Veil piercing – legal clarity

To assess the clarity of a legal rule, it is instrumental to consider whether the rule is
comprehensible, coherent, and easily applicable. A clear rule should be readily understood
by legal practitioners, provide a coherent framework for decision-making, and allow for
predictable outcomes in future cases (Bix, 2007). It is uncontroversial that the law of veil
piercing before Prest was messy. In attempting to rationalise the case law in general
principle, Lord Sumption criticised that much of the authority was ‘characterised by
incautious dicta and inadequate reasoning’, and as mentioned the references to façade or
sham ‘beg too many questions to provide a satisfactory answer [to the relevant wrongdoing]’.
Lord Neuberger while recognising that it was not necessary to decide on the existence (and
scope) of the doctrine, noted a ‘considerable force’ to address the matter in Prest due to the
law’s unsatisfactory and confusing status then ([64]). To the same effect, Lord Clarke
concurred that the doctrine’s limits were unclear, and Lord Walker even went further to
suggest that veil piercing was ‘not a doctrine at all, in the sense of a coherent principle or rule
of law’([103], [106]).

In this connection, Lord Sumption’s distinction between the concealment and evasion
principles apparently brings some clarity to the law of veil piercing. As remarked by his
Lordship, the trial judge in the Smallbone case conflated the ‘quite different concepts of
concealment and avoidance’ ([32]). By separating the cases involving a façade or sham
(concealment) from those where the company is used to evade an existing liability
(evasion), the doctrine becomes more comprehensible and coherent. His Lordship’s approach
clarifies the specific scenario (i.e., evasion) in which the court might consider veil piercing,
and helps legal practitioners better understand when the doctrine may be applicable.
Moreover, distinguishing the two distinct legal concepts provides a more structured
framework for analysing cases which involve the misuse of corporate personality, allowing
courts to focus on the underlying improprieties. Notably, Lord Neuberger was also persuaded
by this distinction, commenting the formulation of the evasion principle as ‘sufficiently clear
as to render it unlikely to be raised in inappropriate cases’ ([60]-[61], [81]).

Apart from the distinction, the Prest decision also contributed to the legal clarity in
other ways. There is a large academic consensus that it settled the conflict between the
Family Division and the other Divisions of the High Court in veil piercing cases (Mujih,
2016). As noted by Lord Sumption and Neuberger, some family cases had controversially
pursued an independent line deviating from the settled authority in Adam ([23], [68]). In
Prest, the Supreme Court unanimously rejected the idea that different principles apply to veil
piercing in family law cases, endorsing Munby J’s dissenting view and maintaining that the
MCA 1973 did not provide a distinct power to disregard the corporate veil. This helps ensure
that both the doctrine and property concept are applied consistently across different areas of
law (Hare, 2013). Besides, the decision clarified the law by distinguishing conventional
alternative remedies, such as agency and equity (as in Prest which decided in favour of the
wife on the basis that the companies held the disputed properties on resulting trust for the
husband), from the concept of veil piercing (whether on the evasion principle or other novel
ground) (Mujih, 2016). As mentioned above, the doctrine should not be applied if alternative
remedies are available. This caveat provides clearer guidance for practitioners to consider
which route(s) to plea their claims, and for courts to decide whether to pierce the corporate
veil (in the narrow sense of treating the company’s member as its legal equivalent).
Distinction: difficult to apply?

Notwithstanding Lord Sumption’s apparently compelling account in categorising

previous cases, Hannigan (2013) raised concerns that the distinction between concealment
(lifting) and evasion (piercing) might be difficult to apply consistently and objectively in
practice. Since concealment is inherent in many evasion cases, and thus the authority could
be classified in either category. She claimed that Horne and Lipman can be seen as
concealment cases. Admittedly, there is a conceptual overlap between concealment and
evasion, and indeed the injunction and specific performance were granted against defendants
personally on concealment principle, who were identified as the real actors (in control of the
company). However, the crux of his Lordship’s observation is that, at face value (as conceded
by Lord Neuberger), the company was held liable on the evasion principle because its legal
personality was abused to evade an existing legal obligation or to frustrate its enforcement.
Hannigan was right to say that the court ‘lifted’ the veil to see if the defendants were behind
the relevant companies, but it is equally important to recognise that the court
subsequently ‘pierced’ the veil to identify the companies as subject to the same
obligations of the defendants, by virtue of their ownership. With respect, her analysis did
not fully capture the nuances of his Lordship’s reasoning, focusing primarily on the
concealment aspect without considering the evasion part, which is the basis on which the
injunction and specific performance were granted against the companies.

Similarly, as for Dalby and Smallbone, Hannigan argued that both cases could be seen
as evasion cases because the interposed companies were intended to frustrate the enforcement
measures against their controllers by concealing the whereabout of the secret
profits/misappropriated funds. However, the crucial point is that, as Hannigan conceded, the
company’s separate legal personality was not used to evade an existing liability they
otherwise have had. Insofar as the evasion principle is concerned, there was no basis to pierce
the corporate veil. The existence of the interposed companies might well make it more
difficult to locate the funds in practice ex post, but their separate legal personalities did not
defeat the claims against D and S in any legal sense, for there could be no ex ante claims
before the receipt. The liability of D and S arose because the interposed company
received the money as their agent or nominee. In fact, only with corporate legal personality
can the liability be said to exist. The concealment principle was properly applied to find the
true facts about the relationship between the interposed companies and their controllers.
Furthermore, Hannigan’s analysis appeared circular. If it is accepted, then D and S would be
liable because, by virtue of their ownership, the company’s receipt was treated as legally
equivalent to theirs, and consequently led to the breach of their fiduciary duties. This amounts
to creation of new liability that would otherwise not have existed, which as Lord Sumption
noted in Prest, is the fundamental objection to the doctrine.

Hannigan might be right to point out that the ‘effect of lifting is little different from
the consequences attached to piercing’; but even though both processes could deprive a
person of the advantage otherwise he would otherwise have obtained from corporate
personality, their bases are conceptually different. As mentioned, lifting was based on
conventional, alternative remedies, which despite circumventing the Salomon rule in terms of
outcome, does not interfere with corporate legal personality (Mujih, 2016); as in Dalby and
Smallbone, the analysis would have been the same if the company at issue had been a natural
person instead. By contrast, piercing, if applied, will amount to a true exception of the
Salomon rule. Hannigan also remarked that although the basis for lifting is not determined,
implicit in Lord Sumption’s description of the concealment principle as ‘legally banal’ is an
‘unconstrained jurisdiction’ to look through the corporate veil to identify the real actor
whenever legally relevant to do so. Notably, however unconstrained this jurisdiction
seems to be, it is de facto limited to scrutiny of the facts. Lifting ultimately depends on
whether a conventional remedy is applicable to the facts so identified. On the footing of the
narrow conception of piercing, there is unlikely inconsistency in the application of the
principles in different cases.

Post-Prest: Courts’ understanding in practice

Arguably, some post-Prest cases suggested a misunderstanding of the law (Musk,

2022). For instance, the Court of Appeal in McDowell despite labelling Jennings as a ‘classic
example of the concealment principle’, curiously described its facts as ‘circumstances in
which it was necessary to pierce the corporate veil of the company in order to ascertain the
true position’. This clearly illustrates the confusion surrounding the distinction, as the
concealment principle does not involve piercing. Moreover, it was suggested that the courts
in Baker and Akhmedov had wrongly applied the evasion principle (Musk, 2022). It is
because the legal relationship between the parties had the effect of making the companies
owning the assets directly liable to the claimants in both cases. Since it is not necessary to
invoke the doctrine, these cases should have been decided on other grounds. Musk (2022) and
Galeza (2020) suggested that Prest did not settle whether the doctrine is frustrated where
other remedies are available. Nonetheless, a closer examination of the judgement revealed
that a bare majority (Lords Sumption [35], Neuberger [80], Mance [98], Clarke [103]) indeed
supported this proposition, whereas Baroness Hale (with whom Lord Wilson agreed) and
Lord Walker did not comment on this. Therefore, insofar as the doctrine exists, no doubt it
should not be applied if there are other remedies. Prest is a clear legal authority in this
respect; the said two cases were simply mistaken.

Indeed, a broader review of authority by Musk suggests the cases above are
anecdotes. In Sale, a confiscation order was made against the appellant for £1.9 million. The
sum represented the benefits accrued by the company under his sole control as a result of a
valuable contract secured through his bribery. The Court of Appeal held that the evasion
principle did not apply since the appellant had not interposed the company to evade an
existing legal obligation. However, the concealment principle was applied in identifying the
appellant’s true benefit, since the activities of the appellant and the company were deemed
‘interlinked as to be indivisible’. On the other hand, in Boyle Transport, the court noted that
although the appellants were in control of the company, it had other legitimate trading
activities, and not all the benefits obtained through fraud could be directly attributed it. Davis
LJ also stressed that although many confiscation proceedings will involve applying the
concealment principle, the corporate veil will not be pierced in the sense envisaged by Lord
Sumption in Prest.

Notably, Hannigan expressed concerns about the confusion between lifting and
piercing the corporate veil, particularly in relation to the Sale decision. In Sale, the court
suggested that the three situations (which were originally bases for piercing) identified in
Seager & Blatch were actually consistent with the concealment principle and could be
applied to lifting the veil instead. Hannigan questioned the reasoning behind this shift and
how the language could survive Prest. While the court’s suggestion may initially seem to blur
the lines between evasion and concealment, a closer examination of the decision in
conjunction with the Boyle Transport above shows that the courts are capable of
distinguishing between the evasion and concealment principles and applying them
appropriately based on the facts of the case. The shift is not merely superficial but rather
reflects a deeper understanding of the principles based on the clarified, narrow conception of
veil piercing. In other words, the test in Seager did not mean to disregard the corporate legal
personality, but instead attempted to identify scenarios when confiscation order can be
extended against the property of the companies with which the convicted was associated.
Insofar as the test captures the scenario in which individuals use the corporate form to
conceal their true benefits from criminal activities, it is consistent with the concealment
principle. This qualification was endorsed in Powell, requiring the test to be read in the
context of Prest. In sum, a fuller account of authority suggests that the court generally has a
good understanding between the distinction between the evasion and concealment principles,
and the shift of the Seager test by no means suggests any confusion about it.

Remaining uncertainty

Nonetheless, the decision in Prest does leave some remaining uncertainty. First, the
court in Prest did not clarify definitively (by providing example) the set of exceptional
circumstances that would justify veil piercing (Lim, 2013). Horne and Lipman, albeit
involving evasion reasoning, should technically be decided on other grounds in light of Prest,
since veil piercing is not a last resort. Another related concern is that the judgement is silent
as to the precise consequence of piercing, other than referring to ‘depriving the company or
its controller of the advantage which they would otherwise have obtained’ (Mitchell, 2019).
This uncertainty was compounded by the VTB decision, which suggested that even if the
corporate veil is pierced, the appropriate remedy is not necessarily one which sees the
member ‘step into the shoes’ of the company. The Supreme Court then displayed deep
reservation in holding the controlling person responsible for the company’s contractual
liabilities, not least because this will cut across fundamental contract law principles ([138]-
[140]). Since there has not been a precedent where veil piercing is the exclusive way to
address the abuse of corporate veil to evade or frustrate the law, this uncertainty will remain
until such a case appears before the court.

Additionally, the treatment of confidently predicted liabilities was not explicitly

dealt with in Prest (i.e. those that are very likely to be incurred by some deliberate conduct,
and just before such conduct, a company is interposed to avoid those liabilities). In Prest, the
companies were established in which the legal interest in the disputed properties was vested,
long before the marriage broke up. Had the legal interest been vested just before the
matrimonial proceeding, the boundary between avoidance of future liability and evasion of
existing liability would have blurred. It was not entirely clear whether these situations can
be captured by the doctrine, especially since a bare majority of judges in Prest did not
accept the evasion principle as the sole ground for veil piercing. While preliminarily
accepting Lord Sumption’s analysis and distinction between evasion and concealment, Lords
Mance and Clarke were cautious of foreclosing all possible future situations (other than the
evasion principle) in which veil piercing may be relevant ([99]-[103]). Baroness Hale (with
whom Lord Wilson agreed) was sceptical of the notion that all cases in which the Court had
been or should be prepared to disregard the separate corporate personality could be classified
into the categories of evasion and concealment ([92]). Instead, she suggested that those cases
might be just examples of ‘the general principle that the individuals who operate limited
companies should not be allowed to take unconscionable advantage of the people with whom
they do business’ ([92]). These disagreements could lead to further debates and potentially
unpredictable outcomes in future cases.
 With benefit of hindsight, subsequent case law suggests that there is in fact little
uncertainty. First, existing liability had been repeatedly affirmed as a requisite element
of veil piercing. In Persad v Singh, the Privy Council overruled lower courts’ decisions of
holding the appellant personally liable for rent arrears and breach of covenant in relation to
the lease between the claimant and a separate company controlled by the appellant. Lord
Neuberger emphasised that there was no evasion of an existing liability and the fact that the
company was a ‘one-man show’ was irrelevant. Similarly, in IBM, the fact that the Company
Headquarters did not owe a duty to the members of the pension schemes, who had been
employed by the UK companies, was fatal to the piercing claim to impose the Imperial duty.
It was irrelevant that the culture of IBM was that of a ‘single enterprise’. Crucially, in
Rossendale, the Supreme Court also rejected the alternative claim of invoking the ‘evasion
principle’ to pierce the corporate veil of the SPVs, maintaining that there was no abuse of
corporate personality to evade existing liability, because the interposition of the SPV had no
effect at all on the respondent’s liability for rates incurred up to the date of grant of the lease
([73]-[75]). Lords Briggs and Leggatt endorsed Lord Sumption’s narrow conception of abuse
as mentioned above, and held that the transfer of ongoing liability was not per se an abuse.
These restrictive decisions effectively rendered no room for inquiry of evasive motive in the
absence of existing liability.

Second, there is unlikely any further development of the ground for veil piercing.
Even in Prest, Lords Mance and Clarke warned that any further exception, if exists at all, will
not be easy to establish ([99]-[103]). In Recoletos, while the Court of Appeal acknowledged
that some judges in Prest were not willing to completely foreclose the law, it also expressed
the difficulties associated with principled development outside the evasion principle.
Subsequent cases mentioned above consistently demonstrate a revival of the courts’
conservative attitude towards expanding other grounds for piercing as appeared in the Adam
case decades before. Recognised as the authority for piercing pre-Prest, the court then
rejected the ‘single economic unit’ argument and upheld that the Salomon principle could not
be freely disregarded merely because the court considers that ‘justice so requires’.
Consequently, the scope of veil piercing will likely remain negligible, as Lord Sumption
remarked in Prest: ‘in almost every case where the [evasion] test is satisfied, the facts will in
practice disclose a legal relationship between the company and its controller which will make
it unnecessary to pierce the corporate veil.’ As such, the concern that the precise consequence
of piercing may be unclear is minimal in practice, because the chance of true piercing case is
small. Indeed, this narrow scope of piercing could be the main reason why Prest did not
provide a clear and definitive set of circumstances of application.