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Piercing the Corporate Veil: The Hidden Adversities

Introduction

Piercing the corporate veil is a rule in English and US law targeted at the regulation of corporate activity. It, however, is sometimes considered a good idea to apply the concept in criminal and civil law, for example, in cases regarding fraudulent actions on behalf of the company, its owners, or stakeholders (“Piercing the corporate veil and fraud,” 2013). Critics and scholars have polarized views regarding the application of the concept (Mujih, 2016). This is because the inappropriate interpretation may result in the undesired application of the rule in the future, laying the basis for legally unbalanced decisions regarding the ultimate responsibility of firms and corporations. This paper aims to discuss how piercing the corporate veil doctrine is applied in courts of various instances, using the example of Prest v Petrodel Resources Ltd, and why resorting to this doctrine in inappropriate cases can be incorrect and even dangerous.

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The Doctrine

The doctrine of piercing the corporate veil is used to treat the duties and rights of the company as the liabilities and rights of its shareholders. There is a widespread opinion reflected in Salomon v A Salomon and Co Ltd [1897] AC 22 that a corporation should be treated as a separate legal entity or legal person, which carries the sole responsibility for the company’s activities, debts, and is seen as the sole beneficiary of the company’s credits (Prest v Petrodel Resources Ltd, 2013; Udemezue & Iguh, 2020). However, there were several exceptional cases or situations when the corporate veil was suggested to be pierced.

It should be noted that such a decision would mean putting aside the limited liability rule and making individuals personally liable for the company’s business. Therefore, most courts are reluctant to pierce the corporate veil and use all possible legal rhetorical tools to resort to other means of dispute resolution whenever possible (“Piercing the corporate veil and fraud,” 2013). Positive consequences of the wide application of the limited liability principle include establishing a sound public market of stocks with high liquidity and diversification, which is crucial for the national economies and supports businesses. Therefore, the courts discuss and consider piercing the corporate veil only in extraordinary cases, and usually find alternative ways, presenting the arguments why piercing the veil would be inappropriate.

Applying the Doctrine in Prest v Petrodel Resources Ltd

Prest v Petrodel Resources Ltd is an important case since it demonstrates how the principle of piercing the corporate veil was applied in practice. The landmark judgment in the case was delivered on 12 June 2013 by the United Kingdom Supreme Court (UKSC) (Mujih, 2016).). It was decided to review Section 24 (1) (a) of the Matrimonial Causes Act 1973 which was used in divorce litigations and was referred to pierce the veil.

Three legal bases were cited seen as a sufficient reason to apply the principle. These were: to “give effective relief,” to ensure the transfer of real estate owned by the husband’s companies “under Section 24 of the Matrimonial Causes Act 1973,” and to ensure the mentioned transfer “on the ground that the properties belong beneficially to the husband under the circumstances in which they came to be vested in the companies” (Mujih, 2016, p. 7). In the first instance, the Family Division court “concluded that in the absence of any impropriety, there was no general principle of law which entitled the court to reach the companies’ assets by piercing the corporate veil” (Mujih, 2016, p. 8). This was the decision in the first stage of the case consideration in the courts of various instances.

Noteworthy, in paragraph 68 of the case document, it was stated that the positive decision to pierce the corporate veil was made by the International Court of Justice (ICJ) in Inre Barcelona Traction, Light and Power Co, Ltd [1970] ICJ 3, which is a rare example. However, regarding the case, Prest v Petrodel Resources Ltd orator added that the ICJ should have considered that “in a common law system, the doctrine should be applied by the courts in the absence of specific legislative sanction” (Prest v Petrodel Resources Ltd, 2013). Therefore, piercing the corporate veil doctrine was not eventually applied in Prest v Petrodel Resources Ltd due to the existence of more direct laws and rules regulating the issues in the case.

To be more precise, Judge Moylan J. concluded that the court should pierce the corporate veil under section 24 of the Matrimonial Causes Act 1973. However, the Court of Appeal later reversed the decision and made a warning that “the practice whereby Family Division judges applied rules not relevant to English property and company law when dealing with company-owned assets in ancillary relief applications “now had to cease” (Mujih, 2016, p. 14). Hence, Prest v Petrodel Resources Ltd became a widely acknowledged legal proceeding that demonstrated the need to look for alternative legal tools if such tools exist, in settling proceedings that do not directly relate to the corporate activities of companies.

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Interestingly, Mujih (2016) notes that the decisions made in favor of applying the principle of piercing the corporate veil are widely criticized by lawyers. For example, Mujih (2016) cites Easterbrook and Fischel who shared the opinion that “piercing seems to happen freakishly; like lightning, it is rare, severe and unprincipled” (p. 9). Mujih (2016) also cites Professor Stephen Bainbridge who says that veil piercing is “unjustifiable, unprincipled, rare and arbitrary” and advocates its abolition (p. 9). The scholar also says that, according to Professor Christopher Nicholls, the semantics of the concept ‘piercing the corporate veil’ needs improvement, and, although it was “used by the courts in many distinct contexts,” it is “analytically vague” (Mujih, 2016, p. 10). At the same time, Mujih (2016) cites Professor Kurt Strasser, who argues that “if the rule was so bad, the courts would long have abandoned it” (p. 10). Consequently, most lawyers agree that the doctrine should be used only in exceptional cases.

Notably, Udemezue and Iguh (2020) analyze how the concept of the corporate legal personality is protected in Salomon v. A Salomon and Co Ltd [1897] AC 22 of the UK House of Lords. The scholars state that, although such a principle is useful and acceptable in legal practice, in particular circumstances, fraudsters rely on this principle to deceive creditors and evade debt obligations (Udemezue & Iguh, 2020). In other words, since the concept of the corporate legal personality is used to circumvent laws or in criminal schemes, according to Udemezue and Iguh (2020), the doctrine of piercing the corporate veil prevents the concept from being used for designated purposes. Therefore, the scholars insist on retaining the concept of a corporate legal personality because of its usefulness in preserving the integrity of the corporate world but recognize the existence of circumstances when the principle of piercing the veil can be applied: by the provision of statutes, under the case law, and in criminal cases.

Thus, the application of the piercing the corporate veil doctrine in courts was discussed using the example of Prest v Petrodel Resources Ltd. Resorting to this doctrine in inappropriate cases can be incorrect and even dangerous. Fraudsters may use the concepts of corporate legal personality and limited liability, protected throughout the English legal system, for fraudulent purposes, and the doctrine should be used with particular care. Otherwise, there will be a precedent for its free application, which could undermine the foundations of corporate law.

References

Mujih, E. (2016). Piercing the corporate veil as a remedy of last resort after Prest v Petrodel Resources Ltd: Inching towards abolition? Company Lawyer, 37(2), 39-71.

Piercing the corporate veil and fraud (2013). Web.

Prest v Petrodel Resources Ltd [2013] UKSC 34

Udemezue, S., & Iguh, N.A. (2020). Does Salomon v. Salomon still reign? A disquisition on recent case law on corporate legal personality and lifting the veil. Nigerian Law School, 1(2), 1-19.

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StudyCorgi. (2023, January 12). Piercing the Corporate Veil: The Hidden Adversities. Retrieved from https://studycorgi.com/piercing-the-corporate-veil-the-hidden-adversities/

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