PIERCING THE CORPORATE VEIL POST PREST - V- PETRODEL RESOURCES

LIMITED

3rd December 2013

Simon Rainey QC and Robert Thomas QC,

www.quadrantchambers.com

Prest v Petrodel Resources Ltd

Where are we now?

What does it mean?

Prest v Petrodel Resources Ltd

Uncertain:

Obiter

Lack of unanimity between the Judges

Prest v Petrodel Resources Ltd

Evasion Principle

Lord Sumption’s formulation endorsed by Lords Neuberger and Mance

Some others unwilling to commit once and for all

And others sceptical that there is a principle at all

Prest v Petrodel Resources Ltd

Concealment Principle

Nothing to do with piercing the corporate veil

Described by Lord Sumption as “legally banal” and to be “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”.

Prest v Petrodel Resources Ltd

Concealment Principle

A new unifying or over-arching principle?

If so, what are its scope and limits?

Prest v Petrodel Resources Ltd

Concealment Principle

Little Guidance Provided:

The device of introducing a company “is insufficient to prevent equity’s eye” from identifying it with the person behind the company [Gencor v Dalby]

The company was “a device and sham” held before his face “in an attempt to avoid recognition by the eye of equity” [Jones v Lipman]

Prest v Petrodel Resources Ltd

Concealment Principle

Finding of impropriety not necessary

No requirement of necessity

Prest v Petrodel Resources Ltd

Evasion Principle

Is it of any practical use?

Prest v Petrodel Resources Ltd

Evasion Principle

Only to be used to prevent the abuse of corporate legal personality

And only to the extent necessary to “deprive the company or its controller of the advantage which they would otherwise have obtained by the company’s separate legal personality”

Cannot create a new liability that would not otherwise exist

Prest v Petrodel Resources Ltd

Evasion Principle

Lord Neuberger - a “valuable means of doing [justice]”

But all of the cases are:

1. Decisions in which it was assumed that the doctrine existed but it was rightly concluded that it did not apply on the facts;

2. Decisions in which it was assumed the doctrine existed and it was wrongly concluded that it applied to the facts;

3. Decisions in which it assumed that the doctrine existed and it was applied to the facts but where the result could have been arrived at on some other, conventional basis and therefore it was wrongly concluded that it applied.

Prest v Petrodel Resources Ltd

Evasion Principle

The necessity principle – Ben Hashem [2009] 1 FLR 115

Gilford and Jones – piercing the corporate veil not necessary?

Prest v Petrodel Resources Ltd

Evasion Principle

When will it apply?

The landscape post Petrodel

The landscape post Petrodel

R v Sale [2013] EWCA Crim 1306

Antonio Gramsci Shipping v Lembergs [2013] EWCA Civ 730

The first application of Petrodel: R. v Sale

Piercing the corporate veil in the Crown Court

Asset confiscation proceedings under the Proceeds of Crime Act 2002

The court's task is to assess whether the Defendant has "benefited from his particular criminal conduct". : see Section 6(4)(c) POCA

Extensive jurisprudence at Court of Appeal (Criminal Division): largely ignored by civil practitioners

The first application of Petrodel: R. v Sale

See the Court of Appeal’s decisions in, for example, Dimsey and Allen [2000] 1 Cr App D (S) 497; R v Bassam Omar [2005] 1 Cr App (S) 86; R v Seager and Blatch [2010] 1 WLR 815.

Cited in Gramsci (Round 1 before Burton J.)

In Seager and Blatch (at [76]): "In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced. First, if an offender attempts to shelter behind a corporate façade, or veil to hide his crime and his benefits from it… secondly, where an offender does acts in the name of a company which (with the necessary mens rea) constitute a criminal offence which leads to the offender's conviction, then "the veil of incorporation is not so much pierced as rudely torn away. Thirdly, where the transaction or business structures constitute a "device", "cloak" or "sham", i.e. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts…"

R. v Sale [2013] EWCA Crim 1306

Decision on Appeal from Woolwich Crown Court: 25th July 2013

D pleaded guilty to corruption offences:

D operated an air con / electrical company which he set up in 2004; had turnover of £9M, large staff and trading ‘book’

2006-2008 offered gifts to employee of Network Rail to secure commercial favours and an introduction to Network Rail

Company received three high value contracts, replacing existing suppliers due to the employee’s efforts. Contracts were properly performed.

Company received about £1.9M (gross) in billed work

R. v Sale [2013] EWCA Crim 1306

The court's task under POCA is to assess whether the Defendant has "benefited from his particular criminal conduct".

Crown Court made a confiscation order which represented the total sum paid to the company by Network Rail (i.e. £1.85 - £1.9 million).

The prosecution's case before the judge was that, although those payments were never made to the Defendant, the court should lift the veil of incorporation and declare the total benefit of the Defendant to be in that sum received by the company

R. v Sale : The arguments on the appeal

Accepted as common ground that Petrodel applied.

Appellant’s contentions:

This was not a case where Lord Sumption's "evasion principle" could apply since the Appellant had not interposed the company so as to frustrate or evade the enforcement of an existing legal obligation.

The "concealment principle" did not apply either because the Appellant's position, and that of the company, was always open and public.

In the circumstances the court should concentrate on the Appellant's personal benefit without reference to the company's financial position.

R. v Sale : The decision of the Court of Appeal

Appeal dismissed.

CA accepted that the case was not an evasion case [39]:

“We are not persuaded that this is a case coming within the evasion principle referred to at paragraph 28 of Prest.

This is because in this case there was no legal obligation or liability which was evaded or frustrated by the interposition of the company in this case whereby the interposition of the company would mean that the separate legal personality of the company would defeat the right or frustrate its enforcement. This was a company which existed long before this corrupt conduct, and which existed for bona fide trading purposes: there was no interposition of the sort described.”

R. v Sale : The decision of the Court of Appeal

But held that the case was a concealment case [40-41]:

“In the circumstances of this case, where the Appellant was the sole controller of the company, and where there was a very close inter-relationship between the corrupt actions of the Appellant and steps taken by the company in advancing those corrupt acts and intentions, the reality is that the activities of both the Appellant and the company are so interlinked as to be indivisible. Both entities are acting together in the corruption.”

“Accordingly, insofar as the company was involved, what it did served to hide what the Appellant was doing. ”

But … the CA went on to decouple the POCA jurisdiction from “veil piercing” and to rephrase Seager as a pure POCA test!

Antonio Gramsci (Round 3): Article 23

Antonio Gramsci (Round 3): Article 23

Following VTB v Nutritek, the attempt to hold Lembergs to the jurisdiction clause on contract grounds necessarily failed.

But in both Gramsci Rounds 1 and 2 as a second string, the Claimants argued that as a matter of EU law, even if the result of lifting the veil was not to make the controller of the corporate body party to the contract in English law, the alter ego could still be considered to have “consented” to English jurisdiction under Article 23 of the Brussels Regulation.

The “consensus” necessary to establish jurisdiction under Article 23 is an autonomous EU concept and has to be applied following EU jurisprudence.

Antonio Gramsci v Lembergs [2013] EWCA Civ 730

The argument:

(1) The ECJ recognises deemed consent where no actual consent given, in appropriate cases: Powell Duffryn Plc v Petereit [1992] ILPr 300

(2) Where the facts sufficed to pierce the veil in English law, that was an appropriate case to deem consent

(3) That gave effect to the doctrine of good faith applied by the ECJ : Berghoefer GmbH v ASA SA [1986] 1 CMLR 13

(4) On policy grounds, deeming of consent was appropriate and necessary.

Antonio Gramsci v Lembergs [2013] EWCA Civ 730

The arguments failed but on the policy argument the Court accepted that “There is undoubted force in this submission”.

But expansion of the law post Petrodel would be difficult [66].

“As to further development of the law, doing so by classical common law techniques may not be easy. … Lord Neuberger was of the view (at [75] that there is a “lack of any coherent principle in the application of the doctrine of “piercing the corporate veil”, and Lord Walker’s view (at [106]) was that it is not a doctrine in the sense of a coherent principle or rule of law but a label. Lady Hale (at [92]) was “not sure whether it is possible to classify all of the cases in which the courts have been or should be prepared to disregard the separate legal personality of a company neatly into cases of either concealment or evasion”. Absent a principle, further development of the law will be difficult for the courts because development of common law and

equity is incremental and often by analogical reasoning.”

Thank you for your attention