New trends in piercing the corporate veil - PowerPoint Presentation

Slide1

New trends in piercing the corporate veil (conservative v liberal approaches)3 December 2013

Dr Aleka

M

andaraka

– Sheppard

Arbitrator

LSLC

– Maritime Business Forum Slide2

New trends in piercing the corporate veil (conservative v liberal approaches)

AMS - LSLC

2Slide3

English lawThe unyielding rock of corporate veilSalomon 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?AMS - LSLC 5Slide6

Lifting or Piercing veilLifting (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 ? 6Slide7

Piercing 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 7Slide8

Piercing veil – Historical OverviewIn 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 1980sAMS - LSLC 8Slide9

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 liabilitiesAMS - LSLC 9Slide10

Piercing 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 justicemay be one entity for economic purposes but not one unit for legal purposesCape had used corporate form legitimately AMS - LSLC 10Slide11

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 thatpurported 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 AMS - LSLC 12Slide13

New trend-limitations? Petrodel v Prest (2013)

‘

sham’ or ‘façade

’ considered by Lord

Sumption

in

Petrodel

as begging too many questionsDon’t give answer to what is relevant ‘wrongdoing’ by controllers AMS - LSLC 13Slide14

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 14Slide15

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 contactDisapproved of by CA and indirectly overruled by SC in VTB Capital (2013): Held: no direct contractual right to jurisdictionAMS - LSLC

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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

liabilityDeclined 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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