The concept of the company's separate legal personality obtained through the 'veil of incorporation' and the limited liability it entails are at the core of company law, enabling much of the dealings within it (e.g. through its protection for investors) (Matthews, 2013). However, piercing this veil has been subject to much controversy over its history, with many academics arguing for the need of clarification on both of its principles (Hannigan, 2013).
Thus, two questions arise. First, whether the veil has indeed been upheld in order to separate companies from their incorporators. The second whether piercing the veil serves its purpose in the present legal context, both of which I will discuss below.
To begin with, the doctrine of a corporate veil was born with the judgement in Salomon (AC, Salomon v Salomon, 1897).It entails the idea that incorporation sets a 'veil' between the company thus created and its incorporators (subsidiaries), forming it into a separate legal person capable of holding property and being liable for its own actions and providing a shield for its investors to protect them from liability (Nyombi, 2014). As a consequence, property owned by the company will not be connected to its shareholders (AC, Macaura v Northern Assurance Co Ltd, 1925). Historically, this was based on the rights of religious orders, but it recently became a response to economic development and the need to ease transactions and provide security for creditors in order to permit companies to raise capital (Nyombi, 2014). The doctrine has varied over time, ranging from Lord Denning's much wider approach stating the veil cannot obstruct the courts' view of the facts (AC, Littlewoods Mail Order Stores v IRC, 1969) to the decidedly reserved decision in VTB saying that the veil cannot be pierced except in very select circumstances (UKSC, VTB Capital Plc v NutritekInternational Corp, 2013).
However this doctrine has not been without criticism; adherence to the solution given in Salomon v.Salomon and reluctance to adopt a permissive approach have led to a wide scope for application of the rule and to the creation of a range of exceptions (Moore, 2006) for which clarification has been widely sought (Hannigan, 2013). These issues raise the question as to the extent in which the doctrine's applicability is still in effect as they negate the corporate veil's impenetrability (Matthews, 2013) and, thus, its certainty.
With regard to this, the recent case of Prest (UKSC, Prest v Petrodel Resources Ltd, 2013) has allowed the Supreme Court to both review existing precedents and clarify the doctrinary standing. Sourced in the aftermath of a divorce rather than a strictly corporate context, it has confirmed the existence of the corporate veil as fundamental to the practice of company law, adding that courts are not 'free to disregard the legal personalities of companies' . Instead, it clearly states the parameters in which the veil could be pierced while maintaining the principle itself: outside of specifically set out precedent and statutory provisions, the veil cannot be pierced.
The judgement distinguished between two categories of situations outside the effects of statutory provisions: evasion and concealment. The first involves a situation where the incorporator deliberately evades an existing obligation by placing the company under their control; thus, piercing the veil prevents the company's controller from obtaining an undue advantage. The second case does not involve piercing the veil at all but requires 'simply' looking beyond the façade (Bailey, 2013). This applies where the facts show other relationships between the company and the incorporator which makes piercing the veil moot; in fact, piercing the veil should only be applied as a last resort.
The decision also leads onto the second point, raising the question of whether the doctrine of lifting the veil has served its purpose, given the strict limitations imposed upon it.
Therefore, secondly, we must consider its purpose. The phrase 'piercing the veil' refers to situations where the judiciary or legislature decide to overlook the separate personality of the company, in effect disregarding it and allowing the courts to look beyond and find liability with the incorporators/parent company for its actions (Dignam andLowry, 2012). It is a mechanism to safeguard against misuse of the veil principle where the conditions for its application are fulfilled ,directly or retrospectively (UKHL, Woolfson v Strathclyde Regional Council, 1979).
Notably, past cases have often been inconclusive as to a general theory, making it difficult to predict when courts would pierce the veil (Gallagher and Ziegler, 1990). Furthermore, the different attitudes towards the doctrine over time have led to different results. During periods when courts were much more interventionist, they tried to correct the potentially unjust outcomes derived from the strictness of the veil principle, allowing its overturning in the interests of justice (although these decisions were exceptions) (Dignam and Lowry, 2012). Arguably, this was done in the spirit of the rule rather than the letter, as to not allow a wrongdoer to abuse the veil and, thus, prevent an injustice (Gallagher and Ziegler, 1990) .
In summary of the above, the ultimate purpose for piercing the veil is to prevent the controller of a company from excessively benefitting from advantages obtained through utilising the company's separate personality (UKSC, Prest v Prest, 2013). Indeed, its utilisation has sometimes been viewed with reserve and it has even been stated that the court cannot pierce the veil merely because 'justice so requires' (CA, Adam v Cape Industries Plc, 1990).
For this matter, the leading judgement from Prest is of interest as the case has brought forth a test for when this should be done: the courts will only pierce the veil when more conventional solutions are not adequate.
However, this other requirement may lead to certain difficulties - firstly, it will restrict the court's ability to further develop the doctrine; secondly, if a claimant cannot win without piercing the veil, there is a question of whether the veil should be pierced at all (Prest itself opted for a resulting trust argument instead) and courts may be reluctant to infer a statutory permit to do so (Matthews, 2013). Recent cases like EWCA, Chandler v Cape Plc, 2012 support the view that courts are instead willing to avoid the doctrine through other rationales (Matthews, 2013).This could indicate difficulties for the doctrine of piercing the veil meeting its purpose since, in order to arrive at just rulings, the courts see it fit to avoid its narrow tests and find resolutions elsewhere in the law (Bailey, 2013).
In conclusion, the recent case of Prest has confirmed the doctrine of the corporate veil. The exceptions permitting piercing the veil are strict and their scope limited. While restating its existence and restricting the capacity for it to be pierced through raising the level of the conditions which need to be fulfilled for it to be done, its power of separating a company from its incorporators is at a peak.
And even though it has clarified the existence of the veil, it has raised new difficulties relating to the narrow scope for piercing it (Nyombi, 2014). For a court to lift the veil it must not only disregard the paramount principle in Salomon but also the duty owed by directors to the company as a whole, and it is not for the courts to interfere in the internal management of a company (Gallagher and Ziegler, 1990). Therefore, applying both these principles is an exercise of balancing different interests of justice and duties, alongside a principle which is a cornerstone to company law.
Yet, the restricted scope for piercing the veil may leave a number of cases where it would have otherwise been applicable outside of the newly stated limitations. As courts seem to now utilise alternatives to piercing the veil, this latter doctrine's development restricts its ability to fulfill its purpose.