Separate legal personality, not separate liability: Looking beyond the corporate veil
The English Court of Appeal in the recent judgment of Investment Bank PSC v El-Husseini examined the purpose and scope of section 423 of the English Insolvency Act (the IA), a provision which deals with transactions defrauding creditors. By examining who could be held accountable for a company’s pre-insolvency decisions, the judgment adds to the jurisprudence on agency and attribution. The approach taken by the English Court of Appeal in this case will be of particular interest to offshore insolvency practitioners as the same principles can be applied by analogy when interpreting similar provisions of BVI Insolvency law (namely, section 246 of the BVI Insolvency Act 2003).
Investment Bank PSC (the Bank) initiated proceedings against a Lebanese businessman (the Defendant) for failing to repay a debt exceeding £19 million arising under personal guarantees. The Bank argued, among other things, that the Defendant, by entering into a number of transactions, sought to disguise his beneficial ownership of certain assets, with a view of putting them beyond the reach of his creditors. At first instance, one of the key issues was to determine whether a debtor acting as a sole director of his company was by itself enough for the debtor to have “entered into” the transaction within the meaning of section 423 of IA.
The Defendant argued that the principle of separate legal personality meant that section 423 could only apply to assets owned by the debtor and not to assets owned by a company indirectly owned by the debtor. At first instance, the court agreed with that interpretation, noting that a transaction by a company cannot automatically be attributed to the individual owner/beneficiary. The Court rejected the contention that the Defendant was transacting in his personal capacity. The principle of separate legal personality therefore prevailed.
The Bank appealed arguing, in summary, that the debtor need not be a party to a contract if it can be shown that he took some steps; participated; or was involved in the transaction. The Bank contended that in determining personal liability for acts performed on behalf of a company, the Court should focus on the threshold requirements which give raise to personal liability and circumvent the doctrine of separate legal personality.
The English Court of Appeal agreed with the Bank’s arguments and allowed the appeal. It was noted, in particular, that the first instance judge erred in assuming that “because the company can only act through a human person, and because in law the act is treated as the act of the company, it could not also have some legal significance when it comes to the individual debtor”. Lord Justice Singh emphasised that, in essence, while the doctrine of separate personality of a company must be respected, it does not provide complete protection for directors from personal liability.
Our team will continue to monitor further developments in this case.
This blog post was written by Partner Jonathan Addo and Associate Julia Iarmukhametova.