VTB Capital plc is a bank incorporated and regulated in England, but majority-owned by a Russian state bank. VTB entered into a loan agreement with a Russian company, RAP, under which VTB lent $225 million to allow RAP to buy a number of Russian dairy companies from Nutritek.
RAP defaulted on the loan and VTB brought a claim alleging that it had been induced to enter into the loan agreement by fraudulent representations made by Nutritek. The substance of the claim was that Nutritek had represented that it and RAP were not under common control, and that the value of the dairies was much more than their actual worth. VTB alleged that these representations were false, as a Russian businessman named Mr Malofeev ultimately owned both RAP and Nutritek. It was also alleged that the valuations of the dairies upon which VTB had relied were based on false information provided by Nutritek.
Two principal issues arose to be determined by the Supreme Court:
- Could VTB pierce the corporate veil in order to treat Malofeev as a party to the loan agreement, so that he could be jointly and severally liable with RAP?
- Should VTB be granted permission to serve proceedings out of the jurisdiction?
Piercing the corporate veil
The Supreme Court was unanimous in upholding the Court of Appeal's decision that allowing the corporate veil to be pierced so as to treat a third party as a co-contracting party was contrary to both authority and principle.
Lord Neuberger gave the lead judgment on this issue.
VTB had argued that Malofeev controlled RAP and Nutritek, and that the corporate veil should be lifted so as to expose Malofeev as the 'puppeteer' behind the actions of the companies. In response, Malofeev argued that the court does not have the power to pierce the corporate veil or, if that was wrong, that it should not do so in this case, because VTB's argument was an unprincipled extension to the doctrine.
The Supreme Court found it unnecessary (because VTB could not succeed in any case) and inappropriate (because this was an interlocutory appeal) to decide the first question of whether the court has the power to pierce the corporate veil. The judge acknowledged that the basis for the ability to pierce the veil is "somewhat obscure", being in some cases described as a remedial principle and in others triggered by the finding of a 'façade' or 'sham'. It also ran up against the classic principle of separation of legal personalities set out in Salomon v A Salomon & Co Ltd ( AC 22). On the other hand, there are a number of cases (notably Adams v Cape Industries plc  Ch 433) in which the principle was held to exist.
On the facts, the Supreme Court found that VTB's argument could not succeed in any case, because it involved not just piercing the veil, but going on to find Malofeev liable as a co-contracting party, even though none of the contracting parties intended him to be a party to the agreement. The court identified only two cases supporting this extension – Antonio Gramsci Shipping Corporation v Stepanovs ( EWHC 333 (Comm)), which was followed in Alliance Bank JSC v Aquanta Corporation ( EWHC 3281 (Comm)). This did not, of itself, mean that VTB's case had to fail. However, given the weight of argument against extension of the principle, it was not warranted in this case.
The court doubted whether the decision in Gramsci was correct, but left the question open to be decided in future. Lord Clarke also expressly reserved for future consideration the issue of whether the court has the power to lift the corporate veil generally, and the correctness or otherwise of Gramsci in particular.
In the Court of Appeal it was found that the law governing the alleged tortious claims was Russian law. The Court of Appeal refused VTB permission to serve its claim out of the jurisdiction.
The Supreme Court upheld (by a majority) the lower court's decision to refuse to grant permission to serve out of the jurisdiction. The test was that set out in Spiliada Maritime Corpn v Cansulex Ltd ( AC 460): the burden of proof is on the claimant to show that the English courts were clearly the appropriate forum for the trial of the action.
Lord Wilson stated that the forum question required an "evaluative judgment" with which (in the words of Lord Goff in Spiliada) "the appellate court should be slow to interfere". In this case there was no basis for overruling the decision made below. The fact that the lower courts had been mistaken in finding that Russian law applied to the tortious claims was not decisive of jurisdiction: the key issues in the case turned on the facts and not on the applicable law.
Notably, the judge went on to query whether it was appropriate for the forum part of the appeal to have been heard by the Supreme Court at all. He stated that the issue of general importance identified by VTB on appeal to the Supreme Court was the question of whether, if a defendant has committed a wrong in England, there is a presumption that it should answer for that wrong in England. But in fact, he said, the concept of there being a formal presumption that the forum should follow the location of the tort was hardly pressed by VTB before the court. The judge went so far as to say that it was:
"doubtful whether the committee would have granted permission to appeal on the forum issue if it had realised that VTB's case would develop into little more than an invitation to re-evaluate all the relevant factors for and against the English forum."
In a similar vein, Neuberger also commented that it is disproportionate for hearings concerning the appropriate forum to entail many days in court and hundreds of thousands of pounds of costs and, in light of the Jackson reforms, encouraged the judiciary to exercise its case management powers to ensure that arguments on service out and stay applications are kept proportionate and do not get "out of hand".
As far as piercing the corporate veil is concerned, the judgment does little to clarify the law and leaves open the question of whether there is scope for the principle to be extended in the way argued for in this case in the future. Any such extension would need to address the doubts raised as to whether Gramsci was correctly decided.
The Court of Appeal recently grappled with this issue in Petrodel Resources Ltd v Prest ( EWCA Civ 1395). In that case the court, by a majority (reflecting the make-up of the panel of two chancery judges and one family judge), overturned a decision of the Family Division that provided for Mrs Prest's ex-husband to transfer 14 properties into her name as part of a divorce settlement, notwithstanding that the properties were held not in the husband's name, but in the name of his company. The Court of Appeal held that the lower court had been wrong to find that the husband's sole ownership of the company entitled him to dispose of its assets. The case has been appealed and will be heard (unusually) by a seven-member panel of the Supreme Court in March 2013. That judgment may bring some welcome clarity to this area of the law.
In relation to jurisdiction arguments, the case makes it plain that it is inappropriate for matters involving a balancing exercise by a lower court to be reopened on appeal unless the lower court erred in principle. Particularly in light of the comments referred to above, this should be taken as a salutary warning to parties that seek simply to recycle arguments made in lower courts on appeal. It remains to be seen to what extent the courts will take up the invitation to exercise more proactive case management to prevent time-consuming and expensive hearings on such matters in the future.
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