Companies doing business on an international basis can
take welcome comfort from a recent Court of Appeal decision, which
confirmed the approach for when a corporate veil will be
lifted.
"Lifting the corporate veil" describes a practice by
which a court decides that a subsidiary is a mere shell or alter
ego used by a parent company to avoid or conceal liability.
By piercing the corporate veil, the court treats that parent and
subsidiary as a single economic entity, thereby placing the debts
and liabilities of the subsidiary on its parent or
shareholders.
In this case, the Court of Appeal rejected an attempt by VTB, a
state-owned Russian bank, to join Nutritrek International, a UK
plc, to an action brought for loss suffered by it under the terms
of a loan agreement. VTB had made a loan of $225m to the purchaser
of several companies owned by Nutritrek, the purchaser defaulted on
the loan and VTB were only able to recover $40m.
VTB argued the loan had been made based on false inducements by
Nutritrek, and that the purchaser had fraudulently conspired with
Nutritrek to obtain the funding. The loan agreement contained an
English law jurisdiction clause which VTB sought to use to join
Nutritrek as a party to the agreement.
VTB contended that the court could lift the corporate veil on the
parties to the loan agreement to show that Nutritrek was a party to
it on the basis that it had been controlling the purchaser's
actions and was ultimately liable for its loss. The Court of Appeal
disagreed on the basis that even if the veil was lifted, it was
unlikely to show that Nutritrek was a party to the loan
agreement.
In lifting the veil, the Court would be creating an artificial
remedy which would undermine the basic principles of English
contract law and it was not prepared to lift the veil simply to
permit a claim to be brought through the English courts where the
defendant was not a party to the relevant contract. While the
corporate veil was not pierced in this case it is clear that the
courts will in some circumstances do so and businesses do well to
remember this – an opportunity for lawyers to add value
and Rawlison Butler are always happy to answer client questions on
liability and corporate veil issues.
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.
