UK: Supreme Court Confirms Corporate Veil Cannot Be Pierced To Make A Puppeteer Party To His Puppet’s Contract

Last Updated: 18 February 2013
Article by Stuart Shepherd

VTB Capital Plc v. Nutritek International Corp and Others [2013] UKSC 5

The Supreme Court has unanimously rejected VTB Capital Plc's("VTB") case that the corporate veil of their contractual counterparty could be pierced so as to render those controlling the counterparty jointly and severally liable under their contract. In doing so, the Supreme Court rejected the approach adopted by Mr Justice Burton in the Commercial Court in Antonio Gramsci Shipping Corporation and Others v. Stepanovs [2011] EWHC333 (Comm), whoheld that, in certain circumstances, the corporate veil could be pierced so as to impose contractual liability on those controlling the corporate entity that had ostensibly entered into the contract concerned.

The background facts

VTB lent US$225,050,000 to a Russian company, Russagroprom LLC ("RAP"), under a Facility Agreement. The advance was primarily to enable RAP to buy six Russian dairy companies and three associated companies from Nutritek International Corp ("Nutritek"). RAP subsequently defaulted on the loan. It was VTB's case that it was induced to enter into the Facility Agreement in relation to the loan, and an accompanying interest rates swap agreement, by misrepresentations made by Nutritek for which other Respondents were jointly and severally liable. The misrepresentations alleged were first, that RAP and Nutritek were not under common control and, second, that the value of the dairy companies was much greater than was in fact the case. VTB's case was that the misrepresentations were fraudulent. VTB sought to pursue their claims against Nutritek and others, including the individual allegedly pulling the strings behind the corporate veil, Mr Malofeev, both in tort and in contract. In order to pursue a claim in contract, and, in particular, to seek to rely on the English jurisdiction clause in the Facility Agreement, VTB argued that the Court should pierce RAP's corporate veil on the basis of the alleged fraudulent conduct so as to render Nutritek and others jointly and severally liable under the Facility Agreement.

The piercing of the corporate veil issue was not the only issue that the Court had to deal with. The other main issue, which logically had to be dealt with first, was in relation to jurisdiction. VTB had obtained ex parte permission to serve the respondents out of the jurisdiction. At that stage, their claim was limited to one in tort. The Respondents applied to set aside the permission to serve out and, at the same time, VTB sought to amend their case so as to introduce a contractual claim against the Respondents based on the argument that RAP's corporate veil could be pierced in the manner described above.

At first instance, Mr Justice Arnold set aside the leave to serve out and refused to grant VTB permission to amend. VTB's appeal to the Court of Appeal in relation to both issues was rejected. They were then given permission to appeal on both issues to the Supreme Court.

The Supreme Court's Judgment

Jurisdiction issue

On the question of jurisdiction, whilst the Supreme Court took a different view to both Mr Justice Arnold and the Court of Appeal in relation to the law applicable to VTB's tortious claims, concluding that they were governed by English law rather than Russian law, they upheld the lower Courts' decision in relation to jurisdiction by a majority of 3:2, with Lords Clarke and Reed dissenting from the judgments of Lords Mance, Neuberger and Wilson.

Corporate veil issue

With regard to VTB's attempt to pierce the corporate veil in respect of RAP, the Supreme Court unanimously rejected their appeal and, in so doing, it read the last rites over the decision of Mr Justice Burton in Antonio Gramsci and Others v. Stepanovs.

Lord Neuberger gave the leading judgment in respect of the corporate veil issue. He considered the Respondents' argument that there were in fact no circumstances in which the Court could pierce the corporate veil. In essence, the Respondents' case was that previous cases that appeared to involve piercing the corporate veil were not what they seemed and were decided on a different basis. In summary, they said that piercing the corporate veil is contrary to high authority, inconsistent with principle and unnecessary to achieve justice.

Lord Neuberger obviously found the arguments in this respect finely balanced and concluded:-

"In my view, it is unnecessary and inappropriate to resolve the issue of whether we should decide that, unless any statute relied on in the particular case expressly or impliedly provided otherwise, the Court cannot pierce the veil of incorporation. It is unnecessary, because the second argument raised on behalf of Mr Malofeev, to which I shall shortly turn, persuades me that VTB cannot succeed on this issue. It is inappropriate because this is an interlocutory appeal, and it would therefore be wrong (absent special circumstances) to decide an issue of such general importance if it is unnecessary to do so."

Lord Neuberger went on to consider (and obviously reject) VTB's efforts to pierce the corporate veil in this case. In doing so, he observed that the notion that the principle of piercing the corporate veil, if the principle exists at all, can be extended as contended for by VTB receives no support from any case save, of course, from Mr Justice Burton's decision in Antonio Gramsci. That, he said, did not necessarily mean VTB's case in this respect must fail but concluded:

"However, given the principle is subject to the criticisms discussed above, it seems to me that strong justification would be required before the court would be prepared to extend it. Once one subjects the proposed extension to analysis, I consider that it is plain that it cannot be sustained: far from there being a strong case for the proposed extension, there is an overwhelming case against it."

Observing that the notion of joint and several contractual liability of the puppet and the puppeteer is inconsistent with the reasoning and decision in Salomon v. Salomon,Lord Neuberger said:

"In any event, it would be wrong to hold that Mr Malofeev should be treated as if he was a party to an agreement, in circumstances where (i) at the time the agreement was entered into, none of the actual parties to the agreement intended to contract with him, and he did not intend to contract with them, and (ii) thereafter, Mr Malofeev never conducted himself as if, or led any other party to believe, he was liable under the agreement. That that is the right approach seems to me to follow from one of the most fundamental principles on which contractual liabilities and rights are based, namely what an objective reasonable observer would believe was the effect of what the parties to the contract, or alleged contract, communicated to each other by words and actions, as assessed in their context...."

So, in conclusion, Lord Neuberger said that even assuming that there is jurisdiction to pierce the corporate veil on appropriate facts, VTB's proposed pleaded case did not give rise to arguable grounds for contending that that jurisdiction could be invoked in the present case.

Comment

Whilst there were two issues before the Supreme Court in this case, namely jurisdiction and the circumstances in which the corporate veil might be pierced, if at all, it is only in relation to the latter issue that the Supreme Court's decision is of significance. Whilst it certainly settled the debate as to whether a puppeteer can be liable under his puppet company's contract, it still leaves open for future determination whether there is, in fact, any jurisdiction in any circumstances to pierce the corporate veil in a true sense of the term and, if so, what these circumstances are.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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