Factual and Procedural Background
This judgment concerns appeals by the Plaintiff against an order made by Judge Arnold following a six-day hearing of applications involving the Plaintiff and three defendants, with a fourth defendant not served and not participating. The defendants include companies incorporated in the British Virgin Islands and Russia, and an individual resident in Russia. The main issues relate to the English court's jurisdiction over non-resident parties served outside the jurisdiction.
The Plaintiff, an English-incorporated bank majority owned by a Russian state-owned bank, lent approximately $225 million to a Russian company (the Borrower) to fund its acquisition of several Russian dairy companies from the first defendant (Seller). The Borrower defaulted on the loan, and the Plaintiff recovered less than $40 million through enforcement of securities. The Plaintiff alleges it was induced to enter the loan agreement by fraudulent misrepresentations made by the Seller, with the other defendants jointly liable.
The Plaintiff initially pleaded claims in tort (deceit and unlawful means conspiracy) based on two alleged misrepresentations: the value of the dairy companies and the independence of the Borrower from the Seller. The Plaintiff sought to amend its claim to add contract claims against three defendants by piercing the corporate veil of the Borrower to hold them liable under the loan agreements.
Judge Arnold refused permission to amend to add contract claims, upheld defendants' challenges to jurisdiction, and set aside a worldwide freezing order (WFO) against the individual defendant. The Plaintiff was granted permission to appeal these decisions. The appeals were consolidated and heard over five days.
Legal Issues Presented
- Whether the Plaintiff can amend its claim to assert contractual liability against certain defendants by piercing the corporate veil of the Borrower, thus making those defendants parties to the loan agreements.
- Whether the English court has jurisdiction over the defendants for the tort claims based on fraudulent misrepresentation and conspiracy.
- Whether the worldwide freezing order against the individual defendant should be continued.
Arguments of the Parties
Appellant's Arguments
- The Plaintiff argued that the Borrower was controlled by the defendants, who used it as a façade to conceal their wrongdoing, thereby justifying piercing the corporate veil to treat them as parties to the loan agreements.
- The Plaintiff contended that piercing the veil would render the defendants jointly and severally liable under the contracts, allowing the English court to assert jurisdiction under the Brussels Regulation or, alternatively, under the Civil Procedure Rules (CPR) for service out of jurisdiction.
- On the tort claims, the Plaintiff asserted it had a good arguable case of loss sustained within the jurisdiction and that England was the appropriate forum for trial.
- Regarding the freezing order, the Plaintiff submitted there was a real risk of dissipation of assets by the individual defendant, justifying continuation of the WFO.
Respondents' Arguments
- The defendants argued that the corporate veil could not be pierced to make them parties to the contracts, as there was no legal basis to treat them as original contracting parties where no intention existed.
- They challenged the Plaintiff's assertion of loss, contending that any loss was suffered by the Plaintiff’s parent company, not the Plaintiff itself, and that the Participation Agreement protected the Plaintiff from loss.
- They submitted that the English court did not have jurisdiction as England was not the appropriate forum, with Russia being the natural forum for the dispute.
- On the freezing order, the defendants contended there was insufficient evidence of a real risk of asset dissipation, and the Plaintiff's application was tainted by material non-disclosure.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Salomon v. A. Salomon and Company, Limited [1897] AC 22 |
Separate legal personality of companies and the principle that a company is distinct from its controllers. |
Confirmed the basic principle of separate corporate personality, limiting veil piercing to exceptional cases. |
| Woolfson v. Strathclyde Regional Council 1978 SLT 159 |
Recognition of the principle of piercing the corporate veil only in special circumstances where the company is a façade concealing true facts. |
Reaffirmed the limited circumstances for veil piercing and emphasized the need for special circumstances. |
| Gilford Motor Company, Limited v. Horne [1933] 1 Ch 935 |
Use of a company as a sham or device to conceal wrongdoing justifies equitable relief against both individual and company. |
Held that injunctions could be granted against both the individual and the company used as a sham. |
| Jones and Another v. Lipman [1962] 1 WLR 832 |
Equitable remedies can be granted against a company controlled by an individual to prevent evasion of contractual obligations. |
Granted specific performance against both individual and company used as a mask to avoid contract obligations. |
| Gencor ACP Ltd and others v. Dalby and others [2000] 2 BCLC 734 |
Veil piercing to hold a company and its controller jointly accountable where the company is a device to conceal wrongdoing. |
Held the individual and company jointly liable for diverted profits, piercing the veil to prevent escape from fiduciary duties. |
| Trustor AB v. Smallbone and others (No 2) [2001] 1 WLR 117 |
Three categories justifying veil piercing: sham or façade, impropriety, or necessity in interests of justice. |
Confirmed veil piercing where a company was used as a device to conceal wrongdoing, but did not extend to treating controllers as original contracting parties. |
| Dadourian Group International Inc and Others v. Simms and Others [2006] EWHC 2973 (Ch) |
Veil piercing only to provide an effective remedy for wrongs done, not simply because a company was involved in wrongdoing. |
Rejected piercing veil to impose contractual liability on controllers where tort remedies were available. |
| Faiza Ben Hashem v. Shayif and Another [2008] EWHC 2380 (Fam) |
Restated principles for piercing the veil: control, impropriety linked to use of company to conceal liability, and necessity. |
Rejected veil piercing; emphasized limited scope and need for misuse of company structure to conceal wrongdoing. |
| Antonio Gramsci Shipping Corporation and Others v. Stepanovs [2011] 1 Lloyd's Law Reports 647 |
Suggested that veil piercing could lead to holding controllers liable as parties to contracts entered into by companies used as puppets. |
Disagreed with by this court; viewed as an incorrect extension of veil piercing principles. |
| Alliance Bank JSC v. Aquanta Corporation and Others [2011] EWHC 3281 |
Similar to Gramsci; considered veil piercing to hold controllers liable under company contracts. |
Disapproved by this court as wrongly decided and inconsistent with established principles. |
| AK Investment CJSC v Kyrgyz Mobile Tel Ltd [2011] UKPC 7 |
Principles for granting permission to serve proceedings out of jurisdiction: serious issue to be tried, good arguable case within gateway, and England as appropriate forum. |
Applied to assess jurisdiction and service out of jurisdiction in this case. |
| Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460 |
Test for forum non conveniens and identifying the appropriate forum for trial. |
Considered in relation to whether England was clearly or distinctly the appropriate forum for the claims. |
| Berezovsky v Michaels [2000] 1 WLR 1004 |
Place where tort is committed is a weighty factor in determining the appropriate forum. |
Discussed in relation to whether there is a presumption that England is the natural forum where loss is sustained. |
| Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 |
Damages aim to put injured party in position as if wrong had not occurred. |
Applied in assessing whether the Plaintiff suffered loss for tort claims. |
| Smith New Court Securities Ltd v Citibank NA [1997] AC 254 |
In deceit claims, damages must account for benefits received as a result of the transaction. |
Applied in analyzing loss and benefits in the context of the loan and participation agreements. |
| Forster v Outred [1982] 1 WLR 86 |
Loss occurs at the time the claimant parts with property in reliance on negligent advice. |
Used to support that Plaintiff's loss crystallized when funds were advanced under the Facility Agreement. |
| British Westinghouse v Underground Railway [1912] AC 673 |
Benefits received as a result of breach may be taken into account in assessing damages. |
Applied to distinguish collateral transactions from benefits reducing loss. |
| Thane Investments Ltd v Tomlinson [2003] EWCA Civ 1272 |
Warning against inferring risk of asset dissipation solely from allegations of dishonesty. |
Considered in assessing whether there was a real risk of dissipation justifying a freezing order. |
| Norwich Union v Eden (1996) unreported |
Where fraud is alleged, it may be open to infer a risk of dissipation sufficient to justify freezing relief. |
Supported the view that a good arguable fraud case can justify a freezing order. |
| Grupo Torras SA v Al Sabah (1997) unreported |
Risk of dissipation may be inferred where a defendant is implicated in fraud and has means to dissipate assets. |
Applied in considering risk of dissipation in freezing order context. |
Court's Reasoning and Analysis
The court undertook a detailed analysis of the proposed amendment to add contract claims against the defendants by piercing the corporate veil. It recognized the fundamental principle from Salomon that a company has a separate legal personality distinct from its controllers, and that veil piercing is an exceptional remedy applied only in limited circumstances where the company is a façade concealing true facts.
The court reviewed authorities on veil piercing, including Gilford, Jones, Gencor, Trustor, Dadourian, and Ben Hashem, emphasizing that the principle is limited to providing remedies against controllers where the company is used improperly to conceal wrongdoing, but does not extend to treating controllers as original parties to contracts entered into by the company.
The Plaintiff's core submission, that piercing the veil should result in the defendants being treated as original contracting parties jointly liable under the loan agreements, was rejected. The court found no legal basis or authority supporting such a fundamental extension of veil piercing. It held that contracts require mutual intention and consent of the parties, which was absent here for the defendants.
The court also rejected reliance on the law of undisclosed principals as inapplicable since no authority or agency relationship existed between the defendants and the Borrower.
On jurisdiction, the court accepted that the Plaintiff had a good arguable case that it suffered loss in England and that there was a serious issue to be tried against one defendant and, contrary to the judge’s finding, also against one holding company defendant. However, the court upheld the judge’s conclusion that England was not clearly or distinctly the appropriate forum, given the strong connections of the dispute to Russia, including where the tortious acts occurred and the parties’ connections.
Regarding the applicable law of the torts, the court applied the Private International Law (Miscellaneous Provisions) Act 1995 and concluded that the law of Russia was substantially more appropriate. It noted that the applicable law remained a live issue for trial.
On the freezing order, the court acknowledged that the Plaintiff had a strong arguable case of fraud and that the use of offshore companies could justify a risk of asset dissipation. However, since the court upheld the refusal of permission to serve out of the jurisdiction, the issue of continuation of the WFO did not arise for decision.
Holding and Implications
The appeals by the Plaintiff are dismissed.
The court held that the proposed amendment to add contract claims by piercing the corporate veil was unsustainable as a matter of law and that the English court lacked jurisdiction to serve proceedings on the foreign defendants based on the tort claims. The court affirmed the judge’s refusal to continue the worldwide freezing order.
The direct consequence is that the Plaintiff’s claims against the defendants cannot proceed in the English courts on the bases advanced. No new legal principle was established; rather, the court reaffirmed existing principles limiting veil piercing and jurisdictional reach. The Plaintiff retains its tort claims but must pursue them in the appropriate jurisdiction.