Guaranteed Higher Grade!
Free Quote
December 05, 2024
The notion of penetrating the corporate veil complicates company law. This argument has emerged due of the ambiguity in this area of law. The courts ought to have transcended the particular circumstances of a case due to the multitude of decisions addressing the objectives of this theory. Conversely, several scholars have sought to elucidate the significance and rationale behind the corporate veil piercing theory within company law, focusing mostly on two categories of enterprises: Limited Liability Companies (LLCs) and Joint Stock Companies.
Firm law in the United Kingdom denotes the principle that the rights and liabilities of a corporation are, generally, the exclusive responsibility of that entity. Typically, owners, directors, and employees of a corporation are not obligated by the rights and duties of the company unless they have explicitly or implicitly accepted responsibility, guaranteed, or indemnified the corporation. The "veil of separation" between a business as a legal body and its actual stockholders is often seen as a metaphor.
The "lifting" of a company's veil, which permits the attribution of liability for its debts or the appropriation of its rights to its owners under a limited set of conditions, is sanctioned by the courts in the United Kingdom. It often occurs exclusively in instances of misbehavior by people or those in authority. In the event of corporate bankruptcy, unpaid creditors will pursue collection if they can demonstrate misbehavior by the responsible individuals, which is why this issue is so significant.
The common law doctrine of "piercing the corporate veil" holds shareholders accountable, so creating an exception to the standard principle that restricts shareholder liability to creditors. Consequently, one may forfeit all the benefits of an LLC or a JSC, which primarily entail a singular risk: the inability to protect shareholders' money in the event of bankruptcy proceedings against the company. When a business fails to satisfy a creditor's claim, the creditor may determine that pursuing payment from other parties, such as shareholders, who are usually their main target, is in their best interest. In such a circumstance, creditors would initiate legal proceedings.
The legal differentiation between a corporation and its stockholders was established in the seminal House of Lords ruling Salomon v A Salomon and Co Ltd. "Like any other independent entity with its own rights and responsibilities," observed Lord Halsbury LC.
When a court elects to pierce the corporate veil under common law, shareholders and directors lose their protection. This redirects focus from the business to the substance of the company or its controllers. Consequently, personal liability for the company's debts and commitments is assigned to the owners or directors. The concept of piercing the corporate veil is rooted in common law. This study is important for assessing the potential and efficacy of the corporate veil piercing concept, as well as the effectiveness of the legal system and judiciary during the implementation of the legislation.
The study seeks to examine the efficacy of breaching the corporate veil and the judicial system's use of the concept when necessary.
Baron Thurlow asserts that the primary principle of corporate law is that a company constitutes a separate legal entity. Consequently, a company exists as a legal entity distinct from its owners. A company constitutes a legal entity. A firm cannot possess morality if it lacks a soul to condemn and a body to strike. Consequently, a juristic person is incapable of doing human-like activities, so differentiating them from ordinary entities. For several years, courts in the United States and elsewhere have deliberated the concept. This concept has existed for an extended period, although no established guidelines have emerged to explicitly delineate its use. Cape Pacific asserts that the doctrine of piercing the corporate veil is "far from settled," indicating that it is unpredictable when courts may disregard a company's separate legal identity.
Lord Macnaghten said, "A corporation possesses a distinct legal identity, entirely separate from its members," in reference to the Salomon case. The significant South African case, Dadoo Ltd v Krugersdorp Municipal Council (referred to as 'Dadoo'), implemented this principle. In this case, the South African Republic's Law 3 of 1885 stipulated that property ownership was restricted only to white individuals. Two Indians established a company called Dadoo Ltd, in which they had complete ownership of the shares. Dadoo rented a stand in Krugersdorp from the company in his own capacity. The town council sought a restraining order to prohibit Dadoo Ltd. from obtaining the property, citing a violation of Law 3 of 1885. The court of appeals determined that a company have a legal existence apart from the persons comprising it. Consequently, Dadoo Ltd. acquired possession of the property.
Various writers and courts use distinct methods to elucidate the concept of "lifting the corporate veil." Legal scholars utilize diverse approaches to define the word. Some choose a restricted perspective, but others employ a broader or more adaptable viewpoint to elucidate it. Lifting the corporate veil entails discarding the corporate veil to ascertain which shareholders are accountable for any misconduct perpetrated by the firm. The broader definition indicates that a court examines the internal workings of a corporate entity to determine its owners and controllers, rather than merely presuming their separation. McKay J stated that piercing the corporate veil is not a principle. The court uncovers the individuals operating inside a firm by revealing its true identity. Veil piercing is an exception to the principle of maintaining a company's distinct legal identity post-formation, which should be reiterated.
It is essential to articulate the significance of lifting the corporate veil, since there exists much discourse over its importance. For others, the acceptance of the principle of piercing the corporate veil poses a genuine threat to limited liability and corporate personality. Philip I Blumberg said that a judge's judgment to pierce the corporate veil is "irreconcilable and not entirely clear."
Numerous factors will contribute to the corporate veil being pierced. Numerous directors, owners, and other individuals in positions of authority abuse their power due to the advantages conferred by corporate personhood. The notion of uncovering the corporate veil is an effective measure to prevent such exploitation. When the corporate veil is misused to conceal fraud or other criminal activities, it is imperative that it be promptly removed. Disregarding the corporate veil is essential to prevent the company from serving as a front or shield for fraudulent, unlawful, or unethical conduct. This is the interpretation of the statement. Courts often penetrate the corporate veil when it is used to conceal misconduct or evade responsibilities. This is referred to as a "sham" or "cloak."
The narrow notion of "lifting the corporate veil" suggests that it would always harm the interests of shareholders and investors. That is not universally accurate. Revealing information is not always detrimental to the firm or its shareholders. It may be advantageous to them at times. During reverse piercing, such occurrences happen. When shareholders or the corporation attempt to penetrate the corporate veil that distinguishes them from the entity, this is referred to as a "reverse pierce of the corporate veil." In some instances, reverse piercing benefits the broader community.
Some assert that the Companies Acts of the United Kingdom have never constituted complete codes due to persistent major gaps in this area of law, as shown by the available data. Nonetheless, to address the inequitable reality arising from the corporate framework, it was, unjust fact, the judiciary who conceptualized the term "piercing the corporate veil," rather than the lawmakers, as has been suggested. The perspectives on the permissibility of veil piercing are contradictory, leading to the characterization of this idea as a "rich but ambiguous body of case law."
By breaching the corporate veil, creditors may appropriate the personal assets of shareholders as security for the settlement of a company's liabilities. Enables the accountability of parent corporations for their subsidiaries or the recognition of groupings of enterprises as a single economic entity. Despite the courts acknowledging that the different entity concept often leads to inequity, their approaches to overthrowing the theory inadequately tackle the issues it has created with corporate groupings and problems with tort law. The courts have been rightly criticized for their "timid" attitude, lacking the initiative to compel or even motivate parent businesses to account for the debts and losses of their subsidiaries.
According to case law, a firm's interactions with an opponent during wartime, when the corporation serves just as a façade concealing the truth, or functions as a cloak or sham, exemplify circumstances under which the courts may penetrate the corporate veil. In exceptional circumstances, a firm may operate as an agent, or a group of corporations may be regarded as a singular economic entity, particularly in relation to delictual rights. Several statutory provisions make members personally responsible for certain corporate debts and duties; nevertheless, they do not impose personal liability on members for damage caused to others due to delict.
Notwithstanding the presence of such exclusions, courts have been perceived as stating that "stockholders of American companies are essentially shielded from tort liability provided they exercise reasonable care in maintaining their corporate entity," and the corporate veil is met with considerable skepticism. Moreover, in the United Kingdom, there exists no unequivocal classification specifically addressing situations where involuntary creditors suffer losses due to the undercapitalization or insolvency of a legitimately established company, irrespective of whether that entity is a parent or subsidiary of another duly registered company. Consequently, Blumberg's characterization of limited liability as having "unthinkingly exceeded the original intent" may be accurate.
The above discussion clearly indicates that UK courts have been notably hesitant to pierce the corporate veil in recent years. Certain persons agree with the methodology used by the English courts, but others dissent. They endeavor to substantiate their stance by referencing many arguments. They contend that this is the suitable technique considering the subject's great sensitivity. Given the absence of alternatives to limited liability in the United Kingdom, the court need to exercise caution in its ruling. In this context, it is often said by both judges and legal scholars that the government ought to create a definitive standard.
The statement that the UK court lacks jurisdiction and that only the legislature have the power to act is imprecise and impractical. The UK court system has the power to undertake necessary measures to guarantee that the judiciary adequately addresses the prevailing circumstances. The courts of the United Kingdom have shown their ability to provide equitable and adaptable rulings whenever they want. The achievements of Lord Denning merit acknowledgment on this occasion. Regarding the lifting of the corporate veil, he rendered several significant and adaptable rulings throughout his tenure.
The courts of the United Kingdom have independently established their own approach to the dissolution of the corporate veil. Judges have generally been reluctant to provide information, and when one has sought to do so, other judges have either condemned the action or subsequently reversed the ruling. Lord Denning's call for judicial flexibility regarding corporate personhood is commendable; yet, the logical rationale presented in this line is questionable. Numerous judges, including members of the House of Lords, publicly condemned his methodology as too lenient and permissible under the circumstances.
English law is one of the most often used options for commercial transactions globally. Regrettably, the 'Doctrine of Piercing the Corporate Veil' is not among such domains. This approach jeopardizes the distinct corporate identity and restricted liability crucial to modern enterprise. The UK Supreme Court justices in Petrodel Resources Ltd v. Prest sought to clarify the matter after many failed efforts, by confining the theory to too tight parameters. This article elucidates how the confusion inherent in the decision has intensified the situation by examining three subsequent rulings, revealing that a "unnamed" and "unrestricted" doctrine has proliferated among conventional remedies as a consequence of the decision.
Prest v. Petrodel exemplifies the stance of English law about the application of the corporate veil doctrine. In Prest, Lord Sumption aims to simplify the concept of mere façade to a more explicit and restrictive standard than previously established. The assertion that the misuse of a company's unique identity does not constitute a clear enhancement of the building's aspect in terms of clarity and certainty is challenging to contest; yet, there exists some data to corroborate this perspective. All limits set by Lord Sumption make the idea of piercing the veil entirely useless. If evasion occurs, it seems plausible to dismiss the concept of a distinct legal entity; yet, it is not easy to provide a concrete instance of evasion in this context. The avoidance principle is fundamentally designed to inhibit the use of the piercing doctrine to impose liability on shareholders for the commitments of the firm, so encountering an internal barrier to the idea of 'forward piercing.' It essentially eradicates the concept of penetrating the corporate veil inside the legal framework, since it will become more difficult, if not impossible, to establish new exceptions to the Salomon principle. The concealing principle pertains to further remedies that may be invoked if the company is used to obstruct individuals from exercising their rights. No more information was provided by Lord Sumption at this time. No more information was provided by Lord Sumption at this time. The lack of clarity in Lord Sumption's finding may encourage courts to rely more on classic legal tools, which are included, among others, in agency, trust, and tort law, and use them within the context of commercial law. This presumably signifies a potential danger of undue involvement in the exploitation of the company structure within the commercial context, which is probable. It is essential to recognize that the company's responsibility for its shareholders' obligations should be as restricted as the shareholders' liability for the company's failure.
The discourse among various researchers about the Prest case indicates that almost all instances of legal person abuse may be rectified by the use of conventional procedures. Consequently, Lord Walker accurately contended that breaching the corporate veil is “essentially a term used to describe the various instances where certain legal principles offer apparent exceptions to the standard of the independent legal personality of a corporate entity.” Lord Sumption aimed to differentiate between evasion and concealment, advocating for the courts to rely on established remedies instead of concepts that were questionable at their inception. The issue arises from his use of ambiguous and unnecessary language to evade and obscure the truth.
The phrases "lifting of the corporate veil" and "disregarding of the corporate personality" are often seen in contemporary business discourse. The English courts have been solicited several times to disregard the distinct legal identities of a corporation and its stockholders, which they have acquiesced to. The courts of the United Kingdom seldom confront this issue. The courts have often shown their reluctance to pierce the veil that shields companies. In almost all situations, they endeavor to preserve the legal identity of the firm, even if it necessitates piercing the corporate veil to achieve justice. The purpose of this essay is to try to explain why the courts in the United Kingdom are reluctant to act. A variety of instances have been studied in this context, and the anatomy of the hesitant approach has been investigated in depth.
In some instances, the courts may lift the corporate veil of a limited company to compel shareholders or directors to contribute to the settlement of existing debts to creditors in the event of bankruptcy. However, there are some exceptions to this rule in the United Kingdom. The "concept" in Salomon v A Salomon & Co Ltd is often referenced as a source of inspiration for this. The Companies Act of 1862 was used by a cobbler from Whitechapel to establish a business. The politicians may have believed that a partnership was the most suitable corporate structure for a smaller number of individuals, which is why the formation of a corporation required seven members. Mr. Salomon met this condition with the assistance of six family members. By giving the company money, he forced it to issue debentures to pay for his debt in the case of bankruptcy, putting it ahead of other creditors. Following the firm's bankruptcy, Mr. Salomon was personally sued by the liquidator on behalf of unpaid creditors. Even though Mr. Salomon was found to have violated the purpose of Parliament by establishing fictitious investors, the House of Lords determined that he could only have done so if he had met with a few fundamental formal registration requirements. Generally speaking, the curtain could not be removed.
For this study, which is a comparative and analytical research endeavor with a clear objective, a doctrinal method is perfect. As part of the methodology for this research, a review of primary and secondary legal sources, including statutes, case law, journal articles, textbooks, and the internet, was carried out. Because English company law principles have a long history of being linked to South African company law, the regulations of the United Kingdom regarding penetrating the corporate veil will be employed in the comparative study. The legal framework of the United Kingdom has been used to provide the doctrine in this case a helpful interpretation due to the correctness with which the relevant UK legislation addressing the piercing of the corporate veil have been constructed.
The main objective of the researcher is to utilize secondary and doctrinal sources to provide an overview of the comparative study that will be carried out with a complete emphasis on legal factors. Adding to the considerable corpus of law in order to further the main objective of legal theory is the fundamental aim of documentary legal study. The ultimate objective of the legal system is justice, not a set of rules, regulations, or jargon. Doctrinal legal research is often used in legal content enrichment and codification, as well as in the interpretation of legal law. By producing fresh concepts, acquiring fresh information, and building a strong foundation for future socio-legal research, legal doctrine research aims to progress the discipline. Laws must be properly designed and their legal substance must be strengthened. Legislators usually leave parts of the law ambiguous or confusing for political purposes, allowing the courts to handle any future problems. Judges, lawyers, and jurists may all feel more confident after studying doctrinal legal ideas. A lawyer may use a methodical technique to conduct a legal investigation in the midst of a case. A judge may make an educated decision on a legal case by using this expertise.
Various Opinions on Lifting the Corporate Shell
Doctrinal analysis identifies the law in a given circumstance. It focuses on the application of legal theory as well as its evolution and history. This is a fully theoretical research that incorporates either basic inquiry to locate a vague legal declaration or in-depth examination to reveal a particular legal statement. It is perhaps the most well-known definition. This library-based research project focuses on the "one true answer" to certain legal issues or obstacles. Therefore, the goal of this approach is to get precise information by asking specific questions. The jurisprudential foundation of doctrinal legal study is positive or analytical law.
The research plan is a crucial component of any study as it aids in the examination of the research issue by providing clear answers to research questions. To ensure that their results are comprehended, researchers need background knowledge and a suitable research technique. The three kinds of research programs that are most often employed to meet research difficulties are quantitative, hybrid, and quantitative systems. Both mixed method techniques—which cover both the quantitative design's why and how as well as non-numerical depth—are used in mixed designs. To achieve their study goals and objectives, researchers may use a variety of testing methods, such as case analysis, focus group analyses, questionnaires, evaluated literature, surveys, and interviews.
To achieve the goals and objectives of a study, researchers often use either deductive or inductive strategies. While deductive methods need assumptions and hypotheses, inductive procedures do not. While the inductive approach is smooth in interpretivism, the deductive method is helpful in positivism. Since there are no hard and fast guidelines to follow when creating assumptions or hypotheses, inductive reasoning is a legitimate way to do it. To do this, the researchers will use descriptive analytical studies to compare user-generated content with the copyright issue in the UK setting. Because they aid in the full interpretation of the relevant legal texts, doctrinal researchers usually use a qualitative approach of analysis while doing legal research. A qualitative approach is required for the doctrinal study's analytical and legal reasoning components.
To get the intended outcomes from a research endeavor, a significant amount of data collection from many sources is needed. To have a better grasp of the research problem, researchers must collect the pertinent data. The most popular methods for gathering data in research are primary and secondary data collecting (using accessible sources such as books, journals, papers, etc.). Therefore, primary data collecting techniques are ideal for speaking with people face-to-face to learn about their perspectives on the subject, as opposed to secondary data collection. In many cases, gathering secondary data allows for a deeper understanding of the topic being studied. To get a complete picture of the literature on the research issue and to evaluate how well the legal system applies the concept of piercing the corporate veil doctrine in the study's setting, secondary sources should also be looked into.
The most difficult and time-consuming part of any theological research is gathering data. Being able to differentiate between main and secondary sources of data is essential for researchers. Due to the complexity of their work, doctrinal legal academics are often criticized for their vagueness. Lawyers undertaking doctrinal research need to be more open and explicit about their methods in an era of increased competition for research funding, when interdisciplinary work is highly valued, and when nonlawyers are engaged in the evaluation of grant applications. Doctrine methodology does not provide a sufficient basis for resolving challenges that occur because it assumes that the law existing in a social context or framework rather than an objective doctrinal vacuum. As a result, problems that arise are not properly resolved. There is no lawless society. It directly affects the environment as it is a part of civilization. It is feasible to use concepts and techniques from other fields to get a deeper understanding of the law and how it operates. Lawyers who want their research to be more applicable to the rest of the world may need more than just doctrinal or library-based research skills.
The validity and reliability criteria are used to evaluate research equality. Every aspect of the study is regularly assessed using methods, procedures, or tests. Despite having different meanings, validity and dependability are inherently linked. It may provide much more information if measured. Being truthful is a crucial part of a reliable measurement. Validity, consistency, and measurement accuracy are examples of processes that are referred to as reliability. Checking for research validity and reliability is crucial as soon as the study design is complete, the data are collated, and the procedures are set up. This study has to be conducted very carefully to guarantee its validity and reliability due to its potential relation to qualitative research techniques. Because software and technology cannot verify the data that researchers gather, they must depend on their own judgment.
Articles/Books/Website
Alanazi B, 'Piercing The Corporate Veil In Various Jurisdictions – Principled Or Unprincipled?' (2020) 16 Corporate Board role duties and composition
Alcock A, 'Piercing The Veil – A Dodo Of A Doctrine?' (2013) 25 The Denning Law Journal
Ali S, 'Doctrinal Research In Law Field' [2013] SSRN Electronic Journal
Banoo S, 'Lifting Of The Corporate Veil: Decoding The Doctrine Of Separate Legal Personality' [2018] SSRN Electronic Journal
Biswas L, 'Approach Of The UK Court In Piercing Corporate Veil' [2011] SSRN Electronic Journal
Davies G, 'The Relationship Between Empirical Legal Studies And Doctrinal Legal Research' (2020) 13 Erasmus Law Review
Grier N, 'Piercing The Corporate Veil: Prest V Petrodel Resources Ltd' (2014) 18 Edinburgh Law Review
Hickey D, and Richards D, 'Piercing The Corporate Veil: Supreme Court Clarifies The English Law Position - Corporate/Commercial Law - UK' (Mondaq.com, 2013) <https://www.mondaq.com/uk/corporate-and-company-law/264752/piercing-the-corporate-veil-supreme-court-clarifies-the-english-law-position> accessed 3 January 2022
Hutchinson T, and Duncan N, 'Defining And Describing What We Do: Doctrinal Legal Research' (2012) 17 Deakin Law Review
Hutchinson T, 'The Doctrinal Method: Incorporating Interdisciplinary Methods In Reforming The Law' [2016] Erasmus Law Review
Kusuma N, and Amboro F, 'Doing The Corporate Business With Piercing The Corporate Veil Doctrine: Indonesia, Us And Uk Perspective' (2020) 3 Sociological Jurisprudence Journal
M.D. P, 'Legal Research- Descriptive Analysis On Doctrinal Methodology' [2019] International Journal of Management, Technology, and Social Sciences
Odusanya D, 'Corporate Personality And Piercing The Corporate Veil' [2021] SSRN Electronic Journal
Phiri S, 'Piercing The Corporate Veil: A Critical Analysis Of Section 20(9) Of The South African Companies Act 71 Of 2008' (2020) 1 Corporate and Business Strategy Review
'Piercing The Corporate Veil' (Offshore-protection.com, 2021) <https://www.offshore-protection.com/piercing-the-corporate-veil> accessed 3 January 2022
'Piercing The Corporate Veil: When Llcs And Corporations May Be At Risk' (www.nolo.com, 2022) <https://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html> accessed 3 January 2022
Schall A, 'The New Law Of Piercing The Corporate Veil In The UK' (2016) 13 European Company and Financial Law Review
S?up P, 'Piercing The Corporate Veil – A Common Pattern?' (2019) 24 Comparative Law Review
Taekema S, and van der Burg W, 'Legal Philosophy As An Enrichment Of Doctrinal Research Part I: Introducing Three Philosophical Methods' [2019] Law and Method
Taekema S, 'Methodologies Of Rule Of Law Research: Why Legal Philosophy Needs Empirical And Doctrinal Scholarship' (2020) 40 Law and Philosophy
Tan C, Wang J, and Hofmann C, 'Piercing The Corporate Veil: Historical, Theoretical And Comparative Perspectives' [2018] SSRN Electronic Journal
Cases
Prest v Petrodel Resources Ltd [2013] UKSC 34
Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530
Salomon v A Salomon and Co Ltd [1897] AC 22
Get original papers written according to your instructions and save time for what matters most.
Order Now
