As a guide to setting up a limited company it is necessary to inform the entrepreneurs and businessmen about the use of piercing the corporate veil in suitable situations. The article focuses on when a remedy can be demanded via lifting the corporate veil and presents a detailed case study of a limited company formation UK to serve the purpose.
Remedies for Lifting the Corporate Veil
When the court finds it appropriate to lift the corporate veil or the circumstances are as such that ignorance towards the separate legal personality of a corporate body becomes inevitable, the party that is fighting for justice has to be given certain compensation. The compensation given by the court may be termed as the remedies. A general rule regarding these remedies is that they should be as such that the party that has been implicated is not restricted by the contract itself that it has signed with the ltd formation UK company for a mere purpose of lifting the veil.
For the elaboration of this generalised view point regarding the remedies, a case of VTB Capital v Nutritek Corporation is discussed here. The company involved in the case was a public limited company. The case is presented in text that follows:
VTB Capital PLC v Nutritek International Corp
Russagroprom LLC (RAP) had to take over 6 dairy plants and 3 companies in association from the company named Nutritek, which in this case was also the first defendant. The company VTB, which was a UK plc company formation had signed an agreement to provide Russagroprom with loans so that the latter company could have enough funds to take over the required property. However, RAP went into loan default. VTB claimed that the agreement signed for the provision of loan was on fraud terms as the defendant company, Nutritek, had defrauded by misrepresenting RAP. In such a scenario, VTB demanded that other defendants should be held liable too. It was further claimed by VTB that the defendants had a full control over RAP. The defendants could be recognised as the parties for the two pacts signed together with Russagroprom and the guarantors after the corporate veil had been pierced. It was held by the Supreme Court as well as the Court of Appeal just as the trial judge stated that the claim raised by VTB could not be defended under the law.
Lord Neuberger stated:
Lord Neuberger first of all refused to clarify the initial argument given by the counsel that the corporate veil could not be pierced in any situation. Lord Neuberger then held:
- I consider that whether the court can pierce the incorporation veil in favour of VTB depending upon suitable and relevant facts. The fundamental reasons given by VTB for the claim seem just in current scenario. The matter should be solved under the relevant provisions given by the law of England. However, I also believe that in cases where the veil has to be lifted for any company with an offshore incorporation, there can be an option given for the law to govern the matter.
- As far as the case of VTB is concerned, the circumstances in this case seem an extended version of the scenarios where in the past the piercing of the corporate veil has been permitted.
- The reason for terming it as an extended version is that the case leads to holding the person liable who controlled the company on the basis that he acted as a co-contractor in the contracts in which some other company was the party actually and he was not.
- In short, VTB claims that Mr. Malofeev should be considered as acting as a co-contractor to the company that had actually signed the two agreements, i.e. RAP, despite the fact that it was neither intended by Mr. Malofeev nor by the claimant i.e. VTB or any of the remaining contracting parties that Mr. Malofeev was a party.
- This idea of extending the principle of lifting the corporate veil to the current case remains unsupported by the cases in the past.
- First of all, VTB does not propose that either of the parties that signed the agreement cannot be held liable under both the agreements. In fact, the proposal given by VTB states that Mr. Malofeev should be held liable together with the contracting party RAP severally. Although it has been accepted initially that there can be circumstances where the corporate veil can be lifted by the court, yet in this case the reasons given for holding Mr. Malofeev severally and jointly liable are discordant with the Salomon ruling.
- The treatment given under law to a company should be as if it is a separate legal person just like a human being. As a matter of fact, a company can be controlled by humans or it takes action via humans and thinks via humans. Hence, it is clear that there will always exist the agency law but, generally the company will only be the principal and not the agent. In the case under consideration, even if the agency law applies, the contracting company plays the role of semi-principal and not semi-agent.
- Under any other rule such as the undisclosed principal, it is not possible in a situation where B and C are involved in a contract, to hold another company i.e. A responsible for the liabilities that B has towards C just on the mere fact that A has a control over B and misrepresented B in front of C to make C enter the contract. It cannot be stated that there was any unfairness done to C. In fact, the law allows C a compensation by take an action against A for defrauding by misrepresenting.
- It would not be fair to term Mr. Malofeev to be given a treatment as if he was a party in the contracts in the following scenarios:
- When the contract was being signed by the actual parties, none of them as well as Mr. Malofeev himself had an intention to make Mr. Malofeev a party in contracts.
- Even after the contract was signed, it was never demonstrated or made to be believed by any of the party by Mr. Malofeev that he had any liabilities under the signed agreements.
- I believe it would be right to believe the effect of the context of the words that the contracting parties exchanged via the contract and the context of the actions they took, as it is the most basic principle for the foundation of the liabilities and rights given in any contract. For instance, Smith v Hughes.
- Mr. Howard QC depended upon the similarity with the law that was relevant to the undisclosed principals in his proposition. I believe, that similarity contradicts the argument given by VTB. The undisclosed principal is always considered as a deviation from the general rule as mentioned in the case Bowstead and as stated by Dillion LJ in the case Welsh Development Agency. According to the Court of Appeal regarding this case in the 89th paragraph it is irrelevant to extend any abnormal rule to this case unless it becomes unjust if the extension is not done.
- It was stated by Lord Hoffman in the case of OBG that if any anomaly is formed by the judges for the justification of extending a principle provided that the principle is itself anomalous, the formation of anomaly is unjust.
- I believe that the reasons given by VTB for its claim are not sufficient to prove RAP as a sham that was used to hide some realities. Rather I believe that a lift of the veil of incorporation would be just if in actual a person that is at the back of a company, instead of the company is the recipient or is acting relevant to the matter.
- But the true facts given by VTB are relevant to the hold, performance of trade, and the Dairie Companies’ worth when the accusations against Mr. Malofeev are taken into consideration or to the authenticity of the arrangement’s behaviour which includes the shifting of belongings between the incorporations that hold a common ownership. None of these true facts can be used to prove that RAP was used as a sham for hiding the truth.
- Another proposition given by Mr. Howard QC was that the piercing of the veil of incorporation could be done because the structure of the corporate was abused by Mr. Malofeev. I do not believe that there is any relevant role played by the abuse of the formation of the corporate in this case in the least, no matter what is meant by abusing the corporate structure. It may be possible that the term is another way of describing the utilisation of any corporate body as sham or that it is a condition that needs to be fulfilled additionally before the lift of the corporate veil is allowed. Else, it only seems to me that it would not be fair to legalise the action of extending any such circumstances for the lifting of the corporate veil.
- As a matter of fact, a number of civilian systems of law give recognition to the abuse of rights. It is fair enough if the courts working domestically apply any such rules under certain aspects of the EU laws. Nevertheless, no suggestion was given to us to implement any such principle as a new basis in the local law to given Mr. Malofeev a treatment of holding him liable under the contract to VTB.
- Assenting to the verdict given by the Court of Appeal, I also believe that the circumstances upon which VTB demands an extension such that the corporate veil is lifted by the court is against the authority and the principle.
- If VTB establishes that it signed the contract with RAP on the basis of the fraud statements that were given by Mr. Malofeev, in that case Mr. Malofeev will have to give a compensation to VTB for his fraudulent words. The remedies that may be suggested may differ, but this provides no attractive basis for the extension of the principle in an abnormal and a new manner that is unprincipled. Moreover, I am not convinced by the idea that the principle should be implemented just to make it possible for VTB to justify the lawsuit that was brought by VTB in the court.
- Following the observation made of the case under consideration, the verdict given for the case of Gramsci seems unjustifiable in my views. As mentioned by the Court of Appeal and the statement of Arnold J, I also feel that the verdict given for the case of Gilford and Jones were wrongly interpreted in the case of Gramsci. Apparently, the verdict intended to prevent any person who seemingly was at the back of a detestable deal, receipt or action from avoiding any liability by making use of the fact that the transaction or action was carried out via a company that served as medium and not as an agent to the person. Any such goal is not enough to legalise the lifting of the veil of incorporation.
As a part of the guide to setting up a limited company the norms and general rules should be understood well. However, there are some exceptions to the general rules. But those exceptions do not find their application in every scenario. Such a case was presented in this article explaining that although piercing the veil of ltd formation UK corporation is allowed under the law yet it cannot be done for reasons that have no sound logic.