In VTB Capital Plc v. Nutritek International Corp & Others,1 the English Court of Appeal has clarified the principles upon which the corporate veil can be pierced and has held that this should not allow contractual claims to proceed against non-contracting parties.
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What is “piercing the corporate veil”?
One of the fundamental principles of company law, set out in Salomon v. Salomon,2 is that a lawfully incorporated company has a legal personality or identity that is quite separate from its controllers. Therefore any liability incurred by the company is limited to the company and does not extend to its shareholders and directors. Similarly, any liability incurred by its controllers is limited to them and does not extend to the company.
There are however exceptional cases in which the English courts will regard it as appropriate to “pierce the corporate veil” and identify the company with those who control it. Where this occurs, the courts may grant remedies against the controllers of the company which in principle would only otherwise be available against the company; and, equally, against the company which in principle would only otherwise be available against those controlling it.
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The mere façade test
It is well recognised that the courts will intervene where a company is used primarily as a vehicle of fraud or as a means of escaping pre-existing legal obligations.
In Gilford Motor Company Ltd v. Horne,3 Mr Horne had been the managing director of the claimant company and was subject to a non-compete covenant in his service contract, restraining him from soliciting customers of the claimant during and after his employment. After leaving his job, Mr Horne set up a new company in his wife’s name and started to solicit the claimant’s customers. The Court of Appeal granted an injunction, not only against Mr Horne but also against the new company on the basis that it “was a mere cloak or sham for the purpose of enabling the defendant to commit a breach of his covenant against solicitation”.4
Similarly, in Jones v. Lipman,5 Mr Lipman had entered into a contract to sell land, but then sought to avoid the sale by transferring the land to a company that he controlled. Russell J ordered specific performance against both Mr Lipman and the company on the basis that the company was “a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity”.6
In Woolfson v. Strathclyde Regional Council,7 Lord Keith of Kinkel considered the Court of Appeal’s decision in DHN Food Distributors Ltd v. Tower Hamlets London BC8 and held that “it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts”.9 This statement was quoted and relied upon in a subsequent Court of Appeal decision in Adams v. Cape Industries Plc.10
In Trustor AB v. Smallbone (No 2)11 Mr Smallbone, a director of the claimant, had misappropriated large sums of the claimant’s money, which he had procured to be paid to various recipients, including his own company Introcom. The claimant sought to make the Mr Smallbone jointly and severally liable for the sums received by Introcom and argued that the veil of incorporation should be pierced. In his judgment, Sir Andrew Morritt V-C held that: “[T]he court is entitled to ‘pierce the corporate veil’ and recognise the receipt of the company as that of the individual(s) in control of it if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of those individual(s)”.12 The Court of Appeal in VTB v. Nutritek has confirmed this as “a sound summary of the principle underlying the ‘veil piercing’ theory”.13
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Further veil piercing principles
Although not key to its findings in VTB v. Nutritek, the Court of Appeal considered and confirmed a set of principles relating to piercing the corporate veil that had been set out in the judgment of Munby J in Faiza Ben Hashem v. Shayif:14
- Ownership and control of a company are not of themselves sufficient to justify piercing the veil.
- The court cannot pierce the veil, even when no unconnected third party is involved, merely because it is perceived that to do so is necessary in the interests of justice.
- The corporate veil can only be pierced when there is some “impropriety”.
- The company’s involvement in an impropriety will not by itself justify a piercing of its veil: the impropriety “must be linked to use of the company structure to avoid or conceal liability”.
- It follows that if the court is to pierce the veil, it is necessary to show both control of the company by the wrongdoer and impropriety in the sense of a misuse of the company as a device or façade to conceal wrongdoing.
The Court of Appeal in VTB v. Nutritek disagreed with the sixth and final principle set out in Munby J’s judgment: that the court will only pierce the veil if this is necessary to provide a remedy for the wrong caused by those controlling the company.15 In the court’s opinion, there was no need to grant an injunction against the company in Gilford Motor Company v. Horne, since it would have been sufficient to grant the injunction against Mr Horne in a form that restrained him from doing the acts, whether by himself, his servants or agents, and there was no need to grant an order for specific performance against the company in Jones v. Lipman, since it would have been sufficient to grant the order against Mr Lipman on the basis that his control of the company meant that he was in a position to procure the completion of the contract.16
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Privity of contract
The main issue concerning the Court of Appeal in VTB v. Nutritek was whether piercing the corporate veil could lead to a situation where non-contracting parties would become contractually bound under an agreement entered by a separate entity that they controlled or that controlled them.
In this case, the claimant bank, VTB, entered into a loan agreement with a third party, RAP, to fund the acquisition of various dairy plants from Nutritek. RAP defaulted on the loan and VTB alleged that it was induced to enter the loan agreement by fraudulent representations made by Nutritek regarding its control of RAP and the value of the dairy plants. In VTB’s submission, once it had entered into the loan agreement it discovered that a Mr Malofeev controlled RAP through companies in the British Virgin Islands and Russia (referred to as Marcap BVI and Marcap Moscow respectively), meaning that RAP and Nutritek were under common control and the transaction was not at arm's length. The accountant's valuation of the dairy plants upon which VTB had relied was also alleged to be based on false financial figures supplied by Nutritek.
VTB alleged that the misrepresentations made by Nutritek were part of a conspiracy between various legal or natural persons, including Marcap BVI, Marcap Moscow and Mr Malofeev. VTB argued that the court should pierce the corporate veil of RAP and find each of these persons liable under the loan agreement.
VTB submitted that the courts in Gilford Motor Company v. Horne and Jones v. Lipman could only have granted the remedies of an injunction and specific performance against the companies controlled by Mr Horne or Mr Lipman on the basis of recognisable causes of action and that the courts were therefore treating these companies as parties to the contracts that the claimants had entered with Mr Horne and Mr Lipman respectively. The Court of Appeal disagreed that there was any suggestion in either of these judgments that the courts were enjoining the companies on the basis that they should be treated as parties to the contracts. In both cases the courts were granting these remedies on the basis that it was just and convenient to do so.17
VTB also relied on the judgments of Burton J in the cases of Antonio Gramsci Shipping Corp v. Stepanovs18 and Alliance Bank JSC v. Aquanta Corporation.19 In Antonio Gramsci, Burton J concluded that there was “no good reason of principle or jurisprudence why the victim cannot enforce the agreement against both the puppet company and the puppeteer who, all the time, was pulling the strings”.20 He therefore held that the veil of incorporation should be pierced to allow the claimants to enforce the charterparties against the defendant as a party to those charterparties. Similarly, in Alliance Bank, Burton J held that “[T]he question of whether the veil should be pierced in such a situation, so as to decide whether the puppeteers are parties to the contract, is to be resolved … by reference to the proper law of the contract”.21
The Court of Appeal in VTB v. Nutritek regarded Burton J’s rulings in Antonio Gramsci and Alliance Bank as having misread Gilford Motor Company v. Horne and Jones v. Lipman.22 The court added that it was “inconceivable that the revelation of the true facts will show Marcap BVI, Marcap Moscow or Mr Malofeev to be parties to either of the relevant contracts. It will at most show no more than that they induced VTB to enter into the relevant contracts by dishonest deception. The suggestion that the application of the veil piercing principle to the facts will require the court to find that these three defendants were original, additional parties to the contracts is nothing more than an appeal to the court to decide the case on the basis of pure fiction”.23
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The Court of Appeal has clarified the circumstances in which the English courts may pierce the corporate veil. It has made it clear that this concept cannot be used to make controllers parties to contracts entered into by the controlled companies, thereby reinforcing the doctrine of privity of contract.
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