When an agreement entered into with a company has to be enforced without personal guarantee backing it up, finance companiesmay consider looking to the director, or parent company, behind a debtor company for redress. Usually, there has been a suspected
fraud or deceit. It appears the company is merely a shell or puppet and the company and controlling mind should be treated as a
single unit.
However, in VTB Capital Plc v Nutritek International Corp and others (2012), the Court of Appeal reaffirmed how difficult it is to ‘pierce the corporate veil’ in practice, especially where a contractual claim is being pursued.
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VTB had issued a claim against the defendants in deceit and unlawful means conspiracy. VTB alleged it had been induced byfraudulent misrepresentations made by the first defendant to enter into a loan agreement with a Russian company (RAP) to acquire a
number of companies from the first defendant.
RAP subsequently defaulted on the loan. VTB sought to amend its claim to make the defendants liable as parties to the contractual
claims arising out of the loan because they were all controlled and owned by the fourth defendant, who in turn owned and controlled RAP. VTB alleged the transaction had never been an arm’s length commercial transaction, as RAP and the defendants were all under common control. It sought to pierce the corporate veil of RAP, alleging it was simply being used as a vehicle to obtain loans, a
fraudulent misuse of its company structure.
The court refused the applications but restated when the corporate veil may be pierced:
– Ownership and control of the company were not of themselves sufficient to justify piercing the veil.
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By GlobalData– The veil could not be pierced just because it was perceived to be necessary in the interests of justice.
– There had to be some impropriety.
– The company’s involvement in the impropriety would not by itself justify piercing the veil. The impropriety had to be linked to the use of the company structure to avoid or conceal liability.
– For the veil to be pierced, there had to be both control of the company by the wrongdoer and the wrongdoing must be an independent wrong, involving some fraudulent or dishonest misuse of the company as a device to conceal the true
facts.
– The company did not have to have been incorporated with deceptive intent.
The Court held that although there may be an arguable case that the veil should be pierced, the defendants could still not be held contractually liable. Privity of contract is a basic principle of law and it is contrary to that principle that a stranger to a contract
(even a controlling director) should be deemed to be a party to it. There was no basis here for making the defendants parties to the loan agreement.
Comment
Piercing the corporate veil is difficult but not impossible on the right facts. Although relief in contract was not available in this case,
claims in deceit and unlawful means conspiracy against RAP’s controlling minds could still be, if the claim is proved.
Greg Standing is a partner in Wragge & Co’s motor finance litigation team
