VTB v Nutritek: Preserving the corporate veil?

VTB v Nutritek: Preserving the corporate veil?


Author: Gareth Davies

The corporate veil principle - that a company has a separate legal personality from its members - is a long established and fundamental element of English company law. It operates to keep a company's liability separate from those who control it.

In our update, Liability of parent companies and the actions of their subsidiaries, we reported that a parent company can be held liable for the actions of its subsidiary where there is an assumption of responsibility.

Those circumstances and others involving the principles of agency, trust or tort might be seen as providing for circumvention of the veil.

However, there have been only exceptional examples (often involving fraud or deceit) where the courts have deemed it appropriate to pierce the corporate veil, holding those who control a company responsible for its actions.

In VTB Capital Plc v Nutritek International Corp and Others, the Court of Appeal clarified the principles on which the corporate veil can be pierced. The Supreme Court has granted leave to appeal the decision.

The Nutritek case concerned a $225m loan agreement made between Russagroprom LLC and VTB Capital Plc in order to finance Russagroprom's acquisition of a number of Russian assets from Nutritek International Corp.

Russagroprom subsequently defaulted on its loan repayments and VTB recovered less than $40m.

VTB alleged that it was induced to enter into the loan by misrepresentations made by Nutritek; firstly as to the value of the assets, secondly as to the owner of Russagroprom.

Its case was that the representations formed part of a conspiracy between Nutritek and various persons, including the ultimate controller of Russagroprom and Nutritek, namely, Russian entrepreneur Konstantin Malofeev and his associated companies.

VTB's initial claim was in the tort of deceit. However, it later attempted to amend its claim to include breach of the loan agreement. The benefit to VTB of this second claim would be that the English courts would have jurisdiction, as the loan agreement was governed by English law.

VTB applied for leave to amend its claim so as to assert that Mr Malofeev and his associated companies were all liable to it under the loan agreement by piercing the corporate veil of Russagroprom.

It argued that all of the characteristics for piercing the corporate veil of Russagroprom were present - there was an involved and fraudulent misuse of the company structure of Russagroprom, which was used as a device to conceal the wrongdoing of Mr Malofeev and his associated companies.

The defendants argued the English Courts had no jurisdiction, relying on the principle of the corporate veil, in that Russagroprom (as borrower) and Nutritek (as seller) were the liable entities, not their controllers.

The Court of Appeal rejected VTB's argument. Essentially, it deemed VTB to have a good claim in the tort of deceit and it was not prepared to pierce the corporate veil of Russagroprom in order to allow VTB to gain a jurisdictional advantage when Mr Malofeev and his associated companies never intended to be parties to the loan agreement (notwithstanding the alleged fraudulent deal structure).

As well as providing clarity on the circumstances when the corporate veil might be pierced, the Court of Appeal's judgment in this case was also a clear rejection of a fundamental inroad into the basic principle of law that a contract is the result of a consensual arrangement only between those who intend to be a party to it.

The appeal to the Supreme Court is scheduled for hearing in November.

Case: VTB Capital PLC v Nutritek International Corp and others [2012] EWCA Civ 808