05 June 2013

“Pay no attention to that man behind the curtain” – lifting the corporate veil

In the recent case of VTB Capital plc v Nutritek International Corp., the English Supreme Court decided to leave the corporate veil largely intact, recognising that a company and its shareholders are separate legal entities.

“Pay no attention to that man behind the curtain” – lifting the corporate veil

For over a century the courts have recognised that a company and its shareholders are separate legal entities.  This has often been a thorn in the side of claimants who, given the reality of business dealings, consider that the person running the show is essentially one and the same person as the company.  When it all goes wrong and the company which the business entered into the contract with goes bust or has minimal assets, the business will often seek to hold the real owner of the company accountable.

Over the years the English courts have been willing to pierce the corporate veil and allow a claimant to sue the owner of the company, but only in exceptional circumstances.  For the corporate veil to be pierced there must have been some impropriety which is linked to the use of a company structure so as to conceal liability.  Put another way, the company is a mere façade used for fraud or to avoid pre-existing legal obligations.

In VTB Capital, the claimant, VTB, had entered into funding agreements with a third party (RAP) to enable RAP to acquire certain companies from Nutritek.  RAP defaulted on the loan.  VTB alleged that it had been induced into entering into the funding agreements by fraudulent misrepresentations on the part of Nutritek.  In particular, VTB alleged that Nutritek misrepresented that RAP and Nutritek were not under common control and that the assets had been overvalued by virtue of false figures provided by Nutritek.  After RAP defaulted on the loan it came to light that RAP and Nutritek were ultimately both controlled by a Mr Malofeev through other companies.  VTB sought to join Mr Malofeev and his companies to the action so that they could be held jointly and severally liable in contract with RAP.

The Supreme Court refused to grant this request, considering that to do so would be an “illegitimate and unprincipled extension” of the circumstances in which the corporate veil may be pierced.  The Supreme Court held that it would not pierce the corporate veil so as to make Mr Malofeev (as the person controlling the company) liable as, in effect, a co-contracting party to the funding agreements, where he was not and was never intended to be a party. 

One important factor to the Supreme Court in not granting the request was that, in so doing, it would not lead to an injustice because VTB had a potential remedy against Mr Malofeev in tort, if it could prove that it had been induced into entering the agreements by fraudulent misrepresentations on his part.

The Supreme Court declined to offer any general guidance on the scope for piercing the veil and to that extent VTB Capital leaves the veil up in the air.  It is hoped that the veil will come back down soon, however, as the Supreme Court is presently deliberating on another case in which a party is seeking to pierce the veil.  In Petrodel Resources & Others v Prest & Others, the Supreme Court heard arguments that, in the context of matrimonial proceedings, the courts were entitled to treat the assets of a company of which the opposing spouse is the sole controller, as being assets to which that spouse is entitled.  The respondent, Mr Prest, had been ordered to pay a lump sum of £17.5 million to the wife but had not done so.  Mr Prest controlled several Isle of Man companies and his ex-wife sought an order regarding the companies, arguing that the court should pierce the veil.   That judgment is awaited and it is hoped that the Supreme Court will seize the opportunity to provide definitive guidance on the circumstances in which it may be possible to pierce the corporate veil.  Although VTB Capital and Petrodel are not binding on the courts of Guernsey and Jersey, the decision is likely to be persuasive as company law in both jurisdictions is essentially English in origin. 

For now, then, the corporate veil remains largely intact, but perhaps not for long.

Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such.

© Carey Olsen 2013

Our people