Piercing the Veil of Incorporation in the 21st Century

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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