Corporate Veil Piercing: Key Developments and Influences

0 | P a g e
Partnerships and Company Law
Corporate Veil Piercing

1 | P a g e
A company is considered as a legal entity which has separate rights and liabilities that are
separate from its owners called shareholders. Due to the separate legal personality of the
company, its shareholders and directors cannot be held personally responsible for its debts
and credits.1 The company can sign contracts with third parties under its name, and it can be
sued by third parties if it fails to comply with contractual terms. Even though a company is a
separate entity; however, it is an artificial personal due to which it is not able to make
business decisions on its own. The directors and shareholders of the company are
responsible for taking business decisions and running their day-to-day operations. Based on
the concept of the separate legal entity, directors can engage in unethical and illegal
business practices without being personally liable for their actions due to which they can
take unfair advantage of the corporate veil.2 In order to avoid this situation, the concept of
corporate veil piercing is implemented through judicial and statutory mediums. The court
can pierce the corporate veil in order to hold the directors and shareholders liable for their
fraudulent actions which they conducted while relying on the separate legal personality of
the company.3 The objective of this essay is to discuss key developments on the concept of
corporate veil piercing and how it influences parties. This essay will begin with an evaluation
of the separate corporate personality to understand its meaning and consequences.
Furthermore, this essay will explain the concept and approaches of piercing of corporate
veil to understand how this concept has developed through judicial and statutory approach.
Lastly, a conclusion will be drawn based on these observations.
The demand of pooling together resources in order to start and operate business gained
popularity in the 17th and 18th century which resulted in the development of the concept of
Joint Stock Company in the 17th century. During this period, the East India Company became
one of the most popular joint stock companies. These companies were able to raise capital
for their operations, and there were no restrictions on the number of owners that could
invest in the company.4 However, the concept of limited liability was not introduced based
on which the liability was imposed on shareholders. During this period, the concept of
1 Lorraine Talbot, Critical company law (Routledge 2015).
2 Len Sealy and Sarah Worthington, Sealy & Worthington's Cases and Materials in Company Law (Oxford
University Press 2013).
3 Hui Huang, ‘Piercing the corporate veil in China: Where is it now and where is it heading?’ (2012) 60 (3) The
American Journal of Comparative Law 743-774.
4 Oscar Gelderblom, Abe De Jong and Joost Jonker, ‘The formative years of the modern corporation: The Dutch
East India Company VOC, 1602–1623’ (2013) 73 (4) The Journal of Economic History 1050-1076.

2 | P a g e
separate legal entity was not introduced due to which the shareholders were personally
liable for the debts of the company. Significant changes were brought after the introduction
of Joint Stock Companies Act 18445 which makes it easier for people to register companies;
however, the concept of separate legal entity was not introduced at the time. In 1856, the
concept of limited liability was introduced. Subsequently, the Limited Liability Act 18556
introduced the limited liability concept which provided that the liabilities of a company is
separate from its owners.7
In this regard, a leading judgement was given by the House of Lords in the case of Salomon v
Salomon & Co Ltd.8 This is a leading case because it established the twin concepts which
include the separate legal entity of the company and limited liability of its members. In this
case, Lord Macnaughton provided that the company is a different person from its
shareholders and it did not act as an agent or trustee for its shareholders; thus, they are not
liable in any shape or form for its liabilities. After this judgement, this concept was accepted
by the court in many other cases; however, since the company is an ratification person,
some rules are changed such as the case of Battle v Irish Art Promotion Centre Limited9 in
which the court provided that a human can represent himself in the court, but a company
require advocate or solicitor. Similarly, this principle was upheld by the court in the
judgement of Lee v Lee’s Air Farming Ltd10 by stating that a company is a separate entity
even if it is run and managed by a single individual. Statutory provisions were also
introduced by the government in the Companies Act 200611 which give effect to the distinct
legal entity of the company from its members and management team.
There are various benefits of the separate legal position of the company that creates
opportunities for its members. The key benefit is that the company is fully liable for its own
debts and its shareholders and directors cannot be held personally liable for repayment of
its debts. The company has perpetual succession based on which its legal entity is not
affected by the death of its members or change in its ownership. The company can own
5 Joint Stock Companies Act 1844
6 Limited Liability Act 1855
7 Rob McQueen, A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920
(Routledge 2016).
8 [1897] AC 22
9 [1968] IR 252
10 [1961] AC 12
11 Companies Act 2006

3 | P a g e
property and sign contracts on its behalf. In Roundabout Ltd v Byrne12 case, a new company
was incorporated by the owners of a pub in order to prevent picketing. In the judgement,
Dixon J provided that despite the fact both company has same owner, each company is
distinct in the eyes of the law. This case shows that owners of a company can get away from
legal responsibilities by relying on corporate veil. However, it did not mean that the
directors and shareholders can misuse their position to engage in illegal or immoral business
practices. The concept of the lifting of the corporate veil was introduced in order to make
sure that director and shareholders are punished for their illegal actions which they took
while managing the operations of the company.
The members of a company can blatantly use its corporate personality as a clock in order to
engage in fraudulent or illegal practices. In order to resolve this issue, courts can rely on
corporate veil piercing to find those people who benefit from these practices.13 The concept
of lifting or piercing of corporate veil means disregarding the separate legal entity of the
company in order to look for the real person who is in control of the company. The objective
of the courts is to determine the reality and find out who are the ones that are running the
operations of the company. This principle is applied by the court to ensure that parties that
manage the operations of the company did not misuse its legal personality to engage in
fraudulent or dishonest practices. Nevertheless, the separate legal entity of the company
remains intact, and it is not affected by this action. The purpose of this concept is
disregarding the full consequences of the separate personality within a particular context to
impose liability on directors or shareholders for a specific transaction in which the company
has entered.14 Based on these observations, it can be understood that the concept of veil
piercing is a relevant concept which is accepted on a universal level to avoid misuse of the
separate legal personality of the company. However, still, it is an enigma of company law
because although this concept exists but it is uncertain and ill-defined. The application of
this concept is constructed largely on invectives and metaphors which often solely rely on
moral indignation as a key reason for imposing of this principle to receive particular
outcomes. Still, this concept is present and applicable on parties on a global stage.
12 [1959] IR 423
13 Judith Elkin, ‘Lifting the Veil and Finding the Pot of Gold: Piercing the Corporate Veil and Substantive
Consolidation in the United States’ (2012) 6 Disp. Resol. Int’l 131.
14 Peter B Oh, ‘Veil-Piercing Unbound’ (2013) 93 BUL Rev. 89.