The importance of VTB v Nutritek

The case of VTB Capital Plc v Nutritek International Corp and others will be mentioned for years to come, says Fried Frank partner Justin Michaelson

Not many things are certain in litigation, but one prediction I can make with confidence is that we will be citing the case of VTB Capital Plc v Nutritek International Corp and others for many years to come following the Supreme Court decision on 6 February 2013.

The speeches not only challenge conventional thinking on piercing the corporate veil, they also develop new theories on forum challenges and provide guidance to judges on avoiding lengthy jurisdiction battles. They also address the “highly unsatisfactory” interim relief that was allowed to continue whilst the appeals continued.

Of course, freezing injunctions are serious and oppressive; they cause extensive paralysis in the operations of the recipient. To call it a nuclear weapon for a trading company is an under-statement: they prevent businesses from progressing and make even the most basic money transfers cumbersome. However what happened here should not be repeated. Lord Wilson described it as a “wrongful” and “protracted” continuation of a worldwide freezing order that led to a “highly unsatisfactory state of affairs” of an order being fixed in place for 18 months against Mr Malofeev when the court held in October 2011 he was not at risk of dissipating his assets (to the contrary, he was trading them up); that VTB was responsible for a material non-disclosure when seeking the order ex parte in August 2011 (VTB did not inform the ex parte judge about a critical element of the central transaction); in circumstances where two levels below of the English judiciary (October 2011 (Chancery Division); and June 2012 (Court of Appeal) rejected jurisdiction for the dispute. Arnold J dismissed the worldwide freezing order on three separate exclusive grounds, but an order obtained on 5 August 2011 remained temporarily in place until 6 February 2013.

The conventional thinking appears to be that if there is an appeal process pending on a first instance decision the interim relief remains in place. This default position needs to be challenged. Lord Wilson in his speech explains that “one cannot quarrel with the logic” of the principle, but it is not explained in the sparse cases available why the “balance of convenience” does not shift or re-align as the successful party sweeps into a lengthy appeal process; surely the position shifts after a respondent succeeds a second time at the Court of Appeal: either that, or there should be an active full re-assessment of the relative positions. It is not dealt with directly by Lord Wilson, but it is to be hoped that his comments on the “highly unsatisfactory state of affairs” will spur a move away from assuming the relief simply remains.

Then there is the forum challenge. The irony of a Russian state-owned bank seeking to establish jurisdiction for a substantial dispute in England should not be lost, particularly when the main respondent in this case is a Russian national. The circuitous arguments deployed here would not have been necessary in Russia. However, the charitable view is that this demonstrates the popularity and neutrality of England.

Whatever the reasons, the Supreme Court was critical of the extent of the witness evidence filed for a forum challenge and the length of time it took to hear the case. In his speech, Lord Neuberger implores judges to use the new procedural rules available to them and the spirit of the recent reforms to curtail this practice and streamline the issue. However it is difficult to do this unless an early guillotine or rule is set restricting the parties in some way, or requiring a narrowing of the issues. In this case, the claimant submitted two separate expert witness statements from Russian lawyers, and then 10 days before the main hearing before Arnold J, submitted a new one, 50 pages in length from a new Russian lawyer, a third individual, who contradicted their second expert and supported half of the respondent’s expert witness report. Despite an attempt to exclude it during a contested hearing, it was reluctantly allowed into the evidence by Roth J. Perhaps now with this supporting statement from Lord Neuberger the position would be different.

It is interesting to note in his speech that Lord Wilson has called appeals on forum non conveniens as “inappropriate”. His Lordship makes this remark because VTB changed the basis of their appeal on forum non conveniens, away from what was said to be the general point of public importance (the usual qualification for a reference up to the Supreme Court), to a basic attempt to persuade the Supreme Court to re-evaluate the tests applied by the courts below. Lords Mance, Neuberger and Wilson all agreed that this is not the function of an appellate court and is not a practice to encourage.

The most likely reason for the reference to the Supreme Court was the novel point put forward by VTB (and relying upon a judgment of Burton J in Antonio Gramsci v Stepanovs [2011] EWHC 333), on piercing the corporate veil. The theory was that the respondents were bound by an English jurisdiction clause in the facility agreement because they were the so-called puppeteers of the so-called puppet counterparty and they were using the counterparty entity to perpetrate fraud. Leaving to one side the weaknesses on the merits of the underlying case referred to briefly in Lord Mance’s speech, the theory is particularly novel because the concept of piercing the corporate veil has previously been considered to relate only to the law of remedies. VTB tried to use the concept merely for the purpose of bringing a litigant into the jurisdiction. This was not appropriate, according to Lord Neuberger, who explains in his speech that although in his view the concept of piercing the corporate veil exists (despite the “blue sky thinking” submission of the respondents to the effect that the concept does not exist and another legal explanation exists on each occasion it has happened; a proposition the Supreme Court has not finally determined), there is nothing to justify the extension of it in these circumstances. The decision leaves a few of those particularly gripping issues open, but it is a commentary that will be relied on for many years to come, in particular the adoption by Lord Neuberger of the Munby J guidance from Ben Hashem v Ali Sharif [2008] EWHC 2380 (Fam) on piercing the veil when “it is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is (mis)use of the company by them as a device or facade to conceal their wrongdoing… at the time of the relevant transaction(s).”.

In conclusion, three levels of the English judiciary have now decided that this dispute is not appropriate for trial over here. For a case that involved a Russian state-owned bank suing a Russian national over a deal that took place in Russia for assets located in Russia, about a business in Russia, with witnesses based in Russia, it is fairly amazing that it took so long to reach this conclusion. (To be fair on Justice Arnold, he decided this within two weeks of the hearing, in a 110-page judgment). What is even more amazing is that the English court continued to freeze the assets of the Russian respondent throughout the time it took him to respond successfully to two appeals – and that this led to an extra unnecessary 14 months of paralysis.

Justin Michaelson is a partner at Fried Frank Harris Shriver & Jacobson (solicitors for the respondents)