The facts of Prest v Petrodel Resources Limited and Others

Transcription

1 Looking behind the corporate smoke-screen clear at last? A consideration of the recent UK Supreme Court decision in Prest v Petrodel Resources Limited and Others The distinction between concealment and evasion lies at the heart of the recent UK Supreme Court decision in Prest v Petrodel Resources Limited 1, a decision which was handed down on 12 June The case contains an impressive analysis of the case law development of the English law principle of piercing the corporate veil, that is where English courts have been prepared to look through corporate structures to identify those who stand behind them, placing aside the doctrine of separate corporate legal personality. However, the real importance of the decision lies in its recognition of the existence of the principle itself, something which had been doubted in some quarters. The formulation of the principle (albeit obiter) in the judgment of Lord Sumption, has since been considered by lower UK courts (including the Court of Appeal) in both civil and criminal proceedings, but it is a formulation which was not embraced with equal enthusiasm (or in some cases, at all) by the other six members of the judicial Panel which heard Mrs Prest's appeal to the Supreme Court. The facts of Prest v Petrodel Resources Limited and Others The case concerned divorce proceedings between Michael and Yasmin Prest. Mr and Mrs Prest were married in They each held dual Nigerian and English citizenship. Mr Prest left employment as a trader with Marc Rich in 2001 and began to run his own oil business. Mrs Prest petitioned for divorce in March 2008, with a decree nisi pronounced in December 2008 and a decree absolute in November Mrs Prest sought ancillary relief against members of the Petrodel group of companies under the Matrimonial Causes Act 1973 and, inter alia, the transfer of seven properties held by them. These transfers were sought in partial satisfaction of a lump sum payment that Mr Prest had been ordered to make to Mrs Prest. The Petrodel group companies resisted the application on the basis that the properties concerned were owned by them and not Mr Prest and that the court had no jurisdiction to order that properties owned by them should be transferred to Mrs Prest. At first instance, Mr Justice Moylan found as a matter of fact that the Petrodel group companies were owned and controlled by Mr Prest and that when the properties were transferred, Mr Prest did so with the intention of gifting them to the companies concerned. He also found that the Petrodel group corporate structure was set up for conventional reasons including wealth protection and tax avoidance 2. Despite these findings of fact, the application was determined in favour of Mrs Prest. Whilst Mr Justice Moylan held that he could not reach the companies assets by piercing the corporate veil on general principles, he concluded that on an application for financial relief 1 [2013] UKSC 34; [2013] 3 W.L.R. 1 2 Yasmin Prest v Michael Prest, Petrodel Resources Limited & Ors 2011 EWHC 2956 (Fam) at [217] lon_lib1\ \1 1

2 ancillary to a divorce under the Matrimonial Causes Act, a wider jurisdiction to pierce the corporate veil was available 3. He ordered, inter alia, that the seven properties concerned be transferred by the Petrodel group companies to Mrs Prest. On appeal by the Petrodel group companies, the Court of Appeal reversed the first instance decision, holding that the Family Division had no such jurisdiction under the Matrimonial Causes Act and that, in view of the findings of fact made by Mr Justice Moylan, both the legal and beneficial interest in the properties had been transferred to the Petrodel group of companies. Thereafter, Mrs Prest appealed to the Supreme Court. The legal team representing her argued as they had done before the lower courts that, on the facts of this particular application, the court could pierce the corporate veil either pursuant to the Matrimonial Causes Act or general principles, and make orders directly against the Petrodel group companies in which the seven properties had been vested. Rather like London buses which tend to arrive in pairs, this case marked the second occasion during the course of 2013 that the UK's highest national court had considered the principle of piercing the corporate veil. In a judgment handed down on 6 February 2013, the Supreme Court held in the case of VTB Capital plc v Nutritek International Corp and Others 4 that on the facts of that case, there was no basis to pierce the corporate veil. The leading judgment on the question was delivered by Lord Neuberger, who ducked out from opining whether piercing the corporate veil existed as a matter of principle, seemingly because he considered that, even if the veil were pierced, the claim would be unsuccessful. By contrast in Prest, Lord Neuberger took a braver line and concurred with Lord Sumption that the general principle did exist. The corporate veil The concept of the separate legal personality of incorporated companies in England dates back over 100 years to the decision of the House of Lords in Salomon v A Salomon and Co Ltd 5 ; which established that a company is to be treated as separate to those who founded, own or control it. As stated by Lord Halsbury LC in Salomon, a legally incorporated company must be treated like any other independent person with its rights and liabilities appropriate to itself whatever may have been the ideas or schemes of those who brought it into existence. 6 3 Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [6] 4 VTB Capital plc v Nutritek International Corp and Others [2013] UKSC 5; 2013 WL Salomon v A Salomon and Co Ltd [1897] A.C Salomon v A Salomon and Co Ltd [1897] A.C. 22 pp lon_lib1\ \1 2

3 This principle of separate legal personality remains the case even if the company is wholly owned and controlled by one person. Further, besides a share of profits of a company declared as a dividend or a return of capital on a restructuring or winding up of the company, this same principle ensures that shareholders and owners have no rights over the assets of a company 7. Also in the context of litigation, documents in the possession or control of a subsidiary have been held not to be in the power of its parent company 8. Recognising the existence of the principle of separate legal personality, at paragraph 8 of his judgment in Prest, Lord Sumption said: These principles are the starting point for the elaborate restrictions imposed by English law on a wide range of transactions which have the direct or indirect effect of distributing capital to shareholders. The separate personality and property of a company is sometimes described as a fiction, and in a sense it is. But the fiction is the whole foundation of English company and insolvency law. 9 Lifting or piercing the corporate veil Whilst the doctrine (referred to below as the Salomon doctrine ) is central to corporate law and economic activity in the English and other common law legal systems, it does not come without its difficulties. Separate legal personality has long been a convenient tool for hiding assets in corporate shells or obscuring the true identity of those perpetrating illegal or improper acts a form of veil to hide behind. It was to combat conduct of this nature that the concept of piercing the corporate veil was first born. In a seminal statement of the law in Woolfson v Strathclyde Regional Council 10, referred to by Lord Sumption in Prest, Lord Keith of Kinkel expressed the need to balance the integrity of the Salomon doctrine with preventing the abuse of corporate structures for spurious purposes and said: it is appropriate to pierce the corporate veil only where the special circumstances exist indicating that it is a mere façade concealing the true facts. 11 This statement recognised that piercing the corporate veil would only be appropriate in cases which on their particular facts merited such intervention. Examples of cases and behaviours which raised questions for the courts in the past included the following: an ex-employee seeking to avoid the restriction of a non-compete clause binding on him personally by running a competing business in the name of a separate company 12 ; 7 Macaura v Northern Assurance Co Ltd [1925] AC 619 per Lord Buckmaster at pp House of Lords in Lonrho Ltd v Shell Petroleum Co Ltd (No.1) [1980] 1 WLR Prest v Petrodel Resources Ltd and others [2013] UKSC 34 at [8] 10 Woolfson v Strathclyde Regional Council 1978 SC(HL) Woolfson v Strathclyde Regional Council 1978 SC(HL) 90 at p Gilford Motor Co Ltd v Horne [1933] Ch 935 lon_lib1\ \1 3

4 an individual agreeing to sell a property to a third party but seeking to frustrate the sale following a change of heart by transferring it to a company wholly owned by him 13 ; and ex-company directors siphoning off funds to offshore companies in breach of fiduciary duty 14. Historical uncertainty However, as related by Lord Sumption, the earlier cases provided no clear rules as to when and how the corporate veil would be lifted or pierced. Some, including the decisions in the courts below in Prest, referred to the abuse of the separate legal personality of a company for a purpose that was in some relevant respect improper 15 ; some to shams or facades, which in Lord Sumption's view begged too many questions to provide a satisfactory answer. 16 He added: The question is heavily burdened by authority, much of it characterised by incautious dicta and inadequate reasoning. 17 The lifting or piercing of a corporate veil might be considered a metaphor in the sense that it is not an exact phrase and could be used to describe either an outcome or a legal principle. Lord Sumption s examination of the previous case law appears to reveal a tension between the need to define exactly any exception to the Salomon doctrine and a tendency of the courts to use the veil metaphor to label any situation where companies were to be associated with egregious actions and intentions of their controllers, and vice versa. Lord Sumption gave examples of where confusion had arisen. He referred to Gencor ACP Ltd v Dalby, where Mr Justice Rimer (as he then was) had held that a company wholly owned and controlled by a fraudulent director, which received funds which had been misappropriated by him, was liable to account to the claimant for those funds. This was stated by Mr Justice Rimer to be an example of piercing the corporate veil. Lord Sumption thought differently and pointed out that this had been a case in which funds had been transferred to a company which was in substance the wrongdoer s nominee 18. It was not truly a case in which the corporate veil had been pierced, but rather the funds were held on trust for the wrongdoer and, accordingly, the company had no beneficial 13 Jones v Lipman [1962] 1 WLR For example, Gencor ACP Ltd v Dalby [2000] 2 BCLC Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [7] 16 Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [28] 17 Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [19] 18 Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [31] lon_lib1\ \1 4

5 interest in them. This analysis similarly underpinned the ultimate outcome in the Supreme Court s decision in Prest. There are other situations in which a company might be held responsible for the actions of its controllers, for example through the rules of agency and the directing mind 19. Controllers might also be liable as agents or joint actors with the companies they control. These are normal rules, however, resulting from the fact that a company, an artificial creation, can only act through its human controllers. These rules might also be characterised as a metaphorical lifting or piercing of the corporate veil in the sense that they look behind a company structure to its controllers. In light of the above, it is not surprising that there was a school of thought that lifting or piercing the veil was not in fact a legal principle at all. As Lord Walker said in Prest: I consider that piercing the corporate veil is not a doctrine at all, in the sense of a coherent principle or rule of law. It is simply a label often, as Lord Sumption observes, used indiscriminately to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a body corporate reaffirmed by the House of Lords in Salomon. 20 Lord Sumption s judgment, as summarised below, expressed the opinion that lifting the corporate veil as a legal principle has a narrower, more technical meaning than this. Clarity - Lord Sumption s formulation Whilst Lord Sumption considered that the previous case law on the topic was confused, he also felt that there was a clear weight of authority in favour of the principle existing 21. He then took the opportunity to formulate a clear approach. He grounded the principle of piercing the corporate veil in general law, invoking the general doctrine that fraud unravels everything and citing with approbation the following dictum of Lord Justice Denning in Lazarus Estates Ltd v Beasley 22 : No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all transactions whatsoever.. 19 Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [92] per Lady Hale 20 Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [106] 21 Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [27] 22 Lazarus Estates Ltd v Beasley [1956] 1 QB 702, 712 lon_lib1\ \1 5

6 In short, where a benefit from a law was obtained by dishonesty, the general law should disregard it. On examining the authorities Lord Sumption concluded that this outcome applied equally to the dishonest use of corporate legal personality 23. Lord Sumption sought to explain the previous inconsistencies in the earlier case law by drawing a distinction between concealment and evasion. In his view, confusion had arisen as a result of these two approaches having been applied indistinctly. In certain cases the corporate structure had been used to conceal the wrongdoing of the controller; in others, the controller had used the corporate structure to evade an existing obligation. In the concealment cases, this was not really piercing the corporate veil at all: the controller had been independently liable all along and had simply used the company structure to try and escape detection. The evasion cases involved the wrongdoing of controllers but an independent remedy was to be provided against their companies so that the controllers did not escape the law. This, said Lord Sumption, was the true case of piercing the corporate veil, in the sense of an independent legal principle. He expressed this principle in the following terms: I conclude 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. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company s separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil....but the recognition of a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company is, I believe, consistent with authority and with long-standing principles of legal policy. 24 This formulation is to be welcomed in that it seeks to clarify the law in this area and it breaks new ground by stating, once and for all, that the principle exists. The judgment emphasises the primacy of the Salomon doctrine by setting clear parameters to its exception, which it bases on the fundamental legal principle that fraud unravels everything. In doing so, Lord Sumption has managed to maintain the sensitive balance between the need to do justice in cases of fraud and abuse and the Salomon doctrine, which is the foundation of our economic and corporate legal system. What is also clear, 23 Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [18] 24 Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [35] lon_lib1\ \1 6

7 however, is that the principle (as Lord Sumption has said) may have limited application, as on the particular facts of any case, other remedies may well be available. The Supreme Court was not unanimous in adopting Lord Sumption s formulation. Only Lord Neuberger and Lord Mance agreed with him and Lord Mance was not so ringing in his endorsement as Lord Neuberger; he thought it was dangerous to circumscribe the rule exactly. As for the other members of the Panel, Lady Hale, with whom Lord Wilson agreed, did not seem to want to decide the point, Lord Clarke expressly did not wish to and Lord Walker disagreed that piercing the corporate veil was a distinct principle of law. The outcome in Prest was determined in favour of Mrs Prest by the Supreme Court applying principles of trust law rather than by application of the legal principle of piercing the corporate veil, but despite the range of views expressed by members of the Panel, Lord Sumption's obiter formulation of the principle has been considered and applied subsequently. Judicial reception In a civil case, the Court of Appeal in Antonio Gramsci Shipping Corporation v Recoletos Ltd 25, handed down a judgment on 19 June 2013 which held that it was not possible to pierce the corporate veil in that case, Lord Justice Beatson referring with approval to the formulation of the legal principle enunciated by Lord Sumption and expressing the following opinion:...it is clear from the decision of the Supreme Court that, in the present state of English law, the Court can only pierce the corporate veil 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. 26 In this case, a judgment had been obtained against a number of companies in respect of an alleged fraudulent scheme in chartering vessels from the Claimant. The relevant charterparties contained exclusive jurisdiction clauses in favour of the courts of England and Wales. The Claimant also sought to pursue the alleged controllers of those companies in England, including Aivars Lembergs. Mr Lembergs resisted the jurisdiction of the English court. An initial attempt to argue that the corporate veil was pierced as against him so as to make him party to the underlying charterparties (and, in consequence, the exclusive jurisdiction clauses) failed following the decision of the Court of Appeal in VTB 27, which had, in the meantime, rejected such an argument. On appeal the Claimant argued that, notwithstanding Mr Lembergs was not a party to the underlying contracts, the corporate veil should be pierced so that he could be treated as having consented to the exclusive jurisdiction clauses under Article 23 of the Brussels 25 [2013] EWCA Civ 730; also known as Antonio Gramsci Shipping Corp v Aivars Lembergs 26 Antonio Gramsci Shipping Corporation v Recoletos Ltd [2013] EWCA Civ 730 at [65] 27 Antonio Gramsci Shipping Corporation v Recoletos Ltd [2013] EWCA Civ 730 at [6] - [8] inclusive lon_lib1\ \1 7

8 Regulation. On finding that the piercing of the corporate veil was a matter for English national law 28, the court held that the principle was not applicable. Notwithstanding his approval for Lord Sumption s formulation in Prest Lord Justice Beatson highlighted that the Supreme Court had not been unequivocal in adopting it 29. He referred to the fact that the Panel as a whole had not wanted to settle the question once and for all and said (obiter): As to further development of the law, doing so by classical common law techniques may not be easy. In Prest's case Lord Sumption (at [28]) identified two underlying principles which he called the concealment principle and the evasion principle. But Lord Neuberger was of the view (at [75] that there is a lack of any coherent principle in the application of the doctrine of piercing the corporate veil, and Lord Walker's view (at [106]) was that it is not a doctrine in the sense of a coherent principle or rule of law but a label. Lady Hale (at [92]) was not sure whether it is possible to classify all of the cases in which the courts have been or should be prepared to disregard the separate legal personality of a company neatly into cases of either concealment or evasion. Absent a principle, further development of the law will be difficult for the courts because development of common law and equity is incremental and often by analogical reasoning. 30 One might, however, say that it is Lord Sumption s formulation in Prest which provides the clarity and principle which has hitherto been missing; Lord Neuberger s reference to the lack of coherent principle in the application of the doctrine seems to refer to the application of the law prior to Prest. However, it remains the case that Lord Sumption s statement was obiter and it followed that the Court of Appeal in Gramsci did not adopt it without reservation. In R v Peter John Sale 31, the Court of Appeal considered Lord Sumption's formulation of the principle in a criminal context. The case concerned confiscation proceedings against the accused under Section 6(4)(c) of the Proceeds of Crime Act The accused had already pleaded guilty to corruption and fraud. Payments had been made by him to an employee of Network Rail in order to corruptly obtain contracts for the company of which he was the sole shareholder and managing director. The proceedings concerned the value of the confiscation order and the question whether the Court should take into account the benefit obtained by the company (the value of the contract in revenue terms) when determining what benefit the accused had obtained from his specific criminal conduct. In other words, could the benefit to the company be attributed to the 28 Antonio Gramsci Shipping Corporation v Recoletos Ltd [2013] EWCA Civ 730 at [64] 29 Antonio Gramsci Shipping Corporation v Recoletos Ltd [2013] EWCA Civ 730 at [65] 30 Antonio Gramsci Shipping Corporation v Recoletos Ltd [2013] EWCA Civ 730 at [66] 31 R v Peter John Sale [2013] EWCA Crim 1306 lon_lib1\ \1 8

9 accused? Did this require the corporate veil to be pierced, whether metaphorically or actually? Lord Justice Treacy in delivering the judgment of the Court of Appeal handed down on 25 July 2013 referred to Lord Sumption s formulation in Prest, sweeping aside any concerns about its obiter status: Whilst strictly speaking the discussion in Prest about piercing the corporate veil was obiter to the decision, it is plain that the Supreme Court was addressing the issue across the law generally and intended to do so. None of the cases cited to or considered by their Lordships were criminal confiscation order cases, but the principles enunciated apply across the board. 32 Applying Lord Sumption s formulation, the Court of Appeal upheld the first instance decision that this was a case in which the corporate veil should be lifted. Although there was no independent legal obligation of the controller which was being evaded by abuse of the corporate structure, the court held that there had been concealment which would justify the court looking behind the corporate structure. The total value of the contract to the company in revenue terms was 1.9 million and the gross profit was approximately 197,000. It was considered disproportionate to make a confiscation order equal to the total contract revenues, but an order was made equal to the value of the gross profit. Sale, and in fact any concealment case, does not really involve an application of the principle of piercing the corporate veil as formulated by Lord Sumption. So why was it referred to by the Court of Appeal in terms which indicated that it was? A previous decision of the Court of Appeal, R v Seager & Blatch from , had decided in relation to confiscation proceedings under the Proceeds of Crime Act, that the corporate veil can be pierced in a number of circumstances, including where an offender does acts in the name of a company which (with the necessary mens rea) constitute a criminal offence which leads to the offender s conviction. 34 The Court of Appeal found that Sale matched this profile. The Court of Appeal in Seager had referred to the corporate veil in its metaphorical sense. So the Court of Appeal in Sale had to do some reformulation in the light of Lord Sumption s trimming of the principle and clarified that the Seager decision was specific to the Proceeds of Crime Act rather than an example of piercing the corporate veil in the strict sense R v Peter John Sale [2013] EWCA Crim 1306 at [20] 33 R v Seager & Blatch [2010] 1 Cr App R (S) R v Seager & Blatch [2010] 1 Cr App R (S) 60 at [76] 35 R v Peter John Sale [2013] EWCA Crim 1306 at [41] lon_lib1\ \1 9

10 In the light of the contrasting judicial responses in Gramsci and Sale, it remains to be seen whether Lord Sumption s formulation will settle the broad principle of the doctrine and whether the lower courts will endorse it. It does have the appearance of a definitive statement of law. However, it seems likely that the caution expressed by a number of their Lordships in Prest will resonate in future cases. The outcome in Prest and looking towards the future Mrs Prest was successful in her appeal and the Supreme Court also endorsed the ruling of the Court of Appeal that the Matrimonial Causes Act 1973 did not give rise to a special jurisdiction to pierce the corporate veil in divorce proceedings, which had been the practice in the Family Division for a number of years. Although not deciding the case on the basis of the legal principle of piercing the corporate veil as formulated by Lord Sumption, the Supreme Court did hold that, on the facts of the particular case, the Petrodel group companies held the properties on resulting trust for Mr Prest and that he had the sole beneficial interest in them. Whilst the intention appears to have been to do justice to Mrs Prest in the circumstances of the case, there is a concern that insufficient consideration was given to the case law relating to resulting trusts and when they arise (and importantly, when they do not). It is outside the scope of this article to consider the trust law implications of this case in any detail, but in view of the findings of fact made by Mr Justice Moylan, it is difficult to conceive that the imposition of a resulting trust was appropriate, there having been no impropriety when the properties were transferred. Their Lordships were clearly unimpressed by Mr Prest's conduct in the course of the proceedings, Lord Sumption noting in his judgment as follows: The proper exercise of [the court s powers to order ancillary relief] calls for a considerable measure of candour by the parties in disclosing their financial affairs, and extensive procedural powers are available to the court to compel disclosure if necessary. In this case, the husband s conduct of the proceedings has been characterised by persistent obstruction, obfuscation and deceit, and a contumelious refusal to comply with rules of court and specific orders. 36 Their Lordships were also seemingly influenced by the fact that it was Mr Prest who had provided the cash to purchase the properties, but to base the grant of relief on the existence of a resulting trust could lead to future argument that transfers of property to, for example, start-up companies did not involve the transfer of the beneficial interest. 36 Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 at [4] lon_lib1\ \1 10

11 That could have dramatic consequences for those who have advanced credit to such companies in reliance on statements of assets contained in statutory accounts. It is possible that arguments taking advantage of the lacunae in the Supreme Court decision will be used in future cases to reopen the discussion on such matters. It is notable that whilst there was much discussion in the Supreme Court of Lord Sumption s bold formulation of the principle of piercing the corporate veil, nothing of note was stated by any of their Lordships in relation to the trust law implications. This remains for consideration on a later occasion. Andrew Legg (Partner) and Oliver Shipway (Associate) in the Litigation and Dispute Management Department of Eversheds LLP lon_lib1\ \1 11