Doctrine Of Piercing Of Corporate Veil: A Comparative Analysis Of New Zealand And Overseas Jurisdiction Laws

Separate legal personality of corporates

Write an essay in which you consider and compare the New Zealand common law approach to piercing the corporate veil with the approach to abuse of corporate personality of one overseas jurisdiction.

In general, corporates are the separate legal entity in the eyes of law. As law treats corporates as a separate entity, directors, officers and members cannot be assume as corporation. They have their different individual identity (Ammolya, 2015). In ordinary course of business, a member can never be held personally liable for liabilities of corporation. Corporations can act like an individual. The same can enter into contracts, can deal with other persons and can do business by it is own name. Although being a non-individual body, corporations has some officers and members to work and to invest in it, yet the same has separate status (Neill, 2014). So it seems that there is always a visionary veil in between corporations and it is members, which separates both of them.

But there are some exceptional circumstances, where the artificial veil in between corporation and members can be pierce. This generally happens when members’ starts using unfair benefits of corporation’s separate entity rule. In such cases, court treats corporation and it is members as the same person (Norris Ward Mckinnon, 2015). This doctrine is known as “piercing of corporate veil”.  This essay covers the discussion of doctrine of piercing of corporate veil while comparing laws of an overseas jurisdiction with the New Zealand common law approach to piercing the corporate veil (Bellassociates Lawyers, 2017).

Providing a separate legal personality to corporates is necessary to motivate it is directors and officers, but along with this, Piercing of corporate veil is also necessary in order to develop a good and ethical economy. In the absence of such doctrine, people would improperly use their position held as member incorporates. As soon as corporates are started to develop, it comes to know that some people are deliberately use their position unfairly and to stop such deeds of members and directors of the company (Counsel, 2013).

There is a famous case, Salomon v A Salomon and Co Ltd [1897] AC 22, related to the separate legal personality rule of company. In this case, a person named Salomon has transferred his existing business to a company that is to “Salomon Ltd.”. In the exchange of such transfer, Salomon has received debentures of Salomon Ltd.; which had a secured charged over the assets of company. Subsequently, when business of Salomon Ltd. went down and the same has come into liquidation process, Salomon being a creditor has asked for the unpaid debts from the liquidator. In this context, liquidator of the said company has taken a step in favor of unsecured creditors by stating that Salomon will be personally liable to make the payment of unsecured creditors of the liquidating company. The reason for doing so was the sole ownership of Salomon Ltd (Jus Dicere, 2018). As Salomon was the only director and members of this company were also the family members of Salomon, this entity could not be treated as separate from Salomon. It was the case where, justice has pierced the corporate veil and declared company’s member Salomon personally liable for the debt of the company (Law Explorer, 2015). After this case, it has become practice in law, that where ever a member or a director will try to seek improper advantage of the Company’s Separate legal entity rule, court will pierce the hypothetical veil.

Exceptions to the rule: Piercing of corporate veil

But as earlier mentioned this practice had some limitations. Such as this veil could only be pierce when there is a deed of dishonestly on part of members or officers of a corporation, which means that court could not do so just to provide a proper justice. For implication of this practice it was a necessity that there must be an intention of member to take unfair advantage of company’s separate legal Personality rule (Nathan, 2013).

In New Zealand, courts follow the same practices. They only give an order to pierce the corporate veil in the circumstances where a member do some acts where no other remedy is available except lifting of corporate veil or in some cases where a member takes advantage of his/her separate identity form corporations in an unjustifiable manner. The lead summary is that court does not pierce corporate veil until the circumstances are not so much strict. This approach is limited, as the same cannot work in the cases where the only issue is unviability of a proper remedy (Pearse Trust Blog, 2013). Regarding Doctrine of Piercing of Corporate veil, courts in New Zealand has the same approach and thinking as it held in the case Salomon v A Salomon and Co Ltd.

In the case, Trevor Ivory Ltd v Anderson - [1992] 2 NZLR 517, court had refused to pierce the corporate veil. It was held in this case that corporations have their separate legal personality and this cannot be denied until the situations rigidly demands to do so.

There is an exceptional case of this practice, where court has decided to pierce the corporate veil for the reason to provide proper remedy and justice to victim. The said case Prest v Petrodel Resources Ltd [2013] UKSC 34 is a landmark in the history of doctrine of piercing of corporate veil. In this case, Mr. and Mrs. Prest were getting divorced. Mr. Prest was a wealthy person. Apart from matrimonial house, Mr. Prest had so many other properties also. But the issue was that Mr. Prest held all these properties on behalf of the companies in which he was the sole director and member. It means all those properties were registered in the name of companies rather than in the name of Mr. Prest. In order to distribution of assets Mrs. Prest has made a claim to get a share from all the other said properties (Cartin, 2013). Firstly, this matter went to family court as it was the case of divorce. In this court, Justice Moylan LJ has held that although this is not an open general public case, yet corporate veil can be Peirce. Supreme Court further held that in such cases where matters are related to divorcing spouses, one cannot avoid his/her liability in relation to assets held by them in a company where they are sole member (Bangham, 2013).

Comparative Analysis of New Zealand and Overseas Jurisdiction Laws

In general, Doctrine of Piercing of corporate veil only works where a person use his/her position of member in a corporation to avoid his/her personal liabilities, or it may say that this doctrine does not apply just to provide some legal remedies to someone. Later on in the case Prest v Petrodel Resources Ltd, when the same has went to court of Appeal, Lord Sumption stated that to pierce the corporate veil, there must be “inadequate reasoning”. By referring the case Adams v Cape Industries plc [1990] Ch 433, it has said that to apply the doctrine of Piercing of corporate veil, there must be some fraud and the same cannot apply to assure justice and proper remedy (Swarb, 2017). The lordship of Lord Sumption went into observation by other lord and he also has affirmed that there must be some dishonestly involves in a case, in order to make a court enable to pierce the corporate veil. After the recommendations of many judges on this case, finally it has decided that corporate veil is required to be pierced in this case, as there is no other legal remedy available for securing interest of Mrs. Prest. It has held in this case that although it is not a practice to pierce the corporate veil in the cases where member does not do something in order to take unfair advantage of corporate’s separate personality rule, yet in some cases court has to do so, just to provide a proper justice to applicant (Carey Olsen, 2013).

After the judgment provided in the case of Prest v Petrodel Resources Ltd, it has noted that most of the persons were in favor of provided justice, as it has given remedy to Mrs. Prest. This judgment has protected the rights of Mrs. Prest, when no other law could so. There are so many other cases knock the doors of court on daily basis, where neither any fraud is detected nor any other remedies are remain open for applicants. So, this case provides the way out to those situation where this was common to not to pierce corporate veil.

In New Zealand while giving decision of a case titled Edel Metals Group Ltd v Geier Ltd [2017] NZHC 225 Justice has referred the statement made by Lord Sumption in Prest v Petrodel Resources Ltd and provided the decision as that in normal situations corporate veil cannot be pierced. A court can only do so when it comes to extra-ordinary circumstances and when there is no remedy is available to parties under the provisions of common law. In New Zealand it is approach of piercing of corporate veil under common law is very limited and bounded till the limit of the cases where there is a misuse of corporation’s separate personality has come into light or where there is not corporate veil is even exist.

Case Law Analysis: Salomon v A Salomon and Co Ltd, Prest v Petrodel Resources Ltd

Whereas in UK, the doctrine of piercing of corporate veil, is known commonly known as approach to abuse of corporate personality. As the discussed case Prest v Petrodel Resources Ltd belongs to UK, it may understand that UK has wider scope of the said doctrine. Although in UK also court order to pierce corporate veil only in the strict circumstances but the law works more in favor of applicants in this company. The last statement can be declare justified by considering decision given in Prest v Petrodel Resources Ltd. Here, while comparing the New Zealand’s approach of piercing of corporate veil with UK’s approach of abuse of corporate personality, it may mention here that in New Zealand, court only provides the order to piercing of corporate veil in such circumstances where dishonesty is done on part of the shareholder of the company or the case is of nature where remedy is not available in common law. This restrictive approach regarding piercing of corporate veil in New Zealand is inspired by the case Salomon v A Salomon and Co Ltd.

It can be clearer by stating that if Prest v Petrodel Resources Ltd would be follow by courts of New Zealand, then judgment will be different from the current one. As it is common in practice to not to pierce the corporate veil except the cases of frauds and dishonesty, it cannot be expect the applicability of doctrine of piercing of corporate veil in cases of divorce and separations. In UK, when the decision came out of the quoted case, then it was in the favor of applicant as no other remedy was available there. In New Zealand, while giving decision of Edel Metals Group Ltd v Geier Ltd, Justice has referred those statements of Prest v Petrodel Resources Ltd which were not in favor of piercing of corporate veil. As this doctrine has developed in order to protect the rights of persons against those who deliberately use their position of member with mala fide intention, so scope of this doctrine is limited to that purpose in New Zealand.

To conclude the matter discussed above, it may state that piercing of corporate veil is the doctrine which is globally accepted. In general it has developed for the protection of company’s separate legal personality’s rule. In some of the countries like New Zealand it is limited upto the said purpose only. In addition this, court gives order to pierce corporate veil in some circumstances where no other remedy is available in common law or where actually the veil cannot be even recognize and question of piercing of same is not even exist; whereas, in some other countries like UK, this doctrine has wider scope and applicability. In UK, in the cases where it is necessary to pierce the corporate veil in order to provide justice, courts can give such orders. In New Zealand this doctrine has it is limited scope and the same is very strict in nature. This cannot be used in order to provide justice or proper remedy alike UK

References

Ammolya. (2015). The Concept of Separate Legal Entity in light of Corporations. Retrieved from: https://www.lawctopus.com/academike/concept-separate-legal-entity-light-corporations/

Bangham, S. (2013) FINANCIAL REMEDIES: Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 Retrieved from: https://www.familylaw.co.uk/news_and_comment/financial-remedies-prest-v-petrodel-resources-ltd-and-others-2013-uksc-34#.WwuGW0iFPIU

Bellassociates Lawyers. (2017). The Corporate Veil. Retrieved from: https://www.bellassociates.co.nz/latest-news/2017/8/8/6kg3sz5pjl6pmnrr600i3ktkqk34sq

Carey Olsen. (2013). Piercing the corporate veil: a new era post Prest v Petrodel. Retrieved from: https://www.careyolsen.com/briefings/piercing-the-corporate-veil-a-new-era-post-prest-v-petrodel

Cartin, A. (2013). Prest v Petrodel Resources Ltd: companies held properties on trust for husband. Retrieved from: https://www.blplaw.com/private-wealth/insights-resources/blog-post/prest-v-petrodel-resources-ltd-companies-held-properties-on-trust-for-husband

Counsel, B. (2013). Domestic (mis)trust and the corporate veil. Retrieved from: https://www.chapmantripp.com/publications/domestic-(mis)trust-and-the-corporate-veil

Edel Metals Group Ltd v Geier Ltd [2017] NZHC 225

Jus Dicere. (2018). Saloman v Saloman & Co. Ltd, 1897. Retrieved from: https://www.jusdicere.co.in/blog/salomon-v-salomon-co-ltd-1897/

Law Explorer. (2015). The Salomon principle and the corporate veil. Retrieved from: https://lawexplores.com/the-salomon-principle-and-the-corporate-veil/

Nathan, H.R. (2013). Piercing the Corporate Veil – An Update. Retrieved from: https://www.mindengross.com/docs/default-source/publications/piercing-the-corporate-veil---an-update

Neil, C., (2014). New Zealand: Business Structures. Retrieved from: https://www.mondaq.com/NewZealand/x/325462/Corporate+Commercial+Law/Business+Structures

Norris Ward Mckinnon. (2015). Company directors' liability - piercing the corporate veil. Retrieved from: https://www.nwm.co.nz/company-directors-liability-piercing-the-corporate-veil/

Pearse Trust Blog. (2013). To Pierce Or Not To Pierce The Corporate Veil? – Landmark Decision. Retrieved from: https://www.pearse-trust.ie/blog/bid/96042/To-Pierce-Or-Not-To-Pierce-The-Corporate-Veil-Landmark-Decision?goback=%2Egde_139480_member_232676540

Prest v Petrodel Resources Ltd [2013] UKSC 34

Salomon v A Salomon and Co Ltd [1897] AC 22

Swarb. (2017). Prest V Petrodel Resources Ltd And Others: Sc 12 Jun 2013. Retrieved from: https://swarb.co.uk/prest-v-petrodel-resources-ltd-and-others-sc-12-jun-2013/

Trevor Ivory Ltd v Anderson - [1992] 2 NZLR 517