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A Chink in the Corporate Veil?

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The corporate veil is a fundamental principle of English law that a company has a distinct and separate legal identity from that of its owner (Saloman v A Saloman).

Finance Brief - 1 October 2013

 

The corporate veil is a fundamental principle of English law that a company has a distinct and separate legal identity from that of its owner (Saloman v A Saloman). This distinction ensures that a company cannot be liable for the obligations of the owner and vice versa. Pursuant to this principle, property owned by a company cannot be directly accessed when the owner is being pursued and should therefore remain the property of that company.

The landscape prior to the case

Family investment companies have become increasingly common as a tax efficient means of wealth preservation and protection. However, there has been a reluctance to exploit this method in recent years as a result of the Family Division's willingness to retrieve the assets of the company to achieve an equitable outcome following a divorce between the company owner and their spouse. This practice disregards the separate legal personality of the company from the owner and is known as piercing the corporate veil. Both academics and those practising within the legal profession felt that the Family Courts had overstepped the mark in this regard and were employing this practice too readily. Prest v Petrodel Resources Limited & Ors [2013] UKSC 34 was therefore highly anticipated as the Supreme Court's definitive answer as to the circumstances in which the corporate veil can be pierced.

Prest v Petrodel Resources Limited & Ors

This appeal centred on proceedings for financial remedies following a divorce between Michael Prest (“the Husband”) and Yasmin Prest (“the Wife”). The case primarily concerned the legal position of a number of properties belonging to the Petrodel Group, a group of companies which were wholly owned by the Husband. The issue before the Supreme Court was whether the corporate veil could be pierced in order that the Wife could seek financial remedies from the properties owned by the companies.

Under the doctrine of the corporate veil, the Wife would not be entitled to the properties owned by the Petrodel Group because each company has a separate legal personality to the Husband. Thus, the question for the Court was whether the Husband, who owns and controls the companies, could be said to be identified with them in law by virtue of that ownership and control. If this was found to be the case the court could pierce the corporate veil and disregard the separate personalities of the companies from their owner (the Husband).

The Supreme Court held that there were three possible legal justifications, pursuant to which it might be permitted to make the assets of the companies available to be considered for the financial remedies following divorce proceedings:

  1. In exceptional and limited circumstances, the Court may disregard the corporate veil in order to give effective relief;
  2. Section 24 of the Matrimonial Causes Act 1973 allows the Court to disregard the corporate veil in certain matrimonial cases; or
  3. The companies may be considered to be holding the properties on trust for the Husband.

1. Exceptional circumstances in which the Court may disregard the corporate veil

The Supreme Court concluded that there is a principle of English law which allows the Court to pierce the corporate veil in very restricted circumstances. This principle applies when an individual has existing legal obligations or liabilities, or is subject to legal restrictions or enforcements, which he deliberately evades, or seeks to frustrate, by using a company under his control. The Court may, in these circumstances, pierce the corporate veil in order to prevent the company or the individual controlling it, from gaining that advantage. The existence of such a principle within English Law was reaffirmed, notwithstanding the fact that this principle had no application to the present case, since the Husband did not seek to evade or frustrate any legal obligations he or his companies had.

2. Disregarding the corporate veil in certain circumstances under Section 24 of the Matrimonial Causes Act 1973

The Court rejected the assertion that the corporate veil could be lifted under section 24 of the Matrimonial Causes Act 1973, on the basis that the words of the statute are general and do not suggest that this was the intention of the legislature. The Court confirmed that general words of a statute cannot be read in a way which is inconsistent with fundamental principles of law, unless such a result is required by express words or necessary implication. This was not considered to be applicable in the present case.

3. The companies may be considered to be holding the properties on trust for the Husband

As such, the only remaining legal basis to compel the properties owned by the companies to be included in the calculation of the Husband's estate was if the Court found that the companies held the properties beneficially on trust for the Husband. This could be the case if, for example, the circumstances of the case suggest to the Court that a resulting trust exists between the companies and the Husband. In the present case, all of the properties acquired by the Petrodel Group were acquired before the Group began its commercial operations and began to generate its own funds. The purchases had therefore been funded with the Husband’s money rather than that of the Petrodel Group companies.

This was the primary basis on which the Supreme Court held that the matrimonial home was held on trust for the Husband by the Petrodel Group. In addition, the Supreme Court relied upon the fact that no rent was paid to the Petrodel Group for the family’s occupation of the property, and it was evident to the Court that the Petrodel Group was little more than a vehicle for holding legal title on trust for the Husband.

Consequently, after analysing the known facts of the case, the Court concluded that the most plausible inference was that the properties were held on resulting trust by the companies for the Husband. This means that the Court has implied that the companies held the property for the benefit of the Husband and thereby giving the Husband an equitable or beneficial interest in the properties. As such, although the companies have legal title over the properties, the Court held that this was not the intention and thus the properties could be deemed to form part of the Husband's estate.

Adverse inferences were drawn by the Court in this case, as a result of the uncooperative stance adopted by the Petrodel Group companies throughout the proceedings. The Court concluded that this was a deliberate attempt to protect the properties, since proper disclosure would be likely to expose them to being beneficially owned by the Husband. As it was, there was no reliable evidence to rebut the plausible inference of a resulting trust in this case.

For all of these reasons, the Supreme Court pierced the corporate veil and found that the properties concerned were held by the companies on resulting trust for the Husband. When the financial remedies were ultimately decided, the Supreme Court’s decision gave the Wife financial recourse to the properties, in order to claim a fair proportion of them following her divorce.

Conclusion

The Supreme Court clearly stated that the Court's power to pierce the corporate veil could only be employed in circumstances when "all other, more conventional, remedies have proved to be of no assistance". Thus, the corporate veil should only be pierced in exceptional and limited circumstances where the owner of a company 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.

This judgment, despite ruling in favour of the Wife, has served to give comfort to those who have formed, or wish to form, family investment companies. The practice of the Family Division whereby the corporate veil would readily be pierced in matrimonial cases has been curtailed and clear limitations on the circumstances in which the corporate veil can be pierced have been imposed.

Ultimately, the English Law doctrine that a company can be considered to be a separate legal entity to its owner has been reaffirmed. The message for lenders is that the corporate veil remains firmly drawn and in order for directors and / owners to be on the hook when lending to a limited company, lenders should always take a guarantee.

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