NEW TRENDS IN PIERCING THE CORPORATE VEIL (CONSERVATIVE V LIBERAL APPROACHES)

3 DECEMBER 2013

Dr Aleka Mandaraka – Sheppard Arbitrator LSLC – Maritime Business Forum

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NEW TRENDS IN PIERCING THE CORPORATE VEIL (CONSERVATIVE V LIBERAL APPROACHES)

Under English law

Under USA Rule B

attachment

Under South Africa

associated ship arrest

Under Greek law

SC case

Under French law

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3ENGLISH LAWTHE UNYIELDING ROCK OF CORPORATE VEIL

• Salomon v A Salomon (1897): a century old principle:Corporate • Separate juristic personality• Separate rights, responsibilities, and assets from

shareholders • Provides way of limiting liability • encourages business development by non-interventionism

• NOT ALLOWED BY LAW TO PIERCE THE VEIL, EXCEPT IN SPECIAL CIRCUMSTANCES

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HOW STRONG IS THE ROCK OF SALOMON?

• Most advanced legal systems abide by the principle • But no international uniformity

• When the law permits exception to the rule, the effect of piercing is drastic:

• disregard of corporate personality

• Depriving company or its controllers of advantages they would have obtained by company’s separate personality

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QUESTIONS EXAMINED BY ENGLISH COURTS:

Would piercing corporate veil be applicable:

• For interests of justice?

• To what impropriety of controllers?

• If there are other remedies in law?

• To hold controllers liable under corporate’s contract?

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LIFTING OR PIERCING VEIL

• Lifting (ordering evidence to peep behind veil for certain legal purpose)

• is distinguished from piercing (ultimate result – sanction - remedy) • See Coral Rose (1991) per Staughton LJ • But these terms are confusingly used indiscriminately in many

cases

• Now ‘Concealment’ cases are equated to lifting – not piercing: (per Lord Sumption – in Petrodel) court is looking behind the veil to discover true facts AMS - LSLC

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7PIERCING VEIL – HISTORICAL OVERVIEW

• 1897 to 1966, HL could not overrule itself during this period

• Salomon rule applied faithfully

• Gilford Motor v Horne (1933) and Jones v Lipman (1962) had been considered (on their facts) classic cases for piercing • In former, a solicitor set up a company to avoid a covenant by

previous employers (injunction obtained to prevent him)

• In latter, Lipman set up a company to avoid a conveyance transaction and transferred land to company (specific performance granted) – equitable remedies AMS - LSLC

8PIERCING VEIL – HISTORICAL OVERVIEW

• In 1969 Lord Denning MR – encouraged lifting of veil

• (Littlewoods Mail Order v IRC) and 1976 (DHN Food Distributors v Tower Hamlets)

• for interests of justice – • basis: corporate structure one economic unity • brought uncertainty to safety of corporations

• Interventionist years until early 1980s

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PIERCING VEIL – HISTORICAL OVERVIEW

In 1978 Lord Keith disapproved of the Denning decisions in Woolfson v Stratclyde • Reaffirmed Salomon

• Stated (obiter): ‘appropriate to pierce corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts (meaning a deliberate dishonest purpose)

• Decision had strong and persuasive influence

• In Re Company (1985) CA allowed piercing for interest of justice: but corporate structure used by controller to divert assets to avoid liabilities

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10PIERCING VEIL – OVERVIEW

• In 1988 Lord Donaldson MR in Evpo Agnic crystallised legitimacy of one-ship companies (SA jurisdiction undermines it)

• In 1989 Adam v Cape CA: • further support of non-intervention with corporate structures

• rejected piercing on basis of one economic unity and interest of justice• may be one entity for economic purposes but not one unit for

legal purposes

• Cape had used corporate form legitimately AMS - LSLC

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PIERCING VEIL – OVERVIEW

• Freezing injunctions obtained e.g Kensington International v Congo (2005) against Vitol and controllers of company

• In Linsen v Humpuss (2011) evidence of abuse of corporate structure – good arguable case that

• purported sales of vessels to 3rd def were shams to render enforcement of judgment against 1st def more difficult

• But Flaux J discharged the freezing injunction – 3rd def not liable under underlying contract for chartered hire

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PIERCING VEIL – OVERVIEW

• In family division judges followed less rigid approach: on basis of ‘what is just and necessary to protect families after divorce

• But Munby J in A v A said (2007):

• there is not one law of ‘sham’ in the Chancery division and another in the Family division – there is only one law of ‘sham’ to be applied by all courts

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NEW TREND-LIMITATIONS? PETRODEL V PREST (2013)

• ‘sham’ or ‘façade’ considered by Lord Sumption in Petrodel as begging too many questions

•Don’t give answer to what is relevant ‘wrongdoing’ by controllers

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NEW TREND – WHAT IMPROPRIETY?

• Petrodel: If piercing the veil has any role to play, • There must be both control by shareholder and impropriety

• The impropriety is in relation to deliberate evasion of existing and independent liabilities of the controller

• whose enforcement the controller deliberately frustrates by interposing the company’s personality

• No piercing of veil if there is another remedy in law – no justice imperative AMS - LSLC

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NEW TREND – LIMITATION - VTB CAPITAL V NUTRITEK

• Question: how far the scope of exception to Salomon be extended?• Could controllers become parties to company’s contract?

• Burton J held in Gramsci v Stepanovs (2011):arguable case to pierce veil to permit an action against controllers under jurisdiction cl of contact

• Disapproved of by CA and indirectly overruled by SC in VTB Capital (2013): • Held: no direct contractual right to jurisdiction

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NEW TREND – LIMITATIONS TO PIERCING VEIL

• VTB Capital: no extension of scope of piercing veil to hold controllers contractually liable to claimant for debt of company

• Principle could not be invoked to create new liability

• Declined to pierce veil when there are other remedies available e.g. tort of deceit or equitable remedies

• Flaux J had held same in Lindsay v O’Loughnane (2010) and Warren J in Dadourian v Simms (2006) AMS - LSLC

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NEW TREND – LIMITATIONS TO PIERCING VEIL

Lord Neuberger in VTB Capital and in Petrodel: • ‘piercing veil is a potentially valuable tool to undo wrongdoing in

some cases, where there is no other remedy available’ (narrow rule)

Lord Sumption in Petrodel: • ‘the recognition of a limited power to pierce veil in carefully

defined circumstances is necessary if the law is not to be disarmed in the face of abuse’ (perhaps broader rule?)

• WHAT DOES IT MEAN? Over to Simon and Robert  • THANK YOU

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