Court of Appeal in key corporate veil ruling

The Court of Appeal has clarified its position on piercing the corporate veil rejecting an appeal against brought by state-owned Russian bank VTB Capital against Nutritrek International.

The Court of Appeal has clarified its position on piercing the corporate veil rejecting an appeal against brought by state-owned Russian bank VTB Capital against Nutritrek International.

The hotly-anticipated ruling given by the appellate court rejects the approach taken in Antonio Gramsci Shipping Corp & ors v Oleg Stephanos. In its 110-page judgment, handed down by Lloyd LJ, Reimer LJ and Aikens LJ, the CoA sets out the principle upon which  the corporate veil can be pierced.

The dispute centres on allegations of fraud and conspiracy against four defendants who  were involved in the acquisition by Russagroprom LLC (RAP) of six Russian dairy plants and associated companies from Nutritek.  VTB had loaned RAP $225m to fund the loan, but later defaulted leaving the bank only able to recover $40m of the loan.

It was alleged that VTB entered into the loan following false inducements made by Nutritrek. The three further defendants, Marshall Capital  Holdings, Marshall Capital and Konstantin Malofeev were alleged to have participated in the supposed fraudulent conspiracy.

The defendants argued that there was no jurisdiction up on which the claim could be heard in London. However, VTB – relying on Antonio Gramsci Shipping Corp v Stepanovs – contended that the court was able to pierce the corporate veil of the parties to the loan and hold the defendants, as the alleged controllers, liable.  This would allow reliance to be placed on the English law jurisdiction clause in the loan.

VTB Capital drafted in PCB Litigation partner Anthony Reim to lead the appeal with four silks taking on the battle to the CoA: Littleton Chambers’ Clive Freedman QC, Erskine Chambers’ Richard Snowden QC, Essex Court Chambers’ Paul McGrath QC, and Fountain Court’s Andrew Burrows QC.

Kearns & Co partner Richard Kearns instructed Hardwicke’s Nigel Jones QC for  Nutritrek, while SJ Berwin partner Justin Michaelson instructed 20 Essex Street’s Iain Milligan QC and Cyril Kinsky QC of 3 Verulam Buildings for Malofeev and Marshall Capital.

According to the judgment Snowden argued for VTB that “the contractual cause of action which  VTB asserts […] is simply a logical application of the judicial “veil piercing” in which the courts engage in reaction to the misuse of a company by those in control of it so as to conceal their own wrongdoing.”

The court disagreed, stating that the submission was “flawed by its own inherent unreality”.

Lloyd LJ added: “His proposition is that, once the corporate veil is lifted and the true facts are revealed, such facts will require the court to conclude that the puppeteers are additional parties to the contracts into which they have procured the puppet to enter. We do not understand this.

“It is inconceivable that the revelation of the true facts will show Marcap BVI, Marcap Moscow or Mr Malofeev to be parties to either of the relevant contracts.”

To accept the appeal, the court added, would lead to an artificial remedy creating fundamental inroads into basic principles of English contract law.

Commenting, SJ Berwin’s Michaelson said: “The Court of Appeal has clearly decided that it is not appropriate to develop the law in the way VTB attempted to here, simply to bring our clients into the jurisdiction under a contract to which they were not a party.”

 

The legal line up

For the appellants VTB Capital

Littleton Chambers’ Clive Freedman QC, Erskine Chambers’ Richard Snowden QC, Essex Court Chambers’ Paul McGrath QC, and Fountain Court’s Andrew Burrows QC to lead 11 Stone Buildings’ Iain Pester, Essex Court Chambers’ David Davies, David Peters also of Essex Court Chambers’ instructed by PCB Litigation partner Anthony Reim

For the defendant (1) Nurtitrek International Corp

Hardwicke’s Nigel Jones QC instructed to lead David Lewis of Hardwicke by Kearns & Co partner Richard Kearns

(2) Marshall Capital Holdings

Michael Lazarus and Christopher Burdin both of 3 Verulam Buildings instructed by  SJ Berwin partner Justin Michaelson and associates Darren Roiser, Swati Tripathi, Shivani Sanghi and Anatoly Matveev

(4) Konstantin Malofeev

 20 Essex Street’s Iain Milligan QC, Fountain Court’s Stephen Rubin QC, 3 Verulam Buildings Cyril Kinsky QC, to lead Essex Court’s Ed Brown and Fountain Court’s Jamie McClelland instructed by SJ Berwin