Piercing Essay - helpful notes. PDF

Preview

Summary

helpful notes....

Description

Piercing the corporate veil: Intro: o While salomon’s separate corporate personality doctrine is the ‘cornerstone of modern co law’, sealy believes that it is a ‘fiction’ because courts may ‘disregard it and look behind the corporate person to its real controllers… to ascribe liability’, known as ‘piercing the corporate veil. o This can happen in exceptional cases at common law and statute; however there are no clear rules or guidelines for lifting the corporate veil and this area of law is vague and confusing. o Recent SC judgement added some clarity?

Main: grounds for lifting the veil: o o

o

Evasion: Prest v petrodel: SC unanimously allowed an appeal by a wife concerning properties vested in several cos belonging to Petrodel Group which were wholly owned and controlled by the husband. Q. whether court has the power to order the transfer of these properties to the wife given that they legally belonged to the cos. Held: the properties vested in cos are held on trust for husband. The trust approach was taken instead of directly piercing the corp veil. o Lord Sumption: held that the concept of piercing the corp veil was limited to when there is deliberate evasion of an existing legal obligation or restriction and there is no other conventional remedy available so as to not be disarmed in the face of fraud. Veil may be pierced to prevent abuse of corporate legal personality.  this statement is inconsistent with def of VP. He says the doctrine is unsatisfactory and confused. It has never been invoked properly and successfully. o He also distinguished evasion from concealment; which is not part of VP court looks behind co form to identify who real actors are and recognise their obligations o VP should only be used as last resort necessity o However, Lord Neuberger’s comment in Prest “no positive evidence of departure from Salomon. Also hannigan argues that restricting VP to one category is deficient its focus on avoidance of pre-existing obligation would exclude egregious wrongdoing.  the distinction between veil-piercing on the ground of evasion and the (non-veil-piercing) concealment principle is difficult to appreciate, if not conceptually-flawed. Hannigan notes that ‘[c]oncealment is inherent in many evasion cases, indeed, evasion is commonly achieved through concealment  Veil-piercing doctrine is narrow in scope, designed to catch rare cases that cannot be decided on the basis of conventional legal reasoning – that is, through contract, equity, torts and any residuum of concealment cases. In Antonio Gramsci Shipping Corpn v. Recoletos Ltd (2014), Court of Appeal noted that this leaves very little scope for judicial development of the doctrine. ??Previous case law: Gilford motor v horne: G had been under a personal obligation because he was subject to a non-competition clause. He sought to incorporate a co and have the co undertake the prohibited activity; servicing motor vehicles.  Tan thinks there was no need for veil piercing in Gilford because the case could've been decided better in a different way. It doesn’t conform to definition of VP. Other grounds: most of them unavailable after prest

o

o

o

o

o

o

Fraud: where SH is misrepresenting something about the business and other party relied upon it to their detriment. Do this to avoid a elgla aobligation or further prohibited conduct. This was the case in re darby; defendants- two undischarged bankrupts with convictions of fraud nominated two others to act as SHs in the incorporation of a co (LIC). LIC had asset; license to work a slate quarry. They also set up another co (welsh). Wanted to sell license to welsh so invited the public to buy securities (didn’t mention the co was theirs). They sold license took money and disappeared. Held: creditors could reach into their assets and have the money repaid. Reaffirmed in VTB capital v nutritek fraud is a valid ground for VP o though it is uncertain if it is a separate ground, per Lady Hale in Prest. o But evasion wasn’t expressed to depend in fraud in prest o Evasion might not require any intention that C rely on a misrep. Sham and façade: is of relevance in commonwealth but perhaps not in Uk after Prest as this would be viewed as concealment. This is based on a ‘Sham; co without substantial operation, façade: hide true dealings between transacting parties they suffer from prob that a sham co or a faced is still a real co, which courts cannot ignore; VTB. o Jones v Lipman: veil was lifted when the co was set up by D to avoid specific performance in relation to transfer of land.  confusing ground Contract: vtb capital v nutritek: C’s argued that the person controlling a co should be held liable as if he had been co-contracting party. This wasn’t the intention of the parties. No need to extend VP doctrine this far. If C’s allegations were sound there would be an action available against the defendant for deceit in contract law and that would be a better course to take it is consistent with the idea the ‘veil-piercing’ should be a principle of ‘last-resort’, per Lord Sumption. Agency: if the co is merely the agent of the SH you should be able to reach into the assets of the principles. Agency is difficult to prove; involves establishing an agreement evidencing assent by the agent to act for and on behalf of the principal. where the company is the ‘alter ego’ of its controller, establishing an agency relationship per Gramophone v Stanley. It can be argued that this is not a true exception to the salomon principles; it is merely an instance where the normal agency principle applies.  would also come under concealment following prest. Statute: Genuine statutory exceptions to the ordinary rule of shareholder limited liability include Insolvency Act 1986, s 214 which creates liability for wrongful trading and can be used against parent companies where they are ‘shadow directors’. Lord diplock in dimbleby v national union of journalists; states that the statutory provision must be in clear and unequivocal language Corporate groups: vp can extend to corp groups  adams v cape industries; significantly narrowed the ability of courts to lift the veil. In this case sub cos were incorporated in the US so that the parent co in the UK could avoid future asbestosis claims in the US. CA reviewed this complex area of law and concluded that they were separate legal entities and the subs were conducting their own business despite being creatures of parent co.  This is consistent with idea from Prest v. Petrodel (2013), that veil-piercing on the basis of evasion arises as a response to company controllers attempting to evade preexisting legal obligations. The structuring of group relations typically concerns future legal obligations not pre-existing obligations.

Alternatives to VP 

Therefore, veil-piercing shall not occur when there is an alternative remedy implicating personal liability of an individual shareholder or parent company, to an outside party. Sealy identified a number of common law actions: Firstly,

contractual arrangements where the parent company will guarantee the obligations of the subsidiary to the third party. Secondly, agency rules making the ‘principal’ liable but control of sole-shareholder or parent company but evidence of agency must be ‘overwhelming’ per Bank of Montreal v Westgrow. Thirdly, trust-relationships where company of single-shareholder or the subsidiary of a group of companies will hold property on resulting trusts, as in Prest. Fourthly, where the insider, usually parent company will be held liable for torts of subsidiary, as in Chandler v Cape, though this will not be often per Thompson v Renwick.

Policy reasons for VP:  as established by Prest VP will occur on rare occasions justified on policy reasons to protect SHs. Therefore no harm having the doctrine when its needed  unsecured creditors who don’t have negotiation power need some of grounds to bring their actions  it protects individuals who have been harmed by subs owned by parents. Policy reasons against VP:  Judicial concern not to create commercial uncertainty and undermine the benefits of incorporation.  hinders investment and entrepreneurs if there is no LL as SHs wealth is not pretected  Having incorporated SHs have a legit expectation that courts will respect the status of entity and apply principle of salomon in ordinary way  wants to protect genuine creditors of the co and doesn’t want to give claimants a level of security which they didn’t bargain for.  If there are other grounds why should we use it as its confusing?  If P chose to remove LL, it would have done so  Eastebrook and Fischel note that limited liability is respected, facilitating separation of ownership and control thus reducing the need for shareholders to monitor company managers, or each other because personal liability of each shareholder is independent of another; it shifts costs of monitoring company from shareholders to credit providers

Conclusion:  The judgements in prest have to some extent added clarity to this area of law however the circumstances where the court can lift the veil are still unclear and more precise guidance is required. The court appear to proceed on a case-bycase basis in deciding whether the corp veil will be lifted...