forms. However these cases are and will remain exceptional. In 2013, the United Kingdom Supreme Court handed down a seminal judgment on the law of corporate veil, Prest v Petrodel Resources Ltd and Others UKSC 34, in which Lord Sumption proposed the evasion and concealment principles. It is not clear sometimes which principle is at play and Lord Sumption felt many cases fell into both concealment and evasion. Prest was of particular interest because of the legal cross-over between family law and corporate law. Another was to take funds from the companies whenever he wished, without right or company authority. 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. The courts have demonstrated that the veil will not be pierced where, despite the presence of wrongdoing, the impropriety was not linked to the use of the corporate structure as a device or facade to conceal or avoid liability, nor will the courts pierce the veil merely because the interests of justice so require (Adams v Cape Industries Plc [1990]). This was explained by Lord Sumption where he stated: “Mr Horne’s personal creditors would not, for example, have been entitled simply by virtue of the facts found by Farwell J, to enforce their claims against the assets of the company.”[28] In the case of Jones v Lipman[29]similarly, the judge decreed specific performance against both Mr Lipman against Mr Lipman on the concealment principle. March 22, 2018/in Company /Private Law Tutor. Therefore the issue of “piercing the corporate veil” never arose, even if the court wrongly proceeded this is in fact was happening. In doing so, the Supreme Court has ordered divorced husband, Michael Prest, to transfer to his former wife, Yasmin Prest, properties held by companies owned and controlled by him, as part of a £17.5m divorce award. Therefore Mr Salomon was not liable (personally) for the debts that Salomon Ltd had incurred. The Supreme Court unanimously overturned the Court of Appeal’s decision. This in turn allowed the court to disregard or pierce the corporate veil. It must be further evidenced that the impropriety is linked to avoidance or concealment of a liability through the use of the company structure. The Supreme Court decision in Prest v Petrodel Resources Limited [2013] UKSC 34 has now become accepted as a leading authority on this issue. In his words the distinction should not be “definitively adopted unless and until the court has heard detailed submissions upon it.”[26]. It is important that the above six articulated principles, which result in the “piercing of the corporate veil”, only be used where all other, more traditional, were not suitable in the circumstances. The law in this area has been rife with conflicting principles and many commentators felt that the Supreme Court decision in Prest v Petrodel provided a unique opportunity to resolve the issue of when the corporate veil can be pierced. In both Lipman and Horne the controllers of the companies had both accrued personal liability which was distinct from the company’s. Lazarus Estates Ltd v Beasley [1956] 1 QB 702. The relatively short and significant judgment in the Supreme Court case of Prest v Petrodel Resources Ltd has gathered vociferous interest from academics and practitioners.It was of key interest as it was a legal cross over between family law and company law. The doctrine was a “potentially valuable judicial tool to undo wrongdoing in some cases where no other principle is available”, provided that there was a coherent approach that courts could follow. He also agreed that concealment cases do not involve piercing the … The fourth defendant company entered into a guarantee and indemnity in favour of the Claimant in respect of the loans advanced. Here it seems to me that the particular wrong which [the Guarantor] has done, is that he has mis-used the company as a device, in effect, or is now seeking to do that.” On this basis Mr Justice Eder found that the Claimant was entitled to a declaration that it could lift the corporate veil as far as the Property was concerned and that any judgment against the Guarantor could be enforced against the Property. He pointing out that there exists an array of principles that achieve the same result and one of these is “the law defines the incidents of most legal relationships between persons (natural or artificial) on the fundamental assumption that their dealings are honest.” [15] He cites Lord Denning in Lazarus Estates Ltd v Beasley [16] who states: “Fraud unravels everything”. (2013) 1 Private Client Business 4-42 individuals with clear goals of protecting their assets. This allowed a judgment obtained against the defendant to be enforced against certain of the company’s assets. One of Mr Prest’s failings was to provide funding without properly documented loans or capital subscription. John Wilson QC examines a ground-breaking Supreme Court ruling on the separate identity of a corporate entity. Both sides of the profession were affected differently. Prest v Petrodel Resources Limited and others [2013] UKSC 34. Supreme Court decision on ancillary relief in Prest v Petrodel Resources Ltd [2013] 2 A.C. 415. Appeal allowed unanimously. “These considerations reflect the broader principle that the corporate veil may be pierced only to prevent the abuse of corporate legal personality. The concept of the corporate veil, also known as the Salomon Principle, separate legal personality amongst other names,[2] was established in Salomon v Salomon[3]. [25] However it was contended by Lord Clarke that the distinction between evasion, and concealment should not be adopted until such time until it was discoursed in the course of the argument. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. Prest v Petrodel Resources Ltd UKSC 34, [2013] R v McDowell [2015] EWCA Crim 173. Lord Herschell said of the doctrine of separateness “does not in point of law…render the shareholders liable to indemnify the company against the debts which it incurs”. This article examines the judicial approach to the corporate veil post-Prest v Petrodel Resources Ltd. In this case, the court recognised that there may be times in which it is appropriate to pierce the veil and ignore a company’s separate … Thus cconcealment is where the company is a “façade” and warrants as Ottolenghi[24] describes is merely “‘Peeping behind the Veil’, or lifting the veil is where the court temporarily suspends the Salomon Principle to determine who is behind it, who controls the company. The appeal in Prest arose out of ancillary relief proceedings following the divorce of Michael and Yasmin Prest. The Claimant made an application for summary judgment for a declaration that Company was the alter ego corporate vehicle for the Guarantor and that the corporate veil should be pierced to allow the judgment obtained against him to be enforced against any or all assets belonging to the Company. The funds were used by the Russian borrower, a company, to facilitate acquisitions from the first defendant which was a British Virgin Islands company, owned and operated from Russia. Then a concluding remark will be made about what the other judges thought. Easterbrook and Fischel, “Limited Liability and the Corporation” (1985) 52 Univ Chicago L Rev 89, Farrar, “Fraud, Fairness and Piercing the Corporate Veil” (1990) 16 Can Bus LJ 474, C Mitchell, in “Lifting the Corporate Veil in the English Courts: An Empirical Study” (1999) 3 Co Fin & Ins LR 15, Ireland, P., ‘The Triumph of the Company Legal Form, 1856-1914’, in Adams, J., (ed), Essays for Clive Schmitthoff, (1983), p.30, Neyers “Canadian Corporate Law, Veil-Piercing, and the Private Law Model Corporation” (2000) 50 Univ Toronto LJ 173, Michael “To Know a Veil” (2000) 26 J Corp Law 41, Payne, J., ‘Lifting the corporate veil: a reassessment of the fraud exception’, [1997], Cambridge Law Journal, 284, Ottolenghi, S., ‘From Peeping behind the corporate veil to ignoring it completely’, [1990] 53 MLR 338, Ramsay and Noakes, “Piercing the Corporate Veil in Australia” (2001) 19 C & SLJ 250, [2] Ireland, P., ‘The Triumph of the Company Legal Form, 1856-1914’, in Adams, J., (ed), Essays for, [8] Easterbrook and Fischel, “Limited Liability and the Corporation” (1985) 52 Univ Chicago L Rev 89; Farrar, “Fraud, Fairness and Piercing the Corporate Veil” (1990) 16 Can Bus LJ 474; C Mitchell, in “Lifting the Corporate Veil in the English Courts: An Empirical Study” (1999) 3 Co Fin & Ins LR 15; Neyers “Canadian Corporate Law, Veil-Piercing, and the Private Law Model Corporation” (2000) 50 Univ Toronto LJ 173; D Michael in “To Know a Veil” (2000) 26 J Corp Law 41; and Ramsay and Noakes, “Piercing the Corporate Veil in Australia” (2001) 19 C & SLJ 250, [18] “(i) Ownership and control of a company were not enough to justify piercing the corporate veil; (ii) The court cannot pierce the corporate veil, even in the absence of third party interests in the company, merely because it is thought to be necessary in the interests of justice; (iii) The corporate veil can be pierced only if there is some impropriety; (iv) The impropriety in question must…be linked to the use of the company structure to avoid or conceal liability; (v) To justify piercing the corporate veil, there must be both control of the company by the wrongdoer(s) and impropriety, that is (mis)use of the company by them as a device or façade to conceal their wrongdoing; and (vi) The company may be a façade even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions.”, [23] [2012] 2 Lloyds Rep 313, see paras 79—80, [24] Ottolenghi, S., ‘From Peeping behind the corporate veil to ignoring it completely’, [1990] 53 MLR 338. By V. Niranjan. Website Privacy Policy | Terms & Conditions. It will present the view the Law Lords had of the “doctrine” to show it was not clear. This was recently demonstrated where a subsidiary company was no longer in existence and the court imposed a duty of care on the parent company for the health and safety of the employees of its subsidiary (Chandler v Cape Plc [2012]). Moylan J, in the Family Division of the High Court, held that Mr Prest had the ability to transfer the properties in practice, so he was “entitled” to them under MCA 1973 s 24(1)(a). The Supreme Court has recently given judgment in the case Prest (Appellant) v Petrodel Resources Limited and others (Respondents), following an appeal from the Court of Appeal. Facts: Mr Prest was an oil-trader. [12], The use of terms such as “veil”, “mask”, “façade” and “sham” are terms that have failed to provide certainty. Lord Sumption asserted that this was the position adopted by Lord Neuberger in VTB, although he argued that due to the fact that the court in that case had not needed to pierce the veil, it could not be used as authority in Prest. Analysis is undertaken of the judgment in Prest and of how judges have adapted and applied this judgment in subsequent cases. Those names might be familiar to some of those reading theses notes as the actions of multi-millionaire oil tycoon Mr Prest received the attention of the national media between 2008 and 2011. control it gained considerable publicity in Prest v Petrodel Resources Ltd & Others UKSC 34.The case played out some of the historical tensions between the Family and … Introduction. Mrs Prest contended that her husband’s wealth vastly exceeded this and argued that properties held by several companies which Mr Prest “wholly owned and controlled” were in reality owned by him. The Judge took the view that although these matters may well be correct they did not go to the satisfaction of the fifth principle. His lordship went on to observe that this principle had been affirmed Trustor AB v Smallbone (No 2) in which it was also established that the dishonesty must involve company law being used as a sham or façade to disguise the true ownership of property. The eighth and ninth defendants, individuals, both provided guarantees in respect of the loan to the second defendant. The divorcing couple, Mr and Mrs Prest, were wealthy. Prest v Petrodel Resources Ltd & Others [2013] UKSC 34 Introduction. The leading judgment was given by Lord Sumption, who observed that the law relating to the circumstances in which it would be permissible for the courts to pierce the corporate veil was characterised by “inadequate reasoning”. It will then look at how the Supreme Court saw the origins of the “doctrine”. Where there has been concealment of liability, he argued, there will be no need to pierce the corporate veil because, as Lord Neuberger agreed, all that would be required would be to look behind the veil to establish the true actors. Ottolenghi describes this as merely an”act of curiosity”, which is the “least offensive to the separate entity theory”. In order to understand the circumstances where the court will pierce/lift the corporate veil it is essential to have a firm grasp of the concept of “the veil” itself. Appeal to the Supreme Court by a wife concerning properties vested in several companies and whether they could be treated in ancillary relief proceedings as beneficially belonging to the husband. For the court to pierce the veil the wrongdoer’s intentions may be considered, but in any case it must be shown that they controlled the company and used it as a facade to conceal their wrongdoing. But by involving the company’s separateness they have effectively to evade responsibility evokes the evasion principle and thus leads to the “piercing the corporate veil”. The question of when the courts will be prepared to “pierce the corporate veil” and disregard Salomon has quizzed judges, lawyers and academics. Munby J surveyed non-family and family cases on “piercing the corporate veil” in the case ofBen Hashem v Al Sharif [17] and from there articulated six principles to be applied in “piercing the corporate veil” type cases. It is simply a label – often as Lord Sumption observes, used indiscriminately – to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a body corporate reaffirmed by the House of Lords inSalomon v A Salomon and Co Ltd”. By continuing to use this website, you consent to the use of cookies in accordance with our Cookie Policy. The decisions Lord Sumption highlighted illustrated a broader principle that “governs cases in which the benefit of some apparently absolute legal principle has been obtained by dishonesty”. The borrower subsequently defaulted on the loan. It was evidenced that the first defendant was residing at the Property and using the address for the registration of and correspondence for a number of other companies. The Supreme Court has just handed down its judgment in the landmark case of Prest v.Petrodel. However, the distinction between them both remains crucial because it will ultimately lead to the court to “rightly or wrongly”, to pierce the corporate veil. In a landmark judgment delivered on 12 June 2013 in the case of Prest v Petrodel Resources Ltd and Others1, the United Kingdom Supreme Court (UKSC) reviewed the law relating to piercing the corporate veil. It intersects two main areas of Thus momentarily suspending the separateness of the corporate structure to see what was happening behind the company, an “act of curiosity”. Piercing the corporate veil: a new era post Prest v Petrodel. This poses the least problems for the Salmon principle. DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852. The case is of great significance. Mr Justice Eder said that “the court will only pierce the veil so far as is necessary to provide a remedy for the particular wrong which those controlling the company have done. There must be evidence of impropriety; however impropriety alone is insufficient to pierce the veil. Patten LJ asserted that this practice “amounts almost to a separate system of legal rules unaffected by the relevant principles of English property and company law” and must cease. In the 24 hours since the Supreme Court published its landmark decision in Prest v Prestodel Resources Ltd & Others ("Prest") there has been a tsunami of commentary upon its consequences. The Court of Appeal in VTB Capital v Nutritek International Corpn[19] adopted the above six articulated principles. Nor can the veil be pierced, where there is no unconnected third party, purely on the basis that to do so would be in the interests of justice. The corporate veil exists to distinguish a company as a legal person so that it stands separate from its directors and shareholders. Prest v Petrodel Resources Ltd & Others [2013] UKSC 34; [2013] All ER (D) 90 (Jun), is a landmark case which is of considerable interest to corporate and insolvency lawyers, as well as family lawyers. It may be an abuse of the separate legal personality of the company to use it to evade the law or to frustrate its enforcement. Lord Sumption considered that the more limited evasion principle had been properly applied by the courts in only a small number of cases. Despite this confusion in the law, Lord Sumption asserted that the position established in Adams v Cape Industries, is that the doctrine of veil piercing required some dishonesty on the part of the company member and was not simply a device that could be employed to ensure justice in a particular case. It will then examine how the old corporate veil cases have been reconciled. Whether or not the company was incorporated with deceptive intent, the courts will want to see that it was being used as a facade at the time of the relevant transaction(s) and a remedy will only be provided in respect of the particular wrong that has been committed. In order to show that a corporate structure has been used as a device to conceal impropriety, the impropriety must first be identified to the court. It will present the view the Law Lords had of the “doctrine” … This decision highlights that although very rare the courts will exercise their jurisdiction to pierce the corporate veil. Since Salomon v Salomon, it has been well established in UK law that a company has a separate personality to that of its members, and that such members cannot be liable for the debts of a company beyond their initial financial contribution to it. By using the corporate structure and its separate legal personality they were trying to defeat their personal obligation. The Claimant obtained a judgment against the third defendant (the Guarantor), in the hope that it could be enforced against a residential property (the Property) declared by the Guarantor as one of his assets prior to the loan being advanced. In certain cases group companies will not be treated as separate, which is contrary to the general principle. The relatively short judgment in the United Kingdom Supreme Court case of Prest v Petrodel Resources Ltd1 (herein, Prest) has garnered vociferous interest from academics and practitioners. [5] With this in mind, to pierce or lift the veil of incorporation would be to find the shareholders liable. One of the main grounds relied upon by the trustees in the application was the “evasion principle”, (so named by Lord Sumption in his leading judgment in Prest v Petrodel Resources Limited and others [2013] UKSC), pursuant to which the Court can depart from the fundamental principle that a company has a separate legal personality from that of its members. The courts are often presented with the question of whether a company is an independent legal entity in cases where litigants are trying to recover from opponents and it is discovered that the contracting party is a brass plate company with no assets but part of a larger, profitable group. My tenant has moved out leaving possessions in my property – what can I do? Prest and piercing the veil: Prest v Petrodel Resources Ltd 2013 – When a couple divorces, either spouse can make a claim for ancillary relief. For Lord Mance this distinction was too narrow for all problems. Introduction. The tenth to sixteenth defendants are alter ego corporate vehicles of the third defendant, who directs and controls the actions of the companies. Obtaining Security For Costs Against an Opponent, Covid Business Interruption Insurance Ruling January 2021, Quantifying Damages Awards in Defamation Cases. [4] Lord Macnaghten explained: “The company is at law a different person altogether from the subscribers…”. It is described by Lord Mance as “a metaphor”[11] while Lord Walker said “it is not a doctrine at all, in the sense of a coherent principle or rule of law. On the other hand the company Alamed Ltd was also a party to the specific performance on the evasion principle, and reference was made to the decision in Horne. The documents included a letter that the Guarantor had written to the Claimant prior to the funds being advanced attaching a net worth statement from a Greek certified public accountant that showed one of the Guarantor’s assets as a “residence in Fulham, 3,500,000 USD”. Only where it can be proved that the corporate structure is being used to conceal or avoid a liability will the protection ordinarily provided by the corporate veil be at risk. In light of the documentary evidence the Judge decided that the assertions of the Guarantor were not credible. In addition, the Guarantor was trying to sell the Property at the time of the freezing injunction application. 03 October 2013. But … ... replaced “façade” or “sham” with the “concealment” principle and the “evasion” principle. Rather than simply putting the principle to one side temporarily, the court denies the Salomon principle, altogether. In Prest v Petrodel [2013] UKSC 34 the English Supreme Court undertook a review of the principles of English law which determine in what circumstances, if any, a court may set aside the separate legal personality of a company from its members and attribute to its members the legal consequences of the company’s acts. The Claimant made demands on the first and second defendants and subsequently terminated the loan agreements. Prest therefore established that although it is possible that the corporate veil may be pierced in some circumstances, it is not clear what these circumstances are beyond the fact that the remedy is only a last resort and as such it seems that the decision failed to take advantage of the opportunity to clarify the law. The court therefore had jurisdiction to make a transfer order. Usually the strict principle of independent corporate existence (Salomon v Salomon Co Ltd [1897] A.C. 22) is applied and the courts will regard the company as separate from its members and the veil will not be pierced. Piercing the corporate veil – No Such Doctrine, Surprisingly Lord Neuberger said[6] that there never existed a clear invocation “of the doctrine” of “piercing the corporate veil” in 80 years since it was thought-out in Gilford Motor Co Ltd v Horne[7]. Trustor AB v Smallbone (No 2) [2001] EWHC 703 Lord Neuberger expressed his views of this, “I agree that, if the court has power to pierce the corporate veil, Munby J was correct in Ben Hashem v Al Shayif [20] to suggest that it could only do so in favour of a party when all other, more conventional, remedies have proved to be of no assistance (and therefore I disagree with the Court of Appeal in VTB,[21] who suggested otherwise.”[22] Moreover the court of Appeal when adopting the above six articulated principles stated: “the relevant wrongdoing must be in the nature of an independent wrong that involves the fraudulent or dishonest misuse of the corporate personality of the company for the purpose of concealing the true facts.”[23], Lord Sumption felt the principle of concealment was commonplace “legally banal” and did not require piercing or disturbing the principle set down in Salomon. It is not an abuse to rely upon the fact (if it is a fact) that a liability is not the controller’s because it is the company’s.”[30] Lord Sumption endorsed Munby J in Ben Hashem v Al Sharif and then stated that the “piercing the corporate veil” doctrine is an important although has a limited place in English law.[31]. However, where the relevant test has been satisfied, the courts can  veil. In order for the evasion principle to come into play the controller of the company had to use the characteristics of the company’s separateness to evade a personal liability. In other words, there had to be some “anterior or independent wrongdoing” by the controller (at [98]). Private Law Tutor © 2018 All Rights Reserved. [8] Perhaps it can be argued that this is not even a doctrine, but a thing that all have struggled to categorise. The fifth, sixth and seventh defendant companies, each provided guarantees or security to the Claimant in respect of the loans. Here the House of Lords held that a company was effectively separate from Mr Salomon. Demands were also made on each of the guarantors of the loans, the third to ninth defendants. One of the most persuasive factors considered by Mr Justice Eder when considering the fifth principle was that the documentary evidence showed the Guarantor to be the ultimate owner and controller of the Company. Lord Sumption felt that the authorities showed that there was a set of circumstances in which the company was used as a vehicle of evading the law as dishonest for the purpose. The evasion principle is where the company is involved in a sham and calls for piercing the veil. Lord Neuberger cited C Mitchell, in “Lifting the Corporate Veil in the English Courts: An Empirical Study”[14] observes that “courts have often used conclusory terms to express their decisions on the point, which for all their vividness tell us nothing about the reasoning which underpins these decisions.”. 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