Jurisdiction - Hong Kong
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Asia Pacific – Corporate Legal Identity: Effective shield?
28 August, 2013
 

Corporate legal identity: effective shield?

 

We look at the UK Supreme Court’s recent pronouncement in Prest v Petrodel Resources Ltd & Ors UKSC 34 on the doctrine of ‘piercing the corporate veil’. Generally, English law (and many other common law jurisdictions) treats the company’s legal identity as distinct from its shareholders. Thus, the rights and liabilities of a company are separate from its shareholders, and any property is its own. This fundamental principal of legal separation was established in Salomon v A Salomon and Co Ltd AC 22

 

The UK Supreme Court’s decision

 

The UK Supreme Court in this case has clarified that that there is a general principle of English law that enables the Court (in very limited circumstances) to pierce the corporate veil, and thus deprive the company or its controller of the advantage they would have otherwise obtained by the company’s separate legal personality. The company’s rights, liabilities, property etc may then be identified with those of its controller. 

 

This was a divorce case, with Mrs Prest being finally successful in her bid for the transfer of seven properties owned by companies controlled by her husband, a wealthy oil executive, in satisfaction of the divorce settlement. The husband was the sole beneficial owner and controller of the companies. 

 

The Supreme Court found in favour of Mrs Prest, but on the basis that the properties, while legally owned by the companies, were in fact held on resulting trust for Mr Prest. While dismissing piercing the corporate veil as a legal basis in the current case, Lord Sumpton stated that “the principle that the court may be justified in piecing the corporate veil if a company’s separate legal identity is being abused for the purpose of some relevant wrongdoing is well established in case law. The difficulty, however, was to identify what a relevant wrongdoing was. Often cases simply refer to the use of a company structure as ‘facade” or “sham”, terms which beg too many questions to provide a satisfactory answer. Rationalising the cases therefore, Lord Sumpton found they fell within two distinct principles: concealment and evasion. Much confusion had been caused by failing to distinguish between them. In fact, only in cases of evasion should the Court be allowed or need to pierce the corporate veil, as elaborated below.

 

The concealment principle

 

Where there has been an interposition of a company or perhaps several companies to conceal the identity of the real actors behind them, then the Court need not disregard the facade (or pierce the corporate veil) as it is only looking behind it to discover the facts the corporate structure is concealing. Thus the following cases did not involve piercing the corporate veil, even if the term was used in the original judgment:

  • an injunction against a man enforcing a restrictive covenant not to compete, where the man subsequently formed a competing company in which his wife was the shareholder (Gilford Motor Co Ltd v Horne Ch 935);
  • specific performance against a man who sold the same property first to the plaintiffs and then to his own shelf company (Jones v Lipman 1 WLR 832) and
  • a claim against a man who diverted secret funds to his company, away from the plaintiff (Gencor ACP Ltd v Dalby 2 BCLC 734). 

 

It can be seen that in all of these cases, the facts disclose a legal relationship between the company and its controller which give rise to legal or equitable rights of the controller over the company’s property, thus making it unnecessary to pierce the corporate veil. 

 

The evasion principle

 

The evasion principle is a much more limited principle. Where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company, then the Court may pierce the corporate veil for the purpose (and only for the purpose) of depriving the company or its controller of the advantage that they would have otherwise enjoyed. Thus Lord Sumpton found that the following cases were decided on the evasion principle:

  • a separate injunction against the company in Gilford Motor Co Ltd v Horne (see above), as the company was a “mere cloak or sham” to allow the man to compete with his former employer; and
  • specific performance against the shelf company in Jones v Lipman (see above) on the basis that the company should be treated as having the same obligation to convey the property to the plaintiff as its shareholder did, even though it was not a party to the contract of sale.

 

On the facts of the present case, the evasion principle had no application as there was no evidence that Mr Prest, in organising the properties and the companies in the way he had, had sought to avoid any obligation relevant to the present proceedings. The properties were vested in the companies long before the marriage broke up. Mr Prest’s purpose was more wealth protection and the avoidance of tax. It follows that the piercing of the corporate veil could not be justified in this case by reference to any general principal of law.

 

Comment

 

Whilst the UK Supreme Court in this case achieved justice through a different route, namely the finding of a resulting trust, it has clarified that there is a general principle that the Court may pierce the corporate veil in the very limited circumstances that it identified. Similar factors for piercing the corporate veil have been identified in previous Hong Kong cases such as Winland Enterprises Group Inc v Wex Pharmaceuticals Inc CA. That case was also based on similar UK authorities which the Supreme Court had considered and clarified in this decision. Similar reasoning may well be followed in Hong Kong decisions going forward. In the UK, this decision has already been applied in Antonio Gramsci Shipping Corp & Ord v Aviars Lembergs EWCA Civ 730

 

 

For further information, please contact:

 

Damon SoPartner, Hogan Lovells

damon.so@hoganlovells.com

 

Rachel Guan, Hogan Lovells

rachael.guan@hoganlovells.com

 

 
 

 

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