The Case Against “Outsider Reverse” Veil Piercing

Abstract

For many years, jurists have struggled to rationalise the common law rules which prescribe the circumstances in which it is justifiable to eschew the principle of separate legal personality which posits that a company is distinct from its members and managers. The premise of this paper is that in a group of cases where the piercing the veil doctrine has been applied it has served to set aside the entity shielding feature of organisational law in order to permit the personal or business creditors of the owners (or beneficial owners) or directors of a registered company to seize the assets of the company in priority to the company's creditors where such owners (or beneficial owners) are not insolvent (“outsider reverse veil piercing”). It is argued that when the veil piercing doctrine is applied in this way the effect it has of removing entity shielding is peculiar to registered companies. Compared with the legal position in relation to a particular incarnation of the Scottish and English partnerships, the Scottish legal institution of joint property and the English law and Scots law trusts, the operation of the veil piercing doctrine in this manner places the registered company at a competitive disadvantage and the creditors of the company in a prejudicial position in comparison with the creditors of the partnership, joint property or trust estate. The conclusion drawn is that the application of the doctrine should be confined within more limited bounds whereby it is disempowered from functioning as a means of removing the entity shielding function of corporate law.