NEW TRENDS IN PIERCING THE CORPORATE VEIL CONSERVATIVE

NEW TRENDS IN PIERCING THE CORPORATE VEIL (CONSERVATIVE V LIBERAL APPROACHES) 3 DECEMBER 2013 Dr Aleka Mandaraka – Sheppard Arbitrator LSLC – Maritime Business Forum

NEW TRENDS IN PIERCING THE CORPORATE VEIL (CONSERVATIVE V LIBERAL APPROACHES) Under English law Under South Africa associated ship arrest Under USA Rule B attachment 2 Under French law Under Greek law SC case AMS - LSLC

ENGLISH LAW THE UNYIELDING ROCK OF CORPORATE VEIL 3 • Salomon v A Salomon (1897): a century old principle: Corporate • Separate juristic personality • Separate rights, responsibilities, and assets from shareholders • Provides way of limiting liability • encourages business development by non-interventionism • NOT ALLOWED BY LAW TO PIERCE THE VEIL, EXCEPT IN SPECIAL CIRCUMSTANCES AMS - LSLC

HOW STRONG IS THE ROCK OF SALOMON? 4 • Most advanced legal systems abide by the principle • But no international uniformity • When the law permits exception to the rule, the effect of piercing is drastic: • disregard of corporate personality • Depriving company or its controllers of advantages they would have obtained by company’s separate personality AMS - LSLC

QUESTIONS EXAMINED BY ENGLISH COURTS: 5 Would piercing corporate veil be applicable: • For interests of justice? • To what impropriety of controllers? • If there are other remedies in law? • To hold controllers liable under corporate’s contract? AMS - LSLC

LIFTING OR PIERCING VEIL ? 6 • Lifting (ordering evidence to peep behind veil for certain legal purpose) • is distinguished from piercing (ultimate result – sanction - remedy) • See Coral Rose (1991) per Staughton LJ • But these terms are confusingly used indiscriminately in many cases • Now ‘Concealment’ cases are equated to lifting – not piercing: (per Lord Sumption – in Petrodel) court is looking behind the veil to discover true facts AMS - LSLC

PIERCING VEIL – HISTORICAL OVERVIEW 7 • 1897 to 1966, HL could not overrule itself during this period • Salomon rule applied faithfully • Gilford Motor v Horne (1933) and Jones v Lipman (1962) had been considered (on their facts) classic cases for piercing • In former, a solicitor set up a company to avoid a covenant by previous employers (injunction obtained to prevent him) • In latter, Lipman set up a company to avoid a conveyance transaction and transferred land to company (specific performance granted) – equitable remedies AMS - LSLC

PIERCING VEIL – HISTORICAL OVERVIEW 8 • In 1969 Lord Denning MR – encouraged lifting of veil • (Littlewoods Mail Order v IRC) and 1976 (DHN Food Distributors v Tower Hamlets) • for interests of justice – • basis: corporate structure one economic unity • brought uncertainty to safety of corporations • Interventionist years until early 1980 s AMS - LSLC

PIERCING VEIL – HISTORICAL OVERVIEW 9 In 1978 Lord Keith disapproved of the Denning decisions in Woolfson v Stratclyde • Reaffirmed Salomon • Stated (obiter): ‘appropriate to pierce corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts (meaning a deliberate dishonest purpose) • Decision had strong and persuasive influence • In Re Company (1985) CA allowed piercing for interest of justice: but corporate structure used by controller to divert assets to avoid liabilities AMS - LSLC

PIERCING VEIL – OVERVIEW 10 • In 1988 Lord Donaldson MR in Evpo Agnic crystallised legitimacy of one-ship companies (SA jurisdiction undermines it) • In 1989 Adam v Cape CA: • further support of non-intervention with corporate structures • rejected piercing on basis of one economic unity and interest of justice • may be one entity for economic purposes but not one unit for legal purposes • Cape had used corporate form legitimately AMS - LSLC

11 PIERCING VEIL – OVERVIEW • Freezing injunctions obtained e. g Kensington International v Congo (2005) against Vitol and controllers of company • In Linsen v Humpuss (2011) evidence of abuse of corporate structure – good arguable case that • purported sales of vessels to 3 rd def were shams to render enforcement of judgment against 1 st def more difficult • But Flaux J discharged the freezing injunction – 3 rd def not liable underlying contract for chartered hire AMS - LSLC

12 PIERCING VEIL – OVERVIEW • In family division judges followed less rigid approach: on basis of ‘what is just and necessary to protect families after divorce • But Munby J in A v A said (2007): • there is not one law of ‘sham’ in the Chancery division and another in the Family division – there is only one law of ‘sham’ to be applied by all courts AMS - LSLC

NEW TREND-LIMITATIONS? PETRODEL V PREST (2013) 13 • ‘sham’ or ‘façade’ considered by Lord Sumption in Petrodel as begging too many questions • Don’t give answer to what is relevant ‘wrongdoing’ by controllers AMS - LSLC

NEW TREND – WHAT IMPROPRIETY? 14 • Petrodel: If piercing the veil has any role to play, • There must be both control by shareholder and impropriety • The impropriety is in relation to deliberate evasion of existing and independent liabilities of the controller • whose enforcement the controller deliberately frustrates by interposing the company’s personality • No piercing of veil if there is another remedy in law – no justice imperative AMS - LSLC

NEW TREND – LIMITATION - VTB CAPITAL V NUTRITEK 15 • Question: how far the scope of exception to Salomon be extended? • Could controllers become parties to company’s contract? • Burton J held in Gramsci v Stepanovs (2011): arguable case to pierce veil to permit an action against controllers under jurisdiction cl of contact • Disapproved of by CA and indirectly overruled by SC in VTB Capital (2013): • Held: no direct contractual right to jurisdiction AMS - LSLC

NEW TREND – LIMITATIONS TO PIERCING VEIL 16 • VTB Capital: no extension of scope of piercing veil to hold controllers contractually liable to claimant for debt of company • Principle could not be invoked to create new liability • Declined to pierce veil when there are other remedies available e. g. tort of deceit or equitable remedies • Flaux J had held same in Lindsay v O’Loughnane (2010) and Warren J in Dadourian v Simms (2006) AMS - LSLC

NEW TREND – LIMITATIONS TO PIERCING VEIL 17 Lord Neuberger in VTB Capital and in Petrodel: • ‘piercing veil is a potentially valuable tool to undo wrongdoing in some cases, where there is no other remedy available’ (narrow rule) Lord Sumption in Petrodel: • ‘the recognition of a limited power to pierce veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse’ (perhaps broader rule? ) • WHAT DOES IT MEAN? Over to Simon and Robert • THANK YOU AMS - LSLC