Piercing the corporate veil: using the evasion principle to pierce corporate veil of companies operated by a bankrupt

Written on 13 Apr 2016

In Wood and another v Baker and others [2015] EWHC 2536 (Ch), the High Court considered an application by joint trustees in bankruptcy for an injunction freezing the business and assets of third parties which were operated by an undischarged bankrupt to conceal assets properly belonging to him.

The court made an interim order under Civil Procedure Rule (CPR) 25.1(1)(c)(i) for the preservation of relevant property. This is the first time the court has pierced the corporate veil in a bankruptcy context.  In doing so, it was persuaded that the evasion principle was the most compelling analysis of the legal basis of the trustees’ application.

Background

A bankrupt has a general duty to co-operate with his trustee in bankruptcy. In particular, the bankrupt must notify his trustee in bankruptcy if his income increases or if he acquires additional property that falls within the bankruptcy estate as after-acquired property,  Here, the bankrupt had failed to do so.

The court found that the bankrupt had interposed companies and other third parties to dissipate his assets, which were properly claimable for the bankruptcy estate by the trustees.

The trustees sought the aid of a freezing injunction. They also sought declarations that the business and assets of each of the corporate respondents (including their bank accounts) were held on trust for the bankrupt, or on behalf of him, or were otherwise owned and controlled by him, and were thus claimable by the trustees.

What did the court decide?

The court was satisfied that the bankrupt had a consistent and long-standing history of concealing his business and assets, as well as evading his bankruptcy obligations. A good arguable case existed to pierce the corporate veil on the basis that:

  • the bankrupt was subject to an existing obligation to disclose after-acquired assets to his trustees;
  • the bankrupt evaded that obligation by interposing the corporate entities; and
  • the bankrupt was clearly trying to evade disclosing the after-acquired assets to the trustees pursuant to its statutory obligations.

The court therefore granted the trustees’ claim for injunctive relief against the corporate respondents. As a result, the companies were prevented from making any payments from their bank accounts, except in the ordinary course of their businesses.

The judgment demonstrates the court’s willingness to support the recovery of assets by trustees in bankruptcy of an uncooperative and apparently dishonest individual.

Practice points

  • it is a fundamental principle of company law that a company has a separate legal personality from its members;
  • in very limited circumstances, a court can pierce the corporate veil (the “evasion principle”);
  • the evasion principle applies when 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;
  • in these circumstances, the court may pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage which they would otherwise have obtained by the company’s separate legal personality;
  • the decision reinforces the view, which has been expressed judicially, that there will be a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law could only be addressed by disregarding the legal personality of the company.