Written by David Zahra, 12 August 2013
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The concept that the ‘corporate veil’ may only be penetrated in rare circumstances has been recently confirmed by a recent decision by the UK Supreme Court (which since 2009 has assumed the judicial functions of the House of Lords), Petrodel v Prest.
This decision highlighted the importance of the concept that when using a limited liability company as a vehicle for the exercise of a particular trade, a trader is only liable for the assets he or she chooses to put at risk in relation to that trade or business.
The ‘corporate veil’ is a legal fiction that protects the trader from being personally liable to the company’s creditors for debts and other obligations incurred by the trade.
The decision confirmed the principle “that if there are […] situations in which piercing the veil may be relevant as a final fall-back, they are likely to be novel and very rare”.
Petrodel v Prest related to a matrimonial dispute where a wealthy oil trader, Mr Prest’s, wife was awarded a divorce settlement of £17.5m from Mr Prest. Mr Prest had most of his assets (properties in London and overseas) held by Petrodel Resources Limited and other companies beneficially owned by Mr Prest as sole shareholder. The High Court, however, ordered the properties to be considered as assets of Mr Prest (and therefore part of the divorce settlement) because Mr Prest could had “the practical ability to procure [the London and overseas properties’] transfer, whether or not he was their beneficial owner” by virtue of him owning and controlling the companies.
Needless to say, Petrodel Resources Limited and the other companies appealed from the High Court’s decision and the Court of Appeal held that the High Court was incorrect in concluding that Mr Prest was “entitled” to the assets of the companies. The assets were owned by the companies and were protected by the ‘corporate veil’.
Unsatisfied, Ms Prest appealed. The Supreme Court overturned the Court of Appeals’ decision and ordered Mr Prest to transfer the assets to his divorcee. The Supreme Court ordered this on the basis that the assets were held by the companies on resulting trust for Mr Prest and not because it pierced the corporate veil – however, in its decision, the Supreme Court dedicated considerable attention to the piercing of the corporate veil and established an important principle.
The separate legal personality of a company was considered to be the “whole foundation of English company and insolvency law” and therefore piercing the corporate veil should only happen in cases of true exceptions. Courts only have the power to pierce the corporate veil when all other more conventional remedies have proved to be of no assistance. The corporate veil should be pierced “in a very rare case” and only in a case of ‘evasion’; i.e. where the legal personality is used to deliberately evade or frustrate the enforcement of a legal right against the controlling mind of the company.
The decision is considered to be a landmark judgement by most English company law practitioners because it has set the “evasion principle” as the basis for the courts’ jurisdiction to pierce the corporate veil.
In Malta, the courts have not yet established, with sufficient clarity, which conditions must be satisfied before piercing the corporate veil although to date, the intention to attempt to evade one’s obligations was present in all cases in which the Maltese courts lifted the corporate veil.
This decision should also serve as further guidance as to how companies should be governed and managed so as to ensure that they truly exist as a separate legal person and that the company carries not only risks for its creditors but also for its shareholders.
A copy of the judgement can be found here: http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2013_0004_Judgment.pdf