By its recent decision in VTB Capital Plc v Nutritek International Corp and Others [2012] EWCA Civ 808, the Court of Appeal has clarified the law regarding the scope of piercing the corporate veil. This decision has provided much-needed certainty on the principle, following recent High Court decisions which sought to extend it.

Context

It has been a long established principle of company law that a company has a separate legal personality from its members. A recognised exception to this rule is where 'special circumstances exist indicating that [the corporate veil] is a mere façade concealing the true facts' (Lord Keith of Kinkel in Woolfson v Strathclyde Regional Council). In these 'special circumstances', the court may pierce the corporate veil in order to look behind the corporate personality to the company’s members. The rationale is to prevent fraudulent individuals escaping liability when the company is merely being used as a means of concealing such fraudulent activity. Historically the sanctions applied to members in this context would be equitable in nature.

The principle is extended

In both Antonio Gramsci Shipping Corp v Stepanovs and Lembergs and Alliance Bank JSC v Acquanta Corp last year, Burton J sought to extend the principle of piercing the corporate veil. In Gramsci, Burton J commented that there was no good reason of principle or jurisprudence why a claimant should not be able to enforce the terms of an agreement against both the 'puppet company' and the 'puppeteer' - the fraudulent individual(s) pulling the strings. This was a significant shift in the court’s approach, providing for remedies in contract rather than just in equity.

VTB Capital Plc v Nutritek International Corp and Others

This case concerned a loan advanced by VTB Capital Plc (VTB) to Russagroprom LLC (R LLC) for the acquisition of dairy plants and associated companies from Nutritek International Corp (Nutritek) under a facility agreement. The agreement excluded the rights of third parties. R LLC defaulted on the loan and VTB recovered less than $40 million by way of enforcement of security and under the interest rate swamp entered into between the parties. VTB made allegations of fraudulent representations by Nutritek:- firstly regarding the value of the dairy plants and companies and secondly that R LLC and Nutritek were not under common control. Further, VTB alleged that Mr Malofeev was the owner of both R LLC and Nutritek.

VTB sought, amongst other things, to claim breach of contract against the associated companies and Mr Malofeev. VTB argued that the court should pierce the corporate veil as R LLC was simply being used as a vehicle in order to obtain loans made by VTB, which constituted fraudulent misuse of the company structure. The High Court refused permission to amend in order to add the claims in contract, a point which VTB then appealed.

Decision by Court of Appeal

Dismissing the appeal, the court’s position was that whilst it could pierce a company’s corporate veil in appropriate cases, it would always be via discretionary jurisdiction. Burton J’s decisions in Gramsci and Alliance resulted from a misreading of previous authorities and it was not open to the court, or indeed necessary, for an artificial remedy in contract to be created. The court also confirmed that in order to pierce the corporate veil it is not sufficient merely to show that the company was involved in wrongdoing – the relevant wrongdoing must be independent in nature that involves the fraudulent misuse of the corporate personality of the company in order to conceal the truth.

Conclusion

Whilst helpful in many respects, this case may dishearten prospective claimants as the court remains steadfast in maintaining the doctrine of privity of contract. Although relief in contract is probably not available, the corporate veil will be pierced on an equitable, discretionary basis so there are still potential remedies for victims of fraud, duped by the misuse of a company structure.