Lifting (or Piercing) the Corporate Veil

Lifting the veil of incorporation or better still; “Piercing the corporate veil”:

means that a court disregards the existence of the corporation because the owners fail to keep one or more corporate requirements and formalities. The lifting or piercing of the corporate veil is more or less a judicial act. Judge Stoughton LJ defined the term as “to pierce the corporate veil is an expression that I would reserve for treating the rights and liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, therefore should mean to have regard to the shareholding in a company for some legal purpose” whereas, Young Jon his part defined the expression “lifting the corporate veil” as “that although whenever each individual company is formed a separate legal personality is created, courts will on occasions, look behind the legal personality to the real controllers.

Thus, it can be said that the Lifting of the Corporate Veil is the exception of Limited Liability. The courts will lift the corporate veil where it is necessary to secure justice, where it is the public interest to do so or where it is for the benefit of revenues. The concept of lifting the corporate veil describes a legal decision where a person of a company is held personally liable for the liabilities of the company despite the general principle that those persons are immune from suits in or that otherwise would hold only the company liable. The doctrine is also known as “disregarding the corporate entity”.

It is difficult to identify a consistent thread running through the decided cases indicating when the veil will be lifted. Certain themes can be identified. These are:

  • Fraud: Fraud is a crime of deceiving somebody in order to get money or goods illegally. The courts have been more prepared to lift the corporate veil when it feels that is or could be perpetrated behind the veil. The courts will not allow the Solomon principal to be used as an engine of fraud. In Gilford Motor Company Ltd. v. Horne, 1933. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company. In order to defeat this he incorporated a limited company in his wife’s name and solicited the customers of the company. The company brought an action against him. The Court of appeal was of the view that “the company was formed as a device, a stratagem, in order to mask the effective carrying on of business of Mr. Horne” in this case it was clear that the main purpose of incorporating the new company was to perpetrate fraud. Thus the court of appeal regarded it as a mere sham to cloak his wrongdoings.

 



  • Group enterprises: The argument of group enterprises is to the effect that in certain cases, some companies that act as a corporate group may operate to hide behind the advantages of limited liability to the disadvantage of their creditors. They may operate in a way that the parent entity is not clearly distinguishable from the subsidiaries. The argument in favor of piercing the corporate veil in these circumstances is to ensure that a corporate group which seeks the advantages of limited liability must also be ready to accept the corresponding responsibilities. This was the opinion of Doyle CJ in the 1998 case of Taylor v Santos Ltd.

 

  • Agency: The doctrine of separate legal entity that the company is a legal entity with a different identity from that of its members means that a company does not exist to become an agent for its shareholders. A company having power to act as an agent may do so as an agent for its parent company or indeed for all or any of the individual members if it is or they authorize it to do so. If so, the parent company or the members will be bound by the acts of its agent so long as those acts are within actual or apparent scope of the authority. But there is no presumption of any such relationship in the absence of an express agreement between the parties it will be difficult to establish one. In cases where the agency agreement holds good and the parties concerned have expressly agreed to such a agreement them the corporate veil shall be lifted and the principal shall be liable for the a acts of the agent. The court in The Electric Light and Power Supply Corporation Limited v Cormack, 1911.  refused to pierce the veil. A one-man company had contracted with the plaintiffs to use their power supply for his work during two years, and not to install any other alternative source of energy power during that period of time. But within that period, the defendant sold his company to another company of which he was both the manager and the main shareholder. The new company thereupon installed energy power other than he one contracted with the plaintiffs. The court refused to pierce the veil, considering the act as a personal undertaking. As such Lord Rich AJ found no evidence that the sale of the business by the defendant was done with the object of evading his personal obligations.

 

  • Unfairness: One other serious ground under which courts would be so ready to pierce the corporate veil is in cases where it is deduced that there was unfairness on the part of the company in question. The plaintiff may pray to the court to pierce the corporate veil on the grounds that doing so would help bring a fair and just result.

 

  • Sham or Façade: An argument that the company under scrutiny is a sham or a façade is one of the strongest points that would prompt a court to lift the veil of incorporation. The argument is quite close to the argument of fraud, but usually stands on its own. In short, to say a company was merely a façade or a sham means the corporate form was incorporated or merely used as a mask to hide the real purpose of the corporate controller. In the case of Sharrment Pty Ltd v Official Trustee in Bankruptcy 1988, Lockhart J, stated that: “A ‘sham’ is…something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.

 

  • Trust: The courts may pierce the corporate veil to look at the characteristics of the shareholders. In the case of Abbey and Planning the court lifted the corporate veil. In this case a school was run by a company but the shares were held by the trustees on educational charitable trusts. The court pierced the veil in order to look into the terms on which the trustee held the shares.

 

  • Tax: At times tax legislations warrant the lifting of the corporate veil. The courts are prepared to disregard the separate legal personality of companies in case of tax evasions or liberal schemes of tax avoidance without any necessary legislative authority.

 

  • Legal provisions:

In case, any member is found guilty after the veil has been lifted, then he or she as per section 89 of the Companies Act 2063 (2006) will be disqualified from being appointed and from continuing to hold office. The following sections provide circumstances for disqualification:

  • Section 89 (1) (e): who is convicted of an offense of theft, fraud, forgery or embezzlement or misuse of goods or funds entrust to him/her, in an authorized manner, and sentenced in respect  thereof,  a  period  of  three  year  has  not elapsed from the expiry of the sentence.
  • Section 89 (1) (f): who has personal interest of any kind in the business or any contract or transaction of the concerned company.
  • Section 89 (2) (a): Any person referred in Sub-section (1) shall not be eligible to be appointed to the office of an independent director.
  • Section 89 (3) (f): If one  is  blacklisted  by  a  competent  body  pursuant  to  the prevailing  law  for his/her default  in repaying a  loan  of  any  bank  or  financial  institution,  and  the period of such black listing has not expired.

[1] Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769

[2] Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 (SCNSW, Young J).

[3] Gilford Motor Company Ltd. v. Horne, 1933 (Ch. 935)

[4] Taylor V. Santos. Corporate Law Electronic, 1998 (Bulletin no. 13, September)

[5] The Electric Light and Power Supply Corporation Limited v Cormack (1911) 11 NSWSR 350

Points : 

  • An exception of distinct personality.
  • Concept of ‘piercing the corporate veil’ describes legal decisions where a shareholder, member or director of a corporation is held liable for its debts or other liabilities.
  • Generally, corporation is liable, but exceptionally, in the course of delivering justice the members or shareholders are liable.
  • This doctrine is known as disregarding corporate entities.
  • The phrase ‘disregarding of corporate entity’ relies on the metaphor of a ‘veil’ or ‘legal fiction’.
  • The doctrine is generally used in cases where liability is found but the corporation is insolvent.

Lifting the corporate veil-(Exception to corporate personality)

  • Disregarding of corporate entity.
  • The principle of separate personality was established in a famous case of Salomon v. Salomon & Company.
  • It is a fundamental principle of company law that company has distinct personality.
  • There is a veil drawn between the company and its members.

-as per this principle typically, courts in most cases refuse the separate personality, go behind the curtain and see who are the real persons composing the company, but sometimes necessity of situation come to the courts or authorities to disregard the corporate legal entity and look to individual members who are in fact the real beneficial owner of all corporate property, and this is fact known as lifting or piercing the corporate veil.

  • If the veil is lifted, individual members are held liable for acts or entitled to its property.

Grounds for Lifting the Corporate Veil

  1. For securing justice.
  2. For the benefit of revenue
  3. Separate legal entity is general rule and lifting the veil is an exception.
  4. Statutory provisions for application lifting the corporate veil; Section 24,120(3),121,122,123,124,163,160(a),160(b),160(m),160(e),160(f),1609(g),160(h),160(i)160(l),161(a),!61(b),95(4),161(w),80,81,160(n),114,161(c),47,160(x),160(z),141,175,160(j), 160(A),160(P),160(Q),160(r),160(t),138-139 etc. of the Companies Act 2063 BS.

  Use of Lifting the Corporate Veil on the basis of the Principles Developed by Courts;

  • To determine the enemy character or residency relation .( See; Company Kanoon, Bharat Raj Uprety)

Daimler v. Continental Tire &Rubber Co.)

  • To determine group of companies (Agency Relation) ( See; Company Kanoon, Bharat Raj Uprety)
  • In case of Fraud or Misconduct ( See; Company Kanoon, Bharat Raj Uprety)

Gilford Motor Co. V Horne

  • For revenue purpose. ( See; Company Kanoon, Bharat Raj Uprety)

Income tax Commissioner V. Sri Meenaxshi Mills

  • A legal decision where a Shareholder or director of company is held liable for debts or other liabilities of company.
  • General principle is that shareholders are immune from suits. Only the company is liable but piercing the corporate veil is an exception.

 

Factors to consider the doctrine of disregarding corporate entity

  • Inaccuracy of corporate records.
  • Concealment or misrepresentation.
  • Failure to maintain arm’s length relationships with related entities.
  • Failure to observe the corporate formalities in terms of behavior and documentation.
  • Failure to pay dividends.
  • Intermingling of assets of corporation and of the shareholders.
  • Manipulation of assets or liabilities
  • Non- Functioning corporate officers and directors.
  • Other factors the court find relevant. Siphoning of corporate fund by the dominant shareholder(s).
  • Treatment for individual in terms of assets of corporation as his/ her own;
  • Alter ego.