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Piercing the corporate veil

14 April 2013

Piercing the corporate veil

Published in Leasing World, 1 March 2013

The idea that incorporated bodies can be treated as legal entities, separate to their directors or shareholders, has been a fundamental principle of UK company law since the case of Saloman v A Saloman & Co Ltd in 1897. As an independent legal entity, any contracts which the company enters into cannot generally be enforced against its “controlling parties”, whether shareholders or directors. Similarly, any liability incurred individually by the controlling parties cannot be enforced against the company.

In recent times, however, there has been a move by the courts to ‘pierce the corporate veil’, and hold these ‘controlling parties’ liable. David Wood, partner in the banking and finance team at DWF, considers the extent of this attempt by the courts, and the implications for those controlling incorporated bodies.

Historical position: when can directors of incorporated companies be held accountable?

Despite the position of incorporated companies as separate legal entities, there has long been recognition that where directors were personally involved in a fraud against a funder, albeit where the borrowing was by the corporate entity, liability could be established against them in the tort of deceit. Similarly, where a director is personally involved in the conversion of an asset (for example, sale of the asset by the company), this can give rise to their liability, on the basis that they are acting as an agent of the company - an agent being personally liable for the conversion.

When can the veil be pierced?

More recently, attempts to enforce liability against individuals controlling incorporated companies have been met with less success, for example in cases where loans have been made to the limited company.

One such example is VTB Capital Plc v Nutritek International Corp [2013] UKSC 5. In this case, the Supreme Court rejected any attempts to treat the owners and shareholders - who were accused of fraudulent misrepresentation - as also being parties to the loan facility. However, while criticising existing authorities where the veil of incorporation had been pierced, the Court was not prepared to come to any final conclusion about if, and when, the veil could be pierced, leaving the issue for the court to grapple with on a future occasion. In doing so, while it examined existing authorities, it did not come to any definitive decision about whether the Court of Appeal’s finding in the same case was correct, ie that it is only appropriate ‘to pierce the corporate veil’ where special circumstances exist, indicating that the company was a mere facade concealing the true facts.

The five-fold test

In VTB Capital, the Court of Appeal had suggested that there was a five fold test based upon a set of principles laid down in Faiza Ben Hashem v. Shayif [2008] EWHC 2380 (Fam):

  • Ownership and control of a company are not themselves sufficient to justify piercing the veil.
  • The court cannot pierce the veil, merely because it is perceived that to do so is necessary in the interests of justice, even when no unconnected third party is involved.
  • Some ‘impropriety’ must exist in order for the court to pierce the corporate veil.
  • This impropriety “must be linked to use of the company structure to avoid or conceal liability”.
  • The court must show that the wrongdoer had control of the company and there was impropriety – ie misusing the company as a device or facade to conceal wrongdoing

Piercing of the veil in action

In the recent decision of Caterpillar Financial Services v Saenz Corporation [2012] EWHC 2888 (Comm), the judge allowed a judgement to be enforced against an individual over an asset held by a company, where the individual was found to have been the controlling owner of the asset, despite there being no clear evidence that they had any interest as shareholder in the company.

In contrast, in the matrimonial case of Petrodel Resources Ltd v Prest [2012] EWCA Civ 1395, the Court of Appeal resisted any attempt to allow financial provision to be made against a company with substantial assets despite the husband being established as the sole owner of that company.

In most instances, the possibility of recovery from an individual or a company where the principal liability lies with a company or vice versa should still be considered, but will, in reality, be rare, unless the claim is for deceit or conversion. Otherwise, the Court of Appeal’s decision in VTB Capital suggests that liability could be based upon evidence of some impropriety which is “linked to the use of the company structure to avoid or conceal liability." However, the issue could yet be subject to further consideration in the Supreme Court.

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