The Corporate Veil: An Ingenious Device
Grantham, Ross, University of Queensland Law Journal
The idea of a legal personality separate from the personality of natural persons has been a part of the common law since at least the 14th century and in the last 150 years the registered company has become the dominant vehicle for the conduct of commerce. Yet despite the ubiquity of the corporate entity fundamental questions remains about the nature of corporate personality, its rationales, and its proper use and scope.
It is thus at once both surprising and unsurprising that within the space of 6 months the Supreme Court of the United Kingdom should have heard two appeals addressing the issue of the power of the court to lift or pierce the corporate veil. As any company lawyer will know, while the existence of a jurisdiction to lift or pierce or ignore the legal personality of the company has been more or less assumed to exist, it is a power that has steadfastly resisted all and any attempts at coherent analysis.
In VTB Capital plc v Nutritek International Corporation (1) their Lordships left the matter up in the air and arguably only contributed to the confusion by calling into question whether such a jurisdiction even existed. However, their Lordships were in very short order presented with another opportunity to consider the issue in Brest v Petrodel Resources Ltd. (2)
Prest concerned a claim for ancillary relief arising out of the divorce of Michael and Yasmin Prest and whether seven residential properties located in the United Kingdom owned by the Petrodel Group of companies, a group controlled by Mr Prest, could be ordered to be transferred to Mrs Prest in partial satisfaction of a lump sum award in her favour as part of the matrimonial property settlement. Mrs Prest's claim in respect of the seven properties reflected the fact that Mr Prest was not resident within the jurisdiction, that he treated the assets of the companies as his own, and that unless they were included in the property settlement it was unlikely that the lump sum order in her favour would be satisfied.
At first instance, Moylan J ordered Mr Prest to procure the transfer of the seven residential properties, legally owned by the Petrodel Group companies, to Mrs Prest. The basis for Moylan J's order was that the Family Division of the High Court enjoyed a sufficiently wide jurisdiction under section 24 of the Matrimonial Causes Act 1973 to pierce the corporate veil and to treat the seven properties as though they belonged to Mr Prest. In the Court of Appeal, however, it was held that there was no justification for the order and that it ought not to have been made.
In the Supreme Court, Mrs Prest sought to justify the order on three bases. First, that the Court was entitled, as a matter of general principle, to disregard the corporate veil. Secondly, that section 24 of the Matrimonial Causes Act conferred a special power to disregard the corporate veil. Thirdly, that the Petrodel companies should be found to hold the seven properties on trust for Mr Prest.
On the facts, their Lordships held that the seven properties were in fact held by the companies in trust for Mr Prest. Although Mr Prest's behaviour was found to be evasive and obstructive, the Court nevertheless found that such evidence as there was gave rise to a presumption that Mr Prest was the beneficial owner of the properties and that Mr Prest had not rebutted those presumptions. (3) Accordingly, as the beneficial owner of the properties, Mr Prest could be ordered to transfer them to Mrs Prest.
While the finding of Mr Prest's beneficial ownership was sufficient to allow the appeal, the major focus of the judgment was the claim based on a piercing of the corporate veil. Despite a clear trend in English company law jurisprudence over the last 20 years to limit the grounds upon which the corporate veil might be pierced or disregarded, (4) the Family Division had pursued an independent line of reasoning. The practice in the Family Division was that the court could pierce the veil when it was 'just and necessary', (5) where the company was the alter ego of the spouse (6) or where it was necessary to give effect to the objectives of the matrimonial property legislation. …