Prest v Petrodel [2013] UKSC 34: Returning To The Doctrinal Roots Of Corporate Veil-Piercing

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Prest v Petrodel [2013] UKSC 34: Returning To The Doctrinal Roots Of Corporate Veil-Piercing Introduction Fundamental to the theory, study and practice of company law is the doctrine of separate

1 Prest v Petrodel [2013] UKSC 34: Returning To The Doctrinal Roots Of Corporate Veil-Piercing Introduction Fundamental to the theory, study and practice of company law is the doctrine of separate legal personality as established in Salomon v Salomon [1897] AC 22 ( Salomon v Salomon ). The case established that the company at law is different from its subscribers, even when its business may still be managed by the same individuals as it was prior to incorporation. Over the years, courts have found ways to disregard the separate legal personality of a company and to identify the company with those in control of it. This is known as piercing the corporate veil. While courts have allowed veil piercing in a number of situations, until recently there has been no authoritative pronouncement on when exactly the corporate veil can be pierced. However, in the recent landmark decision of Prest v Petrodel Resources Ltd and others [2013] UKSC 34 ( Prest v Petrodel ), the UK Supreme Court has attempted to clearly enunciate the core legal principles behind piercing the corporate veil. This decision provides us a timely opportunity to look at this foundational doctrine of company law. Piercing the corporate veil Courts have in past cases justified veil piercing in a myriad of situations, such as when a company is employed to allow a person to evade legal obligations, commit fraud, where a company is an agent or alter ego of its controllers, where companies are run as a single economic unit, or even when the justice of the case so requires. However, the UK Supreme Court observed in Prest v Petrodel that courts have found it difficult to rationalise the reasons behind veil piercing in a way which satisfies both practical as well as commercial reality, and yet remains in line with the principles established in Salomon v Salomon. Lord Sumption (who delivered the leading judgment) even went so far as to suggest that existing authorities on the subject were characterised by incautious dicta and inadequate reasoning. 1 Rajah & Tann LLP

2 While earlier decisions have employed the use of metaphorical language (e.g. sham or façade), Singapore courts have begun developing a principled approach to corporate veil piercing. Significant justification is now required when a plaintiff pleads for the corporate veil to be pierced. This approach is best captured in Steven Chong J s (as he then was) excellent judgment in the Singapore High Court case of Tjong Very Sumito and others v. Chan Sin En [2012] SGHC 125 ( Tjong Very Sumito ). This is in contrast to the English position where for many years there has been conflicting authority, until the recent decision in Prest v Petrodel. The decision in Prest v Petrodel In Prest v Petrodel, a wife issued a claim for ancillary relief under the UK Matrimonial Causes Act 1973 (the Act ) against her husband. The husband was the sole owner of a number of complexly structured offshore companies. The wife alleged that the husband had used the companies to hold legal title to properties which belonged beneficially to him. She pleaded that the corporate veil should be pierced to identify him as the true owner of those properties, so that they could be transferred to her under ancillary proceedings as part of the pool of matrimonial assets. At first instance, Moylan J held that he could not pierce the corporate veil as the husband had not been guilty of any impropriety in relation to the companies. However, in interpreting the UK statute, he found that s.24 of the Act entitled the court a wider jurisdiction to pierce the corporate veil in ancillary proceedings and accordingly ordered the husband to transfer the properties to the wife. The Court of Appeal by majority reversed the trial judge s findings by holding that unless the corporate personality of the company was being abused for a purpose that was improper or the assets were held in trust for the husband, the judge could not have made the order to transfer the properties. On further appeal by the wife, the UK Supreme Court restored the first instance court s order but decided the case based on trust principles. The UK Supreme Court unanimously rejected the argument for the corporate veil to be pierced but held that based on the available evidentiary presumptions, the properties were held on trust for the husband by the companies and on that basis, could be regarded as part of the shared pool of matrimonial assets. Why is Prest v Petrodel Significant? In a throwback to Salomon v Salomon, Lord Sumption recognised the basic principle that it is not an abuse of the corporate form to rely on the fact that liability belongs to the 2 Rajah & Tann LLP

3 company and not its controller. On the contrary, that is precisely the rationale behind incorporating a company to separate the affairs of both controller and company as a matter of risk allocation. In discussing the English jurisprudence on piercing the corporate veil, Lord Sumption drew a distinction between true exceptions to the separate legal personality doctrine and exceptions that should not be properly described as piercing the corporate veil e.g. statutory exceptions or those based on agency principles. He noted that the term has been used indiscriminately and that justifications based on metaphorical terms like sham or façade are not satisfactory or welcome. Arguing from first principles, Lord Sumption explained that any true exception must be motivated by the public policy consideration that the corporate form should not be abused for wrongdoing, e.g. fraud, malfeasance or evasion of legal obligations. Building on this, his Lordship delivered an authoritative statement that the corporate veil should only be pierced 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. Further, the veil should only be pierced to the extent of depriving the company or its controller of the advantage that they would otherwise have obtained by the company s separate legal personality. His Lordship further noted that if the facts of a case disclose a legal relationship between the company and its controller that would make it unnecessary to pierce the corporate veil e.g. trustee-beneficiary or agent-principal, it would be inappropriate to do so as there will be no public policy imperative which justifies that course. The UK Supreme Court s decision in Prest v Petrodel is to be lauded for 3 reasons: (i) (ii) (iii) It is consistent with legal policy, precedent and is a principled development. It is clear and simple, allowing courts to remain faithful to the doctrinal roots of company law established in Salomon v Salomon. It still allows courts to do substantive justice because it continues to prevent the corporate form from being abused as a vehicle for illegal asset-shielding or general wrongdoing by recognising the important policy considerations behind veil piercing. 3 Rajah & Tann LLP

4 The Singapore Position Singapore cases on piercing the corporate veil have generally been principled. For example, our courts do not recognise that the veil can simply be pierced where the justice of the case so requires, recognising a need for impropriety or wrongdoing before the veil is pierced. The Singapore approach is seen in the Singapore High Court decision in Tjong Very Sumito, which is notable for Steven Chong J s recognition that while there is as yet no single test to determine when the veil should be pierced, there should only be two justifications for veil piercing: (i) Where the evidence shows that the company is not in fact a separate entity, i.e. when the controller uses the company as an extension of himself and makes no distinction between its business and his own; and (ii) Where the corporate form has been abused to further an improper purpose, i.e. to escape personal liability for wrongs personally committed. The justifications avoid the use of ambiguous terms like sham or façade, and is in line with Lord Sumption s judgment in Prest v Petrodel. Concluding Words Both Singapore and UK jurisprudence on veil piercing are heading in the same direction towards a principled approach that takes into account commercial reality. This can be seen in the growing recognition that ownership and control are not in themselves sufficient justifications to pierce the corporate veil. In a shift towards first principles, cases like Tjong Very Sumito and Prest v Petrodel establish that there are very limited circumstances when the corporate veil should be pierced. While the Singapore Court of Appeal has yet to pronounce decisively on this issue, it is clear that our jurisprudence is moving towards a position that avoids the imprecision of earlier local and UK decisions, and this is a welcome development. 4 Rajah & Tann LLP

Contact Mohammed Reza Partner D (65) 6232 0197 F (65) 6225 9630 mohammed.reza@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.

Malaysia, Cambodia, Indonesia and the Middle East. Our Asian network also includes regional desks focused on Japan and South Asia.

5 Contact Mohammed Reza Partner D (65) F (65) mohammed.reza@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is the largest law firm in Singapore and Southeast Asia, with regional offices in China, Lao PDR, Vietnam, Thailand and Myanmar, as well as associate and affiliate offices in Malaysia, Cambodia, Indonesia and the Middle East. Our Asian network also includes regional desks focused on Japan and South Asia. As the Singapore member firm of the Lex Mundi Network, we are able to offer access to excellent legal expertise in more than 100 countries. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or the Knowledge & Risk Management Group at eoasis@rajahtann.com. 5 Rajah & Tann LLP

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