Piercing the Veil of Incorporation in the 21st Century

This article explores the concept of piercing the veil of incorporation and its adequacy in the 21st century. It discusses the legal principles and exceptions involved, the challenges and inconsistencies in applying the doctrine, and analyzes relevant cases. The article concludes by considering the need for redefining and clarifying the doctrine.

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The concept of piercing the veil of incorporation is not adequate in the 21st century.
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Introduction
Piecing the corporate veil is simply described as the possibility of looking back at the
separate legal personalities of a company in an effort to make members responsible as an
exception to the rules that are usually protected by the corporate shell. Ibrahim indicates that,
one major thing that signifies a corporation is its legal separation from its stakeholders when
it comes to matters of liability for the purpose of the corporation.1 Personal liability for the
stockholders does not occur because of the separation of legal liabilities that exist in an
organisation. The exceptions into this rule can be found into what has been developed into a
legal principle which is known as the piercing of the corporate veil. That simply means it is a
way of reaching the customers behind the corporation by holding them responsible for the
obligation of the corporation.
Discussion
The Companies Act, 2006 provides that a company is a separate legal entity from its
stakeholders. Salomon v Salomon cases clearly demonstrated that a stakeholder is liable for
the debts of his company. The benefits of limited liability and incorporation include; enabling
the transfer of shares among the stakeholders, encourage further investment by the
shareholders and finally providing the assets that are available to creditors of the company.2
However, the corporate veil can be utilised to safeguard the stakeholders of a corporation
from the company’s creditors, or claimants in tort. Moreover, it can also be utilised to avoid
any future legal liabilities. Macey points out that “the doctrine of piercing the corporate veil,
was developed as an exception to the general rule of limited liability, in an effort to deal with
the challenges of incorporation.” 3
1 Ibrahim A, “Piercing the Corporate Veil under the UAE Companies Law - When can Shareholders be
Responsible?” [2012] Law Update- AlTamimi & Company
2 Companies Act 2006, ss. 168, 172, 175, 239, 260 to 264; 282, 283, s.582 & ss. 994 to 996
3 Macey JR, “The Three Justifications for Piercing the Corporate Veil” (Cheng TK, “The Corporate Veil Doctrine
Revisited: A Comparative Study of the English and the U.S. Corporate Veil Doctrines” (2011) 34 Boston College
International and Comparative Law Review

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With plaintiff seeking to maximise their source of recovery and defendants seeking to
reduce the same, recovery on economic issues might focus on the liability of individual
stakeholders for claims asserted on a company. Nowadays, plaintiffs are quick to point
stakeholders as the defendants in an effort to fraudulently trying to expand the asset pool for
potentially higher recovery. Under the concept of piercing the veil of incorporation, the
burden of proof often requires a separate lawsuit .This in part is due to the fact that such cases
require convincing evidence as opposed to civil lawsuits. While courts might continue to
assert the doctrine, the element required to assure its applicability and principled foundations
will remain challenging to prove. Moreover, in cases such as Adam and Cape, which involve
smaller wholly owned subsidiaries, the court are often willing to excuse the application of
non-compliance on the grounds of corporate formalities, rather than accepting that it is now
inadequate.
Corporate law is a complex, and a majority don’t realise that under the existing
corporate statutes, owners of a corporation can easily be exposed to personal liability. As a
corporate owner, understanding when you might be exposed to a court piercing is
fundamental to ensure that a business runs efficiently. Consultation with experienced legal
personnel can help the owner of a corporation in ensuring that he is on the right “legal lane.”
Most important is a commingling of the assets , management history , maintenance of
adequate records and safeguarding the corporate assets. The reason these issues are important
is that they show that the owner of a corporation is not just a sham cover-up, where they are
just attempting to use personal liability without involving the necessary works.
Application of the doctrine, has not always been fact specific or open-ended. Murray
and Macey have demonstrated that piercing the corporate veil always happens “freakishly”
and when it occurs it does so in a rare, severe and unprincipled manner. Murray further

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argues that in the modern court system the doctrine has become incoherent and unprincipled.4
Recently the Supreme Court had the opportunity of ruling in the case of Presto v Petrodel. In
this case, the lords acknowledged that the doctrine cannot be applied on the grounds of it
being unprincipled.
Lord Neuberger concurred with Jimerson and Snell by stating that, it is evident from
various cases and records that the law connecting to the principle is not satisfactory and in
most cases confusing. He further criticised its application to any ruling by stating that
“piercing the corporate veil is an indiscriminate manifestation used to define only a number
of things and thus its practicality is questionable” 5.In some of the recent cases, the
application of the doctrine has become vague and as a result, most of the contemporary cases
have not solved what it means by “piercing the corporate veil.” It is important to note that it
might not mean the same thing as “going without a clear sense of label, which further adds
more confusion surrounding the veil piercing rule.”
The Salomon v Salomon case Involves Mr. Salomon, an entrepreneur who has
incorporated his company. Given the provisions under the Insolvency Act 1986, which
required the attendance of at least 7 stakeholders, he made some of his relatives as business
associates, allotting them with a share each. 6Despite the clear statement from Lord Halsbury
on Salomon’s case, some years later the English court considered it was acceptable to
disregard some areas of ruling and apply the “piercing the corporate veil.”7 In this case, the
doctrine was used to describe the situation wherein the principle of a separate entity is
deemed as unfair and thus the courts made decisions contrary to the doctrine itself on
4 Murray J, “Piercing the Corporate Veil What Business Owners Need to Know” (The Balance November 6,
2016)
5 Jimerson CB and Snell BN, “The Five Most Common Ways to Pierce the Corporate Veil and Impose Personal
Liability for Corporate Debts” (Lexology March 2, 2016)
6 Insolvency Act 1986 – Part IV – Chapter VI (ss.120-162) – covers winding up.Key sections:-, ss. 115, 122, 123,
175, 176ZA, 213, 214, 238, 239, 240, 245, s.249, s.423, 435 & Sch 6para 11.
7 Halsbury’s Laws (5th edn, 2010) vol 57, para 53 CJ Friedrich, ‘Constitutions and Constitutionalism’,
International Encyclopedia of the Social Sciences III (1968) 319

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different grounds.8 In some of the recent cases, the court has done this in an effort to reach to
the individual behind the veil and reveal the exact nature of the Corporation. However, in this
cases, it was hard for the practitioners to find the basis on which the court could have pieced
the veil. This is an area that most judges see as ill-defined, inconsistent and quite confusing.
For instance, in the case of Briggs v James Hardie, Roger indicated that the lack of a
common and a unifying principle fundamental to the decisions made compelled the court to
ignore the corporate veil.9
In determining the most appropriate time to not consider the principle if a separate
entity, most scholars have always divided their instances in a number of distinct
classifications and in most cases there is no agreement on the forms of classifications, with
some comparable cases being sited in different classifications. Therefore, the definitive
policy for piercing the veil remains indefinable in the modern era, with Shah arguing that it
entirely depends on policy, while others argue that it depends a lot on justice. Multiple
attempts have been made in the past two decades to classify cases in an effort to predict the
outcome of future cases, but this has proven to be very challenging.10 Most of the challenges
are contributed by the fact that has been an area where various case facts have a significant
impact on the outcome. Moreover , In Salomon v Salomon case , the application of the
doctrine proved to be challenging especially in rationalising the case in a specific category
since the personal views of the judge had a bearing on what justified piercing the veil of
incorporation.
In another leading case of Lee v lee Air farming, the Privy Convention believed that
lee is a separate entity from the corporation which he managed, of which he was an
employee. Therefore, Lee’s wife can claim compensation for his death under the Workmen
8 Salomon v A Salomon & Co. Ltd. [1897] AC 22 (HL)
9 Schmitthoff, C. M. , ‘ Salomon in the shadow’ [1976] JBL 305
10 Shah K, “Why and when do courts pierce or lift the corporate veil”

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Compensation Act. Moreover, the House of Lords held that there as a valid contract between
Lee and the corporation and thus, Lee was an employee within the interpretation of the Act.
11However, the lack of consensus in these cases is the fact that the doctrine was applied
interchangeably in both as the owner of the company and as an employee. Even though the
judge in these cases, argued that it might not matter of which language is used, it evidently
separated the two instances.12 Such considerations as the ones in these cases represent the
general principle that the corporate veil might be pierced only in an effort to stop abuse of the
legal personalities of the corporation.
It is important to note that it might be an abuse of the separate legal personality of a
corporation to frustrate the enforcement of the law. Krishnaprasad argues that “there is
limited principle within the English law which can be applied if an individual is under a legal
obligation that is in effect, which he evades purposefully or whose implementation he evades
deliberately in an effort to frustrate the enforcement of the law.”13 That being said, a court
might be compelled to pierce the veil of incorporation for only certain purposes depriving the
owner of a company the advantage they might have obtained through the principle of legal
personality .However, the principle has become limited, because in most cases of the 21st
century, the facts are used to disclose a legal relationship between a corporation and the
owner, thus making it unnecessary to pierce the veil of incorporation.
In an analysis of the case of Adam V cape Industries PLC, it is probably one of the
best cases of establishing the inadequacies of the corporate veil. This is a case that established
the fact that piercing the veil of incorporation shouldn’t be pierced just on the ground that a
group of corporations operated within a single economic entity. Cape Industries PLC led a
group that had a number of wholly owned subsidiaries .The argument for the piercing of the
11 Companies Act 2006. ss. 170-177 (in particular) also ss. 31, 39, 40, 41, 180, 239, 1157
12 Lee v Lee’s Air Farming [1961] AC 12 (PC)
13 Krishnaprasad, K. V. ‘Agency, limited liability and the corporate veil’ (2011) 32 Co
Law 163

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veil incorporation was divided into several groups. The most prevalent argument was the
single economic unit argument, being that a group of companies should be considered as a
single economic entity. However , years later the cases was appealed on the grounds that
“from the cited authorities we are rather left with a sparse guidelines from the principle which
would have guided the court in defining the engagements of the corporate group , within the
interpretation of what words that were applied by the House of Lords in Woolfson”.14 This
demonstrates that the accuracy of the reasoning applied in the case initially was doubted by
the Appeal Court, in which by referencing the Doctrine ,the House of Lords stated that “I
have uncertainties whether the court of appeal accurately used the doctrine to pierce to the
veil of incorporation only where special conditions existed. This indicates that there is a mere
façade hiding the real facts.”15
In Adams v Cape, the agency argument was rejected but it was accepted in the case of
Lee v Lee and in Salomon v Salomon. Craig, argues that “it is not permissible for the court to
ignore a principle in Adams v Cape simply because it considers justice so requires.” The
agency argument was rejected in the specific facts presented in Adams v Cape case.16 This
affirms fraud as the primary basis of piercing the veil of incorporation.17
Summary
The concept of piercing the veil of incorporation has been redefined in several
instances by the Supreme Court. However, there are still doubts about its effective
applicability. Craig expresses the need to determine whether the existing frameworks of the
doctrine are applicable and if so to identify some coherent, and practice aspects for it.” The
concept has been misinterpreted, for the longest time it had not been defined or applied
14 Adams v Cape Industries Plc [1990] Ch 433 (CA)
15 Id
16 Adams v Cape Industries Plc [1990] Ch 433 (CA)
17 Craig, R. , ‘Thou shall do no murder: a discussion paper on the Corporate Manslaughter and Corporate
Homicide Act 2006’ (2009) 30 Co Law 17

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properly. In most case, after its redefining it has probably never been applied appropriately.
Whether its practicality and principled basis exist or not are arguments that have been
accepted by many law scholars, but there is a need for close examination of the fundamental
arguments that have been accepted on the basis of veil piercing the past cases? It is important
to evaluate the agency argument accepted in Salomon v Salomon case since its redefinition
isn’t grounds for piercing the veil of incorporation. That being said, this and other confusions
might lead misinterpretation of cases in the future .As a result of such effect of veil piercing
on limited liability, courts have to approach the doctrine cautiously or limit its application
altogether .

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Bibliography
Adams v Cape Industries Plc [1990] Ch 433 (CA)
Companies Act 2006, ss. 168, 172, 175, 239, 260 to 264; 282, 283, s.582 & ss. 994 to 996
Companies Act 2006. ss. 170-177 (in particular) also ss. 31, 39, 40, 41, 180, 239, 1157
Craig, R. , ‘Thou shall do no murder: a discussion paper on the Corporate Manslaughter and
Corporate Homicide Act 2006’ (2009) 30 Co Law 17
Ibrahim A, “Piercing the Corporate Veil under the UAE Companies Law - When can
Shareholders be Responsible?” [2012] Law Update- AlTamimi & Company
http://www.tamimi.com/en/magazine/law-update/section-6/october-2/piercing-the-
corporate-veil-under-the-uae-companies-law-when-can-shareholders-be-
responsible.html accessed March 28, 2019
Insolvency Act 1986 – Part IV – Chapter VI (ss.120-162) – covers winding up.Key
sections:-, ss. 115, 122, 123, 175, 176ZA, 213, 214, 238, 239, 240, 245, s.249, s.423,
435 & Sch 6para 11.
Jimerson CB and Snell BN, “The Five Most Common Ways to Pierce the Corporate Veil and
Impose Personal Liability for Corporate Debts” (Lexology March 2,
2016)http://www.lexology.com/library/detail.aspx?g=4ff8ebf0-4bca-426e-8273-
758140f6d0eb accessed March 28, 2019
Krishnaprasad, K. V. ‘Agency, limited liability and the corporate veil’ (2011) 32 Co
Law 163
Lee v Lee’s Air Farming [1961] AC 12 (PC)

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Halsbury’s Laws (5th edn, 2010) vol 57, para 53 CJ Friedrich, ‘Constitutions and
Constitutionalism’, International Encyclopedia of the Social Sciences III (1968) 319
Macey JR, “The Three Justifications for Piercing the Corporate Veil” (Cheng TK, “The
Corporate Veil Doctrine Revisited: A Comparative Study of the English and the U.S.
Corporate Veil Doctrines” (2011) 34 Boston College International and Comparative
Law Review https://corpgov.law.harvard.edu/ accessed March 28, 2019
Murray J, “Piercing the Corporate Veil What Business Owners Need to Know” (The Balance
November 6, 2016) https://www.thebalance.com/piercing-the-corporate-veil-
definition-398410 accessed March 28, 2019
Salomon v A Salomon & Co. Ltd. [1897] AC 22 (HL)
Schmitthoff, C. M., ‘Salomon in the shadow’ [1976] JBL 305
Shah K, “Why and when do courts pierce or lift the corporate veil”
https://www.linkedin.com/pulse/20141104084213-31666919-why-and-when-do-
courts-pierce-or-lift-the-corporate-veil accessed March 28, 2019