VTB Capital v Nutritek: The Corporate Veil and the Consequences of Piercing it

It
may be surprising that the highest court in the United Kingdom decides,
in 2013, to reserve for future decision the question whether and when the
corporate veil can be pierced. It has been taken for granted for many years
that a court may pierce the corporate veil and—atleast in this jurisdiction—the
courts have been ready to do so on a wide range of grounds. In this background,
Mr Michael Lazarus’s submission in the Supreme Court that an English court
has no power to pierce the corporate veil as a matter of principle
was, as
Lord Wilson notes, no doubt ambitious, but it highlights that the common law is
yet to articulate properly the grounds on which courts pierce the veil. It is
also extremely significant that the Supreme Court did not reject the submission
but left it open to be decided in an appropriate case. The Supreme Court’s
judgment also contains a number of interesting observations on other matters
relating to the corporate veil, as also issues of choice of law for foreign
torts and forum non conveniens (with
which we are not concerned in this post).

Readers
may refer to our analysis
of the Court of Appeal’s judgment for a more detailed account of the facts and
a summary of Lloyd LJ’s magisterial judgment. In
short, VTB, the claimant, was fraudulently induced to advance about $220
million under a Facility Agreement to RAP to fund RAP’s acquisition of certain
dairy companies from Nutritek. The fraudulent misrepresentations were about the
corporate relationship between Nutritek, RAP and Marshall Capital and the
valuation report. It was accepted that VTB had a claim against Mr Malofeev and
the companies that he controlled in tort, but VTB (for jurisdictional reasons)
wished to pursue a claim in contract against those respondents, even though they
were not parties to the contract. Arnold J and the Court of Appeal rejected the
contention that the puppet, once the corporate veil is lifted, automatically
becomes a party to contracts entered into in the name of the puppeteer.

In
the Supreme Court, two arguments were made against the use of the corporate
veil to give VTB a cause of action. The first, as noted above, was that an
English court has no power to pierce the veil. The second was that the consequence of doing so was in any event
not to add parties to a contract. Lord Neuberger (with whose analysis of this
issue the other members of the court agreed) noted that Mr Lazarus had mounted
a “spirited and sustained attack
against the proposition that such a power exists, by explaining that every case
in which an English court had pierced the veil was based either on a statutory
power to do so, concessions by counsel or could be explained on traditional
grounds (such as agency). Lord Neuberger agrees that there is no House of Lords
or Supreme Court authority in which the existence of the power has been at
issue and affirmed: in Woolfson v
Strathclyde
, it was assumed to exist, and a correct analysis of Salomon v Salomon is conceivably inconsistent with any such power.
Eventually, Lord Neuberger holds that it is unnecessary to decide so important
a question in this case, since it was an interlocutory appeal and since VTB
would in any event fail, since the members of the Court agreed that the power
cannot be exercised on these facts, even if it did exist.

Turning
to when the power may be exercised,
Lord Neuberger’s judgment confirms the recent trend in English law towards a
narrow corporate veil doctrine, exemplified by Munby J’s approach in Ben Hashem, which is cited with approval
in VTB: the statement of principle is
that the veil may be pierced only if the company is “used as a façade concealing the true facts.” At para 142, Lord
Neuberger explains that “true facts” means that “in reality, it is the person behind the company, rather than the
company, which is the relevant actor or recipient (as the case may be)
”. It
is not quite clear whether this test is an alternative
to the Ben Hashem impropriety
test, or an additional requirement.

With
respect to the consequence of
exercising the power to pierce the veil, Lord Neuberger agrees with the Court
of Appeal that none of Gilford, Jones v
Lipman
and Trustor, correctly
analysed, supports the use of the veil to add parties to a contract, and
considers that such an extension is “contrary
to authority and contrary to principle
”. One of the reasons he gives, at
para 138, is that the company, although it acts through human beings, is
generally in the position of the principal, rather than the agent, whereas on
VTB’s case the company would be a quasi-agent, not the quasi-principal. The Supreme Court also endorsed the Court of Appeal’s reasoning on this point.   

The
Supreme Court has, perhaps unsurprisingly, confirmed that the piercing the
corporate veil does not add parties to a contract. The more fundamental
question that it has left open—about whether the corporate veil can at all be
pierced—is an open invitation to counsel to argue the point in an appropriate
case, and that case is keenly awaited.     



A video summary of the judgment, given by Lord
Mance, is available here.

About the author

V. Niranjan

2 comments

  • Not to betray own courage of conviction, but without offending it, one has to frankly say,- this is on a topic which has more or less become a fashionable one. More or less the same or like view (or to that effect ) one has been hearing off and on, from the judiciary itself; besides from other legal luminaries. For instance,@itatonline – See the Video of the presentation at the firm.moneycontrol.com. See also
    CJ Kapadia’s presentation

    As one understands, a couple of fine points stressed, interestingly having a direct reference to the subject topic, are that, – any court judgment is an opinion or perception; and is ideally expected to be rendered on a case to case basis. As the CJ, in his wisdom, forcefully echoed in his address is an age-old principle of jurisprudence; that is, justice must not only be done but also must be seen to have been done.
    In this context, fittingly, the vital role the representing of advocates / counsels have to, or necessarily expected to, play does not need to be specially emphasized. This point, it is remembered, came to be highlighted in a published article – 166 Taxman 72, 73 (Mag.). Instantly recalling, the self-same aspect has been focused on, though at the cost of over stressing, in the published critique on a recently reported ITAT case @ http://taxguru.in/income-tax/itat-order-shantikumar-majithia-dcit-itat-mumbai-critique.html,

    (Ref. comments on the write-up, titled – Amount paid for buyback of shares allowed as business expenditure)

    Note: This is intended to be viewed purely as a feedback, by way sharing own individual thoughts.

  • Mr Niranjan's analysis of the case is commendable, though on certain issues, there may be difference of view on why the English SC refused to allow the amendment of the claim. Note that the plaintiff in this case was wanting to add breach of contract in addition to the original claim of torts. The contractual claim was being pleaded on the ground of lifting or piercing of corporate veil.
    J. Neuberger refused to lift the corporate veil in this case as the case that company was used as a mere facade was not made. In addition, the issue was whether the piercing principles should be based on English law, as it was questionable whether England was te proper forum for determination of the true nature of the contracting company. There is a reference in the judgement to a scholarly article on the proper forum for application of lifting/piercing principles.
    To my mind, the case provides a nice review of lifting/piercing cases and makes an interesting point that courts should not follow "unprincipled" approach to such lifting, as that would make the whole existence of companies irrelevant. The judgement cites Halsbury saying that one cannot, at the same time, say that the company exists, and that it does not.
    True – there is a huge amount of learning yet to be done on when exactly to apply lifting/piercing principles. Currently, it seems to be based on adhocism

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Recent Posts

Topics

Recent Comments

Archives

web analytics