VTB Capital plc v Nutritek International Corp and Others [2012] EWCA Civ 808

Summary

The Supreme Court has considered the circumstances in which the corporate veil can be pierced, whilst also considering the appropriate jurisdiction for a dispute.

Background

VTB Capital plc (“VTB”), a bank incorporated in England and majority owned by JSC VTB Bank, based in Moscow, entered into a Facility Agreement dated 23 November 2007 with a Russian Company, Russagropom LLC (“RAP”) under which VTB advanced US$225,050,000 to assist RAP in the purchase of six Russian dairy companies and three associated companies from Nutritek International Corp (“Nutritek”).

RAP defaulted on the loans and VTB recovered only US$40 million through enforcement of its security. VTB commenced proceedings in the English High Court, claiming that it was induced to enter into the Facility Agreement by fraudulent misrepresentations made in London by Nutritek. The alleged misrepresentations were that (i) the purchases of the dairy companies were arm’s length transactions, when in fact RAP and Nutritek were both ultimately owned, via a mixture of Russian and BVI companies, by Mr Konstantin Malofeev, a Russian citizen based in Moscow, and (ii) the value of the dairy businesses had been greatly overstated.

VTB initially obtained permission to serve out of the jurisdiction, as well as a freezing order against Mr Malofeev’s assets. When those respondents whom had been served with the claim appealed VTB’s permission to serve out of the jurisdiction, VTB applied for leave to amend its Particulars of Claim to add in a contractual claim. This was on the basis that RAP’s corporate veil could be pierced and that the respondents, including Mr Malofeev, became parties to, and were liable for, the breach of the Facility Agreement, which contained a non-exclusive English jurisdiction clause. Mr Malofeev also applied to set aside the freezing injunction.

At first instance the respondents succeeded on all counts. The Court of Appeal upheld his decision and VTB appealed to the Supreme Court.

Issues

The Supreme Court was concerned with:

  1. whether, in circumstances where the corporate veil has been pierced, a contractual claim can be pursued against those shareholders whom are said to be behind the company but who are not parties to the contract;
  2. the appropriate forum for VTB’s claim and whether permission to serve out of the jurisdiction should have been set aside; and
  3. whether to discharge the freezing injunction against Mr Malofeev’s assets.

Decision

The Supreme Court upheld the decision to set aside permission for VTB to serve out of jurisdiction by a majority of 3 to 2. Lord Mance outlined the test for obtaining permission to serve out of jurisdiction, as set out in Spiliada Maritime Corpn v Cansulex Ltd [1987] AC 460. This test puts the burden of proof on the Claimant to show that England is clearly or distinctly the appropriate forum for the dispute. The majority accepted that English law governed the tortious claim but held that VTB were unable to demonstrate that England was clearly or distinctly the appropriate forum, especially bearing in mind that the majority of witnesses and documents which went to the factual evidence were based in Russia and/or in Russian.

The Supreme Court also made it clear that even if there were grounds to do so, which there were not in this case, the appeal courts should be slow to interfere with the decision of the court below on the question of the appropriate forum.

Although obiter, the Supreme Court unanimously rejected VTB’s argument that the corporate veil could be pierced and Mr Malofeev or the other respondents be made contracting parties to the Facility Agreement.

Whilst the Supreme Court accepted that there were circumstances in which the Court may “look behind” or “pierce” the corporate veil and allow shareholders to face the legal consequences of a company’s actions, it was noted that there is very limited scope for the Court to do this and reference was made to the case of Woolfson v Strathclyde Regional Council [1978] SLT 159 in which it was suggested that the Court could only take such a course of action “where special circumstances exist indicating that [the involvement of the company] is a mere façade concealing the true facts.”.

Comment

The Supreme Court followed the well established principles of the circumstances in which the English Courts will assume jurisdiction. The questions of showing England as the “clear” and “distinct” appropriate forum as per the Spiliada case will always be a question to be answered on the facts of each case.

The case did not extend the circumstances under which the corporate veil can be pierced, other than to cast doubt on the decision in Antonio Gramsci Shipping Corporation v Stepanovs [2011] EWHC 333 (Comm). However, each case will be assessed on its merits and it is likely that the question will resurface before the Courts before too long.