06 February 2013

Piercing the corporate veil in fraud cases

Stephen Ross
Partner | UK

It is a well established principle that a company has a separate legal personality from its members. In very limited circumstances, the English courts can ‘pierce the corporate veil’, putting to one side the company’s separate legal personality and holding that its members are subject to the legal consequences of the company’s acts.

The English courts have only permitted the corporate veil to be pierced, or lifted, in a handful of cases in over a century, often where the company was used as a ‘puppet’ to disguise the fraudulent activities of the individual ‘puppeteers’ controlling it. This can be important because individual ‘puppeteers’ may have more funds to satisfy a judgment than the company, which is often insolvent by the time the fraud is uncovered. However, it was never precisely clear when the corporate veil may be pierced and what limitations there were on such an exercise. Recently, in a large fraud case, one English judge held that the corporate veil should be pierced and there was no reason why the ‘puppeteer’ should not be held to be a party to a contract entered into by the ‘puppet’ company he controlled. This was a controversial decision, as some commentators suggested that it extended the principle of piercing the corporate veil one step too far.

The Supreme Court has now considered this issue afresh and today handed down an important judgment on this issue. In the case of VTB Capital plc v Nutritek International Corporation & others [2013] UKSC 5, the Supreme Court has unanimously held that it was against authority and principle to pierce the corporate veil in order to hold that those who misused the company (the ‘puppeteers’) were parties to the contracts entered into by that company (the ‘puppet’) when none of the parties intended that to be the case. The Court refused to rule on the argument that piercing the corporate veil could never be justified.

Although this decision firmly limits the effect of piercing the corporate veil, the principle itself remains intact. This is significant for any fraud case where corporate entities are being used as a device or facade to conceal the liability of controlling individuals; particularly so in a jurisdiction which does not recognise the concept of group corporate liability.

The Withers Civil Fraud Group is dealing with several large scale fraud cases that were on hold pending this decision and we are aware of several others in London. Potential claimants were waiting to see if they would be able to pierce the corporate veil of target companies and go after the individuals based on contractual claims. Following the judgment of the Supreme Court, those claims are now likely to come to life in any event.

For further information please contact Stephen Ross, Head of the Civil Fraud Group on +44 (0)20 7597 6172 or stephen.ross@withersworldwide.com.

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