Prest v Petrodel Resources Ltd (2013)

English Family Law

 

Prest
‘City Buildings’ by Jose Trujillo

‘Piercing the corporate veil’ and the lawful applicability of s.24(1)(a) of Part II of the Matrimonial Causes Act 1973 are uneasily paired to establish liability in this post-matrimonial conflict of property transition, while the extensive evaluation of this mis-applied doctrine in cases of reminiscent yet distinguishable natures gives rise to ponder its continued relevance.

Following the lengthy divorce of a shrewd businessman and his estranged wife, the order of the court to transfer title of a number of properties to the appellant was met with continued evasion and somewhat aggressive objection when the ex-husband consistently went to great lengths in order to frustrate proceedings, and through his refusal to permit the submission of evidence in order to expedite the legal obligation put before him.

First developed in Re Barcelona Traction Light and Power Co Ltd the intended effect of ‘piercing the corporate veil’ was to stymie the deliberate and fraudulent actions of those parties holding controlling shares of limited companies for the sole purpose of self-interest and avoidance of legal duties, while s.24(1)(a) of the 1973 Act provides that:

“[A]n order that a party to the marriage shall transfer to the other party, to any child of the family or to such person as may be specified in the order for the benefit of such a child such property as may be so specified, being property to which the first-mentioned party is entitled, either in possession or reversion…”

However on this occasion there were a number of other properties acquired by the respondent through his established companies, while the majority of the funds used were alleged to have been sourced individually. 

While it was accepted that the matrimonial home would be handed over, the time wasted by the respondent in clarifying his legal and beneficial entitlement to the remaining seven properties led the High Court of Justice to rely upon the above principle in order to establish precise liability and enforce the transfer on grounds that:

“[A]ll the assets held within the companies are effectively the husband’s property. He is able to procure their disposal as he may direct based again on his being the controller of the companies and the only beneficial owner.”

Thus when challenged in the Court of Appeal the appellant argued against the piercing of the corporate veil on grounds that the narrowness of the principle’s design prevented it from such arbitrary application, whereupon the Court upheld the appeal while holding that:

“[T]he only entity with the power to deal with assets held by it is the company.”

Whereupon the case was finally presented before the UK Supreme Court, who took the time to examine previous judicial exercise of this rigid and yet shoe-horned legal moral before upholding the appeal on grounds that transfer of title could take effect through statute, while reminding the parties that:

“[T]he corporate veil may be pierced only to prevent the abuse of corporate legal personality.”

Lifting the Corporate Veil

Insight | March 2017

Corporate Veil
‘NY City Brooklyn Bridge’ by Ylli Haruni

As a doctrine under question, the effects of lifting the corporate veil can be far-reaching if supported through case law, and yet it appears that the judiciary are reluctant to apply it unless under extreme circumstances, and even then with some trepidation.

The primary function of ‘lifting’ or ‘piercing’ the veil of corporations is one of transparency. As is no stranger to the world of enterprise, many an entrepreneur has undoubtedly found themselves at odds with where the boundaries are with conversion of assets, or even fiduciary duties in line with corporate ownership. When matters reach a level that requires legal intervention, the venturing of the courts into financial accounts and expenditure records, is something that rests uneasily on the shoulders of judges.

It is not uncommon after all for businessmen and investors to construct fake companies to provide cover for illegal dealings, no more than shareholders to dominate the actions of their corporations under the guise of boardroom decision making. Paradoxically, it is precisely this subterfuge that beckons court intrusion, and yet for reasons that can be appreciated in their overall meaning, it does not bode well for the victims of those immoral undertakings when the rule of law refuses to fully extend.

Starting at the roots of this clearly under utilised principle, it is important to understand  that supply always creates demand, and so examination of how this doctrine has flourished reveals that the limited liability of incorporation almost invites abuse, regardless of the stakes in hand.

Salomon v Salomon, which dates back to 1897, is considered the birthplace of limited liability, as during the liquidation of a failed business, the shareholder and company were held as separate entities, and therefore unencumbered by obligation to one another. This perhaps dangerous distinction, served well the rule of law, but consequently opened the way to defendants establishing unaccountability for the deviances behind insolvency, or the withholding of property release during matrimonial disputes, as was seen in Prest v Petrodel Resources Ltd and Others, where despite having grounds to ‘pierce’, the judges went instead with beneficial interest accrued through powers conferred under the Matrimonial Causes Act 1973. Since Prest is now considered the leading authority on the protection or exposure of corporate misdeeds, it might pay to look at overseas opinion.

Despite taking a similar vein in most U.S. courts, the small State of Delaware has become reputed as the home for around sixty-five percent of the Fortune 500 companies, and the reasons are clear. Aside from most other county-wide laws shared between States, there appears to be consolidated support for the protection of the corporate veil, under the strongly held belief that without it, the wheels of commerce simply cannot turn. A notable 2014 case Cornell Glasgow LLC. v. Nichols, is now considered the poster boy for the prevention of access to corporate transactions in middle America, however when the facts of the case are examined, there appears no justifiable reason to pierce the corporate veil, despite such clandestine and unprofessional behaviours on the part of the defendants. In fact, when taken in its proper context, the whole matter was tantamount to a classic breach of contract and nothing more.

This over complication of the argument does beg the question of whether claimants are all too quick to attack the character of those accused, in order to alleviate doubts as to a right of claim, where proper evaluation of the facts would likely reveal a swift path to justice that allows reduced costs and minimised court time.

In Canada, the controversial Chevron Corp. v. Yaiguaje has now become the watermark for corporate exposure, coming close to setting a precedent for foreign enquiry into asset liability and covert misdeeds, after the indigenous peoples of Ecuador were subject to extreme pollution through the actions of an overseas corporate subsidiary. While pursuing them through the Canadian courts, and almost becoming a pivotal argument for the extension of ‘piercing’ qualification, it was ultimately overturned in the Superior Court by Justice Hainey, who explained:

“Chevron Canadaʼs shares and assets are not exigible and available for execution and seizure by the plaintiffs in satisfaction of the Ecuadorian judgment against Chevron Corporation.”

This overruling stance (amongst other cases) also fell back on the domestic line taken in Adams v Cape Industries Plc, where it had been decided that:

“Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities.”

While this principle already poses great resistance to those seeking damages, the primary reason the courts declined to lift the corporate veil in Chevron, was simply that since the inception of the claim, no suggestions of fraudulent behaviour were levelled toward the defendants, so no matter how aggrieved the claimants felt, it was held inequitable to overstep the boundaries set by the incorporation and limited liabilities enjoyed by many firms, in order to achieve remedy for damages arising from contractual breach on the part of the actual offending party Texaco; who soon after acquiescing to the judgment bought against them in Ecuador, were taken over by Chevron California (the parent company). In fact quite why the claimants were pursuing Chevron Canada is frankly unfathomable given the background to the matter, therefore it comes as no great surprise that the ruling to ‘pierce’ was quickly dismissed.

So to summarise, it would suggest that on the strength of the cases discussed, it is not really an issue of judicial reluctance as much as a failure for the right matter to present itself. It would also pay to exercise caution when supporting foreign claims that display absolutely no logical bearing on (i) how this confused claim should ever have been initiated, and (ii) why any jurisdiction would move to lend credence to such a fruitless endeavour; while from an equitable perspective, the principle of traceability immediately springs to mind when seeking restitution from companies no longer in existence, and whose assets have long since been laundered.