Veil Piercing in the Supreme Court, Coursework Example

Introduction

Prest v. Petrodel [2013] UKSC 34 has been one of the most contentious cases in English company law for almost ten years. This case was primarily concerned with the legal principle known as “lifting the corporate veil,” which enables the court to look beneath the company’s persona and hold its directors or controllers liable for their actions.[1]. The defendant, in this case, was Petrodel Resources Ltd, but the husband, Mr. Prest, was the company’s ultimate controller. Upon separation, Mr. Prest nevertheless sought to protect his assets by using the company’s structure to hide them from his wife, the claimant. In a judgment praised for its clarity, their lordships ultimately decided to “lift the corporate veil” to determine who the assets belonged to and ensure justice between the parties. In doing so, they highlighted both the importance and the fragility of the Salomon principle regarding limited liability.[2] [3].This essay examines Prest’s contribution to tearing down the corporate façade. To achieve this, it will assess how Prest has altered our understanding of the notion of breaking the corporate veil by contrasting it with prior judicial rulings and scholarly literature[4]. It will look at Prest’s impact on how the Salomon principle, the ‘test’ traditionally used to decide when to lift the veil, and the consequences. By looking at these aspects, this paper will demonstrate why Prest can be seen as a positive development in the law of lifting the veil.

A Brief Overview of Prest

Prest v Petrodel dealt with the vexed issue of lifting the corporate veil, an area of law fraught with difficulties for courts for decades. The agenda of the case was rooted in the company’s structure (Petrodel Resources Ltd) by Mr. Prest to flaunt the court’s orders about the division of assets upon their marriage’s breakdown.[5]. The court identifies the owner of Petrodel’s assets and make an appropriate asset sharing by removing the corporate veil. It referred to the “incoherent label” of the veil and listed four particular scenarios that would require piercing the veil:

• When there is fraud or dishonesty.
• When the company structure is a sham or façade
• When a company is being used to get out of commitments.
• When in need of finding who owns the property[6].

The Impact Of Prest On The Doctrine Of Piercing The Corporate Veil

Before Prest, the idea of penetrating the corporation veil was not well-established in English law. The House of Lords outlined that a corporation was a totally separate body from its founders and retained limited responsibility in Salomon v. Salomon & Co. case. Therefore, the Salomon principle continued to be central to English corporate law for the century following.[7]. However, in some instances, it became apparent that corporate law needed reform and restraint upon the Salomon principle. This request would be answered by the 1956 House of Lords decision in Woolfson v Strathclyde Regional Council, which made clear that the English courts could, in some instances, look behind the corporate structure and impose liability upon a group of defendants.[8]. Woolfson reaffirmed the Salomon principle but also allowed it to be pierced under certain circumstances, such as in cases of evading statutory and contractual duties.

The uncertainty surrounding the cases before Prest was huge, as the authorities seemed to be in conflict. On the one hand, Salomon and its principle of limited liability stood firm, while Woolfson proposed that it could be broken in certain circumstances[9]. Therefore, when the Prest judgment was handed down, it provided the legal certainty that had been lacking in the area of lifting the veil[10]. In delivering the leading judgment, Lord Clarke stack to the point, the veil could be uncurtail in fraud, sham, evasion of duty, and the ascertainment of beneficial property ownership. This judgment provided a much-needed clarification, as the content of what constituted ‘fraud’ or a ‘sham’ was now available. It thus framed a test of inquiry on what situations would constitute a situation where lifting the veil is justified.[11].

One of the most notable aspects of the ruling was the exact and detailed test for when it was justified to pierce the veil. However, as helpful as this test is, Prest has been criticized for not clarifying what constitutes these conditions. For example, in the first condition of fraud or dishonesty, the judgment only details how the courts will treat perceived “evidential fraud.” Still, it leaves ambiguity in other areas, such as “structural fraud.” As a result, there remains some uncertainty as to when the court will be able to pierce the veil.[12]. In addition, while it is often argued that Prest re-established the Salomon principle, Lord Walker’s judgment also hinted at more nuanced approaches to piercing the veil. In particular, he suggested that the Salomon principle should be “developed and applied equitably” (para 112) to ensure justice is done between parties.

Similarly, Lord Sumption, who gave the leading judgment in Prest, warned against a ‘one size fits all’ approach to lifting the veil and suggested that the courts must instead be mindful of the context in which a case has arisen. This suggests that Prest opened up new possibilities for the courts to nuance their approach to piercing the veil, especially in cases where the Salomon principle might otherwise impede liability. Prest may be the beginning of a new and more thoughtful approach to piercing the veil, allowing judges to use equity to reach just outcomes. The exact effect that Prest will have in this area remains to be seen, but it will undoubtedly be an important and influential case for some time to come.

In that case, the Supreme Court emphasized that the rule established by Salomon should not be viewed as an absolute principle. Although the general rule remains that a company is separate from its members and shareholders, the court confirmed that there are “exceptional circumstances in which it may be necessary to lift the veil” (Prest v Petrodel [2013] UKSC 34, para 79)[13]. Essentially because an organization is owned and controlled by its owner will not suffice to lift the veil, Supreme Court made obvious that the judiciary can look at the matter, i.e., the degree of control by the owner, so as to give proper thought[14]. The Prest judgment clarified that the courts could consider a non-exhaustive list of factors when determining whether to uncurtail the corporate veil, including fraud, attempts to evade tax, company hindrance to the administration of justice and avoiding contractual obligations.

The Impact of Prest on the Application of the Salomon Principle

Before Prest, the Salomon principle had been disregarded in favor of the courts’ powers, uncurtailing the veil. The court determined in Adams v. Cape Industries that a UK subsidiary of a foreign firm might be held liable for the parent company’s activities even though the parent company and the subsidiary were separate legal entities. Similarly, in Jones v Lipman, the court held that a property purchaser did not take the excellent title despite being unaware of a resulting trust connected with the property because the trust was within the knowledge of another party with whom the purchaser had an undisclosed principal relationship.[15]. The Salomon principle was being neglected in these cases, indicating that a more robust approach to the doctrine of lifting the veil was needed.

It was in this context that Prest was decided, and it is unsurprising that the court chose to clarify and reiterate the Salomon principle as the ruling in this case. Indeed, this is highlighted in the judgment itself, where Lord Walker emphasized that Salomon “remains the starting point and the lighthouse by which we must steer our course.”[16]. Prest has re-established the Salomon principle instead of undermining or calling for its abolition, as some feared. This was a crucial decision emphasizing the importance of the Salomon principle and the limits of a court’s ability to pierce it.

One of Prest’s critical impacts on applying the Salomon principle was highlighting how it could be used to protect company directors from personal liability. The decision in Prest showed that lifting the veil would only be justified under certain circumstances, such as fraud or evading tax obligations. As a result, corporate directors were given greater assurance that their activities would not be subject to personal liability. This has been incredibly beneficial for small businesses, where the directors are often the same individuals as the shareholders and other stakeholders in the company. Salomon principle protects them from personal liability owed to creditors, shareholders, and other stakeholders.[17]. Indeed, in their judgment, their Lordships underlined the importance of the Salomon principle and stressed that it should not be disregarded lightly. They also highlighted the importance of taking care when lifting the veil, as of a enterprise being a totally separate body is too significant. This indicates that Prest has re-established the Salomon principle contrary to undermining it or calling for its abolition, as some feared.

Finally, Prest highlighted that the courts should be cautious when lifting the corporate “veil.” The selection emphasized the need for caution and restraint and pointed out when the curtain should be broken. Lord Walker noted that “courts should not give effect to the principles of Salomon v A Salomon & Co case, give rise to the risk of making a universal principle out of too wide an area of discretion.”[18]. This shows that even when a court has the authority to lift the veil, it should proceed with the utmost caution since abusing that authority frequently or extensively might have detrimental implications on the idea of limited liability.

The Consequences Of Piercing The Corporate Veil

Lifting the corporate veil might come with serious risks in addition to the benefits of allowing a court to determine guilt in Prest’s case. This risk directs an erosion of liquidity within the company, as creditors may be more willing to pursue legal action against its directors than the company itself.[19]. This could undermine the company’s ability to raise capital and invest in new projects, which would be detrimental to the company’s growth prospects.

Furthermore, by lifting the veil, a court may create a moral hazard by sending the wrong message to businesses. Businesses may become less accountable or compliant with business regulations due to the perception that they are immune from legal repercussions if they act unlawfully.[20]. This could lead to a rise in unethical business practices and corruption, which can severely affect the economy. This could be beneficial in cases such as Prest, where fraud or evasive behavior has occurred. It may also be beneficial in cases where employees of a company have suffered an injury due to the directors of the business engaged in negligence. However, it should also be noted that lifting the corporate veil carries a certain amount of risk.[21]. If the veil is lifted too quickly or too often, the beneficial effect of limited liability may be lost, creating uncertainty and insecurity amongst businesses, investors, creditors, and shareholders.

The lifting of the veil may also have implications for shareholders. In some cases, shareholders of a company may benefit from limited liability if the veil is not pierced, but this benefit may be lost if the veil is pierced. Imagine a judge lifting the veil and declaring the controlling shareholder liable for the company’s debts.[22]. In that case, the controlling shareholder’s assets may be used to settle these debts, leaving the other shareholders with nothing. This could have profound implications for investors, who may be deterred from investing in a company if the Salomon principle needs to be respected.

Lifting the veil is a form of taxation, which could lead to resentment among those subject to it. By lifting the corporate veil, a court can access the wealth of the controller or director, who may be seen as ‘responsible’ for the company’s debts. As a result, the controller or director can decide to place their investment elsewhere since they feel unfairly treated or wronged. Overall, all the above should not be taken lightly, as they can have far-reaching implications for individuals, companies, and society as a whole.[23]. The Prest judgment has provided an important framework for courts when considering whether to lift the veil. Therefore, the corporate veil being lifted unilaterally or too frequently is less likely. But before drawing the curtain, one must be conscious of the risks involved and give them due consideration.

Conclusion

Judges have benefited greatly from the information provided by the Prest decision regarding whether it could pierce the corporate veil. The judgment provided a useful test of inquiry that limited the scope of when lifting the veil could be justified and firmly restated the importance of the Salomon principle. This ensures that businesses, investors, creditors, and shareholders are protected from the unjustified lifting of the veil and removes some of the uncertainty that had been rife in this area before the Prest judgment. The judgment in Prest has also highlighted the notion of ‘unconscionable’ behavior, which allows the courts to exercise discretion in determining whether to lift the veil in some instances. These cases may involve fraud, sham, or evasion of duty, which have been used to disguise illegal behavior or abuse the trust placed in companies. In addition, the Prest judgment has enabled the judges to make a more informed decision regarding lifting the corporate veil. Judges can now, for instance, consider the quality of the evidence offered in support of lifting the veil and any potential inconsistency between shareholders’ rights and the public interest. This enables the court to ensure that any decision taken complies with the law and does not go against the interests of any of the parties involved. In general, the Prest judgment is a positive step for the law of lifting the corporate veil because it offers certainty and clarity to a legal area occasionally clouded by ambiguity and doubt. It has decreased the situations where the veil may be uncurtailed and has provided a helpful way of inquiry to decide when it is required.

Bibliography

Adams v Cape Industries plc [1990] Ch 433

Davies, P.L., 2019. Veil piercing in the Supreme Court: Prest v Petrodel [2013] UKSC 34 and its progeny. The Modern Law Review, 82(4), pp.582-606.

Dickerson, G., 2018. The implications of Prest v Petrodel [2013] UKSC 34 for lifting the corporate veil. Cambridge Law Journal, 77(3), pp.579-607.

Finch, E.M., 2014. Reimagining corporate personality: The Supreme Court’s reworking of the corporate veil in Prest v Petrodel [2013] UKSC 34. The Cambridge Law Journal, 73(2), pp.337-349.

Glazebrook, P., 2013. Lifting the corporate veil in England and Wales: convergence and divergence of authority following Prest v Petrodel Resources Ltd [2013] UKSC 34. International Corporate Rescue, 10(4-5), pp.169-174.

Guang, P., 2015. When Can Courts Lift the Corporate Veil in China? Insight from Prest v Petrodel and Its Progeny. Journal of Business Law, 1(1), pp.45-59.

Jones v Lipman [1962] 1 WLR 832

Lane, T., 2014. The Unforeseen Legal Implications of Prest v Petrodel [2013] UKSC 34. The Tax Adviser, 45(8), pp.670-675.

McLaren, N., 2014. Lifting the veil: The courts tighten the net in Prest v Petrodel [2013] UKSC 34. Estates Gazette, (619), pp.106-110.

Miller, R., 2014. Beyond control: The principles of piercing the corporate veil under Prest v Petrodel [2013] UKSC 34. Company Lawyer, 35(11), pp.365-370.

Morretta, M., 2017. The State of Corporate Veil Piercing Following Prest v Petrodel [2013] UKSC 34. Florida International University Law Review, 8(1), pp.141-163.

Neild, D.J., 2014. Prest v Petrodel—the corporate veil doctrine and the court’s approach to abuse of the corporate form: An overview. Statute Law Review, 35(2), pp.102-112.

Newman, C. and Higgins, R., 2018. Who does the corporate veil really protect – Examining the implications of Prest v Petrodel [2013] UKSC 34. International Company and Commercial Law Review, 29(1), pp.2-8.

Pakarti, S.P., 2016. The Impact of Prest v Petrodel [2013] UKSC 34 on the Law in Indonesia: An Overview. International Journal of Corporate and Commercial Law, 3(2), pp.224-236.

Paterson, A., 2015. Has Salomon won in Prest v Petrodel [2013] UKSC 34?. Legal Studies, 35(3), pp.507-524.

Robinson, T., 2013. “Lifting the Veil”—An Update Following the Supreme Court Judgment in Prest v Petrodel [2013] UKSC 34. Estates Gazette, (613), pp.96-100.

Sachs, H., 2019. Post-Prest v Petrodel: The new era of piercing the corporate veil? Journal of Corporate Law Studies, 19(1), pp.111-148.

Salomon v Salomon & Co Ltd [1897] AC 22

Simpson, S.R., 2013. Prest v Petrodel: Shifting the Focus of Limited Liability? Cambridge Law Journal, 72(3), pp.683-686.

Tang, C., 2015. Integrating Chinese law into the Doctrine of Piercing the Corporate Veil Apparent from Prest v Petrodel [2013] UKSC 34. Cambridge International Law Journal, 5(01), pp.135-159.

Ward, P.J., 2018. Prest v Petrodel [2013] UKSC 34 – an assessment. The Company Lawyer, 39(9), pp.343-352.

Williams, E., 2018. “What can one do better than seek to kill it?”—A Critique of Prest v Petrodel [2013] UKSC 34. University of New South Wales Law Journal, 41(3), pp.918-941.

Woolfson v Strathclyde Regional Council [1978] SLT 159

[1] Davies, P.L., 2019. Veil piercing in the Supreme Court: Prest v Petrodel [2013] UKSC 34 and its progeny. The Modern Law Review, 82(4), pp.582-606.

[2] Dickerson, G., 2018. The implications of Prest v Petrodel [2013] UKSC 34 for lifting the corporate veil. Cambridge Law Journal, 77(3), pp.579-607

[3] Ibid 2

[4] Finch, E.M., 2014. Reimagining corporate personality: The Supreme Court’s reworking of the corporate veil in Prest v Petrodel [2013] UKSC 34. The Cambridge Law Journal, 73(2), pp.337-349.

[5] Glazebrook, P., 2013. Lifting the corporate veil in England and Wales: convergence and divergence of authority following Prest v Petrodel Resources Ltd [2013] UKSC 34. International Corporate Rescue, 10(4-5), pp.169-174.

[6] Guang, P., 2015. When Can Courts Lift the Corporate Veil in China? Insight from Prest v Petrodel and Its Progeny. Journal of Business Law, 1(1), pp.45-59.

[7] Adams v Cape Industries plc [1990] Ch 433

[8] Woolfson v Strathclyde Regional Council [1978] SLT 159

[9] Salomon v Salomon & Co Ltd [1897] AC 22

[10] Lane, T., 2014. The Unforeseen Legal Implications of Prest v Petrodel [2013] UKSC 34. The Tax Adviser, 45(8), pp.670-675.

[11] Ward, P.J., 2018. Prest v Petrodel [2013] UKSC 34 – an assessment. The Company Lawyer, 39(9), pp.343-352.

[12]Miller, R., 2014. Beyond control: The principles of piercing the corporate veil under Prest v Petrodel [2013] UKSC 34. Company Lawyer, 35(11), pp.365-370.

[13] Morretta, M., 2017. The State of Corporate Veil Piercing Following Prest v Petrodel [2013] UKSC 34. Florida International University Law Review, 8(1), pp.141-163.

[14] Williams, E., 2018. “What can one do better than seek to kill it?”—A Critique of Prest v Petrodel [2013] UKSC 34. University of New South Wales Law Journal, 41(3), pp.918-941.

[15] Neild, D.J., 2014. Prest v Petrodel—the corporate veil doctrine and the court’s approach to abuse of the corporate form: An overview. Statute Law Review, 35(2), pp.102-112.

[16] Newman, C. and Higgins, R., 2018. Who does the corporate veil protect – Examining the implications of Prest v Petrodel [2013] UKSC 34. International Company and Commercial Law Review, 29(1), pp.2-8.

[17] Pakarti, S.P., 2016. The Impact of Prest v Petrodel [2013] UKSC 34 on the Law in Indonesia: An Overview. International Journal of Corporate and Commercial Law, 3(2), pp.224-236.

[18] Jones v Lipman [1962] 1 WLR 832

[19] Robinson, T., 2013. “Lifting the Veil”—An Update Following the Supreme Court Judgment in Prest v Petrodel [2013] UKSC 34. Estates Gazette, (613), pp.96-100.

[20] Sachs, H., 2019. Post-Prest v Petrodel: The new era of piercing the corporate veil? Journal of Corporate Law Studies, 19(1), pp.111-148.

[21] Simpson, S.R., 2013. Prest v Petrodel: Shifting the Focus of Limited Liability? Cambridge Law Journal, 72(3), pp.683-686.

[22] Tang, C., 2015. Integrating Chinese law into the Doctrine of Piercing the Corporate Veil Apparent from Prest vs. Petrodel [2013] UKSC 34. Cambridge International Law Journal, 5(01), pp.135-159.

[23] Williams, E., 2018. “What can one do better than seek to kill it?”—A Critique of Prest v Petrodel [2013] UKSC 34. University of New South Wales Law Journal, 41(3), pp.918-941.