Why they attempted to pierce the corporate veil

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Reference no: EM132276960

1. From the short article below, please state the reason why they attempted to pierce the corporate veil.

2. And explain the outcome of the case.

Court 'pierces the corporate veil' where companies used to hide bankrupt's assets

Amy McVey and Fiona Beal look at the recent case of Wood v Baker, and the decision to freeze the assets of companies used to hide the bankrupt’s assets.

The English High Court in the case of Wood v Baker granted an order freezing the assets of a number of limited companies, on the basis that the companies were owned and controlled by a bankrupt individual, and were being used by him to shelter substantial assets that were really his own.

The case was brought by the individual’s trustees in bankruptcy who are appointed to recover, manage and realise a bankrupt’s assets and deal with his creditors. A trustee ‘steps into the shoes’ of the individual, so would ordinarily only themselves be entitled to deal with assets owned by the individual. A company has its own legal personality, separate from the people who own and control it, so the starting point is that assets owned by a company – even if that company is wholly owned by the bankrupt individual – are beyond the reach of a trustee in bankruptcy.

In this case, however, the trustees were able to persuade the court that it should ‘pierce the corporate veil’; that is, look behind the separate legal personality of the companies to get to the shareholder, Mr Baker. This only happens rarely: the UK courts start from the position that a company’s separate legal personality is sacrosanct.

The facts of the case

Mr Baker had failed to cooperate with his trustees throughout his bankruptcy.

Following the trustees’ appointment, Mr Baker was jailed for fraud.

The trustees later discovered that Mr Baker controlled ten companies, which held substantial assets.

The trustees were worried that money was moving out of the companies’ bank accounts for Mr Baker’s personal use. Following the deposit of a significant sum, they asked the court to freeze the companies’ assets on the basis that: those assets were held by the companies on trust for Mr Baker or were otherwise owned and controlled by him; and the assets had been acquired by Mr Baker after he became bankrupt and, under insolvency legislation, the trustees were entitled to deal with them.

The court decision

The court agreed that there was a reasonable argument that Mr Baker was, effectively, the individual behind the companies and that the companies were being used to shelter money and assets properly belonging to Mr Baker.

It looked at the law around piercing the corporate veil. A court can do this if a company’s separate legal personality is being abused so as to evade the enforcement of a legal right against the person who controls the company (ie the shareholder). The legal right against the person in control must exist independently of the company’s involvement, must not be capable of being exercised against the company, and the company must have been brought in only to defeat the right or frustrate its enforcement.

The court decided that, on the facts, there were exceptional circumstances that justified piercing the corporate veil. It made an order preventing Mr Baker’s companies from making payment from their bank accounts, except in the ordinary course of business.

Practical implications

It is common and perfectly legitimate for individuals to conduct their business affairs, and to hold assets, through limited companies. There are many legal and legitimate tax reasons for doing so.

In the unlikely event that a controlling shareholder becomes bankrupt, insolvency practitioners will be encouraged by the decision of the court in this case to look closely at the corporate structure, to see whether a challenge is appropriate. Decisions in this area are, however, always highly fact-sensitive. A court will not automatically pierce the corporate veil of any and all companies owned by a bankrupt individual – quite the opposite, in fact. There would need to be evidence of a certain type of wrongdoing by the bankrupt in relation to a particular company, eg that they had set up that company in order to put assets beyond the reach of creditors.

Reference no: EM132276960

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