Corporate Veil and Lifting of Corporate Veil in Corporations Law

Running head: CORPORATIONS LAW
CORPORATIONS LAW
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CORPORATIONS LAW1
INTRODUCTION:
Under the provisions of Corporation law, a company is regarded as one of the most
favorable types of business structure used all over the world. The reason behind it is distinct and
separate entity different from the identity of the managers or owners of such company from the
legal point of view. The preference towards the company as the most favorable business
structure is due to the advantages this business form allows which are absent in any other forms
of business. The characteristics of the company are not available to any other form of business
forms. The most unique characteristic of the company is its separation of identity of its owners
and managers. The owners together with the managers of any company cannot be held
responsible for the liabilities of the company. All the managers and directors of a company are
given immunity from being made liable for the company liabilities. In addition to this, the share
holders who are also regarded as the company owners have limited liability as they can be made
liable for the contributions they have made in the company capital. The sum of money invested
by any share holder will indicate the amount of liability in the company. Like the directors and
managers, the share holders can never be held liable personally for the company liabilities. The
immunity possessed by the owners and managers of the company is by the effect of corporate
veil1. If the company suffers from any liability or loss, it will neither make the owners nor the
managers liable. Further the court has no authority to pierce the said corporate veil for making
the owners or managers liable. However, there are few situations where the courts may be
needed to lift the corporate veil of the company2. This assignment will further make analysis of
the doctrine of corporate veil in a critical manner and also provide situations where such veil can
1 Macey, Joshua C. "What Corporate Veil." (2018) Mich. L. Rev. 117: 1195.
2 Tsang, King Fung. "An Empirical Research on Piercing the Corporate Veil and Enforcement of Foreign
Judgment." (2017) Tex. Int'l LJ 52: 103.

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be lifted. In this assignment the doctrine of corporate veil has been discussed together with the
principle of lifting the corporate veil. Further, separate legal personality of a corporation is also
recognized in the light of the Corporations Act3.
Discussion
The company can be regarded as a most complicated type of business structure where the
shareholder of the company is known as the owners of it. Both the profit and losses that are
incurred by the company are required to be distributed among the shareholders as they are also
the owners of the company by means of declaring dividends. The company possesses separate
legal identity distinct from the managers and the owners as observed in the case of Peate v
Federal Commissioner of Taxation4. Due to the separation of identities, the liabilities incurred
by the company are not required to be borne by the managers or the shareholders in their
personal capacities. The corporate will principle that offers shield to the owners or the
shareholders of the company was first entrenched in the famous case of Salomon v A Salomon
& Co Ltd5.
In this leading case, it was contended by the courts that a company that has been
registered appropriately will possess a separate identity by severing itself from that of the
managers or owners of the company. The courts in general cannot pierce the corporate veil of the
company for making the owners or the managers of it liable for the act of the company. The
company has a completely separate existence like an individual. The limited liability theory in
respect of a company grants the shareholders of the company a shield which limits the liability of
3 Corporations Act 2001 (Cth).
4 Peate v Federal Commissioner of Taxation (1964) 111 CLR 443.
5 Salomon v A Salomon & Co Ltd [1896] UKHL 1.

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these shareholders in the company as per their contribution to the company capital6. The
shareholders’ liabilities will never exceed the finances they have contributed to the company as
investments. The courts cannot even extend the company’s liability to the private assets of the
company shareholders.
Under the principle of single economic unit theory, a company is needed to be treated
like a single unit when making transactions or when responding to the rights or duties of its
directors or managers. This was best analysed in the case of DHN Food Distributors v Tower
Hamlets7. The company can be regarded as a natural person in relation to the business
transactions as given in section 124 of the Corporations Act89. The company is being provided
with the power to contract or any other transactions in its own name. With this theory, a
company has the authority to represent itself in any legal cases on its behalf.
The screen theory or the theory of corporate veil gives an additional immunity to the
company’s internal management by means of a virtual veil that imposes restrictions on the
outside members of the company from peeping into its internal activities10. After the company is
incorporated, a virtual veil or a theoretical shield covers the company such that outsiders cannot
understand and intervene with the internal activities and identify the company owners.
But there are several situations where this kind of restriction on lifting the corporate veil
belonging to the company has caused discrepancies11. This mainly resulted due to misuse of
6 Jelsma, Phillip L., and Pamela Everett Nollkamper. The limited liability company. LexisNexis, 2017.
7 DHN Food Distributors v Tower Hamlets (1976) 1 WLR 852.
8 Corporations Act 2001 (Cth) s 124.
9 Adriano, Elvia Arcelia Quintana. "The natural person, legal entity or juridical person and juridical personality."
(2015) Penn St. JL & Int'l Aff. 4: 363.
10 Jain, Saurabh, and Q. C. Prebble. "Conceptual Problems of Beneficial Ownership and Corporate Veil." (2019) S.
Jain & J. Prebble, Conceptual Problems of Beneficial Ownership and the Corporate Veil 73.
11 Choquet, Pierre-Louis. "Piercing the corporate veil: Towards a better assessment of the position of transnational
oil and gas companies in the global carbon budget." (2019) The Anthropocene Review: 2053019619865925.