prest v petrodel resources limited and others evasion principle

The Claimant made demands on the first and second defendants and subsequently terminated the loan agreements. But … One of Mr Prest’s failings was to provide funding without properly documented loans or capital subscription. But they disagreed that it should be used as a last resort remedy. HFW acted for Caterpillar Financial Services in a successful application for summary judgment in respect of a declaration that a company was an alter ego corporate vehicle of the defendant. Where there has been concealment of liability, he argued, there will be no need to pierce the corporate veil because, as Lord Neuberger agreed, all that would be required would be to look behind the veil to establish the true actors. . It is not an abuse to cause a legal liability to be incurred by the company in the first place. June 12, 2013 ... that there is a limited principle of English law which applies when a person is ... the veil should not be pierced even where the evasion principle applies, if other appropriate remedies are available to the claimant. Prest v Petrodel Resources Limited and others [2013] UKSC 34. Family lawyers always get very excited about decisions handed down by the Supreme Court; after all, they don’t come very often. This poses the least problems for the Salmon principle. This essay will argue the decision has done little to fault the Salomon principle. The claimant made an application to amend its particulars of claim to incorporate a contractual claim and argued that the corporate veil should be pierced so that the defendants could be held jointly and severally liable with the borrower on the basis that they controlled the actions of the borrower and they had used the borrower as a device to conceal their impropriety. Thus concealment was only used when the controllers of a company were concealing their identity and the court was quite ready to look behind the “façade”, to discover the truth. [33] Lastly Lord Clarke was of the view that the distinction had not been the subject of submissions and it would have to be before it was fully adopted. Mrs Prest appealed to the Supreme Court. Trustor AB v Smallbone (No 2) [2001] EWHC 703 Prest v Petrodel Resources Ltd UKSC 34, [2013] R v McDowell [2015] EWCA Crim 173. The judgment of the Supreme Court in Prest v Petrodel Resources Ltd [2013] UKSC 34 was eagerly anticipated by family and corporate lawyers alike. control it gained considerable publicity in Prest v Petrodel Resources Ltd & Others UKSC 34.The case played out some of the historical tensions between the Family and … The evasion principle on the other hand was when the people behind the company were using it separateness to evade a legal responsibility they themselves had personally. It is not an abuse to rely upon the fact (if it is a fact) that a liability is not the controller’s because it is the company’s.”[30] Lord Sumption endorsed Munby J in Ben Hashem v Al Sharif and then stated that the “piercing the corporate veil” doctrine is an important although has a limited place in English law.[31]. Mr Justice Eder emphasised that at the time the loan agreements were entered into, the Guarantor had told the Claimant that the Property was his asset and no mention of the Company had been made nor had the third defendant indicated that his interest in the Property was by way of a shareholding in the Company. The relatively short judgment in the United Kingdom Supreme Court case of Prest v Petrodel Resources Ltd1 (herein, Prest) has garnered vociferous interest from academics and practitioners. (2013) 1 Private Client Business 4-42 individuals with clear goals of protecting their assets. The Court of Appeal in VTB Capital v Nutritek International Corpn[19] adopted the above six articulated principles. In a landmark judgment delivered on 12 June 2013 in the case of Prest v Petrodel Resources Ltd and Others1, the United Kingdom Supreme Court (UKSC) reviewed the law relating to piercing the corporate veil. My tenant has moved out leaving possessions in my property – what can I do? The Supreme Court has just handed down its judgment in the landmark case of Prest v.Petrodel. [4] Lord Macnaghten explained: “The company is at law a different person altogether from the subscribers…”. Only where it can be proved that the corporate structure is being used to conceal or avoid a liability will the protection ordinarily provided by the corporate veil be at risk. Usually the strict principle of independent corporate existence (Salomon v Salomon Co Ltd [1897] A.C. 22) is applied and the courts will regard the company as separate from its members and the veil will not be pierced. The three companies, each in the substantial ownership of the husband, challenged the orders made against them saying there was no jurisdiction to order their property to be conveyed to the . The court therefore had jurisdiction to make a transfer order. Lord Sumption felt that the authorities showed that there was a set of circumstances in which the company was used as a vehicle of evading the law as dishonest for the purpose. The evasion principle is where the company is involved in a sham and calls for piercing the veil. So great has been the interest generated, amongst company and insolvency lawyers as well as family lawyers, that it is unnecessary, in this article, to recite either the material facts of the case or the convoluted procedural … This was recently demonstrated where a subsidiary company was no longer in existence and the court imposed a duty of care on the parent company for the health and safety of the employees of its subsidiary (Chandler v Cape Plc [2012]). The Supreme Court has recently given judgment in the case Prest (Appellant) v Petrodel Resources Limited and others (Respondents), following an appeal from the Court of Appeal. The Supreme Court unanimously overturned the Court of Appeal’s decision. Throughout the proceedings the Guarantor had asserted that the Property was owned by the fourteenth defendant (the Company) and that he had no beneficial interest in it. John Wilson QC examines a ground-breaking Supreme Court ruling on the separate identity of a corporate entity. Munby J surveyed non-family and family cases on “piercing the corporate veil” in the case ofBen Hashem v Al Sharif [17] and from there articulated six principles to be applied in “piercing the corporate veil” type cases. The Judge went on to say that “exceptionally…this is a case where there are no contemporaneous documents whatsoever to support the assertions made by [the Guarantor], whereas the contemporaneous documents which emanate from the [the Guarantor] himself are completely to the contrary…”. This has why the doctrine has faced so much criticism. Abstract. The courts are often presented with the question of whether a company is an independent legal entity in cases where litigants are trying to recover from opponents and it is discovered that the contracting party is a brass plate company with no assets but part of a larger, profitable group. The claimant was unable to recover the loan by way of the security provided and alleged that fraudulent misrepresentation by the first defendant induced it to enter into the facility agreement and that the other defendants were jointly liable. The first and second defendants defaulted under the loan agreements. He also agreed that concealment cases do not involve piercing the … The Claimant made an application for summary judgment for a declaration that Company was the alter ego corporate vehicle for the Guarantor and that the corporate veil should be pierced to allow the judgment obtained against him to be enforced against any or all assets belonging to the Company. One of the main grounds relied upon by the trustees in the application was the “evasion principle”, (so named by Lord Sumption in his leading judgment in Prest v Petrodel Resources Limited and others [2013] UKSC), pursuant to which the Court can depart from the fundamental principle that a company has a separate legal personality from that of its members. Lazarus Estates Ltd v Beasley [1956] 1 QB 702. They owned a substantial matrimonial home in the UK and a second home in Nevis. Demands were also made on each of the guarantors of the loans, the third to ninth defendants. [18] The court would then be minded to “pierce the corporate veil” in exceptional circumstances for the purposes of providing a remedy for the improper act that those controlling the company had done. Lord Neuberger, who gave the court’s judgment on piercing the corporate veil in VTB Capital, agreed with Lord Sumption that cases fall into two types, concealment and evasion. In order to show that a corporate structure has been used as a device to conceal impropriety, the impropriety must first be identified to the court. The issue for the Supreme Court was how to ensure that, particularly in cases of divorcing spouses and in single-man companies, company law could not be used as a tool to conceal assets or avoid liability in relation to those assets, whilst maintaining the integrity of the Salomon principle. Mr Justice Eder said that “the court will only pierce the veil so far as is necessary to provide a remedy for the particular wrong which those controlling the company have done. Lord Neuberger expressed his views of this, “I agree that, if the court has power to pierce the corporate veil, Munby J was correct in Ben Hashem v Al Shayif [20] to suggest that it could only do so in favour of a party when all other, more conventional, remedies have proved to be of no assistance (and therefore I disagree with the Court of Appeal in VTB,[21] who suggested otherwise.”[22] Moreover the court of Appeal when adopting the above six articulated principles stated: “the relevant wrongdoing must be in the nature of an independent wrong that involves the fraudulent or dishonest misuse of the corporate personality of the company for the purpose of concealing the true facts.”[23], Lord Sumption felt the principle of concealment was commonplace “legally banal” and did not require piercing or disturbing the principle set down in Salomon. In addition, the Guarantor was trying to sell the Property at the time of the freezing injunction application. In light of the documentary evidence the Judge decided that the assertions of the Guarantor were not credible. Here it seems to me that the particular wrong which [the Guarantor] has done, is that he has mis-used the company as a device, in effect, or is now seeking to do that.” On this basis Mr Justice Eder found that the Claimant was entitled to a declaration that it could lift the corporate veil as far as the Property was concerned and that any judgment against the Guarantor could be enforced against the Property. He regarded the “piercing the corporate veil” as “a final fall-back” solution which would infrequently arise. Lord Sumption in the Supreme Court embarked upon a survey of the cases in this area in order to avoid the uncertainty and to discover the principle that underpins the “doctrine’s” invocation. One of the most persuasive factors considered by Mr Justice Eder when considering the fifth principle was that the documentary evidence showed the Guarantor to be the ultimate owner and controller of the Company. Criminal Law, White Collar Crime & Road Traffic Cases. Both sides of the profession were affected differently. Shipowners frequently and legitimately structure their group companies by incorporating single purpose vehicle companies as vessel-owning entities. The eighth and ninth defendants, individuals, both provided guarantees in respect of the loan to the second defendant. Ownership and control of a company are not sufficient in themselves to allow the veil to be pierced. He pointing out that there exists an array of principles that achieve the same result and one of these is “the law defines the incidents of most legal relationships between persons (natural or artificial) on the fundamental assumption that their dealings are honest.” [15] He cites Lord Denning in Lazarus Estates Ltd v Beasley [16] who states: “Fraud unravels everything”. Although it is very rare that piercing of the corporate veil is allowed, there have been sporadic attempts by litigants to do so, such as in the Court of Appeal case (VTB Capital Plc v Nutritek International Corp and others [2012]), in which the claimant bank had provided US$225 million under a facility agreement. [8] Perhaps it can be argued that this is not even a doctrine, but a thing that all have struggled to categorise. A further net worth statement provided by the same accountant 16 months later also identified the Guarantor’s assets to include a “residence in Fulham” with a current value of US$3.2 million. In his words the distinction should not be “definitively adopted unless and until the court has heard detailed submissions upon it.”[26]. What they are trying to present is a view that “piercing the corporate veil” can take on so many shapes and forms. For the court to pierce the veil the wrongdoer’s intentions may be considered, but in any case it must be shown that they controlled the company and used it as a facade to conceal their wrongdoing. Salomon v Salomon [1896] UKHL 1. Lord Sumption considered that the more limited evasion principle had been properly applied by the courts in only a small number of cases. Facts: Mr Prest was an oil-trader. Prest v Petrodel Resources Ltd & Others [2013] UKSC 34; [2013] All ER (D) 90 (Jun), is a landmark case which is of considerable interest to corporate and insolvency lawyers, as well as family lawyers. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. The doctrine was a “potentially valuable judicial tool to undo wrongdoing in some cases where no other principle is available”, provided that there was a coherent approach that courts could follow. Private Law Tutor © 2018 All Rights Reserved. Lord Sumption distinguished the concealment and evasion principle: “The concealment principle is legally banal and does not involve piercing the corporate veil at all. In doing so, the Supreme Court has ordered divorced husband, Michael Prest, to transfer to his former wife, Yasmin Prest, properties held by companies owned and controlled by him, as part of a £17.5m divorce award. The decisions Lord Sumption highlighted illustrated a broader principle that “governs cases in which the benefit of some apparently absolute legal principle has been obtained by dishonesty”. Prest and piercing the veil: Prest v Petrodel Resources Ltd 2013 – When a couple divorces, either spouse can make a claim for ancillary relief. It is simply a label – often as Lord Sumption observes, used indiscriminately – to describe the disparate occasions on which some rule of law produces apparent exceptions to the principle of the separate juristic personality of a body corporate reaffirmed by the House of Lords inSalomon v A Salomon and Co Ltd”. The implications of Prest v Petrodel Resources Limited' (News and Publications, 2013) accessed 20 th December 2015 25 Ibid 26 [1939] 4 All ER (Ch) 27 Shepherd N, 'Petrodel v Prest: cheat's charter or legal consistency?' Introduction. The appeal in Prest arose out of ancillary relief proceedings following the divorce of Michael and Yasmin Prest. This article will critically evaluate the significance of the Prest v Petrodel Resources Ltd decision in light of the corporate veil doctrine. In this case, the court recognised that there may be times in which it is appropriate to pierce the veil and ignore a company’s separate … It will examine the concealment and evasion principle espoused by Lord Sumption. The documents included a letter that the Guarantor had written to the Claimant prior to the funds being advanced attaching a net worth statement from a Greek certified public accountant that showed one of the Guarantor’s assets as a “residence in Fulham, 3,500,000 USD”. Lord Neuberger took the view that in both Horne and Lipman only the concealment principle came into play, so there was no requirement to “pierce the corporate veil.” Lord Lord Neuberger felt this was a useful tool for the judiciary. Indeed, one rather cynical commentator has argued that Lord Sumption “almost seemed relieved” that the veil could not be pierced in Prest because it meant he did not need to determine the “definitive” circumstances in which the veil may be pierced in the future. Piercing the corporate veil: a new era post Prest v Petrodel. The borrower subsequently defaulted on the loan. Thus momentarily suspending the separateness of the corporate structure to see what was happening behind the company, an “act of curiosity”. It will present the view the Law Lords had of the “doctrine” to show it was not clear. His lordship went on to observe that this principle had been affirmed Trustor AB v Smallbone (No 2) in which it was also established that the dishonesty must involve company law being used as a sham or façade to disguise the true ownership of property. It was evidenced that the first defendant was residing at the Property and using the address for the registration of and correspondence for a number of other companies. The Claimant obtained a judgment against the third defendant (the Guarantor), in the hope that it could be enforced against a residential property (the Property) declared by the Guarantor as one of his assets prior to the loan being advanced. Another was to take funds from the companies whenever he wished, without right or company authority. The case was originally heard in the family court as an application for ancillary relief by the wife her divorce case. The Judge accepted that the reference to a “residence in Fulham” was a reference to the Property which the Guarantor asserted that he did not own at the time of the summary judgment hearing nor at the relevant period. Three of the companies of which Mr Prest was the majority shareholder appealed to the Court of Appeal, in which the majority criticised not only Moylan LJ’s dicta but the general practice of the family courts to use the MCA to pierce the corporate veil and asserted that in the absence of abuse of the Salomon principle, the law did not permit this. The funds were used by the Russian borrower, a company, to facilitate acquisitions from the first defendant which was a British Virgin Islands company, owned and operated from Russia. Then a concluding remark will be made about what the other judges thought. Whether or not the company was incorporated with deceptive intent, the courts will want to see that it was being used as a facade at the time of the relevant transaction(s) and a remedy will only be provided in respect of the particular wrong that has been committed. 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