Lifting the Veil of Incorporation - Essay Example

?The paper seeks to critically analyse the Supreme Court’s decision in Prest (Appellant) v PETRODEL Resources and others (respondent) UKSC 34.The paper will then consider whether or not the judgment is consistent with the authorities (other cases) on lifting the veil of incorporation, or whether the court has set a new case authority by this decision. As such, the paper starts by outlining the meaning of corporate veil and this will be followed by a critical analysis of the case drawing examples from different case laws and statutes related to this topic. According to Cillers et al (2004), the association of persons or an organised body can acquire legal personality by way of separate Act. Whenever a company is formed as a separate entity, it acquires the capacity and authority to have its own rights and duties (Gibson, 1988). It can be observed that once the company has been incorporated, it can then be viewed as a separate or independent person with legal rights and liabilities. The popular case of Salomon v Salomon& Co [1897] AC 22 (Hl) illustrates this point. Salomon was the sole owner of the organization and he decides to turn the business venture into a limited company having realised that it had great potential. Salomon got ?10 000 in debentures from the shareholders which were acquired through a bond of the company’s assets. Unfortunately, the deal did not materialise given that the company was later liquidated and the assets were sold and the shareholders were left out. The court upheld that the company was just like Salomon since it was treated just like an individual person. Essentially, it can be seen that the concept of corporate personality is mainly concerned with maintaining the identity of a company through establishing what is known as corporate veil (Gibson, 1988). However, in certain instances, the court ignores the existence of the legal person in what is termed “piercing the corporate veil” (Cillers et al, 2004). As such, the following section of the paper critically analyses the case of the Supreme Court’s decision in Prest v Petrodel Resources in order to establish if it acted within expected authority. Basically, corporate veil can be lifted when the court has deemed it necessary but there should exist certain conditions that can be used to justify the action. Some people tend to use the aspect of corporate veil to suppress other people since it can also act as a shield to protect their properties. Whenever, a company is viewed as a separate entity, it ceases to belong to an individual but it can stand on its own. However, under certain circumstances, it can be seen that this status can be pierced by the court where necessary. The Supreme Court (12,June 2013) case of Prest (Appellant) v Petrodel Resources Limited & Others (Respondents) [2013] UKSC 34 On appeal from: [2012] EWCA Civ 1395, outlines the proceedings for financial remedies following a divorce between Michael and Yasmin Prest. The appellant argues that she should get remedies from the sale of companies belonging to the Petrodel Group which apparently were wholly owned and controlled by Michael Prest, her husband. The Supreme Court case outline also states that “Under Section 24(1)(a) of the Matrimonial Causes Act 1973 (“the 1973 Act”), the court may order that “a party to the marriage shall transfer to the other party…such property as may be so specified, being property to which the first-mentioned party is entitled, either in possession or reversion.” In the judgement of this case, it was unanimously agreed that appeal by Yasmin Prest was valid given that the seven disputed properties were “property to which the [husband] is entitled, either in possession or reversion” hence, they belonged to him. In this case, the respondents argued that the properties belonged to the company not the husband. However, in passing judgement, “the Court confirmed that there is a principle of English law which enables a court in very limited circumstances to pierce the corporate veil” such as the provision of the Section 24(1)(a) of the Matrimonial Causes Act 1973 (Ogier Group, 2013). The court has a jurisdiction to pierce the corporate veil whenever it deems it fit. In some cases, there are some people who are bent on manipulating the legal provisions of the concept of corporate veil to their own advantage. Like in this case, “neither Mr Prest nor the companies had complied with orders for disclosure sufficient to enable the court to fully ascertain the position” since they were hiding behind the element of corporate veil (Ogier Group, 2013). In such a situation, the court has the overall authority to pierce the veil in order to protect the interest of the second part that may be disadvantaged by the provisions corporate veil under the auspices of separate entity where a company is given legal authority to stand on its own apart from the owners. This is not a unique case since there are various cases where the courts used their authority and jurisdiction to lift the corporate veil in order to safeguard the interests of the other people who may have been disadvantaged by this provision. In different circumstances, the court can lift the corporate veil or pierce it in the event that it is used to unfavourably protect the interests of the company as a legal entity while at the same time disadvantaging other people who may also have stakes in the business. Benade (2000) state that in the event that certain aspects of business involve criminal activities at the instigation of the company directors under the guise of corporate personality, then the courts which are designed to enforce the supreme law of the land can decide to lift or pierce the veil. Where the concept of corporate personality is unjustifiably used to suppress other people, the court has a legal right to lift it in order to ensure that justice prevails. This is illustrated in the case of Daimler Co Ltd v Continental Tyre and Rubber Co where the House of the Lords were given a task of identifying the personality of the company members to establish if they were alien or not during First World War. In this case, the court pierced the veil of the corporate personality as a result of the fact that the originality of the members could not be ascertained at that time so it was deemed to be in contravention of the statutory regulations. The court has the overall responsibility of assessing the case in order to establish if the corporate veil is not being abused for the benefit of company owners who may wish to protect their selfish interests under the pretext of this concept. In the case of Prest v Petrodel, the Lords argued that the respondents abused the provision of corporate veil to suit their selfish needs. They also noted that the respondents misrepresented facts while the companies were fully owned by the husband of the appellant. In such a situation, the court invokes its authority and power to pierce this corporate veil in order to ensure that justice prevails. Kleyn & Viljoen (2002), argue that the law is designed to ensure that justice prevails among all parties involved. The law is primarily concerned with ensuring that there is no person disadvantaged as a result of the actions of other people who may be bent on benefiting on the expense of other people. In certain instances, the legal personality can be lifted if the business of the company is carried recklessly with the intent to defraud other people (Havenga, 1996). “This principle was stated in its most absolute form by Denning LJ in a famous dictum in Lazarus Estates Ltd v Beasley [1956] 1 QB 702, 712: “No court in this land will allow a person to keep an advantage which he has obtained by fraud,” The Supreme Court, 2013, p. 9). People who knowingly conduct themselves in such a reckless manner will be liable for all the debts that can be accrued as a result of their actions. For instance, the financial statements of the organization should be made public to all the stakeholders who may be interested in that information. Legal action can be taken if the company attempts to conceal the financial results. Companies that are suspected of carrying illegal activities are also liable for court action and a corporate veil can be pierced. However, in the case of Prest v PETRODEL Resources, it can be argued that the Supreme Court erred in making a decision in favour of the appellant. Whilst the decision is favourable to the appellant in this case, it can also be noted that the same decision can also disadvantage the other members of the company such as the employees. There are other people with major stakes in the seven companies that are being challenged by Prest in order for her to get remedies from the divorce proceedings. Whilst the judgement sounds fair to Prest, it should also be borne in mind that this decision is likely to impact negatively on the majority of the other people with stakes in the company such as the employees. In the event that she decides to implement certain changes in the operations of the companies, the majority of the employees will lose their work and this can negatively impact on their welfare. In making such a decision, the court should also take into account the impact of the judgement on other stakeholders with an interest in the company. The court should try to uphold the company’s separate corporate personality otherwise, they may be negating or undermining the policy as well as the principles that underpin the concept of separate personality (Mallor et al, 2007). The court should not just disregard the company’s legal personality whenever it feels like doing so since this would be in violation of the law. Over and above, it can be concluded that the aspect of separate corporate personality constitutes a very important piece of law which is specifically designed to protect the interests of the company. When a company is formed, it attains a legal personality where it is regarded as a separate entity with legal rights just like any individual person. Under corporate personality, the company ceases to belong to any person but it becomes a legal entity on its own. Whilst this piece of legislation is very important in protecting the interests of the company, it can be seen that there is a tendency by some people to abuse it for the sake of their personal gains at the expense of the other people. Given such a scenario, it can be observed that the court can intervene and it has the sole authority to pierce the veil in order to protect the interests of the other person who may have been disadvantaged by this provision. As illustrated in the case of Prest (Appellant) v Petrodel Resources Limited & Others, it can be seen that the court intervened and gave a favourable judgement to Prest. In passing judgement, the Lords invoked the provisions of Section 24(1)(a) of the Matrimonial Causes Act 1973 and they used it to pierce the corporate veil in order to safeguard the interests of the wife in the divorce case. This is not a unique case given that in similar other cases as discussed above, the courts had to lift the corporate veil in order to ensure that the interests of the other people that were disadvantaged by this provision were protected. On a different note, it can be said that piercing the corporate veil can also disadvantage the company owners and other stakeholders if the judges do not fully take into account the interests of all the parties involved. In order to make sure that justice prevails between the parties involved, a holistic approach has to be taken by the judges so as to be in a position not to infringe on the other people’s rights. References Benade, ML 2000, Corporate Law, 2nd Edition, Butterworth Publishers, London. Cillers,HS & Benade ML 2004, Corporate Law, 3rd Edition, Butterworth Publishers, London. Gibson, GTR 1988, Mercantile & Company Law, 6th Edition, JUTA & Company Ltd, CT. Havenga, MK 1996, “Breach of Directors’ Fiduciary duties: Liability on what basis,” SAMercantile law journal. Kleyn, D & Viljoen, F 2002, Beginner’s guide for law students, 3rd Edition, JUTA. CT. Mallor, PJ 2007, Business Law: The ethical, global, and e-commerce environment, McGraw-Hill international, London. McGregor, L 2000, The human face of corporate governance, Palgrave, London. OGIER Group, 12 June 2013, Prest (Appellant) v Petrodel Resources Limited & Others (Respondents) [2013] UKSC 34 On appeal from: [2012] EWCA Civ 1395. The Supreme Court 12, June 2013. “Prest (Appellant) v Petrodel Resources Limited & Others (Respondents) [2013] UKSC 34 On appeal from: [2012] EWCA Civ 1395” Viewed 17 October, 2013 from:< http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2013_0004_PressSummary.pdf>. The Supreme Court 12, June 2013. JUDGMENT, Prest (Appellant) v Petrodel Resources Limited and others (Respondents). . Read More