Piercing the Corporate Veil

Piercing the Corporate Veil

  • Submitted By: sujidap
  • Date Submitted: 03/17/2009 2:17 AM
  • Category: Book Reports
  • Words: 11708
  • Page: 47
  • Views: 1

CHAPTER 1: Introduction

Upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders. When a company acts, it does so in its own rights and not just as an alias for its controllers. Similarly, the shareholders are not liable for the company's debts beyond their initial capital investment, and have no proprietary interest in the property of the company. An incorporation of a company has thus become a popular choice among business owners and investors as it offers the advantages of the corporate form in terms of limited liability to its shareholders and directors.

If a company is sued or is unable to pay its debts, the creditors can ordinarily reach the company's assets and cannot reach the assets of shareholders. As such, the company is said to be like a protection against liability or a veil that shields its shareholders from corporate debts and other similar obligations.

However, the situation changes when the shareholders use the company to defraud creditors by shielding assets from them and also to achieve injustice or certain types of misconduct by a company e.g. money laundering, bribery and corruption, tax evasion self-dealing, market fraud and other illicit activities. As it is already realized that the corporate personality is frequently faced with risk of abuse, the courts have created equitable exceptions to the concept of limited liability. The courts have acknowledged that the corporate veil of a company may be pierced to deny shareholders the protection that limited liability normally provides.

"Piercing the corporate veil," which is now regularly applied by the courts in both common law and civil law jurisdictions, refers to the judicially imposed exception to the separate legal entity principle, whereby the courts disregard the separateness of the corporation and hold a shareholder responsible for the actions of the corporation as if it were the actions of...

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