Transcript LSLA talk final

Current thinking on piercing the
corporate veil and obtaining relief
against non-parties
Talk by Duncan Matthews Q.C. and Charlotte Tan
20 Essex Street
17 June 2013
Introduction
1. Expansionist approach: freezing injunctions against cause
of action defendants
1. Restrictive approach:
a.
Chabra juridiction; The Mahakam [2012] 2 All ER (Comm)
513
a.
Piercing the corporate veil; VTB v Nutritek [2013] 2 W.L.R.
398 and Petrodel v Prest [2013] UKSC 34
Expansionist approach: freezing injunctions
against CAD defendants
• Freezing injunctions: “one of the law’s two nuclear weapons”: per
Donaldson LJ, Bank Mellat v Nikpour [1985] F.S.R. 87 at 92
• “we live in a time of rapidly growing commercial and financial
sophistication and it behoves the courts to adapt their practices to meet the
current wiles of those defendants who are prepared to devote as much
energy to making themselves immune to the court’s orders as to resisting
the making of such orders on the merits of their case”: per Lord
Donaldson, Derby v Weldon (Nos 3 and 4) [1990] 2 Ch 65 at p77
• “international fraud is nowadays of growing concern in the international
community – if anything it has grown in recent years”: per Patten LJ,
BTA v Solodchenko [2011] 1 WLR 888 at [53]
Expansionist approach: freezing injunctions
against CAD defendants
• BTA v Ablyazov [2009] EWHC 2840 (Comm)
• Continuation inter partes of Freezing Injunction obtained ex parte, including
continuation of passport retention following Bayer v Winter [1986] 1 WLR 497.
• BTA v Ablyazov [2009] EWHC 3267 (Comm)
• Defendant restrained from dealing with any of his assets worldwide, even in excess
of the amount of the claim (plus interest and costs), if his assets in England and
Wales are less than the amount of the claim.
• BTA v Ablyazov [2010] EWHC 1779 (Comm); [2010] EWCA Civ 1141
• Imposing receivership in aid of Freezing Order; continuing passport retention order
in aid of Freezing Order; restricting the scope of the ordinary course of business
permission.
• BTA v Ablyazov [2010] EWHC 2219
• Disclosure order in support of Freezing Order may extend to information leading to
the identity of further wrong-doers (even if the Defendants and/or those further
wrong-doers are in another jurisdiction) and may be backed with debarring unless
order even if the Freezing Order is subject to jurisdictional challenge.
Expansionist approach: freezing injunctions
against CAD defendants
•
BTA v Solodchenko [2011] 1 WLR 888
• Freezing Order can extend to assets where Defendant holds legal but not beneficial interest (English
Commercial Court Standard Form).
•
BTA v Ablyazov [2011] EWHC 1522 (Comm); [2012] 1 WLR 1988
• Contempt hearing for breach of freezing order may precede trial on the merits to reinforce
compliance with freezing order despite overlap of credibility and even substantive issues; it may also
be ordered to proceed on some “counts” with the others to remain in abeyance subject to further
order, leaving the Defendant exposed to risk of further (on-going) committal applications.
•
BTA v Ablyazov [2011] EWHC 2506 (Comm); [2012] EWCA Civ 564
• Defendant may have relief from sanctions revoked and be debarred from defending the action for
non-compliance with disclosure obligations imposed ancillary to freezing order and subsequent noncompliance with conditions of relief against sanction, especially where the Court has been misled
and without necessarily requiring a full trial of the issue as to whether the Court has been misled..
•
BTA v Ablyazov [2012] EWHC 455 (Comm); [2012] EWCA Civ 1411
• Defendant who has been ordered to be committed to prison for contempt of court for breach of
Freezing Order may be ordered to surrender himself to the authorities to serve his sentence and
debarred from defending the proceedings if he fails to comply; so also may such a Defendant be
ordered to serve a fresh disclosure affidavit and debarred from defending the proceedings if he fails to
comply. This is to bring further pressure to bear on a Defendant to comply with a Freezing Order and
even where the Defendant’s non-compliance is not said to have any impact on the ability of the Court
to conduct a fair trial of the issues in the action.
Restrictive approach: Chabra jurisdiction
• TSB Private Bank International SA v Chabra [1992] 1 WLR 231
• “I am of the view that there is a good arguable case that there are assets, apparently
vested in the company, which may be beneficially the property of Mr. Chabra and
therefore available to satisfy the plaintiff's claims against him if established at trial”
• “the company is nothing more than a convenient repository for Mr. Chabra's assets”
• SCF Finance Co Ltd v Masri (No.1) [1985] 1 WLR 876 (CA)
• “Where a plaintiff invites the court to include within the scope of a Mareva injunction
assets which appear on their face to belong to a third party, e.g. a bank account in the
name of a third party, the court should not accede to the invitation without good reason
for supposing that the assets are in truth the assets of the defendant.”
Restrictive approach: Chabra jurisdiction
• Parbulk v Humpuss Intermoda Transportasi (The Mahakam) [2012] 2 All E.R.
(Comm) 513
• Linsen v Humpuss Sea Transport [2011] 2 Lloyd's Rep. 663 (Flaux J)
Restrictive approach: Chabra jurisdiction
• Parbulk v Humpuss Intermoda Transportasi (The Mahakam) [2012] 2 All E.R. (Comm) 513
• “Usually, but not invariably, a freezing order will be directed at assets beneficially owned by the principal
defendant” (emphasis added)
• “…where a defendant/judgment debtor (i.e. a cause of action defendant (‘CAD’) …has a debt, or other
receivable owing to it by a third party NCAD, or a claim, or potential claim, against a third party NCAD, the
English court has jurisdiction (or ‘legal power’ as Aikens J put it) to grant a freezing order against the third
party NCAD, in appropriate circumstances, to restrain the NCAD from dissipating its assets up to the amount
of its debt to, or the claim by, the CAD or judgment debtor. Such an order is doing no more than protecting the
right, or contingent right, of the claimant (whether by a third party debt order, charging order, appointment of
a receiver or liquidator etc.) to obtain satisfaction of its judgment debt against the defendant by means of
attachment, or other collection, of the proceeds of the latter's receivable from, or claim against, the third party”
(emphasis added)
• “Normally, if there is no reason to doubt the propriety of the third party, it may well be sufficient, for example,
to injunct the defendant from collecting the receivable, otherwise than by instructing the third party to pay it
into a designated account. In other circumstances, it may be appropriate, at an interlocutory stage, to appoint a
receiver over the receivable/claim against the third party in order to enable the receiver to collect it and pay it
into court, or an escrow account, or otherwise preserve the receivable/claim from dissipation by the
defendant/judgment debtor. But if, for example, the circumstances show collusion, or impropriety, or some
participation, on the part of the third party, in attempts by the defendant/judgment debtor to render itself
judgment proof, then it may be appropriate for a freezing order to be granted against the third party itself”
(emphasis added)
Restrictive approach: Chabra jurisdiction
• Linsen v Humpuss Sea Transport [2011] 2 Lloyd's Rep. 663
• “It is not enough that the CAD could, if it chose, cause the assets held by the NCAD to
be used to satisfy the judgment. It is necessary that the court be satisfied that there is
good reason to suppose either (i) that the CAD can be compelled (through some process
of enforcement) to cause the assets held by the NCAD to be used for that purpose; or (ii)
that there is some other process of enforcement by which the claimant can obtain
recourse to the assets held by the NCAD.” (emphasis added)
Restrictive approach: Chabra jurisdiction
• Parbulk v Humpuss Intermoda Transportasi (The Mahakam) [2012] 2 All E.R.
(Comm) 513
• “the court nonetheless has to consider whether it is appropriate in any given case to make
an order injuncting the foreign assets of such a defendant, by reference to considerations
of subject matter jurisdiction and principles of international comity.” (emphasis
added)
• “sufficient connection with this jurisdiction to justify the making of a worldwide freezing
order”.
• Linsen v Humpuss Sea Transport [2011] 2 Lloyd's Rep. 663 (Flaux J) and [2011]
EWCA Civ 1042 (CA)
• Personal jurisdiction: service out via CPR gateways
Restrictive approach: Chabra jurisdiction
• Personal jurisdiction over third party
• Not enough to show substantive control; need to show assets available in
enforcement proceedings
• If third party abroad, is it appropriate to grant relief; is there a “sufficient
connection”?
Restrictive approach: piercing the corporate veil
• The law is “unsatisfactory and confused”; there is a “lack of any coherent
principle in the application of the doctrine” : per Lord Neuberger in Prest
• The area is “heavily burdened by authority, much of it characterized by
incautious dicta and inadequate reasoning”: per Lord Sumption in Prest
Restrictive approach: piercing the corporate veil
• Salomon v Salomon [1897] A.C. 22
• “The separate personality and property of a company is sometimes described as a
fiction, and in a sense it is. But the fiction is the whole foundation of English
company and insolvency law.” : per Lord Sumption in Prest
Restrictive approach: piercing the corporate veil
• Gilford v Horne [1933] Ch 935
• Jones v Lipman [1962] 1 WLR 832
• Woolfson v Strathclyde 1978 SC(HL) 90
• Adams v Cape [1990] Ch 433
• Trustor v Smallbone [2001] 1 WLR 1177
• Ben Hashem v Al Shayif [2009] 1 FLR 115
Restrictive approach: piercing the corporate veil
• Antonio Gramsci v Stepanovs [2011] 1 Lloyd's Rep. 647
• VTB v Nutritek [2011] EWHC 3107 (Ch) (Arnold J); [2012] 2 Lloyd's
Rep 313 (CA); [2013] 2 WLR 398 (SC)
• Petrodel v Prest [2013] UKSC 34
Restrictive approach: piercing the corporate veil
1. Does the principle of piercing the corporate veil exist at all?
• VTB per Lord Neuberger
• the principle of veil piercing “is well established in the authorities”; “the consensus
that there are circumstances in which the court may pierce the corporate veil is
impressive. I would not for my part be willing to explain that consensus out of
existence”: per Lord Sumption in Prest
• “it would be wrong to discard a doctrine which, while it has been criticised by judges and
academics, has been generally assumed to exist in all common law jurisdictions, and
represents a potentially valuable judicial tool to undo wrongdoing in some cases, where
no other principle is available.”: per Lord Neuberger in Prest
• “for my part I consider that “piercing the corporate veil” is not a doctrine at all, in the
sense of a coherent principle or rule of law. It is simply a label — often, as Lord
Sumption observes, used indiscriminately — to describe the disparate occasions on which
some rule of law produces apparent exceptions to the principle of the separate juristic
personality of a body corporate”: per Lord Walker in Prest
Restrictive approach: piercing the corporate veil
2. When can the corporate veil be pierced?
• VTB per Lord Neuberger rejected “abuse of corporate structure” concept
• Prest:
• piercing the veil is only available where no other remedy is available against the
wrongdoer
• Lord Sumption and Lord Neuberger:
• The concealment principle: “legally banal…the interposition of a company or
perhaps several companies so as to conceal the identity of the real actors will not deter
the courts from identifying them, assuming that their identity is legally relevant“ (per
Lord Sumption) “They simply involve the application of conventional legal
principles to an arrangement which happens to include a company being interposed to
disguise the true nature of that arrangement” (per Lord Neuberger
• The evasion principle: can be invoked where “a person is under an existing legal
obligation or liability or subject to an existing legal restriction which he deliberately
evades or whose enforcement he deliberately frustrates by interposing a company
under his control"
Restrictive approach: piercing the corporate veil
• Prest (other JSCs):
• Lady Hale and Lord Wilson: overall agreed with Lord Sumption, not sure
if possible to classify all the cases into the two principles.
• Lord Mance: attracted to two principles but did not want to foreclose all
possible future situations.
• Lord Clarke: two principles should not be definitively adopted unless and
until the court heard detailed submissions.
• Lord Walker: no “coherent principle or rule of law”
Restrictive approach: piercing the corporate veil
3. What is the effect of piercing the corporate veil?
• Third party not liable as if he were a party to the contract: VTB v Nutritek
• “in a case in which it is thought appropriate to pierce the veil, any order made in
consequence of such veil piercing is by way of the exercise by the court of a discretionary
jurisdiction.” per CA in VTB
• Effect of Prest?
Conclusion
• Chabra jurisdiction: PJSC v Maksimov [2013] EWHC 422 (Comm)
• Piercing the corporate veil:
• “It is thus likely to be deployed in a very rare case.” per Lord Clarke in Prest
• “What can be said with confidence is that the strength of the principle in Salomon's case
and the number of other tools which the law has available mean that, if there are other
situations in which piercing the veil may be relevant as a final fall-back, they are likely to
be novel and very rare.” Later, he said “No-one should…be encouraged to think that
any further exception, in addition to the evasion principle, will be easy to establish, if any
exists at all. The evident absence, under the close scrutiny to which Lord Sumption has
subjected the case-law, of authority for any further exception speaks for itself”: per Lord
Mance (and Lord Clarke) in Prest
• Text of this talk available at: http://www.20essexst.com/news/talks