LawFlash

English Court of Appeal Decision on Piercing the Corporate Veil

July 30, 2012

What You Need to Know at a Glance:

  • The Court of Appeal has recently re-affirmed the circumstances in which the English Court will pierce the corporate veil.
  • In doing so, however, it overturned a ground-breaking Commercial Court decision from 2011, in which the Commercial Court held that an individual who was the “puppeteer” behind a “puppet” company could be treated as being simultaneously, contractually liable for the contracts of the puppet company.
  • The Court of Appeal decided that the Commercial Court was wrong to do so for several reasons, but principally because it would be fundamentally contrary to the “basic principle of law that contracts are the result of a consensual arrangement between…those intending to be parties to them…”
  • The Court of Appeal refused permission to appeal to the Supreme Court, although the Supreme Court is still considering whether it should give permission.

In More Detail

In the 2011 decision, Antonio Gramsci Shipping Corporation & others v Oleg Stepanovs, Burton J delivered a Commercial Court judgment that promised to extend, significantly, the circumstances in which claimants could successfully recover damages from individuals who wrongfully sought to hide behind the protection of a corporate vehicle. In that particular case, the individual wrongdoers were found to have misused a number of corporate structures to divert profits on certain charterparty contracts away from the claimants. One of the key issues before Burton J was whether, having pierced the corporate veil of the relevant companies, the Court could find the individual defendant to be jointly and severally liable with the companies under the charterparty contracts.

Burton J found there was a good arguable case that the veil of incorporation should be pierced in order to permit the claimants to enforce the relevant charterparties as against the individual defendant (the “puppeteer”, as he was referred to), as if he were a party to those charterparties. The Court noted that “...there is no authority, binding or otherwise, which prevents such a conclusion being reached, whereby a victim would be entitled to enforce a contract entered into by a puppet company against both puppet company and puppeteer”.

In VTB v. Nutritek, essentially the same issue came before the Court of Appeal. The Court of Appeal delivered a lengthy judgment on 20 June 2012, which very helpfully surveys the principal reported cases on the circumstances in which the English Court will pierce the corporate veil. The Court of Appeal quoted, with approval, the formulation of Sir Andrew Morritt in the 2001 case Trustor AB v. Smallbone & others:

“In my judgment, the Court is entitled to ‘pierce the corporate veil’ and recognise the receipt of the company as that of the individual(s) in control of it, if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liabilities of those individual(s)…”

However, the Court of Appeal refused to endorse the decision of Burton J in the Gramsci case referred to above and held that it was not possible to hold the puppeteer liable for the act of the puppet company. It held that to accept that a person could be held liable in contract in these circumstances would “…make a fundamental inroad into the basic principle of law that contracts are the result of a consensual arrangement between…those intending to be parties to them…” 

Comment

As many investors, creditors and financing parties will know to their cost, the misuse of corporate vehicles as a device to shield fraudulent individuals from liability is widespread. The attempt by Burton J in the Gramsci case to extend the circumstances in which claimants can hold individuals liable in these circumstances was therefore welcome.

In that respect, it is perhaps unfortunate that the Court of Appeal has stopped in its tracks what appeared to be a promising extension of the doctrine of alter ego. We note, however, that this may not be the end of the story. The Court of Appeal did not rule out the possibility of extending the doctrine in the right factual circumstances; there is still a possibility that the Supreme Court will decide to entertain an appeal in this case, although its decision in this may not now be known until September.

For more information about the subject matter of this alert, please contact the author or a Bingham partner with whom you regularly work.

This article was originally published by Bingham McCutchen LLP.