Lifting the Corporate Veil: The Conundrum Post-Prest

[T. Sai Sanket Sharma is a third-year student at the National Law School of India University]

Introduction

Treating a corporation as a separate person with its own rights and liabilities is the foundation of the current principles of corporate law established in 1897 in Salomon v. Salomon. Over the years, ‘Lifting/Piercing the Corporate Veil’ has developed as an exception to the above principle, though the exact scope of the exception i.e., when the principle ought to be applied and what is the effect of the same, is unclear. In this regard, it has been contended that Prest v. Petrodel Resources Ltd. lays down the precise contours of the exception and is set to become a definitive precedent on the same. In this paper, the author argues that despite the detailed analysis by Lord Sumption in Prest, what the doctrine entails remains uncertain and despite Prest, courts in India have stuck to a broader understanding of the exception.

The Principle of Evasion: What it Means and is it Real?

Generally, the effect of lifting/piercing the corporate veil is that the shareholders are held liable for a company’s act instead of the company itself. Lord Sumption however, distinguishes between two principles. First is concealment which does not involve piercing the veil and the court merely looks at the corporate structure behind the company. The second is evasion or actual piercing, in which a court ignores the separate legal personality of the company if the person in charge is evading liability. Here, the legal personality of the company is used as a shield against the execution of a right against the person in charge wherein the right exists independently of the company’s involvement.

Lord Sumption then explains the case of Gilford Motor, in which a managing director signed a covenant promising not to approach former customers for business after leaving, but did so indirectly by using his own company to do so. The court held that the company was a mere sham and ordered an injunction against both the company and Mr Horne. According to Lord Sumption, the liability of Mr Horne was independent of the acts of his company given that he had breached the covenant and his liability was based on the concealment principle. On the other hand, it was through applying the evasion principle that the company was also held liable.

In simple words, the effect of piercing the corporate veil for Lord Sumption is that the company is also held liable for the personal liability of the controller. Though the other judges in Prest seem to agree on the framing of the evasion principle generally, a closer analysis contradicts the same. Firstly, for Lady Hale, Gilford is a case of piercing the veil where courts have disregarded the personality of the company to impute liability on its owners which would otherwise be that of the company alone. For her, Lord Sumption’s assertion that evasion involves converting the personal liability of the owner into a liability of the company is actually the converse of piercing the veil.  Secondly, for Lord Mance, piercing the veil is an exception to the principle established in Salomon. Now, in Salomon, the creditors sought to enforce the liability of the company against the controller which was an exception to the principle of the separate personality of a company. This means that an exception to Salomon would entail imputing the liability of the company on the controller and not the other way around as mentioned by Lord Sumption.

The seminal article of S. Ottolenghi further complicates the above analysis. For Ottolenghi, the case of Gilford is an example of ‘extending the veil’ and not ‘penetrating’ where the owner and the company are being bunched together as a single entity regardless of who broke the covenant. For him, piercing the veil involves catching hold of the shareholder. On the whole, despite Lord Sumption’s effort at clarifying the doctrine, the nitty-gritty of the same is far from clear. This is buttressed by Lord Walker’s statement in Prest that “piercing the corporate veil is not a doctrine at all”.

The Position in The UK: Strict Approach

Despite the issues highlighted above, given that the doctrine of lifting the veil exists in some form or other, let us understand the position in the UK on the same starting with pre-Prest cases. In Woolfson, the court held that the corporate veil could be pierced only if the company is a mere façade to conceal the true facts. Similarly, in Trustor AB, the court held that the corporate veil could be disregarded only when there is an impropriety which links to the company’s separate personality being used to conceal a liability. Interestingly, despite the above precedents establishing the existence of a limited principle where the corporate veil can be lifted, in the case of VTB Capital which was decided by the UKSC just before Prest, the court admitted the possibility of there being no power for the court to pierce the corporate veil. The court held that there was no House of Lords or Supreme Court decision which affirmed the existence of the power and thus declined to apply that power to the facts. Concerning post-Prest cases, in Antonio Gramsci, the court upheld the evasion principle as framed in Prest in its entirety. However, in Hurstwood v. Rossendale, the UKSC has cast doubt on whether the evasion principle is the best justification for Gilford. By pointing out the discrepancies in the understanding of the evasion principle between Lord Sumption and Lady Hale as has been done in this paper as well, the court highlighted the inconsistencies in the principle but fell short of overruling its existence given that it was five-judge bench whereas Prest is a seven-judge bench judgement.

In sum, this section illustrates that there is uncertainty surrounding the existence of the piercing/lifting corporate veil principle in the United Kingdom. Even assuming that the principle does exist, the position is that it is only in rare cases that the principle can be employed. In the next section, this position will be contrasted with the position in India.

The Liberal Position in India

Pre-Prest Judgements

The first case of relevance is Tata Engineering where the limited issue was whether the veil should be lifted to allow the Indian shareholders of the company to enforce their fundamental rights. In its reasoning, however, the court laid down a broad principle that the veil could be lifted in cases of fraud and eventually, the doctrine may expand. In Juggi Lal, the court expanded the application of the principle to tax evasion which was further broadened in LIC to improper conduct. Lifting the veil has even benefitted companies in India. In New Horizons, the issue was whether the experience of the constituents of a JV company be considered for the eligibility of a tender. Similar to Tata Engineering, the court again upheld a broad power and stated that corporate could be lifted in the interest of justice, convenience and revenue. It is important to note  that even though the court cites the above-mentioned article by Ottolenghi, there is no discussion on the same.

Post-Prest Judgements that cite Prest

The most important case in this regard is that of Balwant Rai, where the court discussed Prest in detail and held that the principle had to be employed in a restrictive manner and could only be applied when the company was a mere camouflage or sham formed intentionally to escape liabilities by the individuals in control. Though the ratio bears resemblance to the evasion principle, it is noteworthy that Lord Sumption never mentions ‘sham’. This distinction is important given that ‘sham’ itself has multiple connotations. Interestingly, in Arcelor, despite mentioning Prest, the court allows for lifting the veil in ‘public interest’. Most important to note is the 2023 case of Delhi Airport, where the Delhi HC held that the Indian position is far more flexible such that additional grounds for lifting the corporate veil can be created over time whereas the courts in the UK are hesitant to do so. It is pertinent to note that though many of the above cases mention Prest, there is no separate discussion on the same and the courts have just quoted the paras from Balwant that talk about Prest.

Post-Prest Judgements with no mention of Prest

In Gotan Lime, the apex court lifted the veil in ‘public interest’ and similarly in Estate officer, Juggi Lal was given significance. It is pertinent to note is that in both Gotan Lime and Estate Officer, Prest is completely absent from the court’s analysis. Furthermore, both the cases have been decided by a bench of two judges and have failed to even adopt the restrictive approach delineated in Balwant which is a three-judge bench judgement.

Conclusion

In sum, firstly, older cases like LIC and Juggi Lal continue to hold the field on lifting the veil despite the recently delineated restrictive approaches of Prest and Balwant. Secondly, courts in India have neither differentiated lifting and piercing nor explained the effect of the doctrine. There is no singular effect of lifting with the court sometimes lifting the veil just to consider subsidiaries and the company as one, or to catch hold of the controller. This is in contrast to Lord Sumption’s understanding where piercing the veil has the determined consequence of holding the company liable for the personal liability of the controller. Thirdly, the ratio of the cases discussed are essentially instances where the court can lift the veil. Thus, the article concludes that the interpretation of ‘piercing the veil’ doctrine  is much wider in India than in the UK.