The Supreme Court has today unanimously refused to pierce the corporate veil in order to treat an alleged fraudster as a party to a contract entered into by his puppet company. This meant that VTB Capital plc (VTB) could not rely on a jurisdiction clause in the contract giving non-exclusive jurisdiction to the English courts. Lord Neuberger, giving the judgment of the court on this issue, considered that piercing the corporate veil so as to treat a third party as if he were a co-contracting party would be contrary to authority and contrary to principle.

The court declined to give more general consideration to whether, and if so when,  it is possible to pierce the corporate veil as it was unnecessary to do so on the facts, and inappropriate to decide an issue of such general importance on an interlocutory appeal.

The Supreme Court also refused, by a majority of 3 to 2, to set aside the decision of the lower courts that the English courts were not the appropriate courts to hear the dispute. Although it decided that the courts below had erred in some of their conclusions, the majority did not consider those errors were sufficient to interfere with the overall decision as to the appropriate forum. Whilst it is a useful rule of thumb, or prima facie starting point, that a defendant who has committed a wrong within the jurisdiction ought to answer for that wrong in the English courts, other factors may mean England isn’t the appropriate forum.

More generally, Lord Neuberger commented on the time spent and costs incurred in jurisdiction challenges and considered judges should exercise their case management powers to ensure that the evidence and argument are kept within proportionate bounds.

Herbert Smith Freehills acted for the appellant, VTB, having been instructed at the Supreme Court stage. Philip Carrington, Gillian Dobby and Anna Pertoldi comment on the decision.

Background

VTB Capital v Nutritek and others concerns an alleged fraud perpetrated on VTB by a Mr Malofeev and alleged connected entities. There were two main issues before the Supreme Court, firstly, whether it was possible to pierce the corporate veil so as to make Mr Malofeev a party to contracts entered into by his alleged puppet company. If so this would give the English courts jurisdiction pursuant to a non-exclusive jurisdiction clause in the contracts with the company. Secondly, were the courts below correct in holding that England was not the appropriate forum in which the claims should be tried.

Piercing the corporate veil

Lord Neuberger dealt with this aspect of the appeal. It was argued by Mr Malofeev that the court cannot pierce the corporate veil and the cases which suggest it can are wrong (a ‘highly ambitious submission’ according to Lord Wilson). Alternatively, even if the court can in principle pierce the corporate veil it could not do so in this case because it would represent an illegitimate and unprincipled extension of the circumstances in which the veil can be pierced.

Whilst Lord Neuberger could see the force in the argument that there is no power to pierce the corporate veil, he also thought there were arguments the other way. He concluded that it was unnecessary and inappropriate to resolve the issue. It was unnecessary as VTB would not succeed in any event (see below). It was inappropriate because it was an interlocutory appeal, and it would therefore be wrong (absent special circumstances) to decide an issue of such general importance if it was unnecessary to do so.

The judge considered that even assuming the court can pierce the veil of incorporation on appropriate facts, it was not justified in the present case because:

  • It was a novel suggestion that the puppeteer be treated as a co-contracting party.
  • The only cases in support of such a contention were the decisions at first instance of Mr Justice Burton in Antonio Gramsci Shipping Corporation v Stepanovs [2011] EWHC 333 and Alliance Bank JSC v Aquanta Corporation [2011] EWHC 3281.
  • There was an overwhelming case against extending the principle in this way. Such joint and several liability would be inconsistent with the reasoning and decision in Salomon v Salomon [1897] AC 22.
  • No unfairness was caused as there were other remedies available against the alleged puppeteer, such as an action in negligent or fraudulent misrepresentation.

Appropriate forum

In order to obtain leave to serve out of the jurisdiction under common law rules, it is necessary to show there is a serious issue to be tried on the merits, a good arguable case that the claims fall within one of the ‘gateways’ under the Civil Procedure Rules, and that England is clearly or distinctly the appropriate forum for resolution of the claims (AK Investment CJSC v Kyrgyz Mobile Tel Ltd [2011] UKPC 7, Spiliada Maritime Corpn v Cansulex [1987] AC 460). Only the question of appropriate forum was in issue before the Supreme Court.

The Court of Appeal and Arnold J at first instance formed the view that the law governing the alleged torts of deceit and conspiracy was Russian law. The Supreme Court took a different view, accepting, or being prepared to proceed on the basis, that English law governed VTB’s claims.

Having reached this decision, the question was what if any effect this had on the forum issue, in particular whether there was a presumption based on the decision in The Albaforth (Cordoba Shipping Co v National State Bank [1984] 2 Lloyd’s Rep 91) that a defendant who has committed a wrong within the jurisdiction of the English courts ought to answer for that wrong in the English courts.

Lord Mance’s view was that the Albaforth line of authority is a useful rule of thumb, or prima facie starting point, which may in many cases also give a final answer on the question whether jurisdiction should appropriately be exercised. But the variety of circumstances is infinite, and if a court is not satisfied that England is the appropriate forum, then permission to serve out must be refused or set aside. In this case, he thought the issues and evidence would be focused on matters which had happened in and concerned Russia.

He thought it generally preferable, other things being equal, that a case should be tried in the country whose law applies. However, that factor is of particular force if issues of law are likely to be important and if there is evidence of relevant differences in the legal principles or rules applicable to such issues in the two countries in contention as the appropriate forum. Neither consideration applied in this case.

Lord Mance also considered that the courts below would have reached the same decision if they had concluded English law governed the torts, and that the Supreme Court should not be re-exercising their discretion in these circumstances.

In a powerful dissenting judgment, Lord Clarke, with whom Lord Reed agreed, accepted that an appellate court should not interfere with a decision of a lower court unless satisfied that it has erred in principle. However in his view there had been errors which entitled and indeed required the court to reach its own conclusions. The law governing the torts was English law and it is generally appropriate for claims governed by English law to be adjudicated upon by an English court. The facility agreement provided for English law and jurisdiction which was a strong pointer to England being the natural forum even where the defendants were not parties to that agreement. Overall, he did not agree with the Court of Appeal’s conclusion that the centre of gravity of the torts was in Russia. On the Albaforth argument, in Lord Clarke’s view the place where the tort was committed, i.e. England, was a weighty factor and the significance of the authorities was down played in the Court of Appeal.

Comment

The Supreme Court was unanimous in deciding not to pierce the corporate veil in the circumstances of this case. The more general question of whether and if so when the veil can be pierced was left for another day.

Although Lord Neuberger’s judgment has closed the door for now on piercing the corporate veil for the purposes of taking jurisdiction, Lord Clarke commented that he wished to reserve for future decision the true scope of when the corporate veil can be pierced, including whether the Gramsci case was correctly decided. This suggests we may not have had the last word yet on this subject.

On the question of what is the appropriate forum, the case illustrates the difficulty of overturning a finding on this issue on appeal, particularly at Supreme Court level.