‘Piercing the corporate veil’ is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries (such as the jurisdiction of England and Wales) usually uphold this principle of separate personhood, but in exceptional situations may ‘pierce’ or ‘lift’ the corporate veil.
While it has widely been held that ‘piercing the corporate veil’ could only occur in very limited circumstances it appears that those circumstances may have recently been widened. This case is the first time that the House of Lords or Supreme Court has held that a court may, in certain circumstances, pierce the corporate veil, in the absence of specific statutory authority to do so.
In Prest v Petrodel Resources Ltd & Ors, the Supreme Court discussed the principle of English law which enables a court in very limited circumstances to pierce the corporate veil. This can only happen 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. When this occurs the court may then ‘pierce the corporate veil’ for the purpose of depriving the company (or its controller) of the advantage which they would otherwise have obtained by the company’s separate legal personality.
In his leading judgment, Lord Sumption highlighted that the principle had no application in the present case but sought to give some clarification on how and when the courts would look to use this power.
In the present case a wife had sought an order, in ancillary relief proceedings following a divorce, for the transfer to her of properties owned by companies. The companies were wholly owned and controlled by the husband. The husband had misapplied the assets of his companies for his own benefit, but in doing so he had neither concealed nor evaded any legal obligation owed to his wife. In addition he was not guilty of concealing or evaded the law relating to the distribution of assets of a marriage upon its dissolution.
The legal interest in the properties had been vested in the companies long before the marriage broke up. Whatever the husband’s reasons for organising things in that way, there was no evidence that he had been seeking to avoid any obligation relevant in these proceedings. It followed that the piercing of the corporate veil could not be justified here by reference to any general principle of law, but the raising of the issue shows that a court can bear it in mind if it sees evidence of wrongdoing. Even without the other party relying on relevant case law.
Source: Practical Law