Prest v Petrodel Resources Ltd - important changes to the piercing of the corporate veil
Nicholas Grier, M.A., LL.B., W.S.
The Supreme Court inPrest v Petrodel Resources Ltd[1]has taken the opportunity to restrictthe occasions when the corporate veil may be lifted.
A wealthy Nigerian oil-trader, Michael Prest,[2] divorced his wife, Yasmin, butrefused to pay his wife any of the lump sum payments or maintenance to which she was entitled in terms of their divorce.In the words of Lord Sumption,“the husband’s conduct of the proceedings has been characterised by persistent obstruction, obfuscation and deceit, and a contumelious refusal to comply with rules of court and specific orders.”[3]Prest was formerly an executive with the colourful oil trader, Marc Rich, who died in 2013, having spent many years on the run from the American courts for sanction-busting and tax evasion.
When the enforcement proceedings relating to the divorce settlement were being heard in the lower courts, Moylan J., used his powers under the Matrimonial Causes Act 1973 s.23-25to order that Prest should procure the conveyance of the matrimonial home to his ex-wife and make various other payments. In addition Moylan J. ordered the transfer of seven UK properties, legally owned by British companies that Prest controlled, to Prest’s ex-wife in partial satisfaction of a lump sum order. The judge directed those companies to execute such documents as would give effect to the transfer to the wife of the properties.
The transfer of the matrimonial home took place, but thedecision relating to the seven properties was appealed by the companies that Prest controlled. They sought to set aside the judge’s order on the grounds that the judge had no jurisdiction to make this order.
The decision was appealed to the Supreme Court. All the Justices of the Supreme Court clearly thought that Prest should be made to pay the sums due under the divorce settlement. Lord Sumption found a way.
The companies that Prest controlled, and which owned the seven properties, had been in existence for some years, and in some cases had owned the properties before Prest’s marriage. There was no suggestion that the companies had been set up as a method of avoiding any legal obligations, or that the companies were being run dishonestly. While Lord Sumption might have wished to pierce their corporate veils to make the companies transfer the properties, he felt unable to do so because there had been no attempt to hide anything. There was no evidence that the companies were deliberately set up to evade an obligation or frustrate the operation of law, these grounds being, in his view, the occasions when the veil should be pierced.[4]
Having failed in this respect, Lord Sumption turned to section 24 (1)(a) of the Matrimonial Causes Act 1973 which empowers a judge to make an order requiring one party to the marriage to transfer to the other “property to which the first-mentioned party is entitled, either in possession or reversion”. MoylanJ. had made an order under that section requiring the companies to transfer the properties on the grounds that since Prest had the effective control of the companies, Prest was in the same position as he would have been if he were the beneficiary of a bare trust or the companies were his nominees.[5]The effect of Moylan J.’s assumption was to disregard the corporate veil in the context of matrimonial disputes and specifically when one party had control of a company.Lord Sumption indicated that there were no special virtues applicable to the Matrimonial Causes Act 1973 which allowed company law matters in matrimonial disputes to be treated any differently from any other company law matters.[6]Merely because someone has control of a company does not mean that that person is the beneficial owner of the company’s assets.[7] If the controller of a company were deemed to be the beneficial owner of his company’s assets, it could mean that an honest controller, who had respected the separate legal personality of the company, could find himself the beneficial owner of his company’s assets when he had no intention of being in that position.[8]
Moylan J. may have erred on the corporate veil point, but an order under section 24(1)(a) was still possible if Prest could be found to be entitled through “possession or reversion” to the properties. Lord Sumption decided that the properties owned by the companies were indeed owned beneficially by Prest by means of a resulting trust, rather than by piercing the corporate veil.
A resulting trust is a specific term of English law. “Resulting” in this context is from the Latin, resultare, to spring back, meaning that under certain circumstances a transfer may not be seen as final and despite the transferee’s apparent ownership of the asset, the ownership “springs back” to the transferor. A common example is when an asset is transferred to another person or company for a particular purpose, but that purpose is not the one that the asset is used for, or the purpose is impossible to fulfil. The transferee only holds the asset as a resulting trustee for the transferor who is the beneficial owner of the asset, and in these circumstances the asset “springs back” to the transferror.[9] Megarry VC stated in Re Sick and Funeral Society of St John's Sunday School, Golcar,[10] that "A resulting trust is essentially a property concept; any property that a man does not effectually dispose of remains his own".The important word here is “effectually”. Although Presthad transferred the properties to the various companies, sometimes only for £1,given the smallness of the consideration,the reluctance of the companies to comply with any of the previous orders from the courts, and in particular the refusal to give details of the completion statements or loan agreements for the purchases of the various properties, it was acceptable to draw the adverse inference that the companies were acting as resulting trustees for Prest, and that Prest retained the beneficial ownership of the properties. In that case the properties constituted assets that “sprang back”to him personally. As the properties were his,even if the titles to the properties were in the companies’ hands, the companies could be required to transfer the properties to his wife. The essential point was not who controlled the companies, but for whose benefit the companies owned the properties.
In the process of coming to this solution to Mrs Prest’s difficulties, Lord Sumption gave the concept of piercing of the corporate veil a thorough examination. Lord Sumption and Lord Neuberger were both determined to set out for the future the law on corporate veil-piercing, and they have restricted it only to those occasions when a company is being used to evade a legal obligation or frustrate the operation of law. Other recent corporate veil cases,VTB Capital plc v Nutritek International Corpn.[11] and Chandler v Cape plc[12] show a similar reluctance to pierce the veil, neither of these cases coming within those grounds.[13] Lord Neuberger’s judgement in Prestalsolooked at piercing the veil in the Commonwealth and in the USA.[14]Defeated by the absence of consensus on when veil-piercing was permissible, he decided that it was almostimpossible to specify exactly when the corporate veil should be pierced, and that perhaps the whole concept should be abandoned.[15] Hethen conceded that, given the weight of previous cases, Lord Sumption’s limited formula, of piercing the veil only where there was evasion of a legal obligation or the frustration of the operation of the law, was probably acceptable[16]–except where Parliament specifically allowed for it in statute.[17]
So what is meant by evasion of a legal obligation or frustration of the operation of law? A good example in Lord Sumption’s eyes[18] was Gilford Motor Co. Ltd v Horne[19] where Horne unsuccessfully tried to avoid a restrictive covenant, preventing him soliciting former clients, by using a company (owned by his wife and an employee) to solicit them instead.[20]
By contrast, many other past cases, in Lord Sumption’s view, do not, strictly speaking, involve veil-piercing, but either are examples of concealment or occasions when some other method, rather than veil-piercing, would achieve the proper result.For example, in Trustor A.B. v Smallbone,[21] a director concealed misappropriated assets in a company. At the timethat company’s veil was pierced and the funds returned to the true owners. Lord Sumption said that this case, albeit coming to an acceptable result, was not a case where veil-piercing should have taken place. It was more that the company was concealing the funds as agent or nominee for the director and the company was a knowing recipient of the funds.[22]As an example of an alternate remedy being available, where there is fraud, the presence of an intermediary company ostensibly committing the fraud is irrelevant, as fraud never leaves the fraudster. Lord Rodger in Standard Chartered Bank v Pakistan National Shipping Corporation, (No.2)[23]pithily stated it thus:Culpa tenet suos auctores.[24]
Overall, to use Lord Sumption’s own words, “There is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then 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 otherwise have obtained by the company's separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil. Like Munby J inBen Hashem,[25] I consider that if it is not necessary to pierce the corporate veil, it is not appropriate to do so, because on that footing there is no public policy imperative which justifies that course.”[26]
So where does this leave us? The whole point of company law is that the corporate veil should generally protect the directors and shareholders, and this case maintains that view. All the Justices of the Supreme Court agreed with Lord Sumption’s point in the paragraph above. Their reasons for doing so may not have been entirely consistent, Lord Neuberger in particular being at variance with Lord Sumption as to when exactly concealment took place. However, the overall point is that the corporate veil is not to be lightly pierced and where it is pierced it should be on the two grounds indicated. It is of course a great deal easier to pierce the veil where both the company and the individuals are easily identified, (perhaps by being single member companies), and when it is possible to see the company being used to get round the individual’s obligations. This case does not resolve some of the wider issues for companies such as directors’ apparent ability to walk away from any responsibility for highly questionable activity – the topical example being banks’ sales of PPI – but this case does not pretend to deal with such matters. It restricts veil-piercing to two specific grounds and for other matters, some other method will be needed if a director, or as the case may be, controlling shareholder, is to be found liable.
And what happened to the unhappy couple? As at mid-November 2013, Prest was facing possible proceedings for contempt of court. This was because Prest had still not made the payments to his wife, apparently being unable to do so because he wasneeding surgery to remove tumours in the arches of his feet.[27]Finally, it is perhaps ironic that this case features an individual who so conspicuously evaded his own obligations and frustrated enforcement of court decrees against him. To his credit at least he did not use his companies to do so.
[1][2013] 2 AC 415.
[2] Details of Prest’s background and his business career, in his own words, may be found at . Another view of his business activities (and indeed Marc Rich’s) may be found at .
[3] Per Lord Sumption at 4.
[4]Per Lord Sumption at 36.
[5] Per Lord Sumption at 39.
[6] Per Lord Sumption at 40.
[7] Per Lord Sumption at 41.
[8] Per Lord Sumption at 42.
[9]Barclays Bank Ltd v Quistclose Investments Ltd [1970] A.C. 567;Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 A.C. 164.
[10][1972] 2 All ER 439
[11][2013] UKSC 5, [2013] 2 WLR 398.
[12][2012] 1 WLR 3111.
[13] It is interesting, however, that in the very recent case of Cramaso LLP v Viscount Reidhaven’s Trustees, (UK Supreme Court, 11 February 2014), the trustees tried to maintain that they could not be held liable for a statementmade about the benefits of a lease of a grouse moor when the person to whom the statement was made was not the corporate body that ultimatelyleased the moor. The person to whom the statement was made used a limited liability partnership (of which he was a member) to take a lease of the moor. The statement turned out to be inaccurate. The Supreme Court did not accept the trustees’ view, and held that it was foreseeable that the individual to whom the statement was made might not necessarily choose to take a lease of the moor in his own name but might instead use a corporate body in whose name the lease ultimately might be taken. Most cases of veil-piercing are to make a director or member liable for something that he is trying to avoid by using a corporate body. Here the veil is being “parted” (for want of a better word) to allow a benefit to a member to be attributed to his limited liability partnership.
[14]Prest, per Lord Neuberger at paras.75 to 78.
[15] Per Lord Neuberger at 79.
[16] Per Lord Neuberger at para.81.
[17] As for example, Insolvency Act 1986 s.43, and Matrimonial Causes Act 1973 s.37.
[18] Or so he says at para.29. Ironically, Lord Neuberger does not seem to share Lord Sumption’s view of this case, as may be seen at paras. 69-72 where Lord Neuberger seems to suggest that this case could have been decided by reference to agency rather than piercing the veil.
[19] [1933] Ch. 935.
[20] Another example Lord Sumption quotes with approval here is Jones v Lipman[1962] 1 WLR 832.
[21][2001] 3 All E.R. 987.
[22] In a sense, it makes no difference whether the funds were being hidden in a company or in any other agent’s bank account: whoever had the funds was required to return the funds to the true owner.
[23] [2002] 3 W.L.R. 1547.
[24] This succinct phrase is not easily rendered into English. Not only does it mean that someone who does something improper cannot pass the blame or liability onto his subordinates, but it also means that the responsibility for an improper act attaches to or remains with the person who arranged it.
[25]Ben Hashem v Al Shayif[2009] 1 FLR 115.
[26]Prest, per Lord Sumption at 35.
[27] See