Using The “Evasion Principle” To Pierce The Corporate Veil In UK Bankruptcy
The English High Court has granted an injunction to trustees in bankruptcy and pierced the corporate veil of companies which were operated by a bankrupt as his agents and nominees and which held assets on his behalf (Wood and another v Baker and others  EWHC 2536 (Ch)).
The debtor was made bankrupt in 2005 and had been convicted and sentenced on a number of charges of dishonesty. His affairs were complex and assets were owned by a number of third parties including companies and other businesses. The bankrupt had consistently failed to cooperate with his trustees in bankruptcy, as a result of which his discharge from bankruptcy had been suspended indefinitely.
Upon his bankruptcy, all assets beneficially owned by the debtor had vested in his trustees under section 306 Insolvency Act 1986 (“IA86″). Under section 307 IA 1986, if the bankrupt acquires other property during his bankruptcy (“after-acquired property”) the trustees can serve a written notice claiming the after-acquired property for the bankrupt’s estate, following which such property is deemed to have vested in the trustees upon the date when the debtor acquired his interest in it (section 307(3), IA 1986).
Following enquiries into the debtor’s affairs under section 366 IA 1986, the trustees acquired information that substantial sums of money were being paid through accounts held by certain companies on behalf of the bankrupt. The trustees made an urgent application for an injunction to preserve the funds in such companies’ bank accounts, seeking declarations that the business and assets of each of the companies were held on trust for the bankrupt and thus fell within the remits of section 307 of the IA 1986 as after-acquired property.
One of the main grounds relied upon by the trustees in the application was the “evasion principle”, (so named by Lord Sumption in his leading judgment in Prest v Petrodel Resources Limited and others  UKSC), pursuant to which the Court can depart from the fundamental principle that a company has a separate legal personality from that of its members. The evasion principle applies when a person under a legal obligation, liability or restriction seeks deliberately to evade that obligation by interposing a company under his control. In such circumstances, the court may pierce the corporate veil but 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 court granted the injunction against the companies, being satisfied (inter alia) that upon the evidence:
the bankrupt was the prime mover behind the companies who were effectively his nominees;
the companies were being used to shelter money and assets belonging to and business being carried on by the bankrupt; and
the assets were capable of being subject to a notice under section 307 of the IA 1986.
As a result, pending the substantive hearing of the matter, the companies were prevented from making payments from their bank accounts except in the ordinary course of their businesses.
Whilst the trustees held ATE insurance in relation to the claim, it did not cover any potential liability in respect of the undertaking in damages generally required where injunctive relief is sought. Consequently, the trustees proposed that the undertaking be limited to the net realisable value of the unpledged assets in the bankrupt’s estate, less the costs, expenses and disbursements of the bankruptcy, on the basis that the trustees’ claims would be stifled if they were required to give an unlimited undertaking. The Court accepted it was necessary for the court to strike a balance between the interests of the trustees and the respondent companies and held that the trustees’ undertaking should be limited to the amount of monies and net realisable value of the unpledged assets in the bankruptcy estate. It did not exclude the trustees’ costs, expenses and other disbursements from the scope of the undertaking as the Court felt it was not appropriate to decide those issues without notice to the companies. The question as to whether the companies would be required to disclose information about their assets was also left to be determined at the substantive full hearing.
This decision is good news for trustees seeking to trace and realise assets in a bankrupt estate and is one of the few occasions where the court has pierced the corporate veil in a bankruptcy context. The court accepted the evasion principle applied here, given the bankrupt’s conduct over a period of time and his failure to cooperate with the trustees in relation to his assets and shows the court is willing to assist trustees to prevent a bankrupt from hiding and dissipating his assets by granting a freezing order and limiting the cross-undertaking in damages.