Piercing the Corporate Veil

Piercing the Corporate Veil 1. Introduction: The Idea of Corporate Personality To that which we refer to as “piercing the veil” we must first look at the concept of the “veil” itself. In the present day corporate law a corporation is looked at as a separate legal person from its shareholders and directors. This principle which is very much a founding element of the modern legal structure was indeed cemented in the famous English case of Salomon v. A Salomon & Co Ltd [1897] AC 22. When a company goes into bankruptcy it is the investment which is lost by the shareholders which is at issue; they see no loss of their personal assets like homes and savings. 2. What does “Piercing the Veil” refer to? In some cases courts will ignore the separate legal entity of a corporation which results in the individual shareholders or directors being made personally responsible for the company’s debts or actions. This is a break from what is typical. Courts in fact do not like to pierce the veil which they do to that which is certain of limited liability which we may term a foundation of global trade. But also the law doesn’t put up with the corporate structure to be used for illegal doings or fraud. 3. Reasons to Lift the Veil In the past courts have looked for certain “vitiating factors” which in turn can be put into two categories: that which is of judicial origin which judges have developed and that which is put forth in law by the government. A. Fraud and Abuse of Power In the great majority of cases of piercing the veil what we see is that a company is used as a “sham” or a “facade” for which the primary purpose is to hide fraudulent action. If a person forms a company in order to avoid present legal requirement or for the purpose of fraud against creditors, the court will get involved. Case Example: In 1962 in the case of Jones v. Lipman Mr. Lipman agreed to sell land to Mr. Jones which he later had a change of heart about. In an effort to get out of the deal he transferred the property to a company which he owned. The court looked past the company and called it a “mask” and ordered the sale to proceed. B. Ego Agency Theory At times a company may be so controlled by an individual or a parent company that it has no will of its own. In such cases the company is but an “alter ego”. When the lines between personal and business finance are blurred, courts may determine that the company is merely an instrument of the individual. C. Public Affairs Antagonist Character During times of conflict courts may look beyond the corporate shield to see the true character of a company. If a company is incorporated in a neutral country but is controlled by enemy nationals, the company may be treated as hostile. D. Group Dynamics (Single Economic Entity Theory) In complex corporate structures, a subsidiary may commit a legal wrong. Although under the Salomon principle a parent company is not liable, courts may treat the group as a single economic entity in certain circumstances. This approach was discussed in Adams v. Cape Industries plc (1990). 4. Statutory Rules and Regulations Legislatures have also enacted laws allowing veil lifting in specific situations: 1 Insolvent Trading: Directors may be held personally liable if they allow a company to trade while insolvent. 2 Tax Evasion: Authorities may look beyond corporate form to identify true income beneficiaries. 3 Environmental Laws: Directors may be personally liable for corporate environmental harm. 5. The Modern Test: Prest v Petrodel Resources Ltd The leading modern authority is the UK Supreme Court decision in Prest v Petrodel Resources Ltd (2013). Lord Sumption clarified that veil piercing should occur only in exceptional circumstances. The Evasion Principle: Where a person deliberately evades an existing legal obligation by using a company. The Concealment Principle: Where the court uncovers the true facts hidden behind the corporate structure without technically piercing the veil. 6. Conclusion The doctrine of lifting the corporate veil acts as a safeguard against misuse of corporate personality. Its narrow application preserves commercial certainty while preventing injustice. Maintaining corporate integrity through proper governance and separation of personal and business affairs is essential. For creditors, the doctrine remains a vital remedy against abuse of the corporate form.