The concept of “piercing the corporate veil” has been the subject of much discussion amongst judges and commentators in the last century. Corporate Solicitor Maung Aye reviews the Supreme Court’s decision in VTB Capital plc v Nutritek International Corp as it attempts to clarify this concept…

It has long been established as a fundamental principle of company law that a company which has been lawfully incorporated is a legal entity which is distinct and separate from its members (Salomon v A Salomon & Co Ltd). Over the years, courts have held that in certain circumstances, the company’s separate legal entity can essentially be set aside (and thus its corporate veil “pierced”), with its members being held liable for the company’s actions.

An early example of this is the case of Gilford Motor Company Ltd v Horne, where Mr Horne (who was the former managing director of Gilford Motor Company Ltd) set up a new company and began to solicit his former company’s clients in breach of a non-compete covenant which was contained in his service agreement. The case went to the Court of Appeal who granted an injunction against both Mr Horne and his new company on the basis that his new company was a “mere cloak or sham” allowing him to breach the covenants in his service agreement.

In the case of Jones v Lipman, Mr Lipman had entered into a contract to sell certain land to Mr Jones. After changing his mind and in an attempt to avoid the sale, he transferred the land to a company that he controlled. The court found that the company had been used by Mr Lipman solely for the purpose of evading his obligations under the sale contract and therefore granted an order against both Mr Lipman and his company that the sale contract should be performed with the land being sold to Mr Jones.

In the relatively recent decision of Antonio Gramsci Shipping Corp v Stepanovs it was held that where a company had been used by its beneficial owner as a device for the purpose of fraud on a party, the corporate veil should be pierced so that contracts which the party entered into as a result of the fraud could be enforced against those beneficial owners, even though they were not parties to those contracts.

Another recent case, VTB Capital plc v Nutritek International Corp, directly challenged the decision in Gramsci. The case concerned a loan that VTB Capital Plc (VTB) made to Russagroprom LLC (R) to fund the acquisition by R of six Russian dairy plants and associated companies from Nutritek International Corp (Nutritek). The loan was made under the terms of a facility agreement which R subsequently defaulted on.

VTB brought proceedings against Nutritek on the basis that VTB had been induced to enter into the facility agreement by fraudulent misrepresentations made by Nutritek. VTB also brought proceedings against Marshall Capital Holdings LLC (Marshall) a company who owned a substantial interest in Nutritek and Mr Konstantin Malofeev who was alleged to be the principle beneficial owner of both Nutritek and Marshall. VTB essentially wanted the court to pierce R’s corporate veil and add Marshall and Mr Malofeev to the proceedings, even though they were not parties to the facility agreement.

The Court of Appeal in VTB Capital disagreed with the approach adopted in Gramsci and stated that whilst the corporate veil could be pierced in appropriate circumstances, the principle of privity of contract, which prevents a person who is not a party to a contract from enforcing its terms, was a fundamental one. It stated that it was a “basic principle of law that contracts are the result of a consensual arrangement between, and only between, those intending to be parties to them”.

The Court also held that there was no need to fundamentally alter the principle of privity of contract since in this case, VTB could claim for negligent or fraudulent misrepresentation against the parties concerned. Although VTB appealed to the Supreme Court, the Court of Appeal’s decision was unanimously upheld.

The VTB decision has now clarified what has at times been a somewhat uncertain area of law. It seems the courts are prepared to pierce the corporate veil in certain circumstances and grant remedies such as injunctions to prevent a controlling party from escaping any contractual liability. Any extension to this, such as adding non-contracting parties to a contract would be simply in Lord Neuberger’s words, “contrary to authority and contrary to principle”.

Maung Aye
Mackrell Turner Garrett