The recent Court of Appeal decision in R v Powell and Westwood contains an interesting insight into the extent to which company directors may find themselves personally liable for the cost of remediating contamination which has been caused or knowingly permitted by the companies that they control. It has confirmed that the corporate veil should only be pierced in limited circumstances.

Background

Wormtech Limited held an environmental permit for an in-vessel composting facility on land owned by the Ministry of Defence (MoD). Environment Agency officers noted repeated breaches of the permit conditions and served an enforcement notice on the company in around August 2012.  An inspection of the facility in September 2012 revealed that no site workers or machinery were present, that hundreds of tonnes of food waste had been left rotting down to produce leachate, and that leachate lagoons were overflowing.  By October 2012, it appeared that the site had been abandoned and, in November 2012, a winding up order was made against the company.

It fell to the MoD to clear up the leachate and resultant pollution at the site at a cost to the public of approximately £1.125m. One company director, Mrs Powell, was convicted of consenting or conniving in the failure of a company to comply with the conditions of an environmental permit and of consenting or conniving in the treating, keeping or disposing of waste in a manner likely to cause pollution.  Another director, Mr Westwood, pleaded guilty on the basis that the failure by company to comply with the permit conditions was attributable to his neglect.  Both directors were handed suspended prison sentences, ordered to carry out unpaid work, and disqualified from acting as directors.  Both directors were also found to have personally benefitted as a result of the offences and, as a result, confiscation orders under section 6 of the Proceeds of Crime Act 2002 were imposed on them for a total of £230,000.

Issue

The Crown contended that, since the company had kept the controlled waste in a manner likely to cause pollution, it was responsible for clearing up the site, and, by abandoning the site, it had avoided those costs. Therefore, the Crown argued that a pecuniary advantage had accrued to the company and that this should be attributed to Mrs Powell and Mr Westwood.  However, the judge dismissed the Crown’s application to include the cost that the MoD incurred in cleaning up the polluted site within the confiscation orders.  The Crown appealed.

Ruling

Before the judge, the Crown relied upon the judgement in R v Seager and Blatch where the Court of Appeal held:

In the context of criminal cases the courts have identified at least three situations where the corporate veil can be pierced … Secondly, where an offender does act in the name of the company which (with the necessary mens rea) constitutes a criminal offence which leads to the offender’s conviction, then “the veil of incorporation is not so much pierced as rudely torn away”: per Lord Bingham in Jennings v CPS  paragraph 16.

Conversely, the respondents argued that this test was not satisfied when read in conjunction with the statement of Lord Sumption in the Supreme Court in Prest v Petrodel Resources Limited that:

[T]here is a limited principle of English law which applies 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. The court may then pierce the corporate veil for the purpose, and only for the purpose of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality.

Applying the decisions in Seagar and Blatch and Prest, the judge in the present case determined that the corporate veil could only be pierced where the person relying on the protection of the corporate veil was the sole controller or the sole owner of the company. As neither respondent director was the sole controller or the sole owner of the company, the judge ruled that the court was not entitled to pierce the corporate veil and the respondents could not be personally liable for the costs of clean up.

Before the Court of Appeal, the Crown challenged the judge’s ruling that it was necessary to establish that an offender was the sole controller and/or sole shareholder of a company before he or she could be held individually liable for a company’s wrongful actions or omissions. The respondents did not argue that sole control or ownership was a necessary pre-requisite.  Nevertheless, they contended that, even if they could not support the judge’s reasoning, his decision was correct.

In Prest, Lord Sumption identified two distinct principles relevant to the second corporate veil piercing test in Seager and Blatch:

• The concealment principle which is that “the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the “facade”, but only looking behind it to discover the facts which the corporate structure is concealing.”

• The evasion principle which is that “the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement.”

On appeal, the Crown accepted that the second test in Seager and Blatch had to be read in the context of the decision in Prest and that the present case did not fall within the concealment principle.  The question on appeal, therefore, was whether or not the case fell within the evasion principle.

The Court of Appeal first approached the issue by distinguishing between cases where a lawful contract exists but the transaction is tainted by illegality from cases where the entire undertaking is unlawful. Here, the company had been a lawful operation which had subsequently become unlawful through breaches of permit conditions, so this case fell within the former category.  The Court of Appeal then emphasised the need under the evasion principle for there to be a legal right against the person controlling the company that exists independently of the company. In this case, the Court of Appeal could not identify a duty on either respondent existing independently of the company.  The company held the environmental permit and the respondents’ liability arose in a secondary manner as a result of their consent, connivance or neglect in the commissioning of the offence.  Although the Crown countered by arguing that the respondents had an obligation to obey the law irrespective of the company’s position, the Court of Appeal rejected this on the basis that the Crown’s approach would risk making every director liable to a confiscation order whenever their company broke the criminal law.  The appeal was, therefore, dismissed.

Takeaway

This case highlights the competing public policy concerns in corporate veil piercing cases.

On the one hand, there is a desire to protect the public purse from incurring costs in remediating a site where there are individuals in charge of the company that caused the pollution who have personally acted irresponsibly. Prior decisions such as Chandler v Cape PLC have illustrated that the Court of Appeal is prepared to pierce the corporate veil in civil cases with an environmental or health and safety dimension where the interests of justice have demanded.

On the other hand, although sometimes controversial, the corporate veil is an important principle of English law. For centuries, it has encouraged individuals who manage companies to take risks in return for protection from personal liability should their venture fail.  The justification for this approach has been the perceived benefits to the economy and wider society (for example, tax revenues, employment and satisfaction of demand for products and services).

Given that the piercing of the corporate veil is a matter for judicial discretion, it is submitted that courts should do so sparingly or risk undermining certainty and predictability in corporate decision-making and denying natural justice to directors.