Facts
Authorities
Findings on corporate veil issue
Other issues
Towards the end of 2011 a long and carefully reasoned judgment was handed down on the question of when it is appropriate to look behind the identity of a company in order to attach liability to its controlling mind.
In VTB Capital Plc v Nutritek International Corp(1) the claimant alleged a fraud by the defendants. VTB had entered into a loan agreement with RAP for the acquisition of six Russian dairy companies and three other companies - the targets - from Nutritek. When RAP defaulted on the loan, VTB alleged that Nutritek had made fraudulent misrepresentations in order to induce VTB to enter into the loan agreement. These representations were to the effect that RAP was not under Nutritek's control and that the value of the targets was greater than their actual worth. The fourth defendant was a Russian citizen, living in Moscow, who was alleged to be the principal beneficial owner and controller of both Nutritek and RAP.
VTB had previously been given permission to serve proceedings out of the jurisdiction on each of the defendants and a worldwide freezing order had been made. The matter came before the court when VTB wanted to amend its claim, which was essentially based on tort, to include a contractual claim - namely, that it was entitled to pierce the corporate veil in order to hold each of the other defendants jointly and severally liable with RAP for breach of the obligation to make repayment under the loan agreement. The defendants, in turn, challenged the basis on which permission had been given to serve proceedings out of the jurisdiction, and wanted to lift the freezing order.
Both parties appeared to accept that although piercing the corporate veil is a doctrine often associated with "disregarding the separate legal personality of a company from the person or persons who control it", this was too broad as a statement of the law. It was necessary instead to analyse the legal basis of the relief sought.
The "classic statement" was to be found in Trustor AB v Smallbone (No 2),(2) in which Mr Smallbone had transferred money from Barclays Bank to himself and a company that he owned, in breach of fiduciary duty. The judge in that case held that:
"In my judgment the court is entitled to 'pierce the corporate veil' and recognise the receipt of the company as that of the individual(s) in control of it if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of those individual(s)."
However, it was emphasised that although Smallbone set out the relevant principle, it was limited in that case to a claim for knowing receipt of trust property.
In Gilford Motor Company Ltd v Horne(3) Mr Horne had left his job, formed a new company (its shares being held by his wife and his friend) and used that company to carry on a competing business in breach of a restrictive covenant. In Jones v Lipman(4) Mr Lipman agreed to sell land to Mr and Mrs Jones, but then transferred the land to a company which he controlled. The judge commented:
"It is crucial to note that the remedies granted in those cases were equitable remedies; an injunction and an order for specific performance. No damage was claimed in the former and whilst it was claimed in the latter it was not awarded."
The main case in VTB's favour was Antonio Gramsci Shipping Group v Stepanovs,(5) in which Mr Stepanovs had been served out of the jurisdiction on the basis of a charterparty contract to which he was not a party, given Stepanovs' alleged dishonest conduct and his status as a "controller".
Findings on corporate veil issue
Relying on four further cases(6) and expressly rejecting Gramsci, the judge in the present case held as follows:
- It was not accepted that the corporate veil could be pierced whenever the Smallbone conditions were identified.
- It was "inappropriate" to allow the doctrine to be used to make a contractual claim against the controller of a company in respect of his or her wrongdoing, primarily because it was fundamentally inconsistent with a fraud allegation to claim damages for breach of contract.
- The Gramsci reasoning relied on using the puppet company as a "façade", but that led to the anomaly that the company would be jointly liable where the wrongdoer concealed his or her involvement, but not when he or she did not do so - for example, where the wrongdoer was a duly appointed director of the company. This could not be right.
- Following Gramsci involved tearing up the law of privity of contract.
Instead, the judge asserted that the real basis for imposing liability was when there was some independent wrongdoing by the controller, referred to succinctly in Ben Hashem as wrongdoing "dehors" (ie, outside the ordinary business of) the company. He also appeared to agree (although not expressly) with the further analysis that this wrongdoing "had to be linked to the use of the corporate structure to avoid or conceal liability", and that the important issue was whether the company was being used as a sham at the time of the relevant transaction, rather than the purpose for which the company was established. He also cited with approval the view in Dadourian that piercing the corporate veil would occur only to provide the claimant with an effective remedy where the interposition of the sham company would, if successful, deprive the claimant of that remedy. Therefore, leave to amend the particulars of claim was denied.
The decision on this point of law had a devastating effect on the remainder of VTB's claim. VTB had argued that if the other defendants were jointly liable with RAP under the loan agreement, the English court had jurisdiction over all the defendants automatically under its English jurisdiction clause or, alternatively, under Article 23(1) of the Brussels Regulation (44/2001/EC).(7) These arguments now failed.
Once leave to amend had been denied, the judge was simply considering whether leave should have been given in the first place for a claim essentially based in tort to be served out of the jurisdiction in circumstances where the tortious acts had all or mostly taken place in Russia. He decided that it should not, and lifted the worldwide freezing order.
For further information on this topic please contact Abigail Silver at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).
Endnotes
(1) [2011] EWHC 3107 (Ch) per Justice Arnold.
(5) EWHC 333 (Comm), [2011] 1 LI Rep 617 per Burton J.
(6) Yukong Line Ltd of Korea v Rendsburg Investments Corporation of Liberia (No 2) [1998] 1 WLR 294; Dadourian Group International Inc v Simms [2006] EWHC 2973 (Ch); Ben Hashem v Ali Shayif [2008] EWHC 2380 (Fam); and Lindsay v O'Loughnane [2010] EWHC 529 (QB).
(7) Among other things, Article 23(1) provides that "if the parties, one or more of whom is domiciled in a Member State, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes… that court or those courts shall have jurisdiction. Such jurisdiction shall be exclusive unless the parties have agreed otherwise".