Piercing the corporate veil – an analogy with the law of Trusts

The Supreme Court in London has recently considered the circumstances in which Courts can pierce the corporate veil: VTB v Nutritek Int. Corp [2013] UKSC 5.

The dispute involved a Russian lender and Russian borrowers. One of the two questions in the appeal was whether the Courts of England or the Courts of Russia should resolve the dispute. The Supreme Court held 3:2 in favour of Russia.

The second question was whether the Court should pierce the corporate veil. On this question the President of the Court, Lord Neuberger, delivered a decision with which the other Judges agreed.

He was sanguine about the existence of the doctrine, quoting Lord Halsbury LC as saying that a:

“legally incorporated ‘Company’ must be treated like any other independent person with its rights and liabilities appropriate to itself …, whatever may have been the ideas or schemes of those who brought it into existence”, and that it was “impossible to say at the same time that there is a Company and there is not”: para 122

With language that runs in parallel with the “sham Trust” doctrine, the “alter ego” doctrine and the bundle of rights “doctrine” in the law of Trusts he said that:

“Words such as ‘façade’, and other expressions found in cases, such as ‘the true facts’, ‘sham’, ‘mask’, ‘cloak’, ‘device’ or ‘puppet’, may be useful metaphors. However, such pejorative expressions are often dangerous, as they risk assisting moral indignation to triumph over legal principle, and, while they may enable the Court to arrive at a result which seems fair in the case in question, they can also risk causing confusion and uncertainty in the law”: para 124

As a general principle, he said that:

“Where 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. This could not be said to result in unfairness to C: the law provides redress for C against A, in the form of a cause of action in negligent or fraudulent misrepresentation”: para 139

The request to pierce the corporate veil related to the actions of a Mr M. Lord Neuberger said:

“It would be wrong to hold that Mr M should be treated as if he was a party to an agreement, in circumstances where (i) at the time the agreement was entered into, none of the actual parties to the agreement intended to contract with him, and he did not intend to contract with them, and (ii) thereafter, Mr M never conducted himself as if, or led any other party to believe, he was liable under the agreement. That that is the right approach seems to me to follow from one of the most fundamental principles on which contractual liabilities and rights are based, namely, what an objective reasonable observer would believe was the effect of what the parties to the contract, or alleged contract, communicated to each other by words and actions, as assessed in their context …”: para 140

The application of these principles will make it hard to “pierce” the corporate veil or to “lift” the corporate veil (surprisingly, it isn’t clear if these two terms are synonymous - see paras 118-119).

Does this case have any relevance to the law of Trusts?

Companies and Trusts have in common the fact that they are artificial constructs. A Company consists of people who do things but the law deems their actions to be done by a legal construct – a Company. In a similar way, Trusts consist of people who say and do things but the Courts impose a set of rights and obligations upon them which overlay their own personal rights and obligations.

When a one-person Company becomes insolvent it is tempting to look behind the veil of incorporation and determine that the person who mis-managed it should be made liable for its losses. Similarly, with Trusts, when trustees appear to “hide” behind the form of trusteeship it can be tempting to disregard the legal form and hold the individuals accountable on the basis that the “Trusts” do not in fact exist.

In such circumstances, Lord Neuberger’s warning is appropriate:

“ … the use of words such as “sham” or “puppet” may be useful metaphors. However, such pejorative expressions are often dangerous, as they risk assisting moral indignation to triumph over legal principle, and while they may enable the Court to arrive at a result which seems fair in the case in question, they can also risk causing confusion and uncertainty in the law.”

Companies and Trusts have been of enormous benefit to the countries which have adopted them into their laws. But when things appear to go wrong with them, great care needs to be taken to ensure that the Courts do not undermine the two concepts and lessen their usefulness to society.