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Piercing the "corporate veil"

Posted on 25th March 2013
Case law

It is well established that a limited company is a separate legal entity. This means that assets and liabilities can be owned by the company in its own right. The legal separation between the company and its shareholders or controllers is commonly known as the veil of incorporation.

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Adrian Green Adrian
Green
Senior Employment Law Solicitor Telephone: 01473 694403

Prest v Prest and Others [The Times January 2013]

The question is, when can the veil be pierced? Is it possible to do so just because the one person owns all or most of the shares and is in control of the company?

The Court of Appeal recently had to consider this point in an appeal from the decision of the family court. It held that the family court had no power to order a husband to transfer assets held by companies, of which he was a controller or sole shareholder, to settle his wife's financial relief claim. This was because the assets belonged to the companies.

The Facts

Mr Michael Jenseabla Prest was the controller or sole shareholder in a number of companies incorporated in the Isle of Man. The companies owned or had an interest in seven properties. In 2011 the family court ordered that the properties or the interest in the property held by the companies be transferred to Mr Prest's ex-wife. The Order was made in settlement of Mrs Prest's application for financial relief as part of divorce proceedings.

The Decision

The Court of Appeal held that the family court had no power to order a husband to transfer assets held by companies, of which he was a controller or sole shareholder, to settle his wife's financial relief claim. This was because the assets belong to the companies, not the shareholders or controllers.

It is a long standing principle that a duly incorporated company is a separate legal entity from those who have incorporated it. It makes no difference that a single individual controls all of its shares. Consequently, any assets owned by the company are owned by the company and not the shareholder of the company.

The Court of Appeal went onto say that the separate corporate identity of a company is a fact of legal life which all courts are required to recognise and respect.  It is not open to a court, simply because it regards it as just and convenient, to disregard such separate identity to appropriate the assets of a company.

The Court of Appeal acknowledged that the court does have exceptional jurisdiction to pierce a company's corporate veil and in doing so disregard the facts of its separate identity from that of the shareholders.  It pointed out that this could only be done where the controllers of the company had used the fact of its separate identity for improper purposes and exercising the power is to prevent the controllers gaining any advantage from such abuse.

In Practice

This case reinforces the principle that a properly incorporated company is a separate legal entity and the assets and liabilities of the company belong to the company not the shareholders or controllers.  It highlighted how rare the circumstances are where courts can pierce the veil of incorporation.

This case is important for all areas of the law including employment law. It shows how hard it can be for a claimant to enforce a judgment against a respondent who hides behind his limited company.

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