The Court of Appeal has handed down a key judgment relating to ‘piercing the corporate veil’. The corporate veil is pierced when individuals in control of a company are held liable for wrongdoing, even though remedies appear only to be available against the company and not those individuals or vice versa. The court has overruled recent cases which appeared to extend the scope of the doctrine, and declined to find that a company’s controller was a party to a contract entered into in the name of his ‘puppet’ company. The judgment will provide parties with greater certainty as to who is bound by an agreement.
In VTB Capital plc v Nutritek and others VTB, a Russian owned bank, lent $225m to Russagroprom (RAP) to fund RAP’s acquisition of six Russian dairy plants and associated companies from another company, Nutritek. RAP defaulted on the loan. VTB alleged that RAP and Nutritek were in fact under the common control of a Mr Malofeev, and that the acquisition had not been at arm’s length. Proceedings were brought which included a claim for breach of contract, against Nutritek, Mr Malofeev and others. The main loan document was a Facility Agreement made between VTB and RAP which was governed by English law. Mr Malofeev was not a party to the Facility Agreement. VTB argued that the Mr Malofeev had fundamentally misused RAP’s company structure and that he should be liable under the Facility Agreement.
The Court noted the existing principles as to when the corporate veil may be pierced. These include that ownership and control of the company in question are not of themselves sufficient to justify piercing the veil; there has to be impropriety linked to the use of the company’s structure to avoid or conceal liability. The wrongdoing had to be in the nature of a fraudulent or dishonest use of the company’s corporate personality with the purpose of concealing the true facts.
The Court of Appeal said that to accept VTB’s case would be to agree to an unjustified extension of the law. Although, when piercing the corporate veil, the Court could substantially identify a company with those in control of it, it would be going too far to say that a puppet company was a party to a contract entered into by the company’s controller, or vice versa. The puppet company was still a legal entity separate from its controller.
Although the courts consider what is just and convenient when allowing the corporate veil to be pierced, there are nonetheless general principles to be followed. The key principle here is that contracts are the result of a consensual arrangement between, and only between, those intending to be parties to them.
The decision in VTB has clarified an area of the law that is not clear cut. It gives greater certainty that parties who never intended to be bound by a contract will not find themselves subject to contractual liability. The relative certainty of judicial interpretation, of which VTB is an example, should help preserve the attraction to overseas parties of English law as a system for regulating their commercial agreements.
For more information please contact Sohrab Daneshku or your usual Lewis Silkin contact.