Wednesday, February 6, 2013

VTB Capital v Nutritek: The Corporate Veil and the Consequences of Piercing it


It may be surprising that the highest court in the United Kingdom decides, in 2013, to reserve for future decision the question whether and when the corporate veil can be pierced. It has been taken for granted for many years that a court may pierce the corporate veil and—atleast in this jurisdiction—the courts have been ready to do so on a wide range of grounds. In this background, Mr Michael Lazarus’s submission in the Supreme Court that an English court has no power to pierce the corporate veil as a matter of principle was, as Lord Wilson notes, no doubt ambitious, but it highlights that the common law is yet to articulate properly the grounds on which courts pierce the veil. It is also extremely significant that the Supreme Court did not reject the submission but left it open to be decided in an appropriate case. The Supreme Court’s judgment also contains a number of interesting observations on other matters relating to the corporate veil, as also issues of choice of law for foreign torts and forum non conveniens (with which we are not concerned in this post).

Readers may refer to our analysis of the Court of Appeal’s judgment for a more detailed account of the facts and a summary of Lloyd LJ’s magisterial judgment. In short, VTB, the claimant, was fraudulently induced to advance about $220 million under a Facility Agreement to RAP to fund RAP’s acquisition of certain dairy companies from Nutritek. The fraudulent misrepresentations were about the corporate relationship between Nutritek, RAP and Marshall Capital and the valuation report. It was accepted that VTB had a claim against Mr Malofeev and the companies that he controlled in tort, but VTB (for jurisdictional reasons) wished to pursue a claim in contract against those respondents, even though they were not parties to the contract. Arnold J and the Court of Appeal rejected the contention that the puppet, once the corporate veil is lifted, automatically becomes a party to contracts entered into in the name of the puppeteer.

In the Supreme Court, two arguments were made against the use of the corporate veil to give VTB a cause of action. The first, as noted above, was that an English court has no power to pierce the veil. The second was that the consequence of doing so was in any event not to add parties to a contract. Lord Neuberger (with whose analysis of this issue the other members of the court agreed) noted that Mr Lazarus had mounted a “spirited and sustained attack” against the proposition that such a power exists, by explaining that every case in which an English court had pierced the veil was based either on a statutory power to do so, concessions by counsel or could be explained on traditional grounds (such as agency). Lord Neuberger agrees that there is no House of Lords or Supreme Court authority in which the existence of the power has been at issue and affirmed: in Woolfson v Strathclyde, it was assumed to exist, and a correct analysis of Salomon v Salomon is conceivably inconsistent with any such power. Eventually, Lord Neuberger holds that it is unnecessary to decide so important a question in this case, since it was an interlocutory appeal and since VTB would in any event fail, since the members of the Court agreed that the power cannot be exercised on these facts, even if it did exist.

Turning to when the power may be exercised, Lord Neuberger’s judgment confirms the recent trend in English law towards a narrow corporate veil doctrine, exemplified by Munby J’s approach in Ben Hashem, which is cited with approval in VTB: the statement of principle is that the veil may be pierced only if the company is “used as a fa├žade concealing the true facts.” At para 142, Lord Neuberger explains that “true facts” means that “in reality, it is the person behind the company, rather than the company, which is the relevant actor or recipient (as the case may be)”. It is not quite clear whether this test is an alternative to the Ben Hashem impropriety test, or an additional requirement.

With respect to the consequence of exercising the power to pierce the veil, Lord Neuberger agrees with the Court of Appeal that none of Gilford, Jones v Lipman and Trustor, correctly analysed, supports the use of the veil to add parties to a contract, and considers that such an extension is “contrary to authority and contrary to principle”. One of the reasons he gives, at para 138, is that the company, although it acts through human beings, is generally in the position of the principal, rather than the agent, whereas on VTB’s case the company would be a quasi-agent, not the quasi-principal. The Supreme Court also endorsed the Court of Appeal's reasoning on this point.   

The Supreme Court has, perhaps unsurprisingly, confirmed that the piercing the corporate veil does not add parties to a contract. The more fundamental question that it has left open—about whether the corporate veil can at all be pierced—is an open invitation to counsel to argue the point in an appropriate case, and that case is keenly awaited.     

A video summary of the judgment, given by Lord Mance, is available here.

2 comments:

vswami said...

Not to betray own courage of conviction, but without offending it, one has to frankly say,- this is on a topic which has more or less become a fashionable one. More or less the same or like view (or to that effect ) one has been hearing off and on, from the judiciary itself; besides from other legal luminaries. For instance,@itatonline - See the Video of the presentation at the firm.moneycontrol.com. See also
CJ Kapadia’s presentation

As one understands, a couple of fine points stressed, interestingly having a direct reference to the subject topic, are that, - any court judgment is an opinion or perception; and is ideally expected to be rendered on a case to case basis. As the CJ, in his wisdom, forcefully echoed in his address is an age-old principle of jurisprudence; that is, justice must not only be done but also must be seen to have been done.
In this context, fittingly, the vital role the representing of advocates / counsels have to, or necessarily expected to, play does not need to be specially emphasized. This point, it is remembered, came to be highlighted in a published article - 166 Taxman 72, 73 (Mag.). Instantly recalling, the self-same aspect has been focused on, though at the cost of over stressing, in the published critique on a recently reported ITAT case @ http://taxguru.in/income-tax/itat-order-shantikumar-majithia-dcit-itat-mumbai-critique.html,

(Ref. comments on the write-up, titled - Amount paid for buyback of shares allowed as business expenditure)

Note: This is intended to be viewed purely as a feedback, by way sharing own individual thoughts.

Vinod Kothari said...

Mr Niranjan's analysis of the case is commendable, though on certain issues, there may be difference of view on why the English SC refused to allow the amendment of the claim. Note that the plaintiff in this case was wanting to add breach of contract in addition to the original claim of torts. The contractual claim was being pleaded on the ground of lifting or piercing of corporate veil.
J. Neuberger refused to lift the corporate veil in this case as the case that company was used as a mere facade was not made. In addition, the issue was whether the piercing principles should be based on English law, as it was questionable whether England was te proper forum for determination of the true nature of the contracting company. There is a reference in the judgement to a scholarly article on the proper forum for application of lifting/piercing principles.
To my mind, the case provides a nice review of lifting/piercing cases and makes an interesting point that courts should not follow "unprincipled" approach to such lifting, as that would make the whole existence of companies irrelevant. The judgement cites Halsbury saying that one cannot, at the same time, say that the company exists, and that it does not.
True - there is a huge amount of learning yet to be done on when exactly to apply lifting/piercing principles. Currently, it seems to be based on adhocism