Description of the legal term Piercing the Corporate Veil:
Piercing the corporate veil is a legal concept in British law that allows a court to disregard the separate legal personality of a company in order to hold its directors or shareholders personally liable for the company’s actions or debts. This concept is deeply rooted in the principle of separate legal personality established in the landmark case of Salomon v. A. Salomon & Co. Ltd [1897] AC 22, where the House of Lords confirmed that a company is a separate legal entity to its shareholders.
However, the doctrine of piercing the corporate veil stands as an exception to this rule and can be invoked in certain circumstances where the company is found to be a façade concealing the true facts, or there is an element of impropriety. The separate legal personality may be disregarded if it is used as a device or sham to conceal wrongdoing or to evade a legal duty. The intention behind this is to prevent individuals from abusing the corporate structure for fraudulent, dishonest, or improper purposes.
There are two main situations where English courts have been willing to pierce the corporate veil. The first is concealment, where the veil is pierced to reveal the true facts that have been hidden by the corporate façade. The second is evasion, where the court will disregard the corporate veil because the company was involved in an action to evade an existing obligation by its controllers.
It is crucial to note that the courts approach this doctrine with caution and will do so only in very clear circumstances where all other legal principles cannot apply. The burden of proof is on the person seeking to pierce the veil, and they must demonstrate compelling reasons.
The concept is controversial as it undermines the certainty of the separate legal entity concept, but it is justified by the interests of justice.
Legal context in which the term Piercing the Corporate Veil may be used:
One illustrative case of this concept in action is Prest v Petrodel Resources Ltd [2013] UKSC 34. In this case, the Supreme Court faced the issue in the context of a divorce settlement. The court had to decide whether properties that were legally owned by the companies controlled by the husband could be transferred to the wife as part of the matrimonial assets. The Supreme Court cautiously pierced the corporate veil to conclude that the properties were held in trust by the husband’s companies for his benefit. The court noted that merely owning the company was not enough to justify this step; instead, the company had to be used in a manner intended to evade legal obligations, in this case, the obligation to provide for one’s spouse upon divorce.
Another pertinent example is the case of Jones v Lipman [1962] 1 WLR 832. In this case, a man contracted to sell land but then sought to avoid the sale by transferring the property to a company he controlled. When the buyer pursued specific performance of the contract, the court pierced the corporate veil to sidestep the separate legal personality of the company, concluding that the company was merely a façade and was created as an instrument of fraud to evade the seller’s obligation to complete the sale.
Understanding the concept of piercing the corporate veil is paramount in British law as it ensures that the corporate structure cannot be misused as a tool to perpetrate fraud, evade legal duties, or mask improper conduct. It safeguards the application of justice and maintains the balance between upholding the sanctity of the corporate form and preventing its abuse.
