Piercing the Corporate Veil: The Supreme Court has Spoken (2013).

Perhaps the first case any law student taking the company law module will ever be introduced to is that of Salamon v Salamon & Co Ltd (1897). Salamon represented a unanimous decision to uphold the doctrine of corporate personality. What is the corporate personality doctrine? The doctrine established that an incorporated company has a distinct identity from its shareholders (members) and, therefore, must be dealt with and sued in its own name.

Before the anti-capitalists uproar at the idea of a distinct corporate personality, its merits should be explored. For many years to date, the doctrine has facilitated the expansion of business activity by allowing those with little or limited capital, or those lacking an unlimited appetite for risk, the comfort to invest in an incorporated company in the knowledge that should the company fall insolvent or obtain some legal liability against itself it will not be possible for the shareholder to be pursued. Thus, the corporate personality doctrine allowed members of the public to form companies and invest in existing companies in the comfort of the knowledge that they only risk their initial investment and their personal assets will be out of the reach of the company’s creditors.

However, our anti-capitalist friends are not without a point. The doctrine of the corporate personality has not been immune from abuse and for this reason, the courts have taken to the practice of “lifting the corporate veil” in limited circumstances, such as in those situations where it can be argued that the company was created as a mere sham or fa├žade. Salamon was referred to as calamitous by Otto Kahn-Freund, who also called for the abolition of all private companies (see Kahn-Freund, O. “Some Reflections on Company Law Reform”, (1944) 7(1/2) M.L.R. 54, 54). From a technical perspective, concerns in relation to a distinct corporate personality and the limited liability doctrine can be understood: It is all too easy to incorporate company (with distinct corporate personality) and enjoy the benefits of limited liability whilst trying to defraud the company’s creditors from assets that are in the name of the members. And, in light of such concerns, a saga of cases emerged over the decades that followed Salamon which held that the corporate veil could be lifted/pierced and the shareholders of the company could be pursued.

In its most recent case, the Supreme Court has been given the opportunity to adjust the goalposts in relation the ambit of the judicial ability to lift the corporate veil. In VTB Capital plc v Nutritek International Corp and others [2013] UKSC 5 (hereinafter “VTB”) the Supreme Court was asked to consider whether the contractual obligations of the company could be attributed to the shareholders by piercing the corporate veil. In this case, VTB is a PLC registered UK bank and is owned by a Russian Bank. VTB agreed to lend a significant sum of money ($225 million) to a Russian company, Russagroprom LLC, in order to facilitate the purchase of six Russian dairy companies. The owner of Russagroprom was found to be a Russian resident who had conducted the initial negotiations with VTB. Russagroprom defaulted and moneys remained outstanding to VTB. VTB then attempted to sue all holding companies and the Russian resident who owed Russagroprom, a Mr Malofeev, for attempting to defraud VTB with a false representation holding there were no links between Russagroprom and the companies it wished to purchase.

Lord Neuberger, in the Supreme Court, provided the leading judgement on the matter. The Court was asked to state that there should be no remit for the courts to lift the veil and counsel for the defendants provided a “sustained attack” on the lifting of the veil. Whilst agreeing that the case law on the matter was obscure, Lord Neuberger could not bring himself to find that there were no instances beyond statute where courts could lift the veil. However VTB’s claim failed as his Lordship held that it could not be held that a controller or member of a company could be said to have become a party to the contract as the controller’s identity was wholly separate from the corporation.

The case is significant in that it provides another limitation to the lifting of the veil whereby the courts have maintained the rule in Salamon and have done so even against allegation of impropriety and fraud. Lord Neuberger, whilst not agreeing with the respondent counsel that the court could not lift the veil in the absence of a statutory provision, has limited the ambit of the court to do so in relation to contracts completed with the company.

Jay Gajjar

This blog is intended for reference only. The author and London Law Tutor Ltd. cannot guarantee its accuracy and accept no liability for the consequences following from its use. 

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