To know a‘Veil’
Not infrequently in practice, one comes across the issue whether personal liability can supplement corporate liability. This issue was recently before the Privy Council in an illustrative case.
Persad v Singh [2017] UKPC 32 (Judgment given on 30 October 2017)
In order to ‘pierce the corporate veil’ the conditions outlined in Prest v Petrodel Resources Ltd [2013] 2 AC 415 must be met. Such ‘piercing’ would only be appropriate 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.
The issue in this case was whether, as both the High Court and Court of Appeal had held, the appellant (P) could be held liable for sums due to the respondent landlord (S) under a lease S had issued to a company (C) set up by P.
P and S entered into discussions for a 5-year lease of S’ property in Trinidad. When they reached agreement, it was also agreed that P, an attorney, would draft the lease. The lease, as drafted, had C, a company set up by P, as tenant. In January 2002 a copy of the draft lease, executed by the company was sent to S. In May 2002 S signed the lease.
Rent was initially paid, not always on time. On at least two occasions C’s company cheque was signed by P. In late 2003 S became aware of some disrepair and served notice, as required by local statute. In late 2004 S issued proceedings for possession, arrears of rent, damages for breach of covenant, and mesne profits. Both C and P were named as defendants. The claim identified the lease as being made between S and C, and referred to P as a director of C and “at all material times acting on his own or as the servant and/or agent of [C]”. It alleged that both defendants had breached the covenants of the lease.
The High Court gave judgment effectively against both defendants thus allowing the ‘veil’ to be pierced. P’s appeal to the Court of Appeal of Trinidad and Tobago was dismissed. The latter court said that C was effectively a ‘front’ for P. They summarized the judge’s reasons as including that:
- P had concluded negotiations in his personal capacity;
- He had afterward formed the company;
- He had produced no corporate documents and could not recall the last time annual returns had been filed; and that
- Based on these facts it had been inferred that the company had been formed in the hope that, if all was not well, P would not be held personally liable.
The Privy Council disagreed. Lord Neuberger, giving the leading judgment, said that the occasions when the corporate veil would be pierced were rare, a point implied in VTB Capital plc v Nutritek International Corp. [2013] 2 AC 337 and expressed in Prest. Crucially, P had been under no existing “legal obligation or liability” to S at the time that he proffered the draft lease. Further, P had not misled S in any way: S had given evidence that he appreciated that the lease which he was being asked to execute involved grant of the lease to C and not P. He also understood that a limited company was a different legal person to its shareholders or directors. It made no difference that P had personally gone into occupation of a first-floor office within the property (ground-floor shop with office over). The fact that C was a “one man company” was also irrelevant.
The case of Salomon v A Salomon and Co. Ltd [1897] AC 22 famously established the importance of the difference between a company and its shareholders. That case also established that it was fallacious to suggest ‘piercing’ was allowable when the purpose of interposing a company had been to avoid personal liability. The appeal was allowed.
Comment
Being a Privy Council decision, this is not a ‘binding authority’ of course, but the reinforcement of the two Supreme Court decisions is important. The thought behind Salomon one might say, is that the price of encouraging entrepreneurship – that financial liability protection can be obtained by incorporation – is a price well-worth paying.
However, landlords will be well advised to consider these issues when entering a lease with a company, and the wisdom of obtaining appropriate guarantees.
If you require advice, or representation, in a claim relating to land or property you can instruct Paul Moulder by contacting his clerks on 01483 539131 or emailing them at clerks@guildfordchambers.com
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