Trends to Piercing the Corporate Veil Among Courts

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Abstract

The aim of forming a corporation is to protect owners from the liabilities and debts of their ventures. This ensures the growth of the business. However, we must establish whether courts will reach a point where they will take a separate business enterprise as a means of achieving an unfair advantage over creditors and other claimants. In addition, it seems courts also use different standards for different types of business entities. Such different trends can influence the future decisions of plaintiffs when piercing the veils of other corporations that can have crucial ramifications to shareholders. It is these trends that make this research focus on how courts will react when handling certain cases.

Research Questions/Objectives

This research proposal seeks to find out whether such rulings have set precedents for future actions to change approaches of corporate governance in the UK. The research shall also attempt to establish the effects of such decisions for shareholders who protect themselves behind the principle of the corporate veil. The research questions are as follows.

Current trends indicate that courts apply diverse procedures when handling different types of business entities. Do these decisions depend on the strengths of the corporations?
Is it likely that current rulings may influence future decisions on piercing the corporate veil and result in serious ramifications for most corporations?
Will we have a situation where courts will treat separate corporations as means that are unfair to creditors and other claimants?
Can the UK set standards for piercing the corporate veil?

There are limited works regarding the scope and shareholders’ rights in cases where corporate veil are likely to influence the outcomes of court redress. Thus, the significance of this research is to provide precedents for future studies and establish the need to review the existing corporate governance codes so as to define shareholders’ rights and liabilities. This research shall also demonstrate the effects of such rulings on shareholders and their future options.

Literature Review

Some controversial rulings in the recent past have provoked renewed interests in the courts’ roles and abilities to pierce the corporate veil. The known case of Salomon v A Salomon & Co Ltd is one of such rulings. The recent developments include conclusive rulings in cases of Antonio Gramsci Shipping Corp v Stepanovs (Gramsci) and decisions in the case of VTB Capital Plc v Nutritek International Corp (VTB Capital) of 2011 have rekindled new debates regarding the scope of piercing the corporate veil.¹

The UK is famous for its Corporate Governance Codes (the Code). It operates under the principle of “comply or explain”. This makes the Code flexible and applicable as most shareholders and corporations advocate it. In addition, other organisations have imitated the Code internationally. According to the Code, “corporate governance is the system by which board of directors direct and control companies”.² The main function of corporate governance is to enhance effective, entrepreneurial and prudent management that can result in the long-term success of the organisation. Consequently, the Code provides protections for corporations and their shareholders alike. However, there are exceptions especially with regard to personal liabilities of directors and shareholders.³ In some cases, courts may pierce the corporate veil of shareholders. Given the recent financial crisis and bankruptcy of corporations and stark rulings regarding shareholders’ personal liabilities, there is a need to reappraise the Code to a governance system that defines the scope of the corporate veil and shareholders’ rights.

The advantage of forming a corporation is that it stands as a separate entity. The owners and those who manage to enjoy limited personal liability. This means that shareholders are usually not liable for the company’s debts.⁴

When the attorney organising, the company fails to enlighten the business owners on the significance of upholding financial integrity and organisation official procedures, the shareholders stand a risk of becoming personally liable to enterprising who may fail to recognise the company as a separate legal entity.⁵ ⁶Piercing the corporate veil is a situation where the shareholders and the members of the corporation become personally responsible for the debts of the business entity.

Circumstances under which the can court lift the veil of incorporation under the UK Jurisdictions

Law courts ignore the rule of limited liability and pierce the corporate veil. This applies, so as members become liable for the company’s actions despite the fact limited liability rule exists and signifies the two as separate entities.⁷

In the English company law, courts drive at maintaining the protection of companies in keeping separate identity from its owners. Therefore, there are some factors that Anglo-Saxon reflects on before piercing the corporate veil. When courts, detect partnership between companies in a group, sham, facade or creation of a company with intentions of facilitating evasion of fiduciary requirements, they automatically disregard the separate personality of the company in question. ⁸

Fraud

English courts affirm fraud in cases whereby shareholders of a corporation create it for evasion of the legal or fiduciary requirements. This is exclusive when the intentions of the company’s creation are to refuse the creditors’ pre-established legal rights conditions.⁹ A similar case is that of Re Edelsten ex parte Donnelly. In this case, the court failed to ascertain the fraud of the owner of the company, who failed to take the responsibility regarding his creditors basing his decision on limited liability. This translates that the court could not rule out fraud as the creation of the company was not out of sham.

When creditors suffer unjust costs

The unfairness of the company under probe is an instance that directs the UK and other Anglo-Saxon courts to pierce the corporate veil. The plaintiff may seek the court’s intervention on the basis that it would result in justice and fairness.¹⁰

When there is a lack of clear distinction between the corporation and its owners

Some shareholders usually fail to create and hold different operations between their entities and their personal, financial matters. In this case, the court may rule that the business is a sham and does not exist. Thus, shareholders are taking the personal operation of the business.

Agency

In cases where companies operate as corporate groups, it is not clear of the parent entity. The corporate group seems to take advantage by hiding behind limited liabilities at the expense of their creditors. Piercing the corporate veil makes the corporate readily conform to responsibilities that come along with the advantages of limited liabilities.¹¹

Corporate groups

Anglo-Saxon courts pierce the corporate veil where partnership exists. In reference to Bluecorp Pty Ltd v ANZ Executors and Trustee Co Ltd (supra), instances that prompt Anglo-Saxon courts to pierce the corporate veil as Lord Justices stated are “inter-relationship of the corporate structure and the degree of their participation in shared enterprise with benefits reaped from steps initiated and plans executed”.¹²

Sham

Sham or a facade is a critical issue that would prompt the law courts to pierce the corporate veil. In this case, the real intentions behind the creation of the company are vague. In a nutshell, it is something that makes a false appearance.¹³

Effects of Piercing the Corporate Veil

When courts pierce the corporate veil, the shareholders become liable for the company’s debts. This means that the creditors are after the shareholders’ personal assets, homes, investments, bank accounts to alleviate the corporate debts.¹⁴

The recent decisions in the cases of Gramsci and VTB Capital show how the courts differ when it comes to piercing the corporate veil. Judges criticise their decisions regarding rulings of whether or not they should pierce the corporate veil. Many law scholars’ questions whether the courts have established cases of injustice and impropriety when piercing the veil of corporation.¹⁵

Methodology

The research intends to conduct doctrinal analysis of existing cases and rulings, and a thorough library in order to come up with valid conclusions and recommendations. The research shall rely on library sources, an academic journal based on the Web with both free and paid access.

Conclusion

Such controversial rulings indicate that the law of piercing the corporate veil is no longer effective and needs review. In addition, courts should give guidance and clarification regarding clear interpretation and consideration of the law regarding piercing the corporate veil. Thus, the timing of this research is appropriate in order to provide future guidelines.

Reference List

Bainbridge, SM, ‘Abolishing Veil Piercing’, J. Corp Journal of Corporate Law, vol. 26, 2001, p. 479.

Ball, BC, Jr., Miller, MS & Nelson, CS, The corporate veil. When is a subsidiary separate and different from its parent? Cornerstone Research Foundation, 1997, Web.

Blumberg, P, ‘The Corporate Entity in an Era of Multi-National Corporations’, Delaware Journal of Corporate Law, vol. 15, 1990, p. 324.

Cheong – Ann, P, Corporate Liability: A Study in Principles of Attribution, Kluwer Law International, London, 2001.

Dan-Cohen, M, Rights, Persons and Organisations: A Legal Theory for Bureaucratic Society, University of California Press- Berkeley, California, 1987.

Farrar, J, ‘Fraud, Fairness and Piercing the Corporate Veil’, Canadian Business Law Journal, vol. 16, 1990, p. 474.

Financial Reporting Council, The UK Corporate Governance Code, Financial Reporting Council, London, 2010.

Gower & Davies, Principles of Modern Company Law, 7^th edn, Sweet and Maxwell, London, 2003.

Grantham, R & Rickett, C, Corporate Personality in the 20th Century, Hartcourt, Oxford, 1998.

Hawke, N, Corporate Liability, Sweet and Maxwell, London, 2000.

Ian, RM & Noakes, DB, Piercing the Corporate Veil in Australia, Melbourne University Press, Melbourne, 2005.

Payne, J, ‘Lifting the Corporate Veil: A Reassessment of the Fraud Exception’, Cambridge Law Journal, 1997, p. 56.

Pugh, C, ‘United Kingdom: Piercing The Corporate Veil – Recent Developments’, Mondaq Corporate/Company Law, 2012.

Rogowski, G, Company Law in Modern Europe, Dartmouth Pub Co, Sudbury, MA, 1999.

Whincop, M, ‘Overcoming Corporate Law: Instrumentalism, Pragmatism and the Separate Legal Entity Concept’, Company and Securities Law Journal, vol. 15, 1997, p. 411.

Footnotes

1 C Pugh, ‘United Kingdom: Piercing The Corporate Veil – Recent Developments’, Mondaq Corporate/Company Law, 2012.
2 Financial Reporting Council, The UK Corporate Governance Code, Financial Reporting Council, London, 2010.
3 G Rogowski, Company Law in Modern Europe, Dartmouth Pub Co, Sudbury, MA, 1999.
4 Gower & Davies, Principles of Modern Company Law, 7^th edn, Sweet and Maxwell, London, 2003.
5N Hawke, Corporate Liability, Sweet and Maxwell, London, 2000.
6 M Dan-Cohen, Rights, Persons and Organisations: A Legal Theory for Bureaucratic Society, University of California Press- Berkeley, California, 1987.
7 J Payne, ‘Lifting the Corporate Veil: A Reassessment of the Fraud Exception’, Cambridge Law Journal, 1997, p. 56
8 SM Bainbridge, ‘Abolishing Veil Piercing’, J. Corp Journal of Corporate Law, vol. 26, 2001, p. 479.
9 J Farrar, ‘Fraud, Fairness and Piercing the Corporate Veil’, Canadian Business Law Journal, vol. 16, 1990, p. 474.
10 RM Ian & DB Noakes, Piercing the Corporate Veil in Australia, Melbourne University Press, Melbourne, 2005.
11 BC Ball, Jr., MS Miller & CS Nelson, The corporate veil. When is a subsidiary separate and different from its parent? Cornerstone Research Foundation, Web.
12P Blumberg, ‘The Corporate Entity in an Era of Multi-National Corporations’, Delaware Journal of Corporate Law, vol. 15, 1990, p. 324.
13 M Whincop, ‘Overcoming Corporate Law: Instrumentalism, Pragmatism and the Separate Legal Entity Concept’, Company and Securities Law Journal, vol. 15, 1997, p. 411.
14 R Grantham & C Rickett, Corporate Personality in the 20th Century, Hart, Oxford, 1998.
15 P, Cheong – Ann, Corporate Liability: A Study in Principles of Attribution, Kluwer Law International, London, 2001.