The corporate veil should not be pierced to allow contractual claims to be brought against non-contracting parties.
In its keenly-awaited decision in VTB Capital plc v. Nutritek International Corp & Others 1, the UK’s Supreme Court unanimously upheld the Court of Appeal’s ruling on piercing the corporate veil. Lord Neuberger gave the lead judgment, and cited with approval the test laid down by Munby J. in Ben Hashem that, in order to pierce the veil, “it is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is, (mis)use of the company by them as a device or façade to conceal their wrongdoing … at the time of the relevant transaction(s)” 2. The Supreme Court thus agreed with the Court of Appeal that the English courts should not pierce the corporate veil to allow contractual claims to be brought against non-contracting parties.
For the clients who think that, in future, they may want or need to have recourse to persons other than their primary contractual counter-parties, consideration should be given at the time of making the contract as to the circumstances in which such recourse can occur and against whom such recourse may be sought.
Piercing the Corporate Veil — Fundamental Principles
It is a fundamental principle of English Law that a company has its own legal personality, distinct from its members 3. However, in certain circumstances, it is recognised that a court may pierce the corporate veil in order to hold those who control the company responsible for the acts of the company: “it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts”4.
VTB Capital plc (VTB) entered into a loan agreement with a third party (RAP) in order to fund the acquisition of various dairy companies from Nutritek. RAP subsequently defaulted on the loan. VTB alleged that it had been induced to enter into the loan agreement by fraudulent misrepresentations made by Nutritek as to Nutritek’s control of RAP and the value of the dairy companies. After entering into the loan agreement, VTB discovered that RAP and Nutritek were under common control and, therefore, the transaction was not “at arm’s length”.
VTB initially pleaded causes of action against the defendants in deceit and unlawful means conspiracy, but later applied to amend its particulars of claim in order to bring a contractual claim against the second, third and fourth defendants, who were said to exercise control over Nutritek. VTB’s application was refused; the High Court held that it was not appropriate to pierce the corporate veil and allow contractual claims to proceed against the defendants, who were not contracting parties to the loan agreement. In situations where the contracting party was merely a “puppet” company, a victim could not bring a contractual claim against both the “puppet” company and the non-contracting “puppeteer”, who “all the time was pulling the strings”.
The Court of Appeal upheld the decision of the High Court; it was not open to the English courts to hold, once the corporate veil has been pierced, that a puppeteer was a party to a puppet company’s contract.
Supreme Court Decision
On appeal by VTB, the Supreme Court unanimously ruled that it would be contrary to both authority and principle to extend the circumstances in which it has traditionally been held that the corporate veil can be pierced. Upholding the Court of Appeal’s decision, the Supreme Court agreed that it was correct to refuse VTB permission to amend its particulars in order to raise a contractual claim against non-contracting parties; RAP was not being used as a “façade to conceal the true facts”. Lord Clarke reserved for future decision the question of the scope of circumstances in which it is permissible to pierce the corporate veil.
The Supreme Court, in upholding the decision of the Court of Appeal in this case, has added weight to the question of the circumstances in which the corporate veil can be pierced. As such, it serves as a useful reminder of the fundamental principle of English law that a company has a separate legal personality from its members, and that only in exceptional circumstances will the court pierce the corporate veil.