UK: 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 and the puppeteer who all the time was pulling the strings. Accordingly, the claimants were able to enforce the jurisdiction clauses contained in the charterparties entered by the corporate defendants against S, despite the fact that he was not ostensibly a party to those contracts.

The owners then proceeded against L and obtained a worldwide freezing order which L attempted, and failed, to have set aside. The present application before Mr Justice Teare was an application by L challenging the jurisdiction of the Commercial Court to hear the owners claim against him.

The Commercial Court decision

In order to lay the foundation for their argument that the corporate veil should be pierced, the owners had to establish that there was a good arguable case that L controlled the corporate defendants and that the corporate structure had been abused for the purpose of diverting profits from the owners. The judge concluded that the evidence relied on by the owners was sufficiently strong in this respect. That, however, was only the first hurdle and the judge then had to consider whether the owners' case on the law was correct, namely whether the owners were entitled to raise the corporate veil so that L could be treated as a party to the charterparties.

The owners obviously relied on the judgment in respect of their claim against S (Antonio Gramsci and others v. Stepanovs [2011] 1 Lloyd's Rep. 647). In the intervening period between that decision and the hearing of this application, however, the Court of Appeal had issued judgment in an unrelated case involving similar legal issues (VTB Capital PLC v. Nutritek and others [2012] EWCA Civ 808). In that case, the Court of Appeal held that Mr Justice Burton's decision in Antonio Gramsci v. Stepanovs was wrong and should not be followed.

The judge referred at length to the judgment of the Court of Appeal in VTB Capital including the conclusions, inter alia, that (i) treating the "puppeteer" as a party to the "puppet's" contract when that had not been the intention of any of the parties would amount to a fundamental inroad into the basic principle of law that contracts are the result of a consensual arrangement between, and only between, those intending to be parties to them; and (ii) whilst the courts may, in appropriate cases, pierce a company's corporate veil, there is no basis for the proposition that, once the veil is pierced, it is open to the courts to hold that the puppet company was a party to the puppeteer's contract, or vice versa.

The judge concluded that he was bound by the decision in VTB Capital with the result that the owners' contention that by piercing the corporate veil they should be permitted to identify L as the true party to the charterparties was doomed to fail. Accordingly, even if the owners could establish their factual case, the judge held that they had no arguable legal case that L should be treated as a party to the charterparties entered into by the corporate defendants.

Comment

Whilst the Commercial Court decision in Antonio Gramsci v. Stepanovs indicated an extension of the principle of piercing the corporate veil such that a puppeteer company may be treated as a party to contracts entered into by a puppet company under its control, the decision in this case following the Court of Appeal in VTB Capital v. Nutritek has firmly rejected this proposition.

As a result, the current position is that English law will permit claimants to pierce the corporate veil in appropriate cases. Piercing the corporate veil will not, however, enable claimants to create a contractual liability nor to rely upon contractual jurisdiction clauses other than against the actual contracting party. It should be noted that the unsuccessful claimants in VTB Capital have been granted permission to appeal to the Supreme Court, so watch this space for further developments.

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