Monday, 22 July 2013

Piercing the Corporate Veil: The Supreme Court has Spoken (2013).

Perhaps the first case any law student taking the company law module will ever be introduced to is that of Salamon v Salamon & Co Ltd (1897). Salamon represented a unanimous decision to uphold the doctrine of corporate personality. What is the corporate personality doctrine? The doctrine established that an incorporated company has a distinct identity from its shareholders (members) and, therefore, must be dealt with and sued in its own name.

Before the anti-capitalists uproar at the idea of a distinct corporate personality, its merits should be explored. For many years to date, the doctrine has facilitated the expansion of business activity by allowing those with little or limited capital, or those lacking an unlimited appetite for risk, the comfort to invest in an incorporated company in the knowledge that should the company fall insolvent or obtain some legal liability against itself it will not be possible for the shareholder to be pursued. Thus, the corporate personality doctrine allowed members of the public to form companies and invest in existing companies in the comfort of the knowledge that they only risk their initial investment and their personal assets will be out of the reach of the company’s creditors.

However, our anti-capitalist friends are not without a point. The doctrine of the corporate personality has not been immune from abuse and for this reason, the courts have taken to the practice of “lifting the corporate veil” in limited circumstances, such as in those situations where it can be argued that the company was created as a mere sham or façade. Salamon was referred to as calamitous by Otto Kahn-Freund, who also called for the abolition of all private companies (see Kahn-Freund, O. “Some Reflections on Company Law Reform”, (1944) 7(1/2) M.L.R. 54, 54). From a technical perspective, concerns in relation to a distinct corporate personality and the limited liability doctrine can be understood: It is all too easy to incorporate company (with distinct corporate personality) and enjoy the benefits of limited liability whilst trying to defraud the company’s creditors from assets that are in the name of the members. And, in light of such concerns, a saga of cases emerged over the decades that followed Salamon which held that the corporate veil could be lifted/pierced and the shareholders of the company could be pursued.

In its most recent case, the Supreme Court has been given the opportunity to adjust the goalposts in relation the ambit of the judicial ability to lift the corporate veil. In VTB Capital plc v Nutritek International Corp and others [2013] UKSC 5 (hereinafter “VTB”) the Supreme Court was asked to consider whether the contractual obligations of the company could be attributed to the shareholders by piercing the corporate veil. In this case, VTB is a PLC registered UK bank and is owned by a Russian Bank. VTB agreed to lend a significant sum of money ($225 million) to a Russian company, Russagroprom LLC, in order to facilitate the purchase of six Russian dairy companies. The owner of Russagroprom was found to be a Russian resident who had conducted the initial negotiations with VTB. Russagroprom defaulted and moneys remained outstanding to VTB. VTB then attempted to sue all holding companies and the Russian resident who owed Russagroprom, a Mr Malofeev, for attempting to defraud VTB with a false representation holding there were no links between Russagroprom and the companies it wished to purchase.

Lord Neuberger, in the Supreme Court, provided the leading judgement on the matter. The Court was asked to state that there should be no remit for the courts to lift the veil and counsel for the defendants provided a “sustained attack” on the lifting of the veil. Whilst agreeing that the case law on the matter was obscure, Lord Neuberger could not bring himself to find that there were no instances beyond statute where courts could lift the veil. However VTB’s claim failed as his Lordship held that it could not be held that a controller or member of a company could be said to have become a party to the contract as the controller’s identity was wholly separate from the corporation.

The case is significant in that it provides another limitation to the lifting of the veil whereby the courts have maintained the rule in Salamon and have done so even against allegation of impropriety and fraud. Lord Neuberger, whilst not agreeing with the respondent counsel that the court could not lift the veil in the absence of a statutory provision, has limited the ambit of the court to do so in relation to contracts completed with the company.

Jay Gajjar

This blog is intended for reference only. The author and London Law Tutor Ltd. cannot guarantee its accuracy and accept no liability for the consequences following from its use. 

Wednesday, 10 July 2013

Large and Medium-sized Companies and Groups Regulations 2013 - A Step in the Right Direction?

So, it’s time for our first law-related blog post and what better a place to start than a topic very dear to my heart? With an article due to be published in a 2014 edition of the European Business Law Review and numerous personal blog posts on a previous matter, coupled with the 2013 Regulations, the issue of directors’ remuneration seems like the perfect place to begin.

To start with a little context; it has become increasingly common for journal articles and all others forms of media to begin by referring to the most recent global recession and I shall pay respect to this recent trend. The recession heightened pre-existing tensions in relation to the salaries taken home by directors of public companies. The crude summary is that whilst thousands of jobs have been axed at the lower end of the pay scale (for example the thousands of redundancies within the commercial and retail arms of RBS) in a bid to “reduce costs and save money” the high-earning company directors of the same companies have seen their bonuses inflated to levels exceeding those previously seen.

Policy makers are not unfamiliar with this issue; the Greenbury Committee had recommended a need for greater transparency on such reports and the need for full disclosure of remuneration packages with the aim of allowing investors to make informed decisions about whether or not to invest in the company. The shareholder vote, however, remained advisory and the Board of Directors of a company could not be legally compelled to consider. Furthermore, the disclosure requirements led to increased competition as directors became increasingly aware of what their peers were pocketing on an annual basis.

The issue was considered again in 2012 by the Department for Business Innovation and Skills (BIS) and the proposals that followed suggested giving shareholders a binding vote on directors pay as opposed to the current advisory. In my upcoming publications I have highlighted the flaws with this, and there are many. Firstly, despite the shareholder spring, where shareholders were making use of their advisory vote, most shareholders are more interested in the profits of a company as opposed to its corporate governance structure. Secondly, many shareholders only hold shares on a short-term basis (“buy them cheap and sell them high”-type investors). Thirdly, shareholders are often detached from the running of the company and so will know very little about how the performance of the director has impacted upon the company (for example, a company could be making a loss but without the director it could have become insolvent), I could go on.

The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 will apply to companies from the beginning of the new financial year. The Regulations are indeed a step forward with regards to transparency with greater requirements on disclosing non-salary remuneration such as scheme benefits, pension benefits, and the said director’s shareholding. The reports will also need to contain a statement relating to how an agreed remuneration policy is to be implemented and the performance indicators with details of how awards will be calculated. The report must then be put to the shareholders for a vote but their opinion retains the status of an advisory vote.  

So what to make of it? The Regulations are a step forward but more importantly are they a step in the right direction? It is argued that this is not the case. Disclosure requirements have been seen through remuneration reports for a number of years, the truth is that the remuneration is dictated by the market and less by shareholders who tend to remain passive. This criticism is, however, qualified. It is notoriously difficult to formulate a corporate governance strategy that does not fuel and already raging fire. If you cut remuneration in a manner that is inconsistent with the global market or even other professions then company directors may walk. Time will tell whether the proposals, if approved by Parliament, have a substantive impact on the market.

Jay Gajjar

This blog is intended for reference only. The author and London Law Tutor Ltd. cannot guarantee its accuracy and accept no liability for the consequences following from its use. 

Thursday, 4 July 2013

Private Law Tutoring Evolution

Welcome to our brand new blog here at London Law Tutor! We are a dedicated group of expert law tutors who are committed to helping you achieve academic excellence. We are second to none when it comes to innovation in legal education. We introduced Law Tutor Profiles and a Free Law Library for law and non-law students across the globe. Our ultimate aim is to produce the next generation of barristers and solicitors by employing market leading tutoring techniques and cutting edge academic solutions. We also made history by becoming the first private law tutoring company in the world to launch a YouTube channel where any student can gain free knowledge by listening to our ever growing list of basic introductory lectures on different areas of law. This blog will be updated regularly with articles on recent developments in different areas of law.