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Student ID: 77304966

Course: LLM in International Business Laws

Module: Corporate law

Module leader: Dr Gerald Swaby

Coursework title: Formative Assessment – Corporate Law

Coursework due date: 24/03/2023 at 4 PM UK Time

Word count: 1116

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 Formative Assessment
Corporate Law

A. Introduction

Corporate veil piercing is a legal doctrine that allows a court to ignore the separate
legal personality of a company and treat it as a mere extension of its shareholders or
controllers. This is done in exceptional circumstances where a company is being
used to conceal the true position or to evade an existing legal obligation.1

This article critically evaluates the given comment and the approach taken by the
court to piercing the veil in Prest v Petrodel Resources Ltd2.

B. Piercing the Corporate Veil

The concept of corporate veil piercing is well-established in UK law. The principle of

separate legal personality was established in the landmark case of Salomon v A
Salomon and Co Ltd3, where the House of Lords held that a company is a separate
legal entity distinct from its shareholders. However, the courts have recognized that
in certain exceptional circumstances, it may be necessary to pierce the corporate veil
to ensure that justice is done.

The leading case on corporate veil piercing in the UK is Prest v Petrodel Resources
Ltd. In that case, the Supreme Court emphasized the importance of substance over
form and suggested that the court would look beyond the legal form of the company
to the underlying reality of the situation. However, the decision did not provide a
clear test for piercing the veil and left the principles guiding the same uncertain.

The European Union (EU) has also recognized the principle of separate legal
personality of companies. Article 54 of the Treaty on the Functioning of the European
Union (TFEU) provides that companies incorporated in accordance with the laws of a
Member State shall be treated in the same way as natural persons. However, the EU

1
Paul Davies, Introduction to Company Law (Oxford University Press, 4th edn, 2016), p. 218.
2
Prest v Petrodel Resources Ltd [2013] UKSC 34.
3
Salomon v A Salomon and Co Ltd [1897] AC 22.
has also recognized that in certain circumstances, it may be necessary to pierce the
corporate veil to prevent abuse of the corporate form.4

C. Evaluation Of The Comment Made By Gregory Allan

Gregory Allan's remark serves to underscore the ongoing disagreement over the
legal standards governing the ability of courts to pierce the corporate veil. Because
to this, courts now treat veil-piercing on a case-by-case basis, which creates
ambiguity and unpredictability.

In Prest v Petrodel Resources Ltd, the UK Supreme Court dealt with the issue of
veil-piercing in the context of family law proceedings. The case involved a dispute
between a husband and wife over the ownership of assets held by companies
controlled by the husband. The wife argued that the assets held by the companies
should be treated as the husband's property and be available for division as part of
the divorce settlement. The Supreme Court held that the corporate veil could be
pierced in exceptional cases where a company is used to evade an existing legal
obligation or to conceal the true facts.

However, the decision in Prest did not provide clear guidance on the principles
guiding veil-piercing. Lord Neuberger, who delivered the leading judgment,
acknowledged that there was no single test for piercing the veil and that it was a
matter of "evaluating the facts in any given case." The decision emphasized the
importance of substance over form, suggesting that the court would look beyond the
legal form of the company to the underlying reality of the situation.

Despite the lack of clarity, the decision in Prest has been cited as an authority on
veil-piercing in subsequent cases. For instance, in VTB Capital Plc v Nutritek
International Corp5, the Supreme Court referred to the decision in Prest and
emphasized the importance of substance over form. Similarly, in Petrodel Resources
Ltd v Fairfields Solicitors6, the Court of Appeal cited Prest as authority for the
proposition that the court may pierce the corporate veil where a company is used to
conceal the true position.

4
Luca Enriques, 'Piercing the Corporate Veil in Europe' in Eva Lomnicka and Vanessa Finch (eds), European
Corporate Law, 2nd edn (Cambridge University Press, 2020), p. 123.
5
VTB Capital Plc v Nutritek International Corp [2013] UKSC 5.
6
Petrodel Resources Ltd v Fairfields Solicitors [2018] EWCA Civ 1732.
However, there have been criticisms of the decision in Prest. Some commentators
have argued that the decision fails to provide clear guidance on the principles
guiding veil-piercing and may result in uncertainty and unpredictability.7 Others have
criticized the decision for failing to distinguish between the different types of veil-
piercing, such as piercing the veil for fraud or piercing the veil in the interests of
justice.8

The lack of clarity on the principles guiding veil-piercing has led to inconsistency in
the application of the doctrine. For instance, in Adams v Cape Industries Plc9, the
court held that the corporate veil could not be pierced merely because a subsidiary
company was a "puppet" of its parent company. However, in Chandler v Cape Plc10,
the Court of Appeal suggested that the corporate veil could be pierced where the
parent company had knowledge of the subsidiary's wrongdoing and had failed to
take action.

In light of the uncertainty surrounding veil-piercing, some commentators have

suggested that there is a need for a more principled approach to the doctrine. For
instance, in Salomon v A Salomon and Co Ltd, the House of Lords emphasized the
importance of the separate legal personality of companies.

Similarly, in Prest, Lord Sumption suggested that there should be a clear distinction
between cases where veil-piercing is necessary to prevent abuse of the corporate
form and cases where the company is a façade for the controlling shareholder. It is
therefore important for the courts to provide clear guidance on the principles guiding
veil-piercing in order to ensure consistency and predictability in its application.

D. Conclusion

In conclusion, while the decision in Prest provides some guidance on the

circumstances in which the corporate veil may be pierced, it leaves open the
question of the principles guiding veil-piercing. This lack of clarity has resulted in
uncertainty and unpredictability in the application of the doctrine. It is therefore

7
Gregory Allan, ‘To pierce or not to pierce? A doctrinal reappraisal of judicial responses to improper
exploitation of the corporate form’ (2018) J.B.L. 7, 559-583, 572.
8
Umakanth Varottil, 'Doctrine of Piercing the Corporate Veil: Recent Developments in the United Kingdom'
(2014) Singapore Journal of Legal Studies 109, 118.
9
Adams v Cape Industries Plc [1990] Ch 433.
10
Chandler v Cape Plc [2012] EWCA Civ 525.
important for the courts to provide clear guidance on the principles guiding veil-
piercing in order to ensure consistency and predictability in its application.

Submitted By:

Yash Bhargava

Student ID: 77304966