Corporate Veil: Benefits of Lifting the Corporate Veil Language?

This essay explores the concept of the corporate veil, which separates a company's legal identity from its members, and the circumstances under which courts may 'lift' or 'pierce' it. It examines the benefits of such language, considering statutory provisions and judicial interpretations, and the landmark case of Salomon v Salomon. The essay discusses the advantages of separate legal entity, such as limiting shareholder liability and allowing for professional management, while also acknowledging potential drawbacks like shareholder detachment from management. The essay argues that lifting the corporate veil is crucial to uncover the real doer of wrongful acts within a company, ensuring accountability and upholding the principles of justice. The essay also emphasizes the importance of the corporate veil in protecting shareholders and facilitating business operations.

Lifting of Corporate
Veil

Topic: Given the courts reluctance to 'lift' or 'pierce' the corporate veil, is there any real
benefit to such language?
Corporate veil is a theory which states the separate legal identity of the company from its
members. This means that, shareholders who are the owners of the corporate are protected
against the liabilities arising out of the company's actions as provided in the Corporations Act,
2001. In other words, the members are safe against the debts which have incurred as a result of
company's outcomes. Corporate means a company which is an artificial judicial person having a
distinct legal identity from its members (Macey & Mitts, (2014). It is one of the main features
which makes it preferred by the businessperson to opt this type for carrying their business. It is a
part of the legal provisions which are applicable to a body corporate. By considering this,
Australian government has passed Corporations Act, 2001 for governing the registration and
activities of the companies.
Corporate veil can be defined as the legal concept that separates the actions of an
organization to the actions of the shareholder. On decoding this definition, it can be said that
artificial judicial person can own properties, open bank account, make contracts etc. in its own
name. In such a situation, it becomes activities under the authority of the corporate for which it is
solely responsible (Parker, (2015). The outcomes of transactions of properties, entering into or
cancelling of contracts etc. will be the liabilities of the organization. Since, it an artificial person
having no hands, eyes or brains of its own, it appoints directors to act on its behalf. They are
divided into two categories by dividing the duties and activities. They are also provided powers
to make decisions by representing the company.
When board of directors make policies or decisions which are to be applied within the
organization, then it is assumed that company is implementing such policies and decisions. There
is no role of shareholders in this hence, they are kept away from the liabilities arising as a result
of company's act. Corporate veil has its own importance and one of the main significance being
the protection that shareholders get from this (Wolfson and et. al., (2014). The corporate veil
which exist between the members and the company is lifted by the courts to find out the reality
of the offences and other situations of disputes. There can occur number of circumstances in a
company which may arise the question on the involvement of the shareholders in the activities.
Hence, these scenarios make it a compulsion to lift the corporate veil.

In simple terms, to find out the real doer of the wrongful acts in the company the
corporate veil is lifted or pierced to find the person who will be held liable for the wrongful acts
of the company. This is to uncover the actual person who has against the objectives of the entity
and many similar acts. When the corporate veil is lifted, it goes against the principle of “separate
legal entity”. There can be two reasons for piercing the veil which are under statutory provisions
and under judicial interpretation.
Lifting of corporate veil under statutory provisions, it includes the circumstances in
which a person is held liable for the for the fraud or illegal activity (Hespe, (2013). The corporate
veil can be pierced when the court is to determine the relations of holding and subsidiary
companies, to investigate of ownership of company, misrepresentation in prospectus, in case the
entity fails to return application money, fraudulent conduct of business and many more.
Whereas, judicial interpretation has been formed on the basis of some benchmark cases which
can be applied for getting solution. The situations in which corporate veil is lifted under judicial
interpretation are to protect the revenue, to prevent fraud or improper conduct etc. In both the
cases, the ultimate reason is to find the main person behind any such circumstances (Shmatenko,
(2012).
There has been number of cases in the past in which the shareholders have been made
involved in the mistakes or wrongful acts of the company. This made other investors to lose faith
in the structure of a corporate (Tan, Wang & Hofmann, (2018). Salomon v Salomon is the
landmark case in which the corporate veil was lifted. The case goes like this, there was company
which was established by Mr. Salomon who was a shoemaker in England. It was started as a sole
proprietorship which was later converted into a company to make Salomon's sons as the
members (Anderson, (2012). After the business started as a company, wife of Salomon and his
children subscribed the shares by allotting them one share each. It was one of the requirements in
which companies were to required to have at least 7 shareholders. The corporate proceeded to
buy a leather business by the Salomon which was priced £39,000. The valuation was not values
fairly. After some time, when all the deals regarding the shares and debentures were completed,
the company became insolvent. On the occurrence of this, the creditors provided their contention
that there is no difference between the company and Salomon (Manesh, (2016).
This was a serious allegation that was put by the creditors as they felt cheated by being
infused to invest in a fraudulent company. In order to determine the actual person who

committed the offence, the corporate veil was lifted. To which it was found that company was
acting as an agent and a nominee of Salomon due to which he was held personally liable to
indemnify the creditors of the company. Furthermore, it was contended that company's trustee
was merely his shadow. Moreover, the appellate court rejected the rulings of the inferior courts
by providing, “the company is at law a different person altogether from the subscribers to the
MOA and although it may be that after incorporation the business is precisely the same as it was
before, and the same persons are managers and the same hands receive the profits, the company
is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members
liable, in any shape or form, except to the extent and in the manner provided by the Act.”
This judgement highlighted the importance and usage of the principle of separate legal
entity (Shah, (2014). In case the creditors transacted with the company, then the liability is of the
company and not the members. Similarly, one more case has happened in the past in which
corporate veil was lifted. In the case of The King v Portus; ex parte Federated Clerks Union of
Australia, the issues was about the status of the candidates employed in the company which was
owned by the Federal government of Australia. The court passed a judgement, “the company is a
distinct person from its shareholders. The shareholders are not liable to creditors for the debts of
the company. The shareholders do not own the property of the company.”
Separate legal personality is the characteristics of a corporate which is expressed in the
Corporations Act, 2001 (Lee, (2015). This provision makes a difference between the company
and its members. The actual question is whether this principle should always be recognised or
not. Many authors and legal experts have mentioned their view points in which they have
provided importance to this principle. The reasons could be major as well as minor. This
principle has some noticeable advantages by including which this principle should always be
recognised. It allows the company to keep the management and investment separate from each
other. It can help the companies to involve the public in the company by making them invest but
keeping them away from the management (Bainbridge, (2013). When a person invests in the
entity, that individual becomes the owner of the entity but this does not mean that the existence is
mixed with the existence of the shareholders. Apart from this, directors are also appointed for the
management of the entity who make transactions on its behalf.
In case of fraud or any wrongful acts, the shareholders cannot be held liable at the first
instance just because they are the owners of the entity. There has to be a detail investigation to

find out the actual person involved in and responsible for the default. The principle of corporate
veil is a creation of the separate legal entity only. Earlier, when the entity and its members were
treated as one, this has contributed to huge problems and make the general public lose their
confidence from the this business type. The distinction makes a professional environment within
the organization as professional managers are appointed who know that they have to work on
behalf of the company for making increased profit.
In addition to this, there is one more positive aspect of separate legal entity which allows
it to survive in the corporate world for a long time (Grantham, (2013). The key logic behind this
is that a company has perpetual succession which is when combined together with the principle
of distinct legal entity, states that it cannot be wound up on the incidents of the death, lunacy or
insolvency of the any of the members. In other words, it is not affected with the biological death
of the people who are key to the management. It can live forever unless and until the count pass
the orders to wind up the entity. Since, it is a creation of law and only legal provisions related to
corporates have the power to dissolve a body corporate.
The last advantage of this principle is that liability of the shareholders gets limited up to
the extent of the unpaid nominal amount on the shares held by them, in case the company is
limited by shares. However, if the entity is limited by guarantee, then liability is restricted to the
amount so defined in the MOA to be contributed at the time of company being wound up. This is
a major factor by relying which the shareholders invest in the body corporate as they do not want
have unlimited liability for the debts of the entity. This characteristic works as a shield to
safeguard the owners from using their personal liabilities for the repayment of the outstanding
financial liabilities (Garcia-Gallont & Kilpinen, (2015).
Every argument has negative side as well which should be considered for judging the
fact. Some of the demerits, that a company becomes an entity separate from its members as soon
as it is registered under the Corporations Act, 2001. However, it is a serious shortfall if the shares
are held by single person only. The other negative impact is that, the shareholders are not
included in the management of the entity which makes them demotivated. Being the owners of a
corporate, the shareholders have the wish to engaged themselves in the day to day activities. This
is not possible because of the members are kept separated from the company (Boggio, (2013).
The company does not involve them in the monitoring and controlling the commercial activities
of the entity. It is most important for them as they have invested their money to get a return.

In nutshell, it can be said that the feature of separate legal entity is useful in keeping the
debts of the company in the names, ownership and account of the corporate itself. It protects the
owners from paying the creditors the amount which have been taken by the company. In simple
terms, the shareholders are not directly liable for the payments of the creditors. This reduces the
risks which exist on with regard to the shareholders. Also, if a company is not making profit,
then also it can survive as there are variety of the revival options because only the company has
to be revamped and not all the shareholders (porate Veil in the Age of the LLC). Apart from this,
it helps the corporate to have a check on the fraud. This is possible because of the company is
kept different from the members. There is a clear distinction between the liabilities of the body
corporate and members and in no case, these cannot be combined.
There are various theory which are considered
Natural Entity Theory
Company is an artificial person created under any law, it does not take birth like a natural
person but comes into existence through law. They enjoys all the rights which are provided to
any natural person i.e.,they can enter in to any contract, can sue etc. Corporate has a separate
identity from its shareholder. The existence of any corporation depends upon the powers given
by the individuals i.e., promoters who has taken initiative to incorporate the organisation in the
documents to be prepared in the process of registration such as Memorandum of Association &
Article of Association. In addition to this, Directors of the company are appointed as per
requirement of law and charter of the company (Presser, (2013). The procedure to appoint
director are provided in the article of association and if not given then they are appointed by the
shareholders in general meeting. All the directors while vesting powers need to follow the rules
provided in companies act, article of association, memorandum or any other as decided in the
general meeting. The directors can work to the extend powers given to them, but in case of
invalid access of authority the Ultra Vires Principle is applicable i.e., for all the acts by the
director towards third party, company is responsible as they act as agent to company. The
emerging approach says that these powers and regulations so provided are procedural formalities
and significant changes makes it easy to comply with.
The entity theory of Corporate Citizenship

The core idea behind theory of corporate citizenship is that an entity is different from its
constituent elements and carries a separate responsibility towards the society. The demise of
ultra vires doctrine which was originally focused upon the protection of public have enforced the
rise of entity theory of corporate citizenship. This theory signifies the need for corporate social
responsibility in context of an organisation. Natural entity theory focuses on giving rights to a
business to operate freely and accumulate wealth, whereas this theory focuses on the obligations
of natural entities towards the societies (Marks, (2015). The theory of corporate citizenship takes
into consideration interest and welfare of constituencies without giving thought to personal
welfare and gains. But the major challenge which has been ascertained while evaluating
organisational policies is that they tend to decrease the profits which are being earned by an
organisation. It is very difficult for an organisation to justify a policy which works for the
welfare of constituencies inclusive of employees, customers, creditors and communities.
Whereas the shareholder's expect the policies to work for the purpose of wealth maximization
which is less relevant to this scenario. Corporate citizens while fulfilling their responsibility
towards the society tend to disregard the economic self-interest. The major solution which has
been presented to such dilemma is that Management of an entity should be awarded with right to
acts as a agent of corporate entity than they may be able to act against the shareholder's decisions
and fulfil responsibility towards the constituency.
Businesses and individuals that are knowingly breaking workplace laws, particularly
around the underpayment of vulnerable people such as immigrants, the disabled and the young,
are now firmly in the sights of the Fair Work Ombudsman and will be personally prosecuted.
The corporate veil will no longer protect people as individuals, even if the company has since
been dissolved (Peterson, (2017). Interestingly, it doesn’t matter how far down the chain the
individual may be. Even a third party, such as an external accounting firm, will be prosecuted if
they are found to have been a part of the contravention of the law. In a recent presentation to an
industry group, Natalie said tools have been made available by the government for the Fair Work
Ombudsman to hold people involved in breaches of workplace laws to account. There has never
been a better time, she said, for professionals such as accountants to ensure they are always
giving holistic and sound advice.
From the above report, it has been concluded that corporate veil is a feature which
differentiate the members from the existence of the company. There is always a division of the

liabilities which help the entity to focus on its own working without making any default as all the
people are aware about the punishment and penalties. There are situations in which this veil is
lifted to find out the real person who is responsible for the acts. Furthermore, theories are there
for assessing the characteristics of an entity to judge the impact of these.

REFERENCES
Books & Journals:
Macey, J., & Mitts, J. (2014). Finding order in the morass: The three real justifications for
piercing the corporate veil. Cornell L. Rev., 100, 99.
Wolfson, M., and et. al., (2014). Piercing the veil: Private corporations and the income of the
affluent. Mimeo. Available at https://uwaterloo.
ca/school-of-accounting-and-finance/sites/ca./school-of-accounting-and-finance/files/
uploads/files/wolfson-brooks-veall-_incomes_of_affluent. Pdf.
Hespe, K. (2013). Preserving Entity Shielding: How Corporations Should Respond to Reverse
Piercing of the Corporate Veil. J. Bus. & Sec. L., 14, 69.
Anderson, H. (2012). Challenging the Limited Liability of Parent Companies: A Reform Agenda
for Piercing the Corporate Veil. Australian Accounting Review, 22(2), 129-141.
Shah, S. K. (2014). Piercing the veil: The limits of brain death as a legal fiction. U. Mich. JL
Reform, 48, 301.
Bainbridge, S. M. (2013). Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of
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Grantham, R. (2013). The corporate veil: An ingenious device. U. Queensland LJ, 32, 311.
Garcia-Gallont, R., & Kilpinen, A. J. (2015). If the Veil Doesn't Fit... An Empirical Study of 30
Years of Piercing the Corporate Veil in the Age of the LLC. Wake Forest L. Rev., 50,
1229.
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Presser, S. B. (2013). Piercing the corporate veil.
Marks, C. P. (2015). Piercing the Fiduciary Veil. Lewis & Clark L. Rev., 19, 73.
Peterson, C. W. (2017). Piercing the corporate veil by tort creditors. J. Bus. & Tech. L., 13, 63.
Boggio, A. (2013). Linking Corporate Power to Corporate Structures: An Empirical
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Lee, P. W. (2015). The enigma of veil-piercing. International Company and Commercial Law
Review, 26(1), 28.
Manesh, M. (2016). The Case Against Fiduciary Entity Veil Piercing. Business Lawyer, 72.
Shmatenko, L. (2012). Piercing the Corporate Veil is Relative.
Parker, D. (2015). The Company in the 21 st Century: Piercing the veil: reconceptualising the
company under law. Journal of Business Systems, Governance & Ethics, 10(2).
Tan, C. H., Wang, J., & Hofmann, C. (2018). Piercing the Corporate Veil: Historical, Theoretical
and Comparative Perspectives.

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