UK – IS A PARENT COMPANY BOUND BY CONTRACTS OF ITS SUBSIDIARY

Companies doing business on an international basis can take welcome comfort from a recent Court of Appeal decision, which confirmed the approach for when a corporate veil will be lifted. “Lifting the corporate veil” describes a practice by which a court decides that a subsidiary is a mere shell or alter ego used by a parent company to avoid or conceal liability.

By piercing the corporate veil, the court treats that parent and subsidiary as a single economic entity, thereby placing the debts and liabilities of the subsidiary on its parent or shareholders. In this case, the Court of Appeal rejected an attempt by VTB, a state-owned Russian bank, to join Nutritrek International, a UK plc, to an action brought for loss suffered by it under the terms of a loan agreement.

VTB had made a loan of $225m to the purchaser of several companies owned by Nutritrek, the purchaser defaulted on the loan and VTB were only able to recover $40m. VTB argued the loan had been made based on false inducements by Nutritrek, and that the purchaser had fraudulently conspired with Nutritrek to obtain the funding. The loan agreement contained an English law jurisdiction clause which VTB sought to use to join Nutritrek as a party to the agreement.

VTB contended that the court could lift the corporate veil on the parties to the loan agreement to show that Nutritrek was a party to it on the basis that it had been controlling the purchaser’s actions and was ultimately liable for its loss. The Court of Appeal disagreed on the basis that even if the veil was lifted, it was unlikely to show that Nutritrek was a party to the loan agreement. In lifting the veil, the Court would be creating an artificial remedy which would undermine the basic principles of English contract law and it was not prepared to lift the veil simply to permit a claim to be brought through the English courts where the defendant was not a party to the relevant contract.