Liability of directors or shareholders – Can you pierce the veil?
Tom Maple, head of our Dispute Resolution team, considers the circumstances in which directors and/ or shareholders might be held personally liable to third parties.
One of the cornerstones of company law, is that a company has a separate legal personality from its directors and shareholders. Therefore, directors and shareholders cannot be liable, all things being equal, for a company’s liabilities and vice versa. However things aren’t always equal and there are isolated cases where the courts will “pierce the corporate veil” and look behind the company and hold those that control it liable.
The Sham Company – Concealment or Evasion
One of the grounds often cited as justifying the piercing of the corporate veil is that the company is being used as a vehicle for fraud or is a sham i.e. the owners / directors have incorporated a company in an attempt to avoid legal liability.
There are a number of examples of such cases where the claimant has been successful:
- A director setting up a limited company which then received his secret profits/ or moneys obtained in breach of fiduciary duty.
- A former employee who tried to get around a non-compete covenant in his contract by setting up a new company in his wife’s name and then solicited customers through the so called wife’s company.
- A seller trying to avoid a sale of land by transferring the land to a company that the particular individual controlled.
However, these are the exception not the norm, and the courts do not like upsetting centuries of established company law.
A leading Law Lord [Sumption] recently concluded that piercing the corporate veil was in practical terms a remedy of last resort and not one the court would entertain lightly. He concluded as follows:
“there is a limited principle of English law which applies when a person is under an existing legal obligation or liability … which he deliberately evades … by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality.”
- Whilst piercing the corporate veil is restricted to situations involving concealment or evasion, a recent £17m divorce case – Prest v. Petrodel – found a way to get around the need to pierce the corporate veil. In that case, the court ordered that the husband convey certain properties to his wife which were held in the company’s name because they were beneficially owned by Mr. Prest, the company merely held them on trust for him. Accordingly, Mr. Prest had the power to transfer the properties to Mrs. Prest independent of the company. Accordingly, the courts did not need to pierce the corporate veil.
- If a company is put into liquidation, a liquidator has far reaching powers to bring proceedings for the losses of the company occasioned by the wrongdoing of directors.
To all intents and purposes, the courts will not pierce the corporate veil absent concealment or evasion. It is not therefore a claim to be commenced lightly.