UK Supreme Court To Pierce The Issue Of The Corporate Veil

The UK Supreme Court has granted permission to appeal in a case that raises important issues regarding the legal doctrine of "piercing the corporate veil". The decision in VTB Capital Inc. v. Nutritek International Corp. will give the Court an opportunity to clarify when the veil should be pierced, and whether the legal effect of doing so is to constitute the company's controlling minds as actual parties to its agreements in derogation from the privity of contract doctrine. Given the many contexts in which veil-piercing is relevant, and the lack of definitive guidance about it from the Canadian Supreme Court, it is likely that the influence of the VTB case will extend beyond England into Canada, and indeed throughout the Commonwealth.

Background

The facts in VTB were discussed in an earlier post by my colleague, Tom Heintzman. In brief, the dispute arose from a failed loan made by VTB Capital, PLC ("VTB") to Russagroprom LLC ("RAP"), in order to fund the acquisition by RAP of six Russian dairy companies from the defendant, Nutritek International Corp. ("Nutritek"). VTB was an English-incorporated company owned by a Russian bank, JSC VTB Bank ("VTB Moscow"). With financial assistance from VTB Moscow, VTB made the loan to RAP, a Russian-incorporated company, by entering into a "Facility Agreement" with it, and by executing several other related agreements, including an interest rate swap agreement ("ISA") with RAP. When RAP defaulted on the loan, VTB sued Nutritek, a company incorporated in the British Virgin Islands, and two of Nutritek's foreign affiliates, along with a Russian individual, Malofeev, who was alleged to be the principal beneficial owner and controller of Nutritek, its affiliates and of RAP itself.

VTB's claim was initially framed in tort, and asserted that the defendants were liable for deceit and unlawful means conspiracy. At the heart of the action was the allegation that Nutritek and its affiliates made two fraudulent misrepresentations that had induced VTB's entry into the transaction:

1) they misrepresented to VTB that Nutritek and RAP were independent arm's length entities who were not under common control; and

2) they misrepresented the value of Nutritek's dairy companies to Ernst & Young Valuation LLC, which prepared a valuation report for VTB and VTB Moscow.

In 2011, VTB obtained an ex parte order permitting it to serve the defendants ex juris, as well as a worldwide freezing order over US$200 million of Malofeev's assets. The defendants moved to set these orders aside. In response, VTB moved to amend its claim to assert that Malofeev and Nutritek's affiliates were jointly and severally liable with RAP in contract for breach of the Facility Agreement and ISA, on the theory that the court should pierce RAP's corporate veil. VTB's primary motivation for doing so was the fact that the Facility Agreement contained forum-selection and choice-of-law clauses in favour of England. It sought to argue...