The Courts Retrace Their Steps On Lifting The Corporate Veil In Relation To Puppeteer's Contractual Liability

Antonio Gramsci Shipping Corporation & Others v. Recoletos Limited & Others including Aviars Lembergs [2012] EWHC 1887 (Comm)

In the latest of a flurry of decisions on piercing the corporate veil, the Commercial Court (Mr Justice Teare) has provided welcome clarification on the extent to which the courts will permit claimants to go behind a company's corporate veil in order to hold those controlling the company liable under the contracts entered into by that company.

The courts' willingness to pierce the corporate veil in special circumstances (such as when the corporate structure is used as a sham for fraudulent purposes) represents an exception to the principle of separate legal personality, pursuant to which claimants are unable to go behind the corporate veil in order to hold those controlling the company liable in addition to or instead of the company itself.

The background facts

The claimant ship-owners ("owners") were the victims of a fraudulent scheme under which five offshore companies ("the corporate defendants") chartered a number of vessels from the owners under charterparties below the market rate and then sub-chartered the vessels at the market rate, thereby depriving the owners of the difference between the market rate and the charter rate and keeping the profits for themselves.

The Commercial Court had jurisdiction in respect of the claims against the corporate defendants by virtue of the express jurisdiction provisions contained in the charterparties. The owners obtained judgment against the corporate defendants but, in addition, sought to pursue a claim in respect of the diverted profits against two individuals, Mr Stepanovs ("S") and Mr Lembergs ("L"), who lived in Latvia. It was alleged that S and L controlled the corporate defendants and used them as a device for the purposes of diverting the profits and, therefore, the owners should be permitted to pierce the corporate veil and pursue the same claims against S and L.

It was contended by the owners that they were entitled to pierce the corporate veil to the extent that the charterparties should be regarded as contracts with S and L as the individuals controlling the corporate defendants and entitled to rely on the English jurisdiction clause contained in the charterparties against them.

The owners proceeded firstly against S. With respect to S, Mr Justice Burton held that there was no reason why the victim could not enforce the agreement against both the puppet company...