Piercing the veil pertaining to corporate law denotes a situation in which courts dismiss the notion of limited liability and hold an organization’s shareholders and leaders personally liable for the actions or debts. Although there is a variation of the law between state legislation, there has been a generally accepted view against veil piercing and will only apply it in cases of severe misconduct by corporations. Limited liability is beneficial because it allows for the development of public markets for stocks, thus making the liquidity and diversification benefits possible for investors from such markets. Therefore, there is significant support for the argument in support of abolishing veil piercing as the practice’s emergence and raison d’être are highly contested. It exists as an exception to the general rule of limited liability as a way of preventing injustice. As a result of that, the application of veil piercing has been consistently fact-related and open-ended, which means that the rule is incoherent notoriously, with results being unpredictable.
Piercing the veil is a significantly contested and controversial issue because of the matters related to its emergence. In support of the argument that veil piercing should not have existed in the first place, Galeza (2020) mentioned that the origins of the doctrine were “unsound and without any foundation in law” (p. 296). Drawing from Salomon v Salomon & Co Ltd., a sound principle confirming the legal certainty of validly created companies. The principle left little room for interpretation, with the incorporation being given a distinct meaning to be used in the court of law. If incorporation conditions are met, a company is formed, with all relevant rights and liabilities; incorporation becomes a separate legal entity that is treated in court as such. However, to prevent the misuse of the corporate form, the definition of veil-piercing was developed.
The Prest v Petrodel Resources Ltd and Others case is the most notable for recognizing piercing the veil as Lord Sumption proposed the principles of concealment and evasion. Through classifying veil piercing as evasion, it was suggested that the cases of concealment were not truly veil-piercing. In addition, it was decided that the corporate veil could only be pierced in instances that had no available alternative solution. This meant that the notion of veil-piercing had been narrowed (Mujih, 2016). On the contrary, in the same judgment, Lord Walker disagreed with the formulation, stating that veil-piercing was not a doctrine but rather a label.
Walker’s argument in Prest was that piercing the corporate veil must not be considered a doctrine but rather approached as a label. Such a label describes “occasions in which some rule of law would produce apparent exceptions to the separate legal entity principle” (Kabour, 2019, p. 62). It must be a label because the notion of piercing the corporate veil does not exist as an independent doctrine and must operate, providing that there are statutory reasons and other pre-existing common law principles. Such cases as Jones v Lipman, Prest, and Stone & Rolls Ltd v Moore Stephens illustrated that veil-piercing is unnecessary and can be replaced by other legal matters helping resolve relevant issues. Moreover, it is possible to view the cases as being decided on the grounds of alternative common law while being put in the category of veil-piercing. This makes it possible to state that courts have never pierced corporate veils; rather, they refused to give full effect to the separate legal entity of a corporation on the basis of existing grounds of common law. In practice, it means that the idea of piercing the veil is used for describing court cases in which conventional legal principles were used, for example, the law of trust, used for disregarding the limited liability doctrine and the separate legal entity doctrine (Kiu & Shu, 2018). Overall, the practical application of a specific veil-piercing doctrine has yet to exist.
The attempts to save veil-piercing as a doctrine are indeed misplaced because they do not provide support for the view that it could be a coherent and the consistent rule of law to be applied in court. Under the veil-piercing label, there is no consensus as to the rules that courts should apply the common principles of law for imposing liability to an individual behind an organization. Before the Prest case, several court cases that claimed to have pierced the veil were, in fact, using the common principles of law (e.g., agency, trust law) to avoid using such doctrines as a separate legal entity or limited liability. For example, in Jones v Lipman, the ruling of the court can be reflected upon as an instance of the law of trust application under the veil-piercing veil. Besides, in the Gilford Motor case, tort law or the law of agency was applied for granting an injunction to the company. Because courts were seen applying the already existing common law principles under the veil-piercing principle, and since varied approaches were taken on a case-by-case basis, with no coherent notion being used when employing the label. Thus, as a doctrine, veil piercing should not exist because there are other coherent rules of law to which courts have adhered time and time again.
In a perfect scenario, the doctrine of piercing the veil must cease to exist in the court of law. The prior suggestions to save the doctrine and apply it to rare occasions do not have clear guidance, with the practice showing evidence of different principles being used as alternatives. Besides, even in case if the veil-piercing doctrine can only be used as a last resort, the inconsistencies in its application and the availability of alternative remedies. Specifically, even though Jones v Lipman and Gilford Motor were classified by Lord Sumption as the piercing of the veil, such a classification was inconsistent because of the existence of other ways of approaching the cases. Thus, the inconsistencies that regularly accompany the notion of veil-piercing make the proposition to use it as a last resort unnecessary and without significant support from evidence.
As a doctrine, the piercing of the veil cannot exist and should instead be considered a label in court if it cannot be abolished. It is not a coherent rule of law and cannot be applied in every case requiring the separate liability of an individual behind an organization. The existence of such common law principles as the law of trust makes veil-piercing redundant. Even though Prest attempted to make a clarification on the principles of veil-piercing, the ambiguity of the distinction and the liberal approach to lifting has only introduced more confusion, which is unnecessary in the court of law.
References
Galeza, D. (2020). Why piercing the veil should be the last resort. International Company and Commercial Law Review, 31(5), 296-303.
Kabour, R. (2019). Revisiting the inhibited doctrine of piercing the corporate veil in English company law. The King’s Student Law Review, 9(2), 59-73.
Kiu, K. T., & Shu, L. W. (2018). Piercing the corporate veil? A critical analysis on Prest v Petrodel Resources Ltd and others. Dundee Student Law Review, 5(3), 1-8.
Mujih, E. (2016). Piercing the corporate veil as a remedy of last resort after Prest v Petrodel Resources Ltd: Inching towards abolition? Company Lawyer, 37(2), 39-71.