By Conor Cronin
Legal Intern
The doctrine of Separate Legal Personality was established in the UK case Salomon v Salomon and is the cornerstone of Irish company law. The judgment delivered determined that a company is a separate legal entity to its shareholders. In effect, the shareholders cannot be liable for the company’s debts.
In the context of family law proceedings, can a spouse make an order to the court to pierce the corporate veil in order to make proper provision, or will the Salomon rule stand firm? In the UK case Ben Hashem v Al Sharif, the husband’s company of which he is a sole director possessed two properties. The wife claimed that he had full control over the properties and if they were sold, he would receive the full proceeds of the sale as the husband was the only person who could withdraw funds from the company. However, Munby J stated that the corporate veil applies the same in family and non-family law matters. In that regard, Mumby J determined that the following: –
- Ownership and control of a company do not themselves justify piercing the corporate veil.
- The court cannot pierce the veil simply in the interests of justice, even in the absence of third-party interests.
- The corporate veil can only be pierced where there is an impropriety.
- This impropriety must be ‘linked to the use of the company structure to avoid or conceal liability’.
- The wrongdoer must both control the company and have misused it to conceal his wrongdoing.
- The company may be a ‘facade’ even if it was not originally incorporated as such, as the purpose and use of the company may have changed over time. The question is whether or not it was being used for deception at the time of the relevant transactions. However, the court would only pierce the corporate veil so far as was necessary to provide a remedy for the particular wrong committed by the individuals controlling the company.
In respect of the criteria above, the husband did not commit a wrong simply because he operated the company and had the control to put the company in funds or withdraw as he so wished. His company was incorporated and continued to operate bona fide. Ultimately, it was held that the husband was merely availing himself of the advantages of incorporation as afforded by the Salomon rule.
In the UK Supreme Court case Prest v Petrodel, the Court dealt with an appeal from the husband in relation to ancillary relief made to his wife following divorce proceedings. The husband owned and controlled seven companies, all of which were joined as respondents in the wife’s application. Petrodel Resources Limited was the paper owner of the family home. However, it was held that the husband was a beneficiary of the property owned by his company and was ordered to transfer the family home into the wife’s name.
The Irish approach
In BD v JD, McKechnie J addressed the husband who was solely in charge of a group of companies and had maximum flexibility in relation to adjusting his resources to gain advantages from a tax point of view. McKechnie J stated that “… this court has jurisdiction over all the assets of both the applicant and respondent, including those held by the latter through the medium of a limited company, and can make use of them in the most appropriate manner feasible so as to make proper provision for the parties to this marriage”. McKechnie J also said that, as a result of the husband paying his legal fees through his company, he and the company should be treated as one. On appeal to the Supreme Court, Hardiman J affirmed McKechnie’s statement. However, it was not necessary to pierce the corporate veil in this particular situation but it was highlighted by McKechnie J that it could be a possibility in the future depending on the circumstances.
When making decisions in relation to financial provision in the UK, courts have regard to all assets held by either spouse. In Ireland, there is an obligation on the Court to make proper provision. In circumstances where the court is making proper provision and a spouse is the controller of a company that has a significant amount of capital, the court may decide to direct the payment of a lump sum, in recognition of the value/cash in the Company in question, without making an order in relation to the assets of the Company itself. That way, the court isn’t necessarily piercing the corporate veil but rather recognising that the spouse who owns the shares has the benefit of significant wealth (assuming that is the case) and that this needs to be recognized in making proper provision.
If you have any queries in relation to this or any other family law topic do not hesitate to contact Brendan Dillon, Emma Dillon or Aoife Cathcart on 01 2960666
