Prest v Petrodel

Legal Case Summary

Prest v Petrodel Resources Ltd & Others [2013] UKSC 34

Resolving the veil of corporate personality

Introduction

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. However, there have been circumstances in which the courts have been prepared to “pierce the veil”² of corporate personality to find the members of the company liable for company actions in certain 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 opportunity³ to resolve the “never ending story”⁴ of when the corporate veil can be pierced.

The Facts

The divorcing couple, Mr and Mrs Prest, were wealthy. They owned a substantial matrimonial home in the UK and a second home in Nevis.⁵ Mrs Prest contended that her husband’s wealth vastly exceeded this and argued that properties held by several companies of which Mr Prest “wholly owned and controlled” were in reality owned by him. 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.

The case was originally heard in the family court⁶ as an application for ancillary relief by the wife in a case of divorcing spouses, where 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.⁷ Three of the companies of which Mr Prest was the majority shareholder appealed to the Court of Appeal, in which the majority criticised not only Moylan LJ’s dicta but the general practice of the family courts to use the MCA to pierce the corporate veil and asserted that in the absence of abuse of the Salomon principle, the law did not permit this.⁸ 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”⁹ and must cease. Mrs Prest appealed the decision to the Supreme Court.

The Issues

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 Decision

The Supreme Court unanimously overturned the Court of Appeal’s decision. 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”.¹⁰ Despite this confusion in the law, Lord Sumption asserted that the position established in Adams v Cape Industries¹¹, 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.¹² His lordship went on to observe that this principle had been affirmed Trustor AB v Smallbone (No 2)¹³ 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.

Lord Sumption asserted however that the terms sham or façade should be replaced with ‘evasion’ and ‘concealment’.¹⁴ 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.¹⁵ Lord Sumption asserted that this was the position adopted by Lord Neuberger in VTB¹⁶, 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.¹⁷ 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,¹⁸ in this case the application of trust principles to ensure Mrs Prest was entitled to a beneficial interest in the properties. 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 resort¹⁹ and as such it seems that the decision failed to take advantage of the opportunity to clarify the law.

Analysis

Some commentators have asserted that the decision in Prest is to be “welcomed”²⁰ as although it does confirm that the Salomon principle remains a cornerstone of UK company law,²¹ it also recognises that there will be circumstances in which the veil can be pierced in order to grant a remedy. However, this author finds such a view difficult to accept. Firstly, although the 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. Indeed, one rather cynical commentator has argued that Lord Sumption “almost seemed relieved”²² that the veil could not be pierced in Prest because it meant he did not need to determine the “definitive”²³ circumstances in which the veil may be pierced in the future. This author would submit that cynicism aside, 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.

Footnotes

¹ Salomon v Salomon ¹⁸⁹⁷ AC 22

² VTB Capital v Nutritek International Corporation and Others ²⁰¹³ UKSC 5 per Lloyd LJ at ⁴⁷

³ P Breakey, ‘Is Piercing the Veil Contrary to High Authority: A Footnote to the Never Ending Story’ (2013) Comp Law 34(11) 352-355, 355

⁴ L Linklater, ‘Piercing the Corporate Veil’: The Never Ending Story?” (2006) 27 Company Lawyer 65, title

⁵ Prest (n1) per Lord Sumption at ¹

⁶ Prest v Prest, Petrodel Resources Ltd and Others ²⁰¹¹ EWHC 2956 (Fam)

⁷ Matrimonial Causes Act 1973 (MCA)

⁸ Petrodel Resources Ltd & Others v Prest & Others ²⁰¹² EWCA Civ 1395 per Rimer LJ at ¹³⁶

⁹ ibid per Patten LJ at ¹⁶¹

¹⁰ Prest (n1) per Lord Sumption at ¹⁹

¹¹ Adams v Cape Industries Plc ¹⁹⁹⁰ Ch 433

¹² ibid per Slade LJ at ⁵³⁶

¹³ Trustor AB v Smallbone (No 2) ²⁰⁰¹ 1 WLR 1177

¹⁴ Prest (n1) per Lord Sumption at ²⁹

¹⁵ ibid per Lord Neuberger at ⁶¹

¹⁶ VTB (n3)

¹⁷ Prest (n1) per Lord Sumption at ²⁶

¹⁸ ibid per Lord Sumption at ⁵³

¹⁹ ibid per Lord Sumption at ⁶¹

²⁰ E Roxburgh, ‘Prest v Petrodel Resources Ltd: Cold Comfort for Mrs Prest in Scotland’ (2013) SLT 32 223-225, 225

²¹ JHY Chan, ‘Should ‘Reverse Piercing’ of the Corporate Veil be Introduced in English Law’ (2014) Comp Law 35(6) 163-171, 163

²² P Bailey, ‘2013: That Was The Year That Was in Company Law’ Co. L.N. 2014, 347, 1-4,2

²³ S Peppy, ‘Cheat’s Charter Endorsed – Existing Family Division Practice Must Now Cease’ (2012) Family Affairs 56 Winter, 10