Introduction
The principle of separate legal personality, which establishes that a company is a legal entity distinct from its shareholders and directors, is a cornerstone of UK company law. Established in the landmark case of Salomon v A Salomon & Co Ltd (1897), this principle provides benefits such as limited liability, which encourages entrepreneurship and investment. However, the courts have recognised that this corporate ‘veil’ can be abused. The process of ‘lifting’ or ‘piercing’ the corporate veil involves disregarding the company’s separate personality to impose liability on the individuals controlling it. While the judiciary has always been reluctant to take this step in civil law, a reluctance confirmed in Prest v Petrodel Resources Ltd (2013), the approach in criminal cases has appeared more flexible. This essay will argue that although the courts are more willing to look behind the corporate form in criminal matters to prevent the evasion of justice, the underlying legal principles are now largely aligned with the restrictive approach in civil law, yet their application in a criminal context inevitably leads to different outcomes.
The Foundation: Separate Legal Personality
The House of Lords’ decision in Salomon v A Salomon & Co Ltd (1897) affirmed that upon incorporation, a company acquires its own legal personality, entirely separate from its members. Mr Salomon had sold his business to a company he created, in which he and his family were the only shareholders. When the company became insolvent, creditors argued that the company was a sham and that Mr Salomon should be personally liable for its debts. The House of Lords rejected this, holding that the company was validly formed and had a separate identity, meaning Mr Salomon was not personally liable. This principle is fundamental, as it underpins the concept of limited liability, protecting personal assets of shareholders from company debts and thereby encouraging business risk. The courts have consistently defended this principle, viewing any departure from it as a significant step to be taken only in exceptional circumstances.
Piercing the Veil: The Restrictive Civil Law Approach
For many years, the specific circumstances in which a court would pierce the corporate veil were unclear. The courts used various terms like ‘facade’, ‘sham’, or ‘creature’ of the shareholder, leading to inconsistency. Classic cases such as Gilford Motor Co Ltd v Horne (1933), where an ex-employee used a company to breach a non-compete clause, and Jones v Lipman (1962), where a company was formed to avoid the specific performance of a land sale, showed courts would not permit the corporate form to be used for fraud or to evade existing legal obligations. However, the lack of a single, coherent principle created uncertainty.
This uncertainty was addressed by the Supreme Court in Prest v Petrodel Resources Ltd (2013). In this case, Lord Sumption conducted a thorough review of the case law and set out a new framework. He distinguished between the ‘concealment principle’ and the ‘evasion principle’. The concealment principle involves looking behind the company to see who the real actors are, but it does not disregard the veil itself. This is what happened in cases like Gilford, where the court was simply identifying Mr Horne as the real actor behind his company. In contrast, the evasion principle is the true form of veil piercing. According to Lord Sumption, this is only available "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" (Prest v Petrodel Resources Ltd, 2013, para 35). This significantly narrowed the doctrine, confirming that piercing the veil is a remedy of last resort.
The Corporate Veil in Criminal Law
The position in criminal law has traditionally been viewed as different. Companies can be held criminally liable themselves, most commonly through the ‘identification principle’, where the criminal acts and state of mind of senior individuals representing the company's "directing mind and will" are attributed to the company (Tesco Supermarkets Ltd v Nattrass, 1972). However, the question here is when the veil is lifted to make an individual criminally responsible.
In practice, a person who commits a crime can be prosecuted directly, even if they used a company as part of their scheme. For example, a director who commits fraud using the company as a vehicle is liable for fraud in their personal capacity. This does not require piercing the corporate veil; it is direct liability for one's own criminal actions. This aligns with Lord Sumption’s ‘concealment principle’, as the court is merely identifying the true criminal.
However, there are situations where the concept of piercing the veil becomes more relevant. In R v Seager (2009), the Court of Appeal considered the matter in the context of a confiscation order. The court stated that the veil could be pierced when the company was used to "conceal his own criminality or to evade the enforcement of the criminal law". The court suggested that, in the context of criminal conduct, "the court is not limited by the rigidities of the ‘interests of justice’ test or the categories of exception at common law" (R v Seager, 2009, para 76). This suggests a more flexible approach than in civil law.
This phrasing seems to align closely with the ‘evasion principle’ later articulated in Prest. The use of a company to hide criminality could be seen as an attempt to evade a legal restriction (the criminal law itself). This suggests that rather than there being a separate test for criminal law, the type of conduct that attracts criminal sanction is more likely to fall within the narrow Prest exception. For example, if an individual is prohibited by law from conducting a certain activity and sets up a company specifically to do it, they are deliberately evading an existing legal restriction, which would satisfy the evasion principle.
The Impact of Prest on Criminal Cases
Since the decision in Prest, its principles have been applied in criminal contexts, suggesting that a unified doctrine is emerging. In R v Boyle (2016), a case concerning confiscation orders under the Proceeds of Crime Act 2002, the Court of Appeal directly applied the reasoning from Prest. The court confirmed that veil piercing is only possible under the evasion principle, where the company is being used to evade an existing obligation. The court held that simply using a corporate structure to hold the proceeds of crime did not, by itself, justify piercing the veil to treat the company’s assets as the defendant’s personal assets. The prosecution had to prove that the defendant was using the company to evade the enforcement of the confiscation order.
This indicates that the specific, narrow test from Prest now governs criminal cases as well. The idea of a broad, flexible power to lift the veil in criminal cases, as hinted at in R v Seager, has been constrained. While criminal courts are focused on preventing and punishing crime, they must do so within established legal principles. The principle of separate legal personality is not disregarded simply because a crime has been committed. The key question is whether the individual has used the corporate structure specifically to evade an obligation. In many criminal scenarios, this will be the case, which explains why the veil may appear to be lifted more often than in the civil context, but the underlying test remains the same.
Conclusion
In conclusion, the maxim that “fraud unravels everything” does not give the criminal courts a free pass to disregard the corporate veil at will. The foundational principle of separate legal personality established in Salomon is robust. Following the landmark judgment in Prest v Petrodel, the circumstances for piercing the veil in civil law have been clarified and tightly restricted to the ‘evasion principle’. While it was once thought that criminal courts operated under a more flexible regime, recent case law such as R v Boyle demonstrates that the principles from Prest are now dominant in the criminal sphere as well. The perception that the veil is lifted more readily in criminal cases is not because the test is different, but because the conduct involved in many crimes—deliberately using a company to hide illegal activities or their proceeds—fits more naturally within the narrow definition of the evasion principle. Therefore, while the outcomes may differ, the legal test for lifting the corporate veil in criminal cases is now largely unified with the restrictive approach applied in civil law.
References
Cases:
- Gilford Motor Co Ltd v Horne [1933] Ch 935
- Jones v Lipman [1962] 1 WLR 832
- Prest v Petrodel Resources Ltd [2013] UKSC 34
- R v Boyle [2016] EWCA Crim 191
- R v Seager [2009] EWCA Crim 1303
- Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)
- Tesco Supermarkets Ltd v Nattrass [1972] AC 153
