Blog - 30/11/2015
Restructuring & Insolvency
High Court pierces corporate veil of companies operated by bankrupt
The recent case of Wood -v- Baker  EWHC 2536 (Ch) is a rare example of the Court piercing the corporate veil and granting an injunction over companies used by a bankrupt to conceal monies belonging to him.
The joint trustees in bankruptcy applied for an interim injunction freezing the business and assets of various corporate entities believed to be beneficially owned and controlled by an undischarged bankrupt. The application was brought in relation to the trustees’ substantive claim seeking declarations pursuant to section 363 of the Insolvency Act 1986 (the “Act”) that the business and assets of each of the corporate respondents, including any sums held in their bank accounts (which were believed to amount to approximately £1 million), were held on trust for, or on behalf of, the bankrupt. If the main claim is successful, the assets would constitute property acquired after the commencement of the bankruptcy, vest in the trustees and form part of the bankrupt’s estate under section 307 of the Act.
The Court recognised that the bankruptcy, which commenced on 27 June 2005 and was indefinitely suspended, was “complex and protracted” and there had been a “consistent and long-standing history of concealment by the bankrupt of his businesses and assets and evasion on his part of his bankruptcy obligations”. These obligations, which include notifying a trustee of any after-acquired property, arise from section 333 of the Act and continue to apply after a bankrupt’s discharge.
The evidence before the Court showed that the bankrupt had been convicted and sentenced on a number of occasions, at least one of which related to acts specifically undertaken with a view to evading his duties to the trustees. Additionally, the trustees produced documents demonstrating that the companies’ bank accounts were used to pay “over £31,000 for the bankrupt’s second wedding” and “some £5,000 for a birthday dinner for the bankrupt… at a Michelin starred restaurant… [and] to meet other apparently personal expenses”.
The Court acknowledged that “cases of piercing the corporate veil are rare and should be regarded very much as a remedy of last resort”. However, it considered the ‘evasion principle’ – whereby a company is interposed so as to enable an individual to wrongfully evade or frustrate his existing legal obligations – was engaged in this case. The Court was therefore persuaded that the companies were being used to shelter money, business and assets properly belonging to the bankrupt and there was a real risk of dissipation of further company monies at the instance and behest of the bankrupt. Accordingly, the injunction was granted against the corporate respondents.
This judgment is notable as it is a rare example of the Court piercing the corporate veil in a bankruptcy context. It demonstrates the Court will assist trustees in circumstances where the bankrupt seeks to evade the law or frustrate its enforcement.
Also of interest is the Court’s decision regarding the usual requirement for applicants seeking injunctive relief to provide a cross-undertaking in damages. The trustees in this case held very few assets and their ATE insurance covered only adverse costs awards made against them. In the circumstances the Court accepted an undertaking limited to the amount of the monies and the net realisable value of the unpledged assets in the bankrupt’s estate. This ruling will no doubt assist trustees and liquidators in similar future cases when limited assets render it difficult or impossible to provide the standard comprehensive undertaking.
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