prest v petrodel resources limited and others evasion principle

In light of the documentary evidence the Judge decided that the assertions of the Guarantor were not credible. Private Law Tutor © 2018 All Rights Reserved. It will present the view the Law Lords had of the “doctrine” … It will then examine how the old corporate veil cases have been reconciled. 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. 03 October 2013. Lord Neuberger took the view that in both Horne and Lipman only the concealment principle came into play, so there was no requirement to “pierce the corporate veil.” Lord Lord Neuberger felt this was a useful tool for the judiciary. The case was originally heard in the family court as an application for ancillary relief by the wife her divorce case. 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. However, when relief was granted against the company this occurred under the evasion principle, and the corporate veil pierced. 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 applicants were joint … The eighth and ninth defendants, individuals, both provided guarantees in respect of the loan to the second defendant. 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…”. [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. The relevant tests that must be met before the corporate veil may be pierced (Hayshem v Shayif & Anor [2008]) and which have been applied by the courts (VTB Capital Plc v Nutritek International Corp and others [2012] and Caterpillar Financial Services (UK) Limited v Saenz Corp Limited), can be summarised as follows: A number of documents, including those that confirmed that the Guarantor was receiving bank documents on behalf of the Company, showed that the Guarantor was controlling and directing the actions of the Company. Lord Sumption[9] also refers to the “piercing the corporate veil” as an exception to the age old principle laid down in Salomon v A Salomon & Co Ltd [10] at the same time Lord Neuberger and Lord Clarke make reference to it being a “doctrine”. 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.”. What they are trying to present is a view that “piercing the corporate veil” can take on so many shapes and forms. Since Salomon v Salomon, 1 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. There must be evidence of impropriety; however impropriety alone is insufficient to pierce the veil. The Court of Appeal in VTB Capital v Nutritek International Corpn[19] adopted the above six articulated principles. 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. The three companies, each in the substantial ownership of the husband, challenged the orders made against them saying there was no jurisdiction to order their property to be conveyed to the . Prest v Petrodel Resources Limited and others [2013] UKSC 34. [5] With this in mind, to pierce or lift the veil of incorporation would be to find the shareholders liable. So great has been the interest generated, amongst company and insolvency lawyers as well as family lawyers, that it is unnecessary, in this article, to recite either the material facts of the case or the convoluted procedural … Owners have historically relied on this structure to provide themselves with the security that a corporate veil exists to protect assets owned by other entities in the event that unjust attempts are made to pierce it. 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. This article examines the judicial approach to the corporate veil post-Prest v Petrodel Resources Ltd. The fourth defendant company entered into a guarantee and indemnity in favour of the Claimant in respect of the loans advanced. By continuing to use this website, you consent to the use of cookies in accordance with our Cookie Policy. This article will critically evaluate the significance of the Prest v Petrodel Resources Ltd decision in light of the corporate veil doctrine. The implications of Prest v Petrodel Resources Limited' (News and Publications, 2013) accessed 20 th December 2015 25 Ibid 26 [1939] 4 All ER (Ch) 27 Shepherd N, 'Petrodel v Prest: cheat's charter or legal consistency?' However, where the relevant test has been satisfied, the courts can  veil. [33] Lastly Lord Clarke was of the view that the distinction had not been the subject of submissions and it would have to be before it was fully adopted. Supreme Court decision on ancillary relief in Prest v Petrodel Resources Ltd [2013] 2 A.C. 415. Although it is very rare that piercing of the corporate veil is allowed, there have been sporadic attempts by litigants to do so, such as in the Court of Appeal case (VTB Capital Plc v Nutritek International Corp and others [2012]), in which the claimant bank had provided US$225 million under a facility agreement. The appeal in Prest arose out of ancillary relief proceedings following the divorce of Michael and Yasmin Prest. 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. 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. Having obtained permission to serve out of the jurisdiction, the claimant was granted a worldwide freezing order against the fourth defendant, which the claimant alleged controlled the first and second defendants. 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. In addition, the Guarantor was trying to sell the Property at the time of the freezing injunction application. 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. Rather than simply putting the principle to one side temporarily, the court denies the Salomon principle, altogether. HFW acted for Caterpillar Financial Services in a successful application for summary judgment in respect of a declaration that a company was an alter ego corporate vehicle of the defendant. 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. In this case it should be noted that although the matrimonial home itself was also owned by one of the companies, it was established in the Court of Appeal that this was held on trust for Mrs Prest and did not form part of the appeal to the Supreme Court. A further net worth statement provided by the same accountant 16 months later also identified the Guarantor’s assets to include a “residence in Fulham” with a current value of US$3.2 million. The case concerned a very high value divorce.. [32] Lady Hale was doubtful if the “doctrine” could be encapsulated into a neat distinction of concealment and evasion, but that these form part of a broader principle to act with honestly in business. 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 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”. Another was to take funds from the companies whenever he wished, without right or company authority. 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]). Caterpillar Financial Services (UK) Limited (the Claimant) advanced loans to the first and second defendant companies for the purpose of the acquisition and construction of two yachts. 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. In both Lipman and Horne the controllers of the companies had both accrued personal liability which was distinct from the company’s. But … Although the Prest case does make it clear that veil piercing will only be appropriate where there has been evasion of liabilities and where no other remedy of law will provide an appropriate remedy, as shown above, the judgment gives no indication of precisely the circumstances in which the veil may still be pierced and thus the decision should be seen only as contributing further to the uncertainties surrounding this area of law. However these cases are and will remain exceptional. 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 claimant was unable to recover the loan by way of the security provided and alleged that fraudulent misrepresentation by the first defendant induced it to enter into the facility agreement and that the other defendants were jointly liable. Shipowners frequently and legitimately structure their group companies by incorporating single purpose vehicle companies as vessel-owning entities. . John Wilson QC examines a ground-breaking Supreme Court ruling on the separate identity of a corporate entity. 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. In certain cases group companies will not be treated as separate, which is contrary to the general principle. Thus concealment was only used when the controllers of a company were concealing their identity and the court was quite ready to look behind the “façade”, to discover the truth. Appeal from – Petrodel Resources Ltd and Others v Prest and Others CA 26-Oct-2012 The parties had disputed ancillary relief on their divorce. DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852. 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. Prest v Petrodel Resources Ltd UKSC 34 This is the key case where SC considered the issue of whether the court possesses a general power to pierce the corporate veil in the case where these specific legal principles do not apply. The Judge accepted that the reference to a “residence in Fulham” was a reference to the Property which the Guarantor asserted that he did not own at the time of the summary judgment hearing nor at the relevant period. 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 first and second defendants defaulted under the loan agreements. This, according to Mr Justice Eder’s judgment, satisfied the fifth principle. By V. Niranjan. This article will critically evaluate the significance of the Prest v Petrodel Resources Ltd[1] decision in light of the corporate veil doctrine. Abstract. The other Lords generally agreed with Lord Sumption. 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”. The case is of great significance. Lord Sumption distinguished the concealment and evasion principle: “The concealment principle is legally banal and does not involve piercing the corporate veil at all. 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. He regarded the “piercing the corporate veil” as “a final fall-back” solution which would infrequently arise. 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. In all of the case that Lord Sumption considered his view was that the correct consideration was that relief in all cases was being provided by the courts under the concealment principle and not the evasion principle. Criminal Law, White Collar Crime & Road Traffic Cases. 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 divorcing couple, Mr and Mrs Prest, were wealthy. ... replaced “façade” or “sham” with the “concealment” principle and the “evasion” principle. Analysis is undertaken of the judgment in Prest and of how judges have adapted and applied this judgment in subsequent cases. 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. 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 issue for the Supreme Court was how to ensure that, particularly in cases of divorcing spouses and in single-man companies, company law could not be used as a tool to conceal assets or avoid liability in relation to those assets, whilst maintaining the integrity of the Salomon principle. The Supreme Court unanimously overturned the Court of Appeal’s decision. It remains the unfortunate position that although Prest has limited the doctrine by confirming that it is only to be used as a remedy of last resort, a future decision will be required to confirm exactly when the doctrine may be applied. March 22, 2018/in Company /Private Law Tutor. R v Singh [2015] EWCA Crim 173. Although the Prest case does make it clear that veil piercing will only be appropriate where there has been evasion of liabilities and where no other remedy of law will provide an appropriate remedy, as shown above, the judgment gives no indication of precisely the circumstances in which the veil may still be pierced and thus the decision should be seen only as contributing further to the uncertainties … 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 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]. Introduction. 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. The question of when the courts will be prepared to “pierce the corporate veil” and disregard Salomon has quizzed judges, lawyers and academics. My tenant has moved out leaving possessions in my property – what can I do? Introduction. 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. Lord Sumption[13] described “façade” and “sham” as “protean” terms. Mrs Prest appealed to the Supreme Court. In the weeks preceding the Supreme Court’s decision in Petrodel Resources Ltd v Prest, 1 the case was the subject of much attention and commentary, both in the media and legal circles. 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. Thus momentarily suspending the separateness of the corporate structure to see what was happening behind the company, an “act of curiosity”. They owned a substantial matrimonial home in the UK and a second home in Nevis. Mr Justice Eder emphasised that at the time the loan agreements were entered into, the Guarantor had told the Claimant that the Property was his asset and no mention of the Company had been made nor had the third defendant indicated that his interest in the Property was by way of a shareholding in the Company. Lord Sumption asserted however that the terms sham or façade should be replaced with ‘evasion’ and ‘concealment’. Appeal allowed unanimously. Petrodel v Prest: Lord Sumption’s Masterly Analysis of the Corporate Veil. 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”. Trustor AB v Smallbone (No 2) [2001] EWHC 703 Prest v Petrodel Resources Ltd & Others [2013] UKSC 34 Introduction. In the Claimant’s application, it maintained that, had it been presented with these facts, it would not have considered advancing the loans without sufficient security from the Company, which would allow the Claimant to pursue the Company and ultimately enforce a judgment against the Property in the event of default. The judgement in Prest therefore clarified that piercing the corporate veil would only be possible when company law had been used to evade liability, although this alone would not be enough, and that even where such impropriety had arisen, it would usually be possible to apply another area of law in order to grant a remedy, in this case the application of trust principles to ensure Mrs Prest was entitled to a beneficial interest in the properties. 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. (2013) 1 Private Client Business 4-42 individuals with clear goals of protecting their assets. The corporate veil exists to distinguish a company as a legal person so that it stands separate from its directors and shareholders. [8] Perhaps it can be argued that this is not even a doctrine, but a thing that all have struggled to categorise. 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”. Prest v Petrodel Resources Ltd UKSC 34, [2013] R v McDowell [2015] EWCA Crim 173. This essay will argue the decision has done little to fault the Salomon principle. Demands were also made on each of the guarantors of the loans, the third to ninth defendants. The tenth to sixteenth defendants are alter ego corporate vehicles of the third defendant, who directs and controls the actions of the companies. The evasion principle is where the company is involved in a sham and calls for piercing the veil. 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. 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. Therefore when Prest came before the Supreme Court this was an opportunity for the Law Lords to clarify this precise question although it was not wholly relevant in deciding the case. 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 … In that case it was held by Moylan LJ that although there was no general principle by which the corporate veil could be pierced, this was possible under section 24(1)(a) of the Matrimonial Causes Act. This has why the doctrine has faced so much criticism. Prest v Petrodel Resources Ltd emphasises the importance of properly and transparently running companies. The court therefore had jurisdiction to make a transfer order. 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”. The evasion principle is different in that if no piercing takes place, the separate legal personality will defeat the right or frustrate its enforcement. Some commentators have asserted that the decision in Prest is to be “welcomed” as although it does confirm that the Salomon principle remains as a cornerstone of UK company law, it also recognises that there will be circumstances in which the veil can be pierced in order to grant a remedy. The first requirement of control was satisfied on this basis. The Claimant made demands on the first and second defendants and subsequently terminated the loan agreements. For him it was important to be able to reconcile old decision and use the doctrine as a “practical solution”. He had set up number of companies. 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”. 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. 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. The decision has done little to fault the Salomon principle, and the corporate structure to see was... Structure their group companies will not be treated as separate, which is to. 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