: September 18, 2013 |
: Company Law
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Case Law Review:
VTB Capital PLC V. Nutritek International Corp & Ors
The concept of forming of corporations by registration and restricted liability of stake holders of corporations dates back to mid nineteenth century. The concept in its very basic sense means that a company is a separate legal entity, in other words, it is a juristic person.
The company can buy and sell property, can sue and can be sued; these are some of the basic legal implications of separate legal entity.
A very direct consequence which arises with the concept of separate legal identity of a corporation is the misuse of it by people. In reality a company is nothing but an association of persons, who are its beneficiaries, governed by the directors and shareholders of the company. It is nothing but a sum of its members. Thus a lot of times situations arise, when these beneficiaries try to misuse this veil and in such situations the corporate veil of separate legal entity of the company has to be removed and the members of the company are made liable directly. Lifting of corporate veil is one of the most highly debated topics in the business world. The concept of incorporation was introduced only to promote high risk involving but at the same time more profitable businesses among common people as company means limited liability(in its most common form), thus people can limit the risk by forming companies. So if we look at the main purpose behind formation of companies we can easily understand why lifting of corporate veil is such a debatable issue. If the conditions for lifting of corporate veil are made too lenient then the whole purpose behind the concept is defeated and also if the conditions are kept very rigid and narrow then there is a very high risk of misuse of the corporate veil, which would be against the public interest at large. Which is why time and again the issue keeps coming up to the judiciary. The researcher has dealt with the judicial trend on the issue of “lifting of corporate veil” in this project.
When Could The Corporate Veil Be Removed?
Before going into the detailed discussion of various case laws, let us look into various scenarios when the corporate veil would be needed to be lifted.
Fraud is one of the most common reasons for which court have to lift the corporate veil. The companies might be formed to defraud creditors. Jones v. Lipmanis a landmark case in which the defendant first agreed to sell the land to the plaintiff and then changed his mind and to avoid the consequences he tried to take protection behind the cover of his company. The plaintiff brought a suit of specific performance against the defendant. The court in this case lifted the corporate veil and ordered the defendant to make the transfer. Improper conduct such as if the company is being used for tax evasion. Tax planning is allowed until and unless it is done within the four walls of law. A lot of times people try to evade tax using the corporate veil. If the companies are formed by a person purely for the purpose of evading tax then the courts have the power the remove the corporate veil.
Daimler Co. Ltd. v. Continental tyre & rubber Co. Ltdgives another interesting scenario when the courts may remove the corporate veil. If the directors and major shareholders of the company belong to an enemy country then to determine whether really the governing control of the company falls in the hands of enemy country the corporate veil could be removed.
Gilford Motor Co. Ltd. v. Home if a company is formed only for the purpose of carrying on an activity which a person would otherwise be barred for doing or in other words if a company is just a sham then the corporate veil could be lifted. In re F.G Film Ltd.is a case in which the court held that if a company is acting as an agent for its shareholders then the shareholders will be liable for the acts of the company. The corporate veil may also be lifted in the interest of public policy and also if the companies are not following the welfare legislation.
Other than the above mentioned situation there are various statutory provisions under which the corporate veil gets lifted automatically if the provisions of the act are infringed. For instance under Sec. 45 the corporate veil would be lifted if a company carries on business for more than 6 months even after the minimum number of members have fallen below 7 in case of public and 2 in case of private company. Other provisions under which the corporate veil could be lifted could be lifted are Sec. 69, Sec. 147, Sec 542.
VTN Capital PLC V. Nutritek International Corp & Ors
Facts of the case
· Nutritek International Corporation is a British Virgin Island incorporated company, with its ownership and operations in Russia.
· In November 2007, Russian company Russagroprom LLC (from now referred as RAP) acquired six Russian dairy plants (from now referred as Dairy Companies) from Nutritek under a $225 million loan agreement (from now referred as Facility Agreement) from London-based bank VTB.
· RAP defaulted on the Facility Agreement and was unable to pay the balance of the loan. Against this background VTB brought proceedings against Nutritek, Marshall Capital Holdings Limited (a BVI company and indirect owner of a substantial interest in Nutritek) and Mr Konstantin Malofeev (a Russian resident and the alleged principal beneficial owner of both Nutritek and Marshall).
· The original proceedings were issued on the basis that VTB had been induced to enter into the Facility Agreement by fraudulent misrepresentations made by Nutritek, and as direct or indirect beneficial owners, the other defendants should be held jointly liable in tort.
The main issues before the Court of Appeal were
· VTB in its original claim had claimed breach of contract, they claimed that since RAP was the original single contractual borrower, its corporate veil has to pierced.
· However the Court held that it had no jurisdiction to pierce through the privity of contract principle, since the court cannot subject the persons who were never subject to the contractual obligations or ever agreed to be subject to the contract.
· Whether the English courts had jurisdiction to hear the tort claims for deceit and ‘unlawful means’ conspiracy, misrepresentations by Nutritek saying that its control was separate from the control of RAP and transactions were at arms length.
· The court in this matter held that VTB had failed to prove that England was the appropriate forum for the matter, and on analyzing the facts the Court held that the Russian Law was the applicable law in the matter, and rejected the contention of the party that the presumption in tort cases is that the place where the tort is committed is the appropriate forum.
· The court on the issue of the WFO (world wide freezing order) held that there was no question of continuing the same.
The court reiterated the principles laid down in Faiza Ben Hashim v. Shayifby Munby J.;
· Ownership and control in them are not sufficient to pierce the corporate veil.
· Interest of justice is not sufficient even when no unconnected third party is involved.
· Only when there is some “impropriety” can the veil be pierced.
· The above impropriety must be linked to the use of the company structure to avoid or conceal liability
· Necessary to prove control and misuse by the wrongdoer use of company as a device or Façade to conceal his wrongdoings.
On the issue of privity of contract the question whether the veil should be pierced in a situation as to decide whether the puppeteers are party to the contract is to be resolved by reference to the proper law of contract. The courts have upheld in judgments of Antonio Gramsci Shipping Corp. v. Stepanovs and Alliance Bank JSW v. Aquanta Corp. that there is no good reason of principle or jurisprudence why a victim cannot enforce an agreement between him and the puppet company who at all times is pulling the strings.
In Woolfson v. Strathclycde Regional Council and DNH Food Distributors Ltd. v. Tower Hamlets London BC. The courts have held that only in cases where the circumstances exist to show that the company is being used as a mere façade to conceal the true facts, this was further upheld in Adams v. Cape industries. I would like to focus on the word ‘only’, it is ‘only’ when the company is being used as a tool to cover the wrong doings of another, however in the present case one cannot really see how RAP is being used by Nutriek as a cloak, nor has it been completely been proven by VTB that in fact there was a relation between the two companies, no link whatsoever can be seen in the company structure to prove the same.
In this case even if the corporate veil is removed VTB has not been able to show that Nutritek is the controller in the present contract and has used RAP as just a puppet to perpetrate the fraud. Hence if construed objectively since a contract creates rights and obligation only between parties to it Nutritek is a completely separate entity hence the corporate veil cannot be lifted.
In this case the court has toughened the doctrine of privity of contract. In researcher’s view it is a good decision as it does not satisfy the tests laid down by the courts in other judgments and there is no principle agent agreement. The lifting of corporate veil of parties which are part of the transaction just because of the doctrine of privity of contract should not be made too easy as it does not seem to be a very common and usual way of misuse of the separate legal entity by companies. Piercing of corporate veil as mentioned earlier also is a very sensitive issue and must be dealt with high precaution by the judiciary so as to not defeat the whole purpose behind the formation of separate legal entity of a corporation.
The Indian law on the issue is same as the English law as it is borrowed from the English law only. Salomon v. ASalomon & Co. is an authority since the beginning in India on the issue. In LIC of India v. Escorts Ltd, Justice O. Chinnapa Reddy had stressed that the corporate veil should be lifted where the associated companies are inextricably connected as to be in reality, part of one concern. The statutory provisions of the Indian and the English law are also quite similar regarding the issue.
After looking at the various case laws it could be said that rigid guidelines can never be laid down as to decide under what circumstances the doctrine could be applied and under what circumstances it could not be applied. It depends on the circumstances of each and every case.
In researcher’s view this is the right approach as there always should be scope for accommodation according to the circumstances of each and every particular case, because for maintaining the right balance between the public welfare at large and the corporate interests of businessmen, every case must be looked into separately.
Though the courts have repeatedly laid down various grounds for piercing of the corporate veil it is still very ambiguous, as to how the court should decide in a particular case. It varies on a case to case basis, there can no hard and a fast rule regarding this. However looking at the judicial trend it can be seen that courts on very rare occasions allow piercing of the corporate veil. In the instant case also piercing would be too farfetched a remedy, the remedy under tort law should be sufficient enough in the matter.
*Muzammil Hassan, 4th year student, B.A LLB (Hons), NALSAR University of Law.
# Salomon v. A Salomon & Co. Ltd  AC 22
# Corporate Personality & Piercing of the Corporate Veil, Madhavander Chauhan, available at jurisonline.in, last accessed 20th March, 2013.
# 1962 AER 442
# Sir Dinshaw Manekji Petit (1927) BOM 371
# (1916) 2 AC 307
# (1933) Ch. 935 CA
# (1953) 1 AER 615
# Grounds for lifting of the Corporate Veil, available at http://indiacorplaw.blogspot.in/2008/11/grounds-for-lifting-corporate-veil.html, last accessed 15th March,2013
#  EWCA Civ 808
#  EWHC 2380 (Fam para159)
#  EWHC 333 (Comm)
#  EWHC 3281(Comm)
# Corporate Personality & Piercing of the Corporate Veil, Madhavander Chauhan, available at jurisonline.in, last accessed 20th March, 2013.
# Ltd  AC 22
# AIR 1986 SC 1370
A major wave of economic reforms was initiated in India in the year 1991. A thrust towards economic liberalization162 led to a new era in Indian corporate governance. The year 1992 witnessed the establishment of SEBI as the Indian securities markets regulator. SEBI rapidly began ushering in securities market reforms that gradually led to corporate governance reforms as well. Curiously, the first corporate governance initiative was sponsored by industry. In 1998, a National Task force constituted by the Confederation of Indian Industry (CII) recommended a code for Desirable Corporate Governance, which was voluntarily adopted by a few companies. Thereafter, a committee chaired by Mr. Kumar Mangalam Birla submitted a report to SEBI to promote and raise the standard of Corporate Governance in respect of listed companies. Based on the recommendations of the Kumar Mangalam Birla committee the Equity Listing Agreement that was applicable to all listed companies of a certain size. Indias corporate governance norms therefore came to be governed through a clause in the listing agreement popularly referred to as Clause 49. Although both the CII Code as well as the Kumar Mangalam Birla Committee Report expressly cautioned against mechanically importing forms of corporate governance from the developed world, several concepts introduced by them were indeed those that emerged in countries such as the U.S. and the U.K. These include the concepts such as an independent board and audit committee. Now-a-days the role of the independent directors is drawing wide attention especially in the context of public companies. This class of directors is actually elected directors who are not executive directors and who not participate in day-tot-day activities of the company.
The Kumarmangalam Birla Committee has defined an independent director as an entity who does not have a material pecuniary relationship or transactions with the company, its promoter, its managements or its subsidiaries, which in judgment of the Board, may effect the independence of the judgment. Three years later the Naresh Chandra committee gave governance more thought. Finally, in 2004 the Narayanmurthy committee affected changes to clause 49 of the listing agreement.
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