The Veil, Behind and Beyond

Energy and infrastructure projects are costly and risky investments, albeit with potential for high rewards. 

As a result, private (and public) supported investment into infrastructure and energy projects tends to be structured through the use of one or more Special Purpose Vehicles (SPVs), such as a Holding Company (HoldCo) and a Project Company (ProjectCo). Traditionally, such arrangements have provided reliable protection, with funders largely insulated from the consequences of day-to-day decision making at the SPV level. Depending on the circumstances, however, arrangements beyond the SPV can come under scrutiny. In particular, the interactions between an SPV and its funders can impact day to day decision making on the project. 

Whilst not without challenges, there is an increasing trend in courts, tribunals and other decision makers looking beyond the SPV at the broader relationships overlaying the SPV structure and the ultimate source of funds on projects.  In this article, we consider the use of SPVs in delivering large-scale energy and infrastructure projects, and whether there are any limits on the de facto protection actually afforded to funders, by reference to cases where the SPV's broader relationships have impacted the decision making at the HoldCo and/or ProjectCo level. 

Overview of SPVs

SPVs tend to be the preferred vehicle for developing and constructing large-scale energy and infrastructure projects. This is primarily because they have a separate legal personality, which provides a level of separation from and insulation for its funders.  A key advantage of such insulation is the difficulty it creates (for a third party) in seeking recourse beyond the SPV in the event of disputes. This protection is typically referred to as the "corporate veil". 

(Diagram 1: A typical funder/SPV relationship)

In the context of construction procurement, it is the ProjectCo that typically enters into construction contracts with the construction and engineering contractor and O&M contractor. Most often there is no direct contractual relationship between the HoldCo or funders and the EPC/O&M contractor, and if are direct agreements in place they are usually there for use in extreme circumstances such as the insolvency of the SPV.

This means that, where disputes arise, any claims by the EPC/O&M contractor are usually made against the ProjectCo only (unless of course the claim is brought under a parent company guarantee). In these types of claims, there are very narrow instances in which courts/tribunals may pierce the corporate veil, such as where the corporate structure has been used to evade legal obligations (see Prest v Petrodel Res. Ltd [2013] UKSC 34). Further, whilst courts/tribunals may consider the extent of separation (or lack thereof) between the subsidiary and its parent based on the parent company's level of control over the subsidiary, this in itself will not usually be determinative of whether the corporate veil should be lifted. 

Moreover, where arbitration is the chosen dispute resolution mechanism, any awards, orders or measures granted by a tribunal will only be binding on the parties to the arbitration agreement (i.e. the ProjectCo and contractor), and not on any third parties (i.e. funders). 

Whilst instances in which the corporate veil is lifted remain uncommon, the interactions between an SPV and its funders can play a significant part in how disputes at the SPV level are determined.  In this regard, courts/tribunals are increasingly scrutinising the funding that sits behind an SPV and the arrangements that allow funders to exert control over the SPV's day to day decision making and its interactions with the contractors and other suppliers. 

We have outlined below the instances in which we regularly see these issues play out. 

Conduct

Financing documents between the SPV and funders will commonly give the latter rights to access information and control the decision making of the SPV through the inclusion of:

• restrictive or negative covenants and other restrictions, which limit the SPV's ability to act independently without prior approval;
• veto rights (which allow certain stakeholders to block specific decisions or actions proposed by the management of the SPV) and/or affirmative rights (which require that certain actions or decisions by the SPV can only be taken with the explicit approval of stakeholders); 
• rights to information, including when and how information is to be made available to funders; and
• rights relating to board management and the appointment of directors, which can lead to situations where the officers and/or directors of the shareholder entities actively manage the SPV. 

These provisions are included primarily to protect the commercial interests of funders. However, the increasing use of private capital in funding projects and the tendency of these investors to have a shorter-term investment horizon means they tend in favour increased levels of influence over decision making at the SPV level.  This can have a direct impact on the interactions between the SPV and contractors.

When it comes to document production there is an increase interest amongst courts and tribunals regarding the communications between investors and the SPV.  In the past, such requests would often be successfully resisted on the basis that they are not relevant to the issues in dispute – what have the SPV's communications with third party investors got to do with its interactions with the contractor?  More recently, Courts and Tribunals have rejected such objections and ordered production of those documents which is indicative of their interest in the underlying commercial reasoning behind decisions at the SPV – contractor/supplier level, commercial reasoning which in reality is being driven by the investors rather than the SPV project management team.

Investors right to information

The extent to which funders are entitled to access or require information from the SPV will depend on the terms of the finance/shareholder documents.  

However, counterparties will often target or include information exchanged between the SPV and its funders within its disclosure requests and such information can be used to demonstrate knowledge of claims or inconsistent positions being taken by SPV management further up the corporate structure.  For example, the SPV may have produced regular weekly or monthly reports to its funders, the substance or nuance of which may differ from corresponding project reporting documents within the SPV and that communicated to the contractor/supplier.  

Documents issued to funders during the project may also contain privileged information, such as legal advice in respect of claims being made against the SPV.  Where privileged information is consensually shared, it is important to keep the information confidential and establish the basis on which privilege is preserved (e.g. common interest privilege, which will, where it applies, avoid the sharing of information being considered a waiver of privilege).  Without appropriate protections in place, this may give rise to arguments about waiver, particularly where the document containing the privileged information is shared beyond the funders.  

Aside from disputes about waiver of privilege, another issue that commonly arises is whether an SPV can or should make information available to its holding company.  In this regard, even where a holding company has an express right to the SPV's information, there may be grounds on which the SPV can withhold privileged information.  In Aabar Holdings S.à.r.l. v Glencore Plc & Others [2024] EWHC 3046 (Comm), for instance, the High Court ended a longstanding principle that a company could not assert privilege against its own shareholders save for documents that came into existence for the purpose of hostile shareholder litigation (for further information on this case, please see our post here).  

Security for costs etc.

A common feature of construction projects involving SPVs are that they:

• tend to have limited liquidity (at least until the project enters its operational phase),
• have a single high value asset (the facility being constructed) but are often heavily indebted (the security being the facility itself); and
• investors in SPVs tend to be the ultimate beneficiaries of any successful litigation/arbitration against the contractor/supplier.

In those circumstances, an obvious defence against an application by the contractor for security for costs etc against an SPV, is that the SPV itself does not have the necessary funds to provide the security sought and an order for security would stifle an otherwise valid claim (or counterclaim).  However, where the SPV's investors obviously have deep pockets, courts/tribunals are increasingly willing to order security against an SPV on the basis that its investors can provide the funds.  This is not an order directly enforceable against the investors (they are not a named party to the underlying dispute) but such orders are indirectly enforceable by way of the investors interest in the outcome of the dispute.

For example, in Consort Healthcare (Tameside) PLC v Tameside and Glossop Integrated Care NHS Foundation Trust [2024] EWHC 1702 (Ch), one of the issues considered was the court's discretion to award security of costs in the context of a restructuring plan. In this case, the Trust made an application for security for costs against Consort Healthcare, who accepted that it may be unable to pay any adverse costs liability, but argued on several grounds that the application should not be granted. In its decision, the court took into account the fact that two investment funds owned the entire interest in both the equity and subordinated debt in Consort Healthcare, observing the following:

The court held that based on their assets and liquidity, "[the funds] could reasonably be expected to put up security for [Consort Healthcare's] costs." It also considered that the funds had provided approximately £5 million in funding to Consort Healthcare on the basis that it would be interest-free and would be converted into shares, rather than repaid in cash, suggesting that "the Funds consider that they will derive a substantial commercial benefit if the Plan is sanctioned which is worth more than the principal amount of the [funding]." The court therefore granted the Trust's security for costs application. 

Concluding remarks

Although instances in which courts/tribunals have allowed the corporate veil to be lifted remain limited, the nature of funding and other contractual arrangements that sit above the SPV is increasingly becoming a material factor that informs courts/tribunals' decisions in relation to matters such as disclosure and security for costs.  In light of this growing trend, parties should expect greater scrutiny over the immediate financial resources an SPV has at its disposal as well as its interactions with investors and lenders.