Veil Piercing Research Articles

Can Veil Piercing Be Considered a Well-developed Doctrine?

Can Veil Piercing Be Considered a Well-developed Doctrine?

Developments in Singapore Company Law in 2021

Singapore’s common law-origin corporate law regime ranks highly on corporate law and governance indices and is administered in part by superior courts served by judges with significant commercial expertise. As part of the Singapore Academy of Law’s Annual Review of Cases, this Paper reviews decisions of the Singapore superior courts (comprising the High Court and the Court of Appeal) decided in 2020. The cases reviewed feature a wide range of issues with domestic and international significance, including private enforcement of directors’ duties, corporate attribution, corporate veil piercing and shareholder disputes. This Annual Review will be useful for academics and lawyers who wish to stay up to date on legal developments in a leading Asian, common law jurisdiction, and on the reception of landmark common law cases in a leading Anglo-Commonwealth jurisdiction.

The Failures of the Insolvency Provisions: A Road to Establishing the Pertinence of Veil Piercing?

This article explores the pertinence of ‘piercing’ for fraudulent trading. It considers the failures of the insolvency provisions and examines the failures through the lens of the evasion principle for piercing. The article argues that the piercing doctrine does not prove to be an effective remedy of last resort. Despite this, the article argues against the abolition of veil piercing, as this would leave the law in a state of vacuity and concludes by suggesting methods of reform that could improve the doctrine. Piercing the Corporate Veil, the Fraudulent Trading Provision, the Wrongful Trading Provision, the Insolvency Act 1986, Prest v. Petrodel Resources Ltd, Morphitis v. Bernasconi

Franking Credits: An Example of Formalistic Corporate Veil Piercing

Under the franking credit system of company tax in Australia shareholders can pierce the corporate veil and claim their corporation’s tax payments as prepayments for their own. Allowing shareholders to pierce the corporate veil in this way is based on the idea that a company, for tax purposes, ought to be treated like a partnership. In this paper, I discuss the fact that this inappropriately treats unalike entities alike. A large public company, for example, shares none of the features of a partnership, and so ought not to be treated like one. Treating all companies like partnerships, whether underneath the legal form of incorporation exists anything resembling a partnership or not, I call ‘formalistic veil piercing’. It involves focusing on the form and ignoring underlying social and commercial realities. I contrast the use of formalistic veil piercing under tax law with the use of the ‘formalistic separate entity principle’ in other legal contexts. The formalistic separate entity principle similarly ignores underlying social and commercial realities, though, instead of veil piercing, it applies the separate principle instead. These two formalisms, as I show, mean limited tax liability for the shareholders of large public companies, and limited tort liability for the parent companies of wholly owned subsidiaries. Because neither of these policy outcomes are desirable, I conclude that both formalisms ought to be rejected. This is the text of a talk given at the 2021 Tax Symposium: Critical Junctures/Critical Perspectives – A call for new voices in tax reform, hosted by Monash Law School

Piercing the corporate veil in various jurisdictions – Principled or unprincipled?

The principle of limited liability of a company has been uniformly adopted by developed countries. In order to ensure a fair balance, the courts agree on occasion to ‘pierce’ or ‘lift’ the corporate veil, which involves imposing liability on the mother company for actions of its subsidiary or individual shareholders, directors, and other involved persons for actions of the company. In this regard, there have been several studies arguing the legal issues associated with the limited liability of a company and piercing the corporate veil such as Schall (2016) and Michoud (2019). This paper compares current veil-piercing practices in three jurisdictions: the UK, the US, and Australia in order to outline the advantages and limitations of the approaches taken by the courts in each country as well as to identify best practices in terms of veil piercing. For that purpose, an analytical approach to the examination of the relevant legal rules, principles, and court cases has been adopted in undertaking the present paper. The paper comes up with a number of specific suggestions and recommendations for improving the regulatory role in regard to the subject of piercing of the corporate veil.

The Essential Roles of Agency Law

This Article suggests a fundamental shift in how we think about agency. The essential function of agency law lies not only in enabling the delegation of authority, as is widely suggested, but as significantly in its effect on creditors’ rights through asset partitioning. There is an increasing temptation in legal scholarship to treat agency law as a sideshow confined to the first day of corporations class. This is because much of what agency law does in commerce could simply be accomplished through standard-form contracts that provide default terms for the relationships among firms, their managers, and third parties. Even agency’s much-vaunted fiduciary duties can easily be altered or waived by contract—and often are. This Article identifies the essential roles of agency law, which parties could not contractually replicate, and the important efficiencies that flow from them. Agency’s essential roles in commercial enterprise are twofold: first, to permit one person to attribute the legal significance of his or her acts to another, and second, to facilitate asset partitioning. Just as limited liability partitions off the assets of a firm’s owners from the assets of the firm itself, agency law partitions off the assets of a firm’s managers from the firm’s own assets. Recognizing this function reframes the usual staging of contractual disputes in agency as a zero-sum balancing act between the interests of third parties and of principals. Whether owners or managers should be liable for a firm’s unpaid contracts is not just a win-lose distributional question—pitting the firm’s creditors against insiders—but rather can be socially efficient. Through simplifying and specializing asset pools, asset partitioning lowers the cost of monitoring the firm’s assets and thus the cost of credit. To illustrate the asset partitioning role of agency law, I unearth two doctrines ignored by scholarship—the “veil piercing” doctrines of agency. Understanding agency’s asset partitioning role has extensive implications for theory and practice. In addition to providing a unifying account of agency law, the analysis resolves current disputes in the interpretation of its doctrine. Most importantly, recognizing the essential roles of agency demonstrates its ongoing significance to commercial and corporate law.

Centros and Defensive Regulatory Competition: Some Thoughts and a Glimpse at the Data

This paper looks at the phenomenon of “defensive regulatory competition” in European corporate law following Centros, Uberseering and Inspire Art. In order to retain control over the corporate governing private limited entities operating within their territories and to prevent the proliferation of “foreign limited” formations, Member States have modified some of the features of their laws that company founders considers most unattractive, such as minimum capital and time-consuming incorporation procedures. The first part of the paper analyzes the market for the law governing privately held firms, drawing from the debate in the United States. The US and Europe differ in that regulatory competition, as far as substantive law is concerned, focuses mainly on ex post mechanisms such as directors’ duties and veil piercing. By contrast, European competition seems to be driven by ex ante issues relating to firm formation, such as minimum capital. The second part of the paper draws from an ongoing empirical research project that attempts to explore the effects of regulatory competition and uses reforms in Germany and Belgium as examples. Regression analysis suggests that at least the German 2008 reform had a minor effect on the number of UK private limited companies being set up to do business in Germany.

Centros and Defensive Regulatory Competition: Some Thoughts and a Glimpse at the Data

This article looks at the phenomenon of ‘defensive regulatory competition’ in European corporate law following Centros, Überseering and Inspire Art. In order to retain control over the corporate governing private limited entities operating within their territories and to prevent the proliferation of ‘foreign limited’ formations, Member States have modified some of the features of their laws that company founders consider to be the most unattractive, such as minimum capital and time-consuming incorporation procedures. The first part of the article analyzes the market for the law governing privately held firms, drawing from the debate in the United States. The US and Europe differ in that regulatory competition, as far as substantive law is concerned, focuses mainly on ex post mechanisms such as directors’ duties and veil piercing. By contrast, European competition seems to be driven by ex ante issues relating to firm formation, such as minimum capital. The second part of the article draws on an ongoing empirical research project that attempts to explore the effects of regulatory competition and uses reforms in Germany and Belgium as examples. Regression analysis suggests that at least the German 2008 reform had a minor effect on the number of UK private limited companies being set up to do business in Germany.

Veil Piercing and the Untapped Power of State Courts

The Supreme Court in recent years has embraced an antimajoritarian trend toward providing constitutional protections for the elite who own or control corporations. This trend is especially troubling as it threatens to undermine the balance found in state corporate law between private ordering for internal corporate matters and government regulation to police the negative externalities of the corporate form. The Court’s interventions also have the potential to leave vulnerable groups without the protection of religiously-neutral laws designed to prevent discrimination, protect workers, or provide essential services such as health care. While the Supreme Court has not yet explicitly preempted what has traditionally been the province of states, the Court has relied, both implicitly and explicitly, on its own controversial definitions of state law as the foundation on which to create speech rights for corporations and religious rights for corporate owners. Absent explicit federal preemption, states can and should fight back against this creeping federalization of state corporate law. This Article provides a roadmap. It suggests modest changes to the veil piercing doctrine that can help to restore, at least in part, the balance of power between states and their corporate creations. A state court signaling to business owners even a potential for piercing, and thus the potential for unlimited personal liability, could discourage corporations doing business in the state from seeking religious exemptions to neutrally applicable laws. Most importantly, these changes do not threaten to undermine the corporate control mechanisms that have allowed for efficient private ordering within corporations, nor will they allow corporations to avoid these third-party protections by reincorporating in a different state. Forcing the federal courts to confront state assertions of their right to limit and define corporations will, at the very least, require the Supreme Court to be transparent about the extent to which it intends to federalize state corporate law, advancing rule of law values like certainty and predictability that are important to individuals and corporations alike.

Entity Versus Enterprise: Dealing with Insolvency of Corporate Groups

Business is being increasingly viewed on an enterprise basis; accounting standards and securities regulators view the business on a “group” basis. However, corporate laws remain anchored to separation of legal entity; this is largely the case of insolvency laws too. However, given the primary object of insolvency laws to rescue an entity, an entity-focused approach mostly may fail to do justice to the needs of an ailing enterprise, where resources, operations and assets may be scattered across entities. In liquidation too, where the intent is to liquidate assets, if the assets are entangled across entities and jurisdictions, no meaningful liquidation may be achieved. While the approaches to achieving group-focused insolvency resolution or liquidation may be many, there are essentially two major ones – procedural consolidation, and substantive consolidation. Procedural consolidation is where the proceedings of insolvency of different entities are coordinated, even if before different judicial or adjudicating authorities. This has successfully been done in several major insolvencies involving cross-border entities, such as BCCI, Maxwell, Lehman and Madoff. Substantive consolidation disregards the separation of entities and pools the assets and liabilities of various entities into a common hotchpot. This extreme remedy is rarely used, even though UNCITRAL has been aggressively working on developing the principles for the same. Basically, substantive consolidation is ordered by courts where pooling of assets and liabilities is to larger benefit of different creditors, and generally not prejudicial to any. Mostly, this is done under circumstances similar to those inviting “lifting or piercing the corporate veil”, even substantive consolidation is different from veil lifting or piercing. Judicial comfort to substantively consolidate entities has been oscillating over time, though the ruling in Owens Corning seems to be a significant milestone. In India, even though there are no precedents to substantive consolidation under winding up proceedings, there have been several rulings of courts where lifting/piercing of veil has been done. This is mostly done in cases where there is abuse of corporate personality. Thus, explicit provisions in sec. 36 (4) (d) of the Code, whereby the assets of an Indian or foreign subsidiary are not to be treated as a part of liquidation estate, may not been as doing damage to the essential principle of disregarding corporate personality, where the personality itself is not real.

Duties Owed to Creditors in China.

It is true that the development of business law in China is gradually catching the eyes of international investors, practitioners, and academics and government officials who are China observers. The corporate structure is the “veil” that provides protection and if that veil is pierced, there is no more protection. Thus, one of the primary benefits of creating a corporate entity is to limit the liability of the shareholders. However, under certain circumstances, the corporate entity may be overlooked. This is also known as piercing the corporate veil and is the most frequent method for holding the shareholders liable for the acts of a corporation. The Chinese doctrine emphasizes the intention to prevent the malicious evasion by shareholders of the debts of the company, it is open to debate whether or not there may be any other instances where the shareholders’ breaching of the general principle of good-faith would lead to a Chinese court piercing the corporate veil of a company to hold its shareholders liable. Furthermore, it might be difficult for a creditor to bring sufficient evidence to demonstrate a claim that the shareholders’ liability should extend beyond its capital contribution, as most information relating to a Chinese company is not disclosed to the public. As in common law jurisdictions, the doctrine of piercing the corporate veil in China will be mainly a creature of case law, not legislation, so its achievement will necessarily change over time. It is expected and in our view required that further judicial interpretations will be issued to elucidate the circumstances in which the corporate veil will be pierced so as to perfect the doctrine. The main problem is the absence of clear-cut rules to establish the standard for invoking the veil-piercing doctrine. In particular, it is unclear what factors the court will consider determining whether the corporate personality and shareholders’ limited liability have been harmed. The United States courts have produced a long list of factors that point toward veil piercing in a series of cases. It is far from being clear, what are the significant factors that the court will consider in any veil-piercing case, as the law has almost no mention the factors. Thus, it may be concluded that, in normal circumstances where the company is financially stable, the primary duty of directors under the Chinese Companies law is to promote the success of the company with orientation to the interests of its shareholders as a whole and having regard to various specified factors but, when a company is insolvent or in financial distress, the directors discharge their duties by reference to the best interests of the creditors of the company. It may not always be obviously known as to when a company is in the “zone of insolvency” or “near insolvency” or “on the verge of insolvency”. There are no tests or rules laid down defining these terms. These terms remain indefinable and it may therefore be difficult for directors to know when exactly their duties to creditors start at the Chinese civil law. This has been an issue in all jurisdictions under my study. In the US, England as well as Canada; there are no criteria that could determine that a company is in the zone that these terms represent. In fact, the SCC in a recent decision has in general rejected such terms because in its opinion it is incapable of any definition and of no legal meaning. The Section 214 lays down a test to determine insolvent liquidation but arguably by the time a company is insolvent it has already passed through this “zone of insolvency” for which it seems that there are no tests and this affects creditors directly.

Group Company Liability

According to a universal bedrock principle of corporate law, corporations have separate legal personality and limited liability. These principles apply equally to corporate groups. Accordingly, a parent company is normally not liable for legal infractions and unpaid debts of its subsidiaries. In relation to torts and other misconduct committed by corporations, however, the bedrock principles of corporate law are increasingly subject to criticism, in particular where such claims cannot be brought by tort victims due to undercapitalization of subsidiaries, among other problems. While the doctrine of veil piercing may allow for relief in certain scenarios, this practice has fallen out of favour with many courts and the legal requirements for doing so have become increasingly strict. Thus, courts have developed new approaches to holding parent companies liable such as holding the parent directly liable. In view of these significant shifts, this article examines the law and policy considerations governing parent company and—more broadly—group liability. It argues that reform is necessary, which may be found in a model that involves combinations of voting equity ownership-based enterprise liability concepts with modified vicarious liability for corporations.

Piercing the Corporate Veil: Historical, Theoretical and Comparative Perspectives

The concept of a company as a separate entity from its shareholders is well known and recognized in many common law and civil law jurisdictions. Generally, it is regarded as a fundamental aspect of corporate law and for this reason courts are loath to depart from it. Nevertheless, the principle of separate personality is not absolute and in both common law and civil law countries the courts have the power to depart from it. Where this occurs, it is often said that the courts “pierce” or “lift” the corporate veil. This will usually, but not inevitably, lead to liability being imposed on another person, perhaps in addition to the corporate vehicle. This paper aims to compare and critically examine the circumstances under which veil piercing takes place against the objectives of incorporation. The countries examined are England, Singapore and the United States (US) which are common law jurisdictions, as well as the civil law countries of China and Germany. The main purpose of this comparison is to offer a reasonably comprehensive and thorough examination of how the principle of veil piercing, which has been formally adopted either through case law or legislation, is doctrinally applied by the courts in these jurisdictions. The functional method in comparative law is inevitably employed in this paper, but we also consider other aspects. It will be seen that there are many parallels between the countries being compared, whether common law or civil law, in part because the historical circumstances leading to the rise of corporate personality were very similar, and also because the corporations laws in Asian countries referred to in this paper are legal transplants. The paper argues that in almost all the jurisdictions examined, some cases of veil piercing ought not to have been decided as such because doing so gives rise to suboptimal outcomes. Instead other legal tools should have been used particularly those in the law of torts. We believe this paper fills a gap in the literature of comparative corporate law as the doctrine of veil piercing has been frequently misapplied and there is also a paucity of academic commentary in this area.

Reverse-Piercing of the Corporate Veil in Canada

In the most common type of veil piercing, the plaintiff is trying to make a shareholder liable for the debts of the corporation. It is less well recognized that there is a second type of claim that has sometimes been referred to in Canadian courts as piercing the corporate veil, where the claim is not to make a shareholder responsible for the debts of the corporation, but the reverse. The plaintiff states that the defendant is the beneficial owner of assets in a corporation. The court is asked to disregard the separate corporate personality and use the corporation’s assets to pay the defendant’s debt. This is widely recognized as a separate category and referred to as “reverse piercing” in the United States. There are good legal grounds for allowing such a claim in certain circumstances. It could be justified either because the corporation holds the property in trust, or because the failure to pay the debt is oppressive. In the latter case, the court has discretion under the Business Corporations Act to craft whatever order is necessary to create an equitable remedy. In Yaiguaje v. Chevron Corporation, the majority of the Ontario Court of Appeal did not appreciate the variety of usages of piercing the veil. The dissenting judge correctly noted that the precedents relied on by the majority were “decisions respecting liability, not judgment enforcement decisions.” It stands to reason that the hurdle for reverse piercing should be lower than in the more common claims that seek to circumvent shareholder immunity.

Asset Partitioning, Limited Liability and Veil Piercing: Review Essay on Bainbridge/Henderson, Limited Liability

One of the core features of modern corporate law is affirmative and defensive partitioning of the corporation’s assets and the shareholders’ (private) assets. Defensive asset partitioning contains the rule of limited liability. What makes it special is that it may not be created by contract—or only under severe restrictions. Courts in many jurisdictions curtail this rule by doctrines such as ‘piercing the corporate veil’, exposing shareholders to a creditor’s claim and therefore to personal liability for the corporation’s debts. The circumstances giving cause to such measures are not clear, however. Additionally, in historical perspective, combining business entities with defensive asset partitioning is not a self-evident maneuver; even modern scholars challenge the idea of limiting liability in general, at least vis-a-vis tort creditors. Stephen Bainbridge and M. Todd Henderson thus take up an important and timely topic with their book on limited liability and veil piercing. Considering the wide variety of aspects they discuss, their book provides a welcome chance not just to write a short review, but to take up some general issues of asset partitioning and veil piercing. After providing a historical perspective on limited liability the review essay turns to its relationship with incorporation. It then deals with the question why limited liability should be accepted at all, thus preparing the stage for a look at alternative approaches.

Piercing the Corporate Veil - Should English Law Go Dutch?

English law is known for its robust approach to the issue of veil piercing. As such, it does not allow creditors to hold shareholders liable for company debts. This means that in the absence of contractual guarantees, shareholders are generally able to escape liability for failure within their company. On the other hand, the Dutch legal system allows creditors to seek recourse against shareholders by way of circumventing the separate legal personality of corporations through the operation of tort. In the Netherlands, the so-called 'indirect veil piercing' according to which shareholders can be held liable on the basis of tort, is deeply embedded in the legal system. This paper analyses some recent major developments in English tort law and concludes that a shift towards a more flexible, tort-law based approach to corporate veil piercing would be a much welcomed development leading to greater creditor protection.

Statutory discretion or common law power? Some reflections on “veil piercing” and the consideration of (the value of) trust assets in dividing matrimonial property at divorce – Part Two

Although it is an entrenched principle of company law that the abuse of corporate personality may require the “corporate veil” of a company to be “pierced”, this possibility has only recently become a feature of South African trust law. While this is a salutary development in theory, the application and practical usefulness of this remedy remain shrouded in uncertainty. A particularly acute manifestation hereof arises where it is argued that (the value of) trust property should be considered for the purposes of dividing matrimonial property at divorce. By drawing on the established principles of “piercing” in the company context and analysing relevant case law, Part One of this article (that appeared in the December 2016 issue of this journal) concluded that the prevailing position in respect of trusts neither accords with the principles of proper trust administration nor gives effect to the legal obligations imposed on divorcing spouses by matrimonial property law. More specifically, it was argued that, while piercing the trust veil is a power that is derived from common law (as opposed to legislation), the actual exercising of this power in a divorce context is dependent on a nexus provided by the matrimonial property regime in question. From this platform, Part Two of the article provides perspectives on how the property of an abused trust should be dealt with in divorces involving the three major matrimonial property regimes that are recognised by South African family law. Potential litigation based on these contentions should contribute towards rectifying the unsatisfactory legal position that prevails.

Piercing of the corporate veil for evasion of tort obligations

This article analyses the common law doctrine of piercing of the corporate veil in the context of tort liabilities of a company. It is generally accepted that the veil piercing doctrine can be applied where a company is used to evade existing legal obligations but not where a company is used to avoid future legal obligations. In the tort context, the prevailing view is that it is permissible to establish a company to carry on activities to enable the controllers of the company to escape personal tort liabilities arising from the activities. However, it is argued in this article that such a situation potentially involves the use (misuse) of a company to evade existing tort obligations and that there is greater scope than traditionally understood for piercing of the corporate veil to impose a company’s tort liabilities on its controllers.

Statutory discretion or common law power? Some reflections on “veil piercing” and the consideration of (the value of) trust assets in dividing matrimonial property at divorce – Part One

Although it is an entrenched principle of company law that the abuse of corporate personality may require the “corporate veil” of a company to be “pierced”, this possibility has only recently become a feature of South African trust law. While this is a salutary development in theory, the application and practical usefulness of this remedy remain shrouded in uncertainty. A particularly acute manifestation hereof arises where it is argued that (the value of) trust property should be considered for the purposes of dividing matrimonial property at divorce. By drawing on the established principles of “piercing” in the company context and analysing relevant case law, Part One of this article concludes that the prevailing position in respect of trusts neither accords with the principles of proper trust administration nor gives effect to the legal obligations imposed on divorcing spouses by matrimonial property law. More specifically, it is argued that, while piercing the trust veil is a power that is derived from common law (as opposed to legislation), the actual exercising of this power in a divorce context is dependent on a nexus provided by the matrimonial property regime in question. From this platform, Part Two of this article will provide perspectives on how the property of an abused trust should be dealt with in divorces involving the three major matrimonial property regimes that are recognised by South African family law. In addition, it will be argued that potential litigation based on these contentions should contribute towards rectifying the unsatisfactory legal position that prevails.

Grouping Liabilityy and the Salomon Principle: Judiciall or Systemicc Abuse?

Nowadays, the group-structured organisation symbolises the efficient modern business actor, which features the fragmenting of an enterprise into smaller incorporated units to perform particular functions. Given the systemic importance of modern corporations, 'LL' and 'SCP' are said to be the desirable foundation for an enabling company law and the cornerstone of entrepreneurial liability, enhancing investment, trade and wealth creation. Nevertheless, the vexing issue of group liability has long troubled debates of the Salomon v. Salomon principle. It could be fairly said that in the group context, both 'LL' and 'SCP', have been much more exposed to the judicial discretion on piercing the veil and have raised fierce debates on the appropriateness of the 'SCP' per se in 'grouping companies' or the appropriateness, if ever, of piercing the veil. Indeed, the application of LL and SCP in the group context is undoubtedly valuable and should be impervious to close. Nevertheless, as this work will illustrate, through a close examination to the 'group' case law, 'SCP' and the circumstances of 'veil piercing' should be imminently embraced by another framework, that be a parental liability presumption as an exception under statute. Support for that will be sought on the current state of law governing the 'veil piercing' in the group context, which has led to a vicious circle where any judicial decision to expand or limit the ‘veil piercing’, only jeopardises and downgrade Salomon's importance. On the one hand, a strict adherence to the SCP- and, thus, LL- virtually limits the 'veil piercing' but, at the same time, exposes the 'SCP' to severer violation from the commercial practice which will render Salomon, not merely an ordinary case, but the primary authority, the Trojan horse, for facilitating fraud or hazardous practices. This implication will be further referred as 'systemic abuse'. On the other hand, a loose observation to the Salomon principles in order to ensure that the group structure is not abused, clearly weakens the SCP principle's importance and renders commercial convenience merely infeasible. This implication will be further referred as 'judicial abuse'.