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Corporate personality: utilising trust law to invoke the application of the concealment principle

  • Gregory Allan (a1) and Stephen Griffin (a2)

Abstract

The landmark Supreme Court judgment in Prest v Petrodel Resources Ltd provides a significant reassessment of the law relating to a court's ability to circumvent corporate personality. The Supreme Court considered that the application of ordinary legal principles (‘the concealment principle’) should ordinarily override a court's ability to apply an equitable veil-piercing doctrine (‘the evasion principle’). Whilst accepting the primacy of the concealment principle, this paper disputes the correctness of the Supreme Court's implied assertion that, in cases concerning ‘one-man type’ companies, the concealment principle should be advanced through application of agency-derived principles. Rather, this paper contends that the concealment principle should be progressed by adopting solutions derived from the law of constructive trusts and associated principles of equity. To an objective of providing a doctrinally sound framework for the development of the law in the post-Prest era, this paper further suggests that the constituent elements of the evasion principle could be consistent with the operation of a distinct species of constructive trust. Moreover, it is argued that, in future, this ‘evasion trust’ should, in complete abrogation of the equitable piercing doctrine, be developed so as to apply in all cases exhibiting intentional and fraudulent abuses of the incorporation process.

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Corresponding author

*Corresponding author. E-mail: gwa5@le.ac.uk

Footnotes

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The authors would like to thank Professor Janet Ulph for her comments on an earlier draft of this paper.

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References

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1 See Companies Act 2006, s 16.

2 [1897] AC 22.

3 This phrase is used in this paper in recognition that, although a ‘one-man company’ is one in which there is a sole beneficial shareholder, there are many companies which, whilst not technically ‘one-man companies’, are companies in which an individual controls a majority of the shares and dominates management without necessarily being the sole shareholder. The phrase ‘one-man type company’ includes the latter as well as the former.

4 [2013] UKSC 34; [2013] 2 AC 415.

5 Above n 4 [at 498] per Lord Neuberger.

6 See especially Lord Neuberger's judgment, above n 4 [at 498–503].

7 Lord Walker considered [at 508] that piercing the corporate veil was not a doctrine, or a coherent principle or a rule of law, but simply a label which had often been used indiscriminately to describe the disparate occasions on which some rule of law produced an apparent exception to the Salomon principle.

8 The majority view was represented by Lord Neuberger, Lord Sumption, Lord Mance and Lord Clarke. Lord Mance and Lord Clarke did not, however, wish to foreclose all possible future situations in which a court would be justified in piercing the corporate veil, albeit accepting that such situations were likely to be novel and very rare. Representing the minority view, Baroness Hale (above n 4 [at 506]), with whom Lord Wilson agreed, opined that the cases in which the corporate veil had been pierced should be viewed more simply as examples of a much broader principle which prohibited individuals who operated limited companies from taking unconscionable advantage of the people with whom they did business.

9 This novel classification of the ‘piercing cases’, split between either the evasion principle or the concealment principle, was advanced by Lord Sumption, above n 4 [at 484]. Lord Sumption's classification has been accepted in several subsequent authorities – eg R v Boyle Transport (Northern Ireland) Ltd [2016] EWCA Crim 19; [2016] 4 WLR 63; R v McDowell [2015] EWCA Crim 173; [2015] 2 Cr App R (S) 14; Airbus Operations Ltd v Withey [2014] EWHC 1126 (QB); R v Sale [2013] EWCA Crim 1306; [2014] 1 WLR 663.

10 The properties had been purchased by the husband in the names of the companies, or transferred by him to the companies. The husband had not sought to evade any existing liabilities when the transfers occurred. He had, however, failed to comply with court orders relating to evidence about the transfer of the properties and had deliberately concealed relevant facts and details about the transfer. The Supreme Court held therefore that there was no evidence to rebut a presumption that the company took the properties as a resulting trustee for the husband who was to be regarded as the beneficial owner of the same. Accordingly, the properties formed a part of the matrimonial assets.

11 For example, in Chandler v Cape plc [2012] 1 WLR 3111, the application of principles of tort enabled the corporate veil to be circumvented. Furthermore, in McDowell, above n 9, the concealment principle was invoked so that a device company's receipt of the proceeds of a crime could be regarded as its controller's receipt for the purposes of applying the Proceeds of Crime Act 2002.

12 The minority view was expressed by Baroness Hale above n 4 [at 506], with whom Lord Wilson agreed. Both doubted that the cases should be classified into either concealment or evasion cases.

13 Above n 4 [at 487].

14 Ibid [at 479].

15 Ibid [at 503].

16 It is possible for an agent to assume the responsibilities of a trustee, but the authorities provide a stringent test to justify this finding. This test is unlikely to be satisfied in cases that are concerned with veil-piercing. See Pearson v Lehman Brothers Finance SA [2010] EWHC 2914 (Ch).

17 Above n 2.

18 Gilford Motor Co v Horne [1933] Ch 935; Jones v Lipman [1962] 1 WLR 832; Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177; Gencor ACP Ltd v Dalby [2000] 2 BCLC 734.

19 Lord Neuberger agreed with this definition, above n 4 [at 499].

20 Above n 4 [at 487].

21 Ibid [at 498].

22 [2013] UKSC 5; [2013] 2 A.C. 337.

23 Ibid [at 383].

24 Above n 4 [at 67].

25 Ibid [at 32].

26 Ibid [at 19]. Similar concerns over clarity and/or injudicious invocation of principle were expressed by Lord Clarke [at 103] and Lord Wilson [at 106].

27 Interestingly, Harding has recently argued that a ‘modal conception’ of the rule of law should encompass ‘values like clarity, consistency and predictability in the legal system’. The similarity between the attributes identified by Harding and those alluded to by Lord Neuberger is striking, see Harding, MEquity and the rule of law’ (2016) 132 LQR 278, 280. The desirability of such values identified by Harding has been emphasised both judicially and academically many times. See for example Merkur Island Shipping Corp. v Laughton [1983] 2 AC 570 at 612 per Lord Diplock; Bingham, LordThe rule of law’ (2007) 66 CLJ 67, 70. In respect of the need for clarity specifically in veil-piercing cases, see also the judicial and academic authorities discussed by Lord Neuberger in Prest, above n 4 [at 74–78].

28 Above n 4 [at 484]. Lord Clarke agreed with Lord Sumption on this point [at 507].

29 Ibid [at 511–513].

30 Ibid [at 502–503].

31 Above n 18.

32 The shares were held by nominees for Horne, and he was, at the very least, a shadow director.

33 [1894] 2 Ch 377.

34 Above n 18 [at 961–962] per Lord Hanworth MR.

35 Ibid [at 956]. Also, at first instance, Farwell J, [at 937], explained that the defendant company was susceptible to the injunction because Horne was ‘committing breaches of the covenant by the agency of the defendant company’. Both Lawrence LJ [at 965] and Romer LJ [at 969] expressed agreement with Farwell J on this point.

36 Above n 4 [at 500].

37 Ibid [at 485].

38 That is, as an agency relationship requires both a principal and agent, if Horne was considered to be the principal in the relationship, it would ordinarily follow that the device company should be regarded as Horne's agent. As to the permissibility of granting an injunction directly against both principal and agent, see Prest, above n 4 [at 500] per Lord Neuberger.

39 Above n18.

40 Ibid.

41 Above n 4 [at 487]. As Lord Sumption considered that the device companies could have been viewed to be agents of their controllers, it is difficult to determine with certainty whether his Lordship did actually hold the view that a ‘one-man type company’ could never be viewed as an agent of its controller.

42 Indeed, there would appear to be no binding authority to substantiate the claim that a device company, in the guise of a ‘one-man type company’, can act as the agent of an individual in circumstances where the basis of the alleged agency relationship is founded upon the individual exerting absolute control over the device company.

43 Above n 2 [at 43].

44 The decision of the House of Lords in Salomon, above n 2, was not, however, considered or even cited at first instance or by the Court of Appeal in Gilford, above n 18.

45 Above n 18.

46 Lipman was the absolute or beneficial owner of all of the shares, and was a director. The other director was seemingly a puppet of Lipman.

47 Above n 18 [at 836].

48 The successful and technically correct application of the equitable piercing principle (the evasion principle) was, however, evident in Locke (Albert) (1940) v Winsford Urban DC (1973) 71 LGR 308. In other reported cases in which the equitable piercing principle was purportedly applied, the factual circumstances of the cases failed to accord with technical requirements necessary to the correct application of the principle, ie the façade company's distinct legal status was not used to hide an existing legal obligation of its controller; see eg Gencor, above n 18; Trustor (No 2), above n 18.

49 Above n 18 [at 836]. For a case that in part followed this reasoning see Smith v Samuel Smith Old Brewery (Tadcaster) [2007] EWCA Civ 1461.

50 Above n 4 [at 486]. It is to be observed that Baroness Hale (with whom Lord Wilson agreed) took a diverse approach in respect of the interpretation of the liability outcomes in Gilford and Jones. Her Ladyship opined that the concepts of agency and of the ‘directing mind’ (in effect attribution principles) could have been used to establish the device company's liability (above n 4 [at 506]). Baroness Hale advanced the case of Stone & Rolls Ltd v Moore Stephens [2009] AC 1391, as an example of a case in which corporate liability had been established by attribution principles. Attribution principles are discussed below at n 129, and accompanying text. Baroness Hale justified the controller's liability on the basis ‘that the individuals who operate limited companies should not be allowed to take unconscionable advantage of the people with whom they do business'. Baroness Hale did not define the term ‘unconscionable advantage’.

51 Above n 18.

52 Ibid.

53 In Trustor AB v Smallbone (No 1) [2000] 1 All ER 811, Rimer J found that Introcom was under the control of a Liechtenstein trust called the ‘Lindsay Smallbone Trust’, of which Smallbone was a beneficiary, and furthermore that the directors of Introcom were nominees acting on the instructions of Smallbone. Smallbone could therefore properly be regarded as the controller of Introcom.

54 Albeit that Trustor could not recover the same amount twice.

55 Summary judgment against Introcom, rendering it liable in personam in respect of the sums that it had received, was given in August 1998 by Master Bowman by way of a RSC Ord 14 judgment. Summary judgment against Smallbone in respect of the sums that he had received personally was granted by Rimer J (Unreported, 2000).

56 OT (CA (Civ Div); 09 May 2000).

57 In Rimer J's 2000 summary judgment, he had reduced the amount payable by Introcom according to Master Bowman's original order.

58 Above n 56 [at 62].

59 Above n 56 [at 97].

60 Above n 18.

61 Also, see Shell International Trading & Shipping Co. Ltd v Tikhonov [2010] EWHC 1399 (QB). Here a Mr Tikhonov, in breach of his fiduciary duties to Shell, accepted bribes from a third party, the proceeds of which were paid directly, without ever passing into the hands of Tikhonov, into the accounts of T Capital Ltd, a company entirely under the control of Tikhonov. Shell sued to recover the amount of the bribe. Holding in favour of Shell, Jack J explained that ‘[t]he money was received by T Capital and not by Mr Tikhonov. But it was received by T Capital at his direction and for his benefit. The corporate veil cannot here stand as a barrier between [Shell] and Mr Tikhonov, and Mr Tikhonov is to be held accountable as if he had received the money himself’ [at 29]. It should be noted that Shell did not seek an order that Tikhonov and T Capital were jointly and severally liable, probably because it had already proven impossible for Shell to recover from T Capital via a default judgment.

62 It is to be observed that such a conclusion raises an anomaly insofar as liability for knowing receipt is generally regarded as attaching to a third party to a breach; see Williams v Central Bank of Nigeria [2014] UKSC 10; [2014] AC 1189 [at 1197–1198] per Lord Sumption.

63 Above n 18.

64 Burnstead Ltd was described, above n 18 per Rimer J [at 19], as being ‘wholly owned and controlled by Mr Dalby’.

65 As a consequence of breaching the conflict of interest duty, Dalby would have been ordinarily liable to account for any personal profit that he made; see Cook v Deeks [1916] 1 AC 514. Yet in this instance, Burnstead Ltd took the profits directly and not Dalby (in Cook, it was found that the corporate opportunity was taken by the directors and transferred to the company, which took with notice of the victim company's equitable interest).

66 Above n 18 [at 744]. Note, however, that Rimer J did not justify this decision by means of an analysis of the prior veil piercing cases.

67 Ibid [at 745].

68 Ibid [at 744]. Rimer J also stated [at 750] that ‘the Burnstead receipt represents a personal profit obtained by Mr Dalby in the course of acting as a director of ACP and for which he is accountable to ACP’. This again strongly suggests that Rimer J regarded the delinquent fiduciary as the beneficial recipient of bounty paid directly into the accounts of the device company.

69 This point is considered in more detail below, text to nn 106–109.

70 This point is advanced in the judgment of Lord Sumption, above n 4 [at 485–486].

71 Ibid [at 487].

72 Ibid per Lord Sumption [at 487] and Lord Neuberger at [498–501].

73 Ibid [at 506].

74 [1990] Ch 433.

75 Ibid [at 539] per Slade LJ, quoting from Woolfson v Strathclyde Regional Council 1978 SC (HL) 90 [at 96] per Lord Keith.

76 Ibid [at 542–548] per Slade LJ

77 See for example Garnac Grain Co Inc v HMF Faure and Fairclough Ltd [1968] AC 1130 [at 1137].

78 Had the subsidiary disobeyed its holding company's policy directives in relation to exercising its apparent autonomy, it is most probable that the holding company would have required the subsidiary to return to business practices established and dictated by the holding company's policy initiatives. Yet in Adams the contemplation of such a business practice did not warrant a finding of absolute control.

79 Above n 4 [at 445–446]. In Re Carey [1895] 2 QB 264 (a pre-Salomon decision), a sole trader (Carey) whose business was in severe financial difficulty incorporated a company and transferred the business assets to the company in consideration for a controlling interest in the company's share capital. Carey was subsequently made bankrupt. The trustee in bankruptcy successfully obtained a court order entitling the company's assets to be used to discharge Carey's personal debts in priority to the repayment of the company's creditors. In making such an order, Vaughan Williams J found that the newly incorporated company was Carey's agent, as Carey exercised absolute control over the company. Subsequently in Re Hirth [1899] 1 QB 612 (a post-Salomon decision, concerned with similar facts to those found in Re Carey) the Court of Appeal, in the light of the judgment of the House of Lords in Salomon, no longer considered the decision in Carey to represent the law; namely, it was implicit from the Salomon judgment that the controller of a ‘one-man type company’ could not be deemed liable for the company's debts on the basis of an agency argument founded on the premise that the controller exerted absolute control over the company's affairs.

80 The Court of Appeal was concerned with identifying the existence of a relationship between a group of companies that would amount to the finding of a single ‘economic entity’. The Court concluded that the ‘economic entity’ relationship could not be sustained other than in circumstances substantiating an agency relationship. In Prest, the Supreme Court made no observations in relation to piercing issues in the context of groups of companies.

81 See eg CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704; Comax Secure Business Services Ltd v Wilson [2001] All ER (D) 222 (Jun); Shell, above n 61; Airbus, above n 9.

82 In respect of directors, the conflict of interest duty is now governed by the Companies Act 2006 ss 175–177. Prior to the codification of directors’ duties by the Companies Act 2006, transactions involving a conflict of interest and duty were regulated as a rule of equity – see for example Regal Hastings Ltd v Gulliver [1967] 2 AC 134. This equitable rule was applied strictly, and this strict interpretation is now incorporated into the terms of CA 2006, ss 175–177; see for example Towers v Premier Waste Management Ltd [2012] BCC 72. In its simplest form, the conflict of interest duty may be described as a duty of loyalty and fidelity which prohibits a director of a company from exploiting a corporate opportunity, corporate property, corporate information or his/her own corporate position, to his/her own potential advantage.

83 FHR Europe Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45 [2014]; 3 WLR 535.

84 Note that in, P Davies Gower and Davies: The Principles of Modern Company Law (London: Sweet & Maxwell, 8th edn, 2008) p 580 points out that, in cases in which ‘a profit arises out of a contract between the director and a third party … an account of profit will be the sole remedy’.

85 See eg Trustor (No 2), above n 18; Gencor, above n 18.

86 In Prest, above n 4 [at 745], the cases of Trustor (No 2), above n 18 and Gencor, above n 18, were explained as cases invoking agency law principles.

87 Trustor (No 3), above n 56.

88 Also see Shell, above n 61, and CMS Dolphin, above n 81.

89 Above n 9.

90 By analogy, this reasoning was akin to that found in Trustor (No2), above n 18.

91 Above n 9 [at 461] per Havelock-Allan J.

92 Ibid.

93 Above, text to n 45.

94 As Davis and Virgo remark ‘… a party who receives property as an agent cannot be sued for his receipt, since he only holds the property ministerially, for the benefit of another’ (Davis, P and Virgo, G Equity & Trusts Text, Cases and Materials (Oxford: Oxford University Press, 2013) p 904) (emphasis in original). See also Agip (Africa) Ltd v Jackson [1991] Ch 547. Note that, in Trustor (No 2), above n 18, it was held that the device company was liable in personam for knowing receipt.

95 See Agip, ibid, for an example of parties who took the disputed funds as agents being held liable for dishonest assistance. On dishonest assistance generally, see Twinsectra v Yardley [2002] 2 A.C. 164 (HL), as interpreted in Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37; [2006] 1 WLR 1476 (PC).

96 See in particular Ultraframe v Fielding [2005] EWHC 1638 (Ch) [at 1595–1601] per Lewison J.

97 The liability orders amounted to joint and several liability of both the fiduciary and the device company in, for example, Trustor (No 2), above n 18; Gencor, above n 18; Airbus, above n 9; CMS Dolphin, above n 81; Comax, above n 81.

98 There could be obvious benefits of claiming in personam against the device companies, especially if the device company was solvent and had assets; see for example Airbus, above n 9.

99 Furthermore, if such cases were decided by way of an agency solution, creditors other than the claimant, such as for example the Inland Revenue, would also be obliged to claim against the controller as opposed to having the option of pursuing the claim against both the controller and the device company.

100 Broderip v Salomon [1895] 2 Ch 253 [at 338] per Lindley LJ.

101 Ibid [at 56].

102 For academic explanations in support of this view, see Watson, STwo lessons from Trustor’ (2003) 119 LQR 13 at 16. Watson regards Smallbone (the controller) as being ‘[t]he ultimate beneficial receiver’ of all of the money paid at his behest by Trustor to Introcom (the device company as trustee). See also Tan Heng-Han ‘Veil piercing – a fresh start’ [2015] 1 JBL 20 at 24. Heng-Han explains Trustor and Gencor as cases in which ‘the [device] company, not being the true owner, would merely have held the [fruits of the breach] on trust for the real owner [ie its controller]’.

103 Although not for knowing receipt, as this is a liability placed upon a third party to the breach of trust or fiduciary duty, rather than upon the primary perpetrator of the breach of fiduciary duty. This point was apparently overlooked in Trustor (No 2), above n 18.

104 Above n 100 per Lindley LJ [at 338]. Lindley LJ was explaining that the position of a trustee is contrary to that of an agent. The latter carries on business solely for his principal and is therefore not susceptible to in personam liability, whereas the former carries on business as a principal, but subject to the beneficiary's beneficial interest and the duties associated with trusteeship. According to this reasoning, a trustee could potentially be made liable for knowing receipt.

105 Indeed, in Trustor (No 2), above n 18, it was held that as a consequence of Smallbone's breach of duty, Introcom's receipt of the fruits of that breach made it a constructive trustee for Trustor. In FHR Europe, above n 83, it was held that bribes and secret commissions are held on constructive trust for the principal or beneficiary. In Boardman v Phipps [1967] 2 AC 46, it was held that incidental profits are held on constructive trust for the principal or beneficiary.

106 This might be what Rimer J had in mind in Gencor, above n 18. As explained above, text to n 67, Rimer J seemed to suggest that the device company took on trust for its controller (the delinquent fiduciary). In Prest, above n 4, Lord Sumption, [at 486], suggested that Rimer J had been mindful of the ‘prior equitable interest’ of the victim company. So maybe Rimer J took the view that the device company took on trust for the controller who, in turn, took his equitable interest subject to the victim company's prior equitable interest.

107 See Nelson v Greening & Sykes (Builders) Ltd [2007] EWCA Civ 1358.

108 There is no existing authority which directly supports the establishment of such a complex arrangement in the Trustor–Gencor line of cases, although it may be queried whether in Prest, above n 4 [at 486], Lord Sumption, in his explanation of Gencor, was obliquely referring to such an arrangement. The existence of a sub-trust which was a resulting trust was recognised in Nelson, above n 107.

109 This issue is discussed in Nelson, above n 107. It was suggested by Lawrence Collins LJ in Nelson that the legal status of the sub-trust may be recognised, but the authorities are equivocal on this point. See the discussion on this point in Nelson [at 52–58].

110 At this point, it is useful to refer back to Lord Davey's observation – see above, text to n 101.

111 See for example Re Kayford [1975] 1 WLR 279.

112 See especially the comments of Lord Davey in Salomon, above n 2 [at 55].

113 Law of Property Act 1925, s 53(1)(b).

114 These categories of constructive trust were recognised by the House of Lords in Westdeutsche Landesbank Gironzentrale v Islington LBC [1996] AC 669. In respect of fraudulent receipt, see Lord Browne-Wilkinson's discussion under the heading ‘The stolen bag of coins’ [at 715–716].

115 Usually a party who has transferred property in error, or who has been fraudulently induced to transfer property; see Westdeutsche, ibid.

116 There is post-Prest authority that a ‘common intention’ constructive trust may arise in a quasi-corporate setting. In M v M [2013] EWHC 2534 (Fam), upon a wife's application for ancillary relief, it was held that several companies under the husband's control held various properties subject to a ‘common intention’ constructive trust in his favour on the ground that ‘the [controller] intended to retain each beneficial interest in the properties and it therefore follows inexorably that it was also the intention of the [device] companies’ [at 551] per King J In Crossco No 4. Unltd v Jolan Ltd [2011] EWCA Civ 1619; [2012] All ER 754, it was recognised by the Court of Appeal that the principles relating to ‘common intention’ constructive trusts may be employed outside the context of the family home.

117 Discussed below, see n 129 and accompanying text.

118 M v M, above n 116.

119 See the comments of Lord Walker in Prest, above n 4 [at 509].

120 Above n 56. See above, text to nn 56–59.

121 Authorities that, in English law, a dishonest assistant is jointly and severally liable with the party whom he has assisted in a loss-causing breach (within this context, the device company's breach of the equitable obligations subject to which it took the property), include Trustor (No 3) itself and Grupo Torras SA v Al-Sabah (No 5) [2001] CLC 221. More generally, see S Elliott and Mitchell, CRemedies for dishonest assistance’ (2004) 67(1) MLR 16.

122 Williams, above n 62.

123 Ibid [at 1208] per Lord Sumption. The extent of the duties of knowing recipients has been explored in more detail by certain commentators. See for example Mitchell, C and Watterson, SRemedies for knowing receipt’ in Mitchell, C (ed) Constructive and Resulting Trusts (Oxford: Hart, 2009) pp 115158. In particular, Mitchell and Watterson state (at p130) that ‘equity fixes them with custodial duties which are the same as some of the duties which are voluntarily assumed by express trustees’, and further that ‘a knowing recipient's core duty, and generally his only duty of practical significance, is to restore the misapplied trust property’.

124 Especially when it is borne in mind that a liability for dishonest assistance is not restricted to cases concerning assistance with breaches of trust. For a specific authority that a knowing recipient can be liable in his own right for a breach of trust, see Perry v Knott (1841) 4 Beav 179.

125 See above n 114.

126 In this sense, a ‘constructive trustee’ means a party who would still, after Williams, be referred to as a constructive trustee and who owes a fuller range of duties than what is owed by a mere knowing recipient (see Nolan, RCEquitable property122 LQR (2006) 232).

127 Notably, the view that a knowing recipient is not a trustee was widely accepted at the time of Trustor (No 3) – see Paragon Finance plc v Thakerar & Co [1999] 1 All ER 400 – and was likely known to the members of the Court of Appeal who sat in Trustor (No 3). This, perhaps, adds weight to the second construction proposed here.

128 [1995] BCC 942. Lord Neuberger classified the attribution rules into three distinct categories: (i) the primary rule of attribution provides that a company must necessarily have attributed to it the state of mind of its directing organ under its constitution; (ii) attribution rules may further be determined by general principles of agency whereby the directing organ of the company (ordinarily the company's board), delegate to an individual, the ‘directing mind’ of the company in a specific matter(s), by way of an actual, implied or ostensible authority; and finally (iii) attribution may be deployed exceptionally in special circumstances, namely where the court is required to fashion a special rule of attribution for a particular substantive rule.

129 Trustor (No 3), above n 56 [at 64]. See also Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2015] UKSC 23, [2015] 2 WLR 1168, in which the Supreme Court approved the application of the attribution rules in accordance with the classification so expressed by Lord Neuberger in Meridian Global, ibid. The Court concluded that where a third-party claim against a company (eg for knowing receipt) arose as a result of the misconduct of a director or other agent of the company, the company would be attributed with the act and state of mind of the director or other agent. It should also be noted that M v M, above n 116, is a direct authority that the intention of the controller of a company can be imputed onto the company itself for the purposes of establishing a constructive trust (albeit, in this case, a ‘common intention’ constructive trust).

130 In all of the existing cases within the Trustor–Gencor line, the dishonesty necessary to establish the delinquent fiduciary's liability for what is now generally referred to as ‘dishonest assistance’ would readily be established. The test for dishonestly is considered primarily to be an objective one and equates to a conscious impropriety or a reckless disregard of the rights of others rather than mere negligence or oversight. As such it is sufficient that the dishonest assistor was aware that his participation in the arrangement was contrary to normally acceptable standards of honest conduct; see Royal Brunei Airlines v Tan [1995] 2 AC 378 and Twinsectra, above n 95 as interpreted in Barlow Clowes, above n 95.

131 [2001] All ER (D) 222. In Comax, a Mr Coker (C), a director of Comax, obtained secret commissions. Coker was assisted in this task by a Mr Wilson, formerly a senior employee of Comax. The secret commissions resulting from Coker's breach of duty were paid directly to Nemesis plc, a company under Wilson's control. Coker, Wilson and Nemesis plc were all held to be jointly and severally liable to account for the profits. Coker was held liable as the fiduciary in breach, Nemesis plc as a knowing recipient and Wilson (the directing mind of Nemesis plc) as a dishonest assister.

132 [2010] EWHC 1449 (Ch). Here, funds were paid to a device company in breach of trust. The device company dissipated the funds. The device company was found liable in personam for knowing receipt. The device company's state of mind was ascertained via its controller. The claimants sought to pierce the corporate veil to a conclusion that the controller should be liable for knowing receipt. In advancing this argument, both Trustor (No 2), above n 18, and Gencor, above n 18, were cited as supporting authorities. This argument was defeated, however, on the premise that there was insufficient evidence to establish that the device company was deliberately being used as a façade. Instead, Norris J held the controller liable for dishonestly assisting in the breaches of trust by which the device company obtained the funds.

133 T rustor (No 3), above n 56, was not cited in either Comax, above n 131 or Habitable Concepts, ibid.

134 See for example R v IRC Haulage [1944] 1 All ER 691.

135 See eg McDonnell [1966] 1 QB 233.

136 See above n 130.

137 In cases falling within the Trustor–Gencor line, the participation by the controller in the dissipation by the device company of the victim company's property will usually be flagrantly dishonest. In Trustor (No 3), above n 56, Scott VC routinely reached the conclusion that the controller had been dishonest, as did Seymour QC in Comax, above n 81. In Airbus, above n 9, although the controller was not held to be a dishonest assister, other parties who did not owe fiduciary duties to the victim company but who had engaged in similar activities to the controller were held to have dishonestly assisted him. Furthermore, in Shell, above n 61, CMS Dolphin, above n 81, and Gencor, above n 18, the trial judges made it clear that they regarded the fiduciaries’ conduct to have been dishonest.

138 It should be emphasised that, without the absolute control of the delinquent fiduciary, the device company could not be regarded as his/her agent or trustee.

139 Above n 81. Note that, in CMS Dolphin, the delinquent fiduciary initially set up a partnership and misappropriated the victim company's corporate opportunities in favour of the partnership. The partnership was then incorporated, and the benefit of the contracts in question was transferred to the company. The court held, following Cook v Deeks [1916] 1 AC 554, that the device company had taken with notice that the contracts had been obtained in breach of fiduciary duties, and liability of the company and the delinquent was established on this basis. One of the contracts, however, was diverted directly to the device company. In respect of this contract, the reasoning in Cook cannot apply, and CMS falls within the Trustor–Gencor line.

140 [2011] EWCA Civ 347.

141 Above n 83.

142 It is highly improbable that the evasion principle could ever be correctly applied in a situation involving a group of companies, namely to pierce the corporate veil of a company which was a subsidiary of its holding company. Here, in the context of the operation of the evasion principle, any existing legal obligation which the holding company wished to hide behind its subsidiary company would, in all probability, have been a legal obligation entered into by the subsidiary company or another subsidiary company under the control of the holding company, rather than an obligation entered into by the holding company itself; see eg Ord v Belhaven Public Houses Ltd [1998] 2 BCLC 477.

143 For discussion of fraudulent and intentional abuses of the incorporation process which fall outside the current scope of the evasion principle, see below nn 177–179 and accompanying text.

144 Above n 33.

145 Gilford, above n 18 [at 961] per Lord Hanworth; Jones [1962], above n 18 [at 838] per Russell J.

146 See for example above, nn 28 and 29 and accompanying text.

147 Here a grocer, a Mr Hancock, sold his business to the plaintiff. The sale agreement included a restraint of trade covenant. Shortly after the sale, Hancock's wife set up a grocer's business in the name of ‘Mrs T P Hancock’. This new business was situated close to the shop that the plaintiff had acquired from Mr Hancock. The new business was carried on mainly by Mr Kerr (Mr Hancock's nephew) and Mr Hancock himself took little part. The plaintiff sued for breach of the covenant. It was held that the new business genuinely belonged and was carried on by Mrs Hancock. Mr Hancock was not in breach of the covenant.

148 Above n 33 [at 385]. Similar sentiments were expressed by AL Smith LJ [at 391].

149 Broderip v Salomon, above n 100. On appeal to the House of Lords, above n 2, it was found that Salomon had not acted mala fide, and the company was not a mere device.

150 Broderip, above n 100 [at 339].

151 See above, text to n 101. Note also Lord Halsbury's observation [at 34] that Mr Salomon was ‘… not shown to have done or to have intended to do anything dishonest or untrustworthy, but to have suffered a great misfortune without any fault of his own …’.

152 See the Land Registration Act 1925 s 20. Further, Jones was not in actual occupation of the land in question, so could not have possessed an overriding interest under the Law of Property Act 1925 s 70(1)(g). Similar provisions are to be found in the Land Registration Act 2002.

153 See the argument of Lord Cooke, cited by Toulson J in Yukong Line Ltd v Rendsberg Investments Corporation of Liberia [1998] 1 WLR 295 [at 307–308], and the observations of Burton J in Antonio Gramsci Shipping Corp. v Stephanovs [2011] EWHC 333 (Comm) [at 18].

154 That is, only protected or overriding interests were capable of binding a purchaser of registered land (see the Land Registration Act 1925 s 20). See also Williams & Glyn's Bank v Boland [1981] AC 487. Again, the position is similar according to the regime under the Land Registration Act 2002.

155 See for example Collings v Lee [2001] 2 All ER 332.

156 Potter v Sanders (1846) 6 Hare 1, is authority for the fact that when a valid contract for the sale of land is entered into, and legal title is subsequently transferred to a third party in breach of that contract, the court may (subject of course to modern land registration rules) order specific performance against both the vendor and the third party. Therefore while, as suggested by Lord Neuberger in Prest, above n 4 [at 501], it may not have been necessary for Russell J to order specific performance against the company, Russell J was still properly entitled to make the order against both the device company and Lipman.

157 Prest, above n 4 [at 479] per Lord Sumption, [at 503], per Lord Neuberger and [at 505] per Baroness Hale. It is interesting to observe that Baroness Hale regarded the court's power to pierce the corporate veil as being a mere manifestation of the principle pursuant to which ‘the courts have power to prevent the statutes … being used as an engine of fraud’. Yet the long-standing equitable principle that a statute may not be used as an engine of fraud generally involves the court recognising a trust in order to prevent the fraud. For a discussion of this principle, see Allan, GOnce a fraud, forever a fraud: the time-honoured doctrine of parol agreement trusts’ (2014) 34 LS 419.

158 Note that the conditions for the creation of an express trust by conduct, as outlined by Megarry J in Re Kayford [1975] 1 WLR 279 [at 282] are unlikely to be satisfied in ‘evasion-type cases’, and resulting trusts do not arise specifically to the purpose of preventing fraud. It is arguable, however, that Jones, above n 18, may have been resolved by the simple imposition of a resulting trust on the basis that there was insufficient evidence that the parties intended to transfer the beneficial interest. This conclusion may be sustained on the basis that the consideration provided by the company was most likely illusory, at least for the purposes of establishing a resulting trust; see for example Birch v Blagrave (1755) Amb 264; Platamone v Staple (1815) G Coo 250; Davies v Otty (No 2) (1865) 35 Beav 208; Kuppusami v Kuppusami [2002] EWHC 2578 (Ch); Ali v Khan [2002] EWCA Civ 974; [2002] WTLR 187. In all of these said cases, the court recognised a resulting trust in favour of the transferor on the ground that there was insufficient evidence that the parties intended to transfer the beneficial interest.

159 See for example Paragon, above n 127 [at 409] per Millett LJ.

160 This could include assets, rights or a business.

161 See above, text to n 115.

162 See for example Gissing v Gissing [1971] AC 886 and Lloyd's Bank v Rosset [1991] AC 107. Although unconscionability was not mentioned in the recent cases of Stack v Dowden [2007] UKHL 17; [2007] 2 AC 432 and Jones v Kernott [2011] UKSC 53; [2012] 1 AC 776, neither of these latter two cases was directly concerned with cases involving a single legal owner of the disputed property.

163 M v M, above n 116.

164 For example, a constructive trust based on unconscionable retention or a ‘common intention’ constructive trust could, if extended to cases such as Gilford, also potentially apply to cases such as Ord, above n 142.

165 A justice criterion for piercing the corporate veil was accepted by Lord Denning in, for example, Littlewoods Mail Order Stores Ltd v IRC [1969] 1 WLR 1241, and Wallensteiner v Moir [1974] 1 WLR 991. Lord Denning considered that the judiciary had a discretion to pierce the corporate veil in circumstances where justice demanded that the corporate personality of a company should be ignored.

166 Discussed above, text to n 80.

167 It is to be observed that the ‘evasion trust’ would not be a constructive trust of general application and, as such, would technically fall outside a strict interpretation of the concealment principle. It is, however, not unusual for the courts to develop strict prerequisites for the invocation of specific trust-based doctrines which are founded, in general terms, on the prevention of fraud or unconscionability. Obvious examples include the ‘Pallant v Morgan equity’ (see Banner Homes v Luff Developments [2000] Ch 372), the doctrine of secret trusts (see Blackwell v Blackwell [1929] AC 318), and the doctrine of proprietary estoppel (see Thorner v Major [2009] UKHL 18; [2009] 1 WLR 776).

168 [2015] EWHC 3680 (Comm).

169 Phillips J held [at 8–9] that the companies were resulting trustees for the defendant or that, if a resulting trust could not be established, the claimant was beneficial owner on the basis of the evasion principle.

170 [2015] EWHC 2536 (Ch).

171 The ‘evasion trust’ may simply be the label which most accurately describes the consequences of invocation of the evasion principle. In both JSC and Wood it was held that application of the evasion principle did enable the court to recognise the beneficial ownership of assets as separate from the legal title as an alternative to recognising a trust arising for conventional reasons.

172 See Insolvency Act 1986, ss 333 and 307.

173 The case concerned an application for an interim freezing order against, inter alia, the assets and businesses of the device companies. It was thus only necessary for the applicant (the trustee in bankruptcy) to prove a ‘good arguable case’ ([at 34] per Hodge QC sitting as Judge of the High Court). The court held [at 32] per Hodge QC that the evasion principle provided ‘the most compelling justification’.

174 Although the nebulous phrase ‘agents and nominees’ ([at 32] per Hodge QC) was again used to describe the capacity in which the companies held the assets, it is evident that the court had in mind a trust relationship, for the companies were described [at 32] as ‘holding the assets on his behalf’. Hodge QC also preferred an explanation based on the evasion principle over counsel's arguments that the companies were agents or trustees in a more conventional sense (see [30], [32] and [33]).

175 A detailed pre-Prest treatment of this vexed and important question can be found in Raja v Van Hoogstraten [2006] EWHC 2564 (Ch) [at 31] per Pumfrey J.

176 See for example McFarlane, BConstructive trusts arising on a receipt of property sub conditione’ (2004) LQR 667; Gardner, SReliance-based constructive trusts’ in Mitchell, C (ed) Constructive and Resulting Trusts (Oxford: Hart, 2009) pp 6394. Hopkins, NConscience, discretion and the creation of property rights’ (2006) 26 LS 475; Allan, above n 157.

177 Existing examples of such a case would include R e Darby; Ex p Brougham [1911] 1 KB 95; Drew v HM Advocate 1995 SCCR 647; 1996 SLT.1062, and Kensington International Limited v Republic of Congo & Ors [2005] EWHC 2684 (Comm); [2006] 2 BCLC 296.

178 See above n 4.

179 See further, and by analogy, Griffin, SDisturbing corporate personality to remedy a fraudulent incorporation – an analysis of the piercing principle’ (2015) 66 NILQ 321. The substance of this paper contends that, as an alternative to disturbing corporate personality by applying the concealment principle, it may be possible, in following the true spirit of the judgments advanced by the House of Lords in Salomon, to extend the current and accepted equitable piercing principle (the evasion principle) to cases exhibiting an intentional and fraudulent abuse of the incorporation process.

The authors would like to thank Professor Janet Ulph for her comments on an earlier draft of this paper.

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Corporate personality: utilising trust law to invoke the application of the concealment principle

  • Gregory Allan (a1) and Stephen Griffin (a2)

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