Piercing the Corporate Veil: A Study of the Legal Principles and Exceptions

The concept of piercing the corporate veil allows courts to look beyond a company's legal personality and hold its shareholders or directors accountable for their actions. This can occur in cases where a company is used as a facade to gain unfair advantages, or where criminal actions are involved. The court will pierce the corporate veil if it is established that individuals are using the company to benefit themselves rather than operate the business as intended.

LAW OF BUSINESS
ENTERPRISES

TABLE OF CONTENTS
1. INTRODUCTION 1.
2. Separate Legal Personality 1.
3. Limited Liability 2.
4. Piercing of Corporate Identity 3.
5. CONCLUSION 4.
6. REFERENCES 5.

INTRODUCTION
Incorporation of a company has the effect of creating a separate legal personality of
the entity, which is completely distinct from the personal identity of directors or managing
directors of an enterprise. Registration of an entity with the concerned authority entitles it to
exercise all the functions in order to operate and exist within the market. Incorporation is a
legal process which every entity is required to undergo in order to create corporate entity. At
first instance an entity which intends to acquire such a position in the market is required to
make a registration under S. 16(2) of the Companies Act 2006. In pursuance to the same a
certificate of Incorporation is provided to the concerned company. In accordance to this Act a
corporation is created on getting registered with the relevant authority. It results into
formation of an artificial person which is separate in identity from the natural persons who
are imposed with an obligation to manage and operate the company. Thus, in the present
research the consequences which are resulted on all the members of a company shall be
discussed.
Separate Legal Identity
An incorporated company upon receiving the certificate of registration acquires a
distinct and separate legal personality. The subscribers to memorandum or other members of
a company are the natural persons who are have been entitled to operate the functions of the
company. It is important to note that all the functions and operations are carried out in the
name of the enterprise and hence, it is said to exist as an artificial person with its own
identity. In consequence to the same every corporate is entitle to sue or be sued in the court of
law. The concept of legal personality was accepted by English Law which is essence creates
separate legal rights and duties of a corporate. In the case of Mach Marketing International
SA v. MacColl (1995) it was opined by the court that incorporation marks the birth of an
artificial person and has no existence before acquiring the certificate of incorporation. The
state of maturity is attained only at this stage and all the functions can be undertaken in the
name of company (Ireland, 2010). Moreover, this distinct legal personality of a corporate also
empowers an enterprise to enter into contractual or other legal relations, own and acquire
properties and so on. This legal principle is supported from the legal provision of Section 74
of Insolvency Act which clearly states that registration and the consequent incorporation of a
corporate in the nature of limited liability protect the members from being imposed with

personal liability for the action of a company. A similar opinion was first established by the
court in the case of Solomon v. Solomon (1896)
This concept of separate legal identity is also represented through the phrase of
corporate veil which also refers to the general principle of company being responsible for its
own action. This can be understood from the fact that the manner in which a natural person
can never be made responsible or liable for actions of another person, directors or
shareholders can also not be made liable for conduct or obligations of a corporate. However,
this general rule is subject to certain exceptions wherein the person has assumed the
responsibility or undertaken an act for personal advantage in the name of company. Hence,
there exists a veil to separate the legal identity of a company and people who invest in the
operations of such entities. A business corporate is the first artificial person to be made liable
for actions undertaken by the directors and employees in the name of a company. The market
economies are primarily based on this doctrine of separate legal personality which can also be
characterized as a fundamental assumption in the corporate field (Cheng, 2010). It is
important to understand that a company exists legally, but has no physical existence. It cannot
be treated as an agent of a shareholder or vice versa. Hence, it is required to be treated as a
person, though artificial in nature, for its own right. The concept of incorporation can be
termed as significant as it marks the birth of a legal person which can also be termed as a
lifeless creature. Further, it is dependent upon natural persons to be operated and undertake
all its functions. In the case of HL Bolton (Engineering) Co. Ltd. V. TJ Graham & Sons Ltd.
(1957) it reiterated by the court that a corporation can be equated to a human being, which
has a brain along with a nerve centre to operate all the aspects. Moreover, it also has social
responsibilities to build a reputation of good citizens which is sensitive towards issues of
society.
Limited Liability
An increasing number of companies in today’s world are adopting limiting liability of
their respective members, which infers that in the event a company goes into liquidation the
unpaid creditors shall not be entitled to seek contribution from shareholders or employees of
company. In such cases the company bears an unlimited liability for all the obligations and
debts which exist in its name and are required to pay with all the assets it posses. However,
the shareholders’ and employees’ liability in such a case is limited by shares and this is the
default position of a company. In order to deal with such situations also, the doctrine of

separate legal identity finds significance as such shareholders or members possess a distinct
legal identity from the limited company. Hence, the direct liability of shareholders to satisfy
the obligations of a company towards other persons is nil. Thus there exists zero liability of
shareholders or members toward third persons. However, this situation is subject to the
exception wherein the shareholders can be imposed with indirect liability to the extent the
application money or such other amount remains unpaid (Klabbers, 2010). Hence, it can be
concluded that in the case of limited liability companies, the shareholders have limited
liability as against the company itself which has unlimited liability for all the actions
undertaken by the directors or employees.
The general duties which are imposed on a director require them to act in compliance
with all the provisions of constitution of a company and exercise powers which are conferred
by such a constitution. Further, they are under an obligation to always act in good faith for
the benefits of company, along with fostering the business relations with various
stakeholders. A director is moreover, required to act reasonably in a diligent as well as
careful manner. In the event of any breach of the specific duties imposed on a director in
relation to negligence breach of trust, default and so on, a director shall not be exempted be
from liabilities.
Piercing of Corporate Veil
In the event a company becomes insolvent corporate veil can be lifted in certain
specific situations to make shareholders or directors liable for making outstanding payments
to the creditors. This is an exception to the general principle of separation of legal identity in
pursuance to which the directors and shareholders cannot be made liable for the actions
undertaken in the name of a company. In the renowned judicial pronouncements of Solomon
v Solomon (1896) it was established, through a unanimous ruling, that the concept of
corporate personality is subject to exception which essentially operates to breach the separate
legal identity myth and make the natural persons liable. However, it has been observed that in
English law only in limited situations this veil is uplifted. Thus, in the event the directors or
shareholders act to take personal advantage of the legal status and fraudulently act in an
unjust manner. Courts in such cases are entitled to lift the corporate veil after strictly
considering the surrounding factual situation. In the case of EBM Co. Ltd. V. Dominion Bank
(1937) it was observed by the court that it is a matter of supreme important that a clear
distinction is maintained between corporate personality and directors, throughout the course

of dealing in terms of their respective rights, liabilities and assets (The Corporate Veil: When
will it be pierced?, 2017). In the case of Atlas Maritime Co. SA v. Avlon Maritime Ltd. (1991)
it was held by the court that the term ‘piercing the corporate veil’ shall only refer to treating
the liabilities or activities of a corporate to that of shareholders. This essentially refers to
looking behind the corporate identity of an entity and identifying the real wrongdoer. It
denies the existence of corporate status to make the directors or shareholders liable for the
fraudulent actions they have undertaken in the name of company.
Courts in respect to this case has taken a strict stand and has held that the veil shall be
breached only in the event the wrongdoer has used corporate structure in a manner that no
liability is imposed on him or has used it as a device. In furtherance to the same it has been
upheld in Adams v. Cape Industries Plc (1990) that the court shall not look beyond the
corporate identity only for sake of interest of justice. In a recent judgment of VTB Capital Plc
v. Nutritek International Corp & Ors (2012) the court held that there was a sporadic attempt
to pierce the corporate veil (Cheng, 2011). However there are certain cases wherein company
shall not be treated as separate from their shareholders or directors. One such situation is in
the case of criminal actions wherein the natural persons can also be made liable for criminal
actions and hence there arises a need to pierce the corporate veil. In the case of Richmond v.
London Borough Council (1989) it was held that a company cannot be made liable for
criminal actions and hence, in such cases it is a necessity to pierce the corporate personalities.
Apart from this situation, in cases where in the shareholders or directors have acted in a
manner to gain unfair or undue advantage, by hiding behind the corporate personality, the
court shall pierce the corporate veil. In the case of Solomon v. Solomon it was held by the
court the court that in accordance to the general principle there does not exist any agency
relation between a company and its directors/shareholders. However, there may arise
situations where in such an agency relationship is imputed into facts so as to make the actual
person behind the wrongful act as liable.
In cases wherein it can be established that the entire process of incorporation of an
entity is a complete hoax and the directors are acting to divert all the benefits in their name,
the court shall pierce the legal personality. In the case of Gencor ACP Ltd. v Dalby (2000) the
court considered the facts wherein the director was acting in breach of fiduciary duty by
diverting all the business opportunities towards his personal company. In pursuance to the
same it was opined by the court that the company was merely a facade and was not operating
to undertake any business. In the case of Pest v. Petrodel (2013) (Piercing the corporate

veil: Supreme Court clarifies the English law position, 2013) it was stated that it could be
easily established that the director was misusing the corporate personality for taking undue
advantage and hence is an appropriate case for piercing the corporate veil. Thus, it can be
concluded that the concept of piercing the corporate veil essentially looks behind the complex
corporate structure to make the directors or shareholders liable for their negligent or
fraudulent actions.
CONCLUSION
The Corporate law operates in a manner that the corporate personality of a company,
which is achieved on incorporation, is completely distinct and separate from the personalities
or their respective directors or shareholders. This principle in essence operates to protect the
natural persons from the actions and obligations of an artificial person. In pursuance to the
same an artificial person has been made capable by law to be sued or sue others in the event
of any wrong. However, this corporate structure can be pierced by the court in the event it is
established that the natural persons were using the personality of artificial person to gain
undue or unfair advantages.

REFERENCES
Books and Journals
Cheng, T. K., 2010. Form and substance of the doctrine of piercing the corporate
veil. Browser Download This Paper.
Cheng, T. K., 2011. The Corporate Veil Doctrine Revisited: A Comparative Study of the
English and the US Corporate Veil Doctrines. Browser Download This Paper.
Ireland, P., 2010. Limited liability, shareholder rights and the problem of corporate
irresponsibility. Cambridge Journal of Economics. 34 (5). pp. 837-856.
Klabbers, J., 2010. The Concept of Legal Personality. International Legal Personality,
Ashgate Publishing Limited, Surrey. p. 7.
Online
Piercing the corporate veil: Supreme Court clarifies the English law position, 2013. [Online].
Available through:
<http://www.incelaw.com/en/knowledge-bank/publications/piercing-the-corporate-veil-
supreme-court-clarifies-the-english-law-position >. [Accessed on 6th March 2017].
The Corporate Veil: When will it be pierced?, 2017. [Online]. Available through:
<http://www.hfw.com/Piercing-the-Corporate-Veil-Dec-2012 >. [Accessed on 6th
March 2017].