Company Topic 4 Tutorial 2 Piercing the Veil SPTI PDF

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Company Topic 4 Tutorial 2 Piercing the Veil SPTI...

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LLB COMPANY LAW

TOPIC 4 TUTORIAL 2

LLB COMPANY LAW TOPIC 4 VEIL LIFTING TUTORIAL 2 SPTI

LLB (Hons) Programmes

Learning Outcomes

1.

Understand the circumstances in which the courts are willing to pierce the veil of incorporation.

2.

Identify and apply the legislation allowing the veil of incorporation to be lifted.

3.

Analyse the decision of the Supreme Court in Prest v Prestodel Resources Ltd & Others [2013] UKSC 34.

Scenario

Company A is based in the UK and operates as a publishing business. Company A has two wholly owned subsidiaries Company B and Company C which operate in various parts of the world. The two subsidiaries print, publish and sell the books. The sole director of Company A is Margaret, who is also the director of Company B and Company C.

Advise in the following scenarios:

a) Margaret owns a plot of land in Islington, which she agrees to lease to Ingrid and contracts are drawn up. Planning permission to develop the land comes though, and Margaret no longer wishes to lease out the land. She transfers the plot of land to Company A and refuses to lease the land to Ingrid. Margaret has no other assets in her name.

Following Prest, this example may be seen as an example of the evasion principle. The evasion principle applies where the company is interposed for the

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LLB COMPANY LAW

TOPIC 4 TUTORIAL 2

purpose of avoiding an existing legal obligation. However, per Prest, the court will not pierce the veil if there is an alternate remedy available.

In Jones v Lipman it would have been sufficient to have made the order for specific performance against Lipman, requiring him to procure the company, through his control of it, to convey the property to Jones. Arguably such an approach could be taken here and that there is no need to pierce the corporate veil.

b) Margaret agrees to sell Company B to XYZ Limited (a third party). Margaret fails to mention that Company B is facing a massive litigation claim worth £10 million and assures XYZ Limited that Company B is a good financial prospect. XYZ Limited purchases Company B and suffers loss and wishes to claim against Margaret.

This is a simplified example of the principle from VTB Capital Plc v Nutritek International Corp.

Applying this case to the scenario, XYZ Limited would have a claim against Margaret in tort for misrepresentation but the court would not pierce the corporate veil.

c) Company C is based in Dubai. An employee of Company C is injured at work. The employee brings a claim in tort against Company A.

This example is looking for analysis of the decision in Chandler v Cape plc. A parent company will not be liable for the acts of a subsidiary by reason only of its shareholding, but it may have its own duty of care towards employees of the subsidiary. This is not ‘piercing the veil’.

More information required in order to determine if Company A owes a duty of care to the employees of Company C.

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LLB COMPANY LAW

TOPIC 4 TUTORIAL 2

d) Company C primarily runs the international selling operations and makes a high profit. Given the favourable tax regime in Dubai, Margaret wishes to isolate Company C’s profits from the rest of the group.

Company A is required to produce group accounts pursuant to section 399 CA 2006.

This is not an example of piercing the corporate veil. e) Due to fierce competition from internet book publishers, Margaret is forced to wind up Company C. She injects £10,000 of her own money into Company A to keep it running. She secures the debt by issuing a debenture. She then makes a contract to buy four batches of cookery books, hoping in vain to turn the fortunes around of Company A. Business continues to decline and Company A is wound up, owing £18,000 to creditors. The debt is broken down into £5,000 to the suppliers of the cookery books, £3,000 to various unsecured creditors, and the £10,000 to Margaret. Margaret has a number of personal assets.

Again, this scenario is not an example piercing the corporate veil. Instead it is wrongful trading under s.214 Insolvency Act 1986.

Margaret’s liability to the creditors would hinge on whether she knew there was a reasonable chance of Company A avoiding insolvent liquidation and if she took ‘every step’ necessary to minimise loss to creditors. Purchasing the additional books, thereby incurring further liability, may be evidence that she does not satisfy the ‘every step’ defence. The court could order Margaret to make a contribution to the creditors.

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