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The Second Opinion: The UK Supreme Court Declines to Extend the “Piercing the Corporate Veil” Doctrine

A Commentary on Recent Legal Developments by the Opinions Group of McCarthy Tétrault LLP

Posted in The Second Opinion
Hovsep Afarian

In a much-anticipated decision released earlier this week that could have implications throughout Canada, the UK Supreme Court revisited and ultimately reaffirmed its venerable decision in Salomon v. Salomon, which recognized over a century ago the separate legal existence of a corporation from its shareholders. The Supreme Court was urged to lift the corporate veil in order to treat the owner of the corporations involved in the dispute as, in effect, a contracting party to various agreements signed only by the corporations. The Court unhesitatingly declined to do so.

The facts of the case VTB Capital plc v. Nutritek International Corp., briefly stated, are as follows. VTB Capital plc (“VTB”) entered into agreements with Russagroprom LLC (“RAP”) whereby VTB loaned over $225 million to RAP to enable RAP to buy various companies from Nutritek International Corp. (“Nutritek”). RAP defaulted on the loan. VTB claimed it was induced to enter into these agreements by the misrepresentations made by Nutritek. A businessman named Malofeev was alleged to be the ultimate controlling owner of Nutritek and two of its affiliates (the “Affiliates”). VTB sought to amend its claim in order to raise a piercing of the veil argument so as to make Malofeev and the Affiliates jointly and severally liable with RAP in contract for the alleged misrepresentations.

The UK Supreme Court unanimously rejected the plaintiff’s attempt to plead that the corporate veil should be pierced, ruling that such an argument was bound to fail as it “represents an illegitimate and unprincipled extension of the circumstances in which the veil can be pierced” (at para. 117). Lord Neuberger penned the leading speech.

Significantly, adopting a restrictive approach, Lord Neuberger as a threshold matter was not prepared to finally conclude that such a doctrine even exists in law, stating that “the precise nature, basis and meaning of the principle are all somewhat obscure” (at para. 123).

However, even assuming the existence of the doctrine, Lord Neuberger held that piercing the corporate veil in order to hold a controlling owner of a corporation liable for a contract to which it was not formally a party “is contrary to high authority, inconsistent with principle, and unnecessary to achieve justice” (at para. 126).

Lord Neuberger was not prepared to extend the doctrine given that the law affords an adequate alternative remedy in these circumstances (namely, a direct claim for misrepresentation), and given that the issue was before the court via an interlocutory appeal.

Although the parameters of the veil-piercing doctrine remain unclear, the UK Supreme Court’s decision has nevertheless introduced a measure of clarity which will inform the development of the unsettled Canadian jurisprudence as well. The VTB decision stands for the proposition that, generally speaking:

“[W]here B and C are the contracting parties and A is not, there is simply no justification for holding A responsible for B’s contractual liabilities to C simply because A controls B and has made misrepresentations about B to induce C to enter into the contract…the law provides redress for C against A, in the form of a cause of action in negligent or fraudulent misrepresentation.”

The UK Supreme Court’s unanimous ruling also calls into question the very existence of the veil-piercing doctrine, an issue the resolution of which the Court deferred to a future case. Heartened by the Court’s comments, practitioners will no doubt press for a narrow application of the doctrine and attempt to hasten its demise.

The decision in VTB also raises important conflicts of law issues, such as what law is to be applied to the question of whether the veil of a foreign corporation is to be pierced. This and other interesting conflicts of law issues will form the subject of a future post.

An earlier post penned by my colleague on the English Court of Appeal’s decision in this case can be read here.

The McCarthy Tétrault Opinions Group consists of members of the firm’s litigation department whose practices focus on written advocacy and the provision of strategic advice and opinions in the context of complex business disputes and transactions.  The members of the Opinions Group are Anthony Alexander, Martin Boodman, Brandon Kain, Hovsep Afarian and Kirsten Thompson.