Context: The doctrine of separate legal personality remains one of the most important principles in UK company law, protecting shareholders through limited liability while allowing companies to operate as independent legal entities. However, courts occasionally disregard this separation through the controversial doctrine of corporate veil lifting. The UK Supreme Court's decision in Prest v Petrodel Resources Ltd reshaped the debate by restricting veil piercing primarily to cases involving the evasion of existing legal obligations. This article critically examines Prest, the continuing influence of Salomon v Salomon, Adams v Cape Industries, and subsequent case law, making it essential reading for LLB, LLM, SQE, and corporate law students studying English company law.
Question: ‘The Supreme Court’s judgment in Prest v Petrodel Resources Ltd [2013] UKSC 34 has added clarity to the situations in which the corporate veil will be lifted.’
Critically evaluate the above statement in relation to the law on lifting the corporate veil
Answer:
A revolution in commerce and corporate affairs took place when English court recognised that the corporation has independence legal existence than its owners and management. It made investing in businesses efficient and risk-averse. This doctrine, called the “CV” (‘CV’), or separate legal personality (SLP) company, was established in the seminal case of Salomon v Salomon. The doctrine simply means that a company has personhood under the law. It is separate from the owners. Company can sue and sued in its name; it can enter into legal relations (such as contracts) with others. Its property and assets are separate from personal property owned by its owners. Owners’ liability is limited in a company to the extend of their paid up share capital. Company’s debts and liabilities are not personal debts and liabilities of the owners. This remains the most consistently applied, upheld, and positively treated case in English company law. Given the longeivity of the doctrine, exceptions were created over the decades. This relates to concept of “veil lifting” or “piercing the CV.” This means that in certain cases, owners are held to be liable for the debts and liabilities of the company.
Lord Sumption has clarified the law on veil lifting (VL). However other judges have created confusion about additional ground and future development for VL. Cases after PRESt show that VL is now limited to ground of ‘evasion of liability’ (EL). However academic is divided. This essay argues that Prest has clarified the law to great extent and preserved the SLP.
This essay shall analyse the nature of CV in English law. It shall explore the various grounds for veil lifting. It shall analyse the facts, ratio decidendi, and reasoning of the judges in Prest v Petrodel. Considering academic opinion, the importance for Prest in the long line of cases on CV shall be analysed as to whether it has clarified the confusion surrounding when CV can be exercised. Subsequent cases applying Prest shall also be examined.
Given the importance of CV, lifting it can disrupt certainty surrounding company law. CV is risk allocation method. It is based also on limited liability and division between ownership and management. Shareholders get their personal assets protected. This attracts investment. Company’s losses are borne by the company and its profits can be distributed to shareholders. They can also be directors of the company and control its affairs, and be employee at the same time.Therefore, courts have been very reluctant to find grounds to lift veil, as it can bring unpredictability to whole spectrum of company law concepts and affairs.
Question arises whether this legal fiction of CV can be abused and exploited by shareholders - be it natural persons or parent companies (holding shares in subsidiaries). One can understand that company may be set up to evade liabilities by investing through the company and taking all profit home. Or, parent-subsidiary group structure may be exploited to avoid (tax, tortious, contractual, or other) liabilities of domestic or foreign subsidiaries. Shareholders may be held responsible for causing or evading such liabilities, duty of care towards employees of subsidiary, or using corporate form to conceal material facts. Such grounds were analysed in the seminal case of Adams v Cape Industries plc. Court held that CV could be lifted if company was a mere facade concealing true facts, subsidiary company acting as authorised agent of the parent (agency argument), or companies constituting single economic unit. Over time, there has been inconsistent attempt to veil lifting grounds. Agency and single economic unit argument stood rejected by subsequent cases. This reinforced the improtance of CV.
Even before Adams, there has been uncertainty about when courts should intervene to lift veil. Dignam and Lowrycharacterise 1966 to 1989 as interventionist years where courts increasingly lifted veil to dispense justice. But over time this approach was rejected. In Jones v Lipman court had earlier rationalised the law by invoking a consistent veil lifting category of using company as facade for concealing facts and evading existing legal liability. Similarly, in Gilford Motor v Horne, an ex-employee had obligation not to solicit customers from former employer. He set up a company to do so. Court held that company was a front for Mr Horne to evade his legal liability. In Raja v Van Hoogstraten, this ratio was upheld as valid ground. In Creasey v Breachwood Motors, veil was lifted to prevent evasion of liabilities.
Group tortious liability has also been recognised as valid ground of veil lifting in Chandler v Cape and Lubbe v Cape Industries plc cases. However, single economic unit analysis was criticised in Ben Hashem v Ali Shayif and Linsen v Humpuss Sea Transport. These cases show that we “have moved back to uncertainty dominating this important area...” The problem has not been too many veil lifting cases. The problem remains uncertainty about precisely when can a court do so and clear grounds for doing so.
In Prest, the facts involved family proceedings. The divorced wife sought to attach properties of company owned by husband. The ground was that he created group structure to evade an existing legal liability, by denying wife satisfaction of decretal amount. Court did not lift the CV as there was no such evasion. Court attempted to review this area of law to set out precise grounds for veil lifting and indicate whether there could be further development.
Firstly, court was unanimous in its ruling. It also held that veil lifting can occur albeit with limited grounds. All agreed for narrow space for future development. Evasion of liability and concealment of material facts were indicated as valid grounds. Lord Sumption gave leading judgment and comprehensive analysis of existing law.
The evasion principle was defined by Lord Sumption has abuse of corporate form to hide true facts of defendant as owner of assets or as liable for debts. This allows the court “to disregard the CV 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 SLP of the company will defeat the right or frustrate its enforcement.” He specifically approved the classic evasion-based veil liftings in Lipman and Horne. Similarly, in Trustor and Gencor, there was no veil lifting justified because there was no evasion of liability. The bottom-line is that “CV may be pierced only to prevent the abuse of corporate legal personality.” Hence, if someone states that it is liability of a company, it is not abuse of corporate form.
Court approached the ground of ‘concealment’ in a nuanced manner. While analysing such cases, court note that veil lifting occurred to reveal true facts but SLP was not rejected. Despite various instances of veil lifting, court noted that it is discussed very often but applied rarely. This may be the reason for uncertainty and mysticism surrounding the doctrine. Regarding the cases involving controllers of company being jointly and severally liable for company’s obligations in a contract, court applied the basic principle that there must be abuse of corporate form. Fact that liability is not controller’s and is of company’s, it is not abuse. But this was argued in VTB Capital case.
New liability cannot be created. Hence, veil lifting acts as shield not sword. Lord Sumption concluded that “there is a limited principle of English law which 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.” Mere control of company or parent/subsidiary is not enough. Veil lifting can only occur to deprive the company or the controller “of the advantage that they would otherwise have obtained by the company’s SLP.” Other broad grounds such as agency, single economic unit, impropriety, and dispensation of justice were excluded from possible grounds. Other judges agreed with the reasoning in the case but left the scope of doctrine open, per Lords Clarke, Mance, Neuberger, and Lady Hale. They all agreed that veil lifting should be to prevent company as engine of fraud or prevent unconscionable behaviour.
In subsequent cases, Prest has further reduced instance of veil lifting. Lewison LJ in Ottercroft reiterated that veil lifting takes place where there is evasion of existing liability or attempt to frustrate its enforcement. In this case, company and director were joint tortfeasor, hence there was no veil lifting. In Leon case, contractual obligation between company and other party involving leasehold interest did not attract veiling as attributing “an interest in the Lease to Mr Leon would involve piercing of CV which could not be justified,” citing Prest. In Hurstwood, David Richards LJ – in a tax avoidance case – stated that “as Lord Sumption explained in Prest” development beyond evasion principle is extremely rare. Since tax evasion does not involve contractual context, there could be no veil lifting.
Academics have, however, been ambivalent about approach in Prest. Firstly, Gregory Allan appreciated the clarification of rejection in Prest regarding residuary grounds. But problem with Prest is that it did not remove uncertainty regarding concealment principle. This has created another possible ground of alter ego justification to establish company as controller’s agent. This has been done in Withey and Pache. Concealment was also invoked to lift veil in R v Sale. This means that court lost a considerable opportunity to clarify ground of concealment. It should not be basis for denial of SLP but only to establish true factors and hold controllers liable, where appropriate. Secondly, Galeza has argued that veil lifting should have been established as last resort remedy. The door for further development should have been closed. Judges in prest did reiterate use of veil piercing as extreme measure and held the new grounds to be rare. But distinction between concealment and evasion has created potential uncertainty.
Thirdly, Million and Bainbridge have attacked the very basis of veil lifting as giving judges broad discretion. They argue that it should have been abolished as it is hardly practicable. This criticism misses the mark that abuse of corporate form and using it as engine of fraud – much like abuse of statute to play fraud – serves a sound policy rationale. They further criticize lack of guidance on “novel and rare” circumstances where veil lifting may be further developed. Thirdly, Nsubuga and Watkins have argued that “semantic ambiguities” existed before Prest. While Prest has consolidated the case law and tried to simplify it, it did not remove all confusions. Perhaps this is because of fact sensitive nature of claims for veil lifting which cannot be neatly categorized into fixed compartments. Hence, Wong is of the opinion that court has successfully harmonized this area of law and restrained judicial discretion in a significant way.
Therefore, Prest has certainly restored classical ground of veil lifting as extremely limited and fact sensitive. Court certainly resolved many pending confusions. It rejected single economic unit and agency principles. Court focused mainly evasion of liability and construed other grounds such as involving tortious liability within this framework. It also offered the analysis of assigning duty of care to relevant persons in certain cases where it is assignable without having the need to lift veil. Court has certainly limited the scope of veil lifting in a considerable manner. This is evident from reluctance of courts, subsequently, to attribute new liability to the controllers to disregard corporate personality. But as evident from some cases and academic opinion, the door of veil lifting remains open for further confusing development. This is especially true in the context of concealment ground. Academic opinion is divided about what approach the court should have taken. Some have argued for completely abolishing it. This is not a good approach from public policy perspective. Yet in hindsight, Prest has reaffirmed Salomon doctrine in a significant and clear manner.
See, Alan Dignam and John Lowry, Company Law (7 edition, Oxford University Press, 2014)
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
Prest v Petrodel [2013] UKSC 34
Lee v Lee's Air Farming Ltd [1960] UKPC 33
Adams v Cape Industries plc [1990] Ch 433
Littlewoods Mail Order Stores v IRC; DHN Food Distributors v Tower Hamlets
Jones v Lipman [1962] 1 All ER 442
Gilford Motor Co Ltd v Horne [1933] Ch 935, [1933] All ER Rep 109
Raja v Van Hoogstraten (2007) The Times, August 23
Creasey v Breachwood Motors Ltd [1993] BCLC 480
Chandler v Cape Plc [2011] EWHC 951 (QB)
Lubbe v Cape Industries plc [2000] 1 WLR 1545, HL
Ben Hashem v Ali Shayif [2008] EWHC 2380 (Fam)
Linsen International Ltd v Humpuss Sea Transport Pte Ltd [2011] EWHC 2339 (Comm)
Trustor AB v Smallbone [2001] 3 All ER 987
Gencor ACP Ltd v Dalby [2000] 2 BCLC 734
Ottercroft Limited v Scandia Care Ltd [2016] EWCA Civ 867
Leon v Attorney General and others [2020] 3 All ER 140
Rossendale Borough Council v Hurstwood Properties (A) Ltd and other companies; Wigan Council v Property Alliance Group Ltd [2019] 2 BCLC 591
Airbus Operations Ltd v Withey [2014] EWHC 1126
Clegg v Pache [2017] EWCA Civ 256
R. v Sale [2013] EWCA Crim 1306
Hamiisi Junior Nsubuga and Los Watkins, The road to Prest v Petrodel: an analysis of the UK judicial approach to the CV - Part 1 (2020) 31(10) International Company and Commercial Law Review 547, 551
Catherine K Y Wong, Has Petrodel v Prest further limited the instances in which courts will pierce the CV? (2017) 38(5) Company Lawyer 158, 160
Andrew Bowen QC, Concealment, evasion and piercing the CV: Prest v Petrodel Resources Ltd (2014) 129(Apr) Business Law Bulletin 1, 2
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