Piercing The Corporate Veil: Exploring The Effectiveness Of The Legal System And Courts In Its Application Essay.

The Confusion around Piercing the Corporate Veil

Company law is confused by the piercing of the corporate veil doctrine. Because of the lack of clarity in this area of law, this argument has arisen. The courts should really have gone beyond the specific circumstances of a case because the vast number of cases that deal with this doctrine's goal. In contrast, many academics have attempted to explain the extent and the reasons why the piercing of the corporate veil theory plays an essential role in the area of company law, concentrating primarily on two types of firms, such as Limited Liability Company (LLC) and Joint Stock Companies.

Firm law in the United Kingdom refers to the premise that the rights and obligations of a corporation are, in general, the responsibility of that company only. As a general rule, shareholders, directors, and employees of a corporation are not bound by the rights and responsibilities of the business unless they have openly or tacitly acknowledged responsibility, guaranteed, or indemnified the corporation. When it comes to corporations, the "veil of separation" between both the legal entity and its real-world shareholders has usually been referred to as a metaphor.

This "lifting" of a company's veil, which allows its owners to be held responsible for its debts or profit from its rights in a very restricted number of circumstances, is permitted by the courts in the United Kingdom. It usually only occurs when there has been misconduct on the part of the individuals or person in power. When a corporation goes bankrupt, unpaid creditors will seek to collect their money if they can establish misconduct by the persons in charge, which is why this matters most often.

By holding shareholders liable, a common law theory known as "piercing of the corporate veil" makes an exception to the usual norm that limits the responsibility of shareholders to creditors. It is therefore possible to lose all of the advantages of an LLC or a JSC, which in general have only one risk: failing to safeguard the shareholders' capital if bankruptcy procedures are brought against the firm. When a corporation is unable to meet the creditor's demand, the creditor will decide that it is in their best interest to seek the payment from other parties, such as the shareholders, which are typically their primary target. Creditors would resort to legal action in such a scenario.

The legal distinction between a corporation and its shareholders was established in the landmark House of Lords judgment Salomon v A Salomon and Co Ltd. "Like any other autonomous person with its rights and duties suitable to itself," Lord Halsbury LC stated.

When a judge decides to breach the corporate veil under common law, shareholders and directors lose their protection. To put it another way, this shifts the attention away from the firm itself to the content of the company or the company's controllers. As a result, personal accountability for the company's debts and obligations is transferred to the shareholders or directors. The notion of penetrating the corporate veil is common law. The research is relevant from the perspective of identifying the potential and effectiveness of the principle of piercing the corporate veil and the effectiveness of legal system and courts at the time of application of the law.

Firm Law and the Veil of Separation

The research aims at exploring the effectiveness of piercing the corporate veil and the effectiveness of legal system and the law in applying the doctrine when required.

• To evaluate the efficiency of piercing the corporate veil
• To understand the principle of lifting up the corporate veil
• To know the effectiveness of the law in piercing the corporate veil when necessary

1. How effective is the doctrine of Piercing the Corporate Veil?
2. what is lifting up the corporate veil?
3. How effective the law is in piercing the corporate veil when necessary?

According to Baron Thurlow, The fundamental tenet of corporate law is that a corporation is a distinct legal entity. As a result, a corporation exists legally apart from its owners. A corporation is a legal entity. It is impossible for a company to be moral when it lacks a soul to curse and no body to kick. As a result, a juristic person cannot perform human-like functions, distinguishing them from ordinary beings. For many years, courts in the United States and abroad have debated the idea. This idea has been around for a long time, but no set of rules has arisen to clearly define how it should be used. According to Cape Pacific, the law of breaching the corporation veil is "far from decided." This means that it is impossible to forecast when courts would dismiss a company's independent legal existence.

"A corporation has a separate legal existence, totally different from its members," Lord Macnaghten stated while discussing the Salomon case. An important South African case, Dadoo Ltd v Krugersdorp Municipal Council (hence 'Dadoo,') put this theory into practice. In this instance, the South African Republic's Law 3 of 1885 stated that only white people were allowed to possess land. Two Indians, on the other hand, created a business named Dadoo Ltd, in which they owned 100% of the stock. Dadoo leased a Krugersdorp stand from the corporation in his own capacity. Law 3 of 1885 was violated, and the town council requested a restraining order to prevent Dadoo Ltd. from acquiring the land. The court of appeals ruled that a corporation is distinct from the individuals who make it up in terms of its legal existence. As a result, Dadoo Ltd. was given ownership of the property.

Different authors and judges use different ways to explain the "lifting of the corporate veil." Jurists use different ways to explain the term. Some use a narrow point of view, while others use a wider or more flexible point of view to explain it. According to this definition, lifting the corporate veil is ignoring or disregarding the corporate veil in order to find out whose shareholders are responsible for any wrongdoing on behalf of the business. As you can see, the more broad definition here is that "where a court looks at what is happening inside the company entity in order to decide about its owners and controllers, rather than just assuming that they're separate from each other." Pierce the corporate veil, McKay J said, is not a principle. It's how the court gets to know who is working behind a company by taking the cover off of it. Lifting a company's corporate veil is an exception to the rule of keeping a company's separate legal personality after it's formed, so this should be made clear again.

Now, it's important to say why it's important to lift the corporate veil, because there's a lot of debate about how important it is. For some, a danger to limited liability and the corporate personality is a real possibility if theory of removing the corporate veil is accepted as true. For example, Philip I Blumberg has said that a judge's decision to lift the corporate veil is "irreconcilable and not entirely clear."

When the Veil is Lifted

There are a lot of reasons why the corporate veil is going to be ripped off. Many directors, shareholders, and other people who are in charge of the company abuse their power because they have the power of corporate personality. To stop this kind of abuse, the doctrine of lifting the corporate veil is a good thing. When the corporate veil is being exploited as a cover for fraud or other crime, it is critical that it be lifted immediately. Lifting the corporate veil is important to stop the corporation from being used as a cover or defence for fraud or other illegal or unethical behaviour. This is what the statement means. Courts are often willing to cut through the veil of a company's separate personality if it is used to hide wrongdoing or avoid obligations. This is called a "sham" or "cloak."

The restricted definition of the term "lifting corporate veil" generates the impression that this will unquestionably be detrimental to the interests of shareholders and investors. That's not always true. In fact, It is not always damaging to the corporation or its shareholders to reveal information. It can be beneficial to them at times as well. During reverse piercing, things like this happen. When shareholders or the company itself try to get through a corporate veil that separates them from the company, this is called a "reverse pierce of the corporate veil." In some cases, reverse piercing is advantageous to the entire community.

According to some, the Companies Acts of the United Kingdom have never been comprehensive codes since there have always been significant ambiguities in this field of law, which is supported by the evidence. However, in order to cope with the unfair reality that emerges as a result of the corporate structure, it was in fact the courts that devised the notion of "through the corporate veil," not the legislators, as has been represented. The opinions on whether or not the veil should be penetrated are inconsistent, which is why this concept has been described as "rich but ambiguous body of case law."

By piercing the corporate veil, creditors can seize the personal assets of shareholders as collateral for the repayment of a company's obligations. Allows either parent companies to be held accountable for their subsidiaries or for groups of firms to be recognized as a single economic unit. Although the courts recognize that the distinct entity doctrine frequently results in unfairness, their formulations for overturning the theory fall short of adequately addressing the challenges that the doctrine has produced in reference to groupings of businesses and conflicts with delict law. As a result, the courts have been justifiably criticized for being "timid" in their approach, failing to force or even encourage parent corporations to answer for the debts and losses incurred by their subsidiaries.

A firm's dealings with an adversary during war, whenever the company is a "mere façade hiding the actual facts," or when the company is a "cloak or sham," are all examples of scenarios in which the courts can pierce the veil, according to the case law. In rare situations, a business may be said to be functioning as an agent or that a collection of companies constitutes a single economic unit, which is more relevant to delictual claims. A few statute provisions render members personally accountable for certain corporate debts and obligations, but these do nothing to hold members personally liable to others who suffer harm as a result of delict.

The Common Law Theory of Piercing the Corporate Veil

Despite the existence of such exclusions, the courts have been regarded as "stockholders of American companies are "basically exempt from tort liability so long as they maintain their corporate entity with reasonable care," and the corporate veil is far from enthusiastic." Furthermore, in the United Kingdom, there is no clear-cut category expressly for circumstances when involuntary creditors incur loss as a result of the undercapitalisation or insolvency of a legitimately established company, whether that firm is the parent or the subsidiary of another legitimately-registered company. As a result, Blumberg's description of limited liability as having "unthinkingly beyond the initial purpose" may be valid.

It has already become evident from the above debate that the courts in the United Kingdom have been extremely reluctant to break the corporate veil in recent years. Some individuals agree with the approach used by the English courts, while others disagree. They make an attempt to support their position by citing various arguments. They believe that this is the appropriate approach given the fact that it is a highly sensitive subject. Because there is now no alternative to limited liability in the United Kingdom, the court should be conservative in its decision. In this regard, "the argument is frequently advanced, both by judges and jurists, that the government should establish a clear norm."

The notion that the UK court has no authority and that only the legislature has the authority to act is a vague and unrealistic assertion. The UK court system has the authority to take the necessary actions to ensure that the judiciary is properly responsive to the situation at hand. In truth, the courts of the United Kingdom have already demonstrated that they are capable of making fair and flexible decisions anytime they want. Lord Denning's accomplishments are worthy of mention on this particular occasion. In terms of the lifting of the corporate veil, he was able to make several substantial and flexible judgments throughout his tenure.

Indeed, the courts of the United Kingdom have paved their own path to the removal of the corporate veil, with no help from anybody else. Typically, judges have been hesitant to raise the curtain, and when a judge has attempted to do so, the other judges have either criticized him or overturned his judgment later on in the process. The demand for judicial flexibility in relation to corporate personhood made by Lord Denning is praiseworthy, but his logical reasoning in this paragraph is subject to question. Several other judges, including members of the House of Lords, had openly criticized his approach as being too flexible and acceptable given the circumstances.

When it comes to business transactions, English law is one of the most popular alternatives throughout the world. Sadly, the 'Doctrine of Piercing the Corporate Veil' is not one of those areas. To put it another way, this concept has threatened to undermine both the separate corporate identity and limited liability that are essential to contemporary business. The UK Supreme Court judges in Petrodel Resources Ltd v. Prest endeavoured to bring clarity once again after numerous unsuccessful attempts to shed light on this issue by circumscribing the theory to excessively restrictive bounds. To show that the decision's underlying confusion has in fact exacerbated the mess, this article "pierces" that apparent veil of clarity by analysing three subsequent rulings and shows that an "unnamed" and "unrestricted" doctrine has now spread among conventional remedies as a result of the decision.

The Landmark Salomon v A Salomon and Co Ltd Judgment

Prest v. Petrodel is a case that better illustrates the position of English law when it comes to applying the idea of corporate veil. In Prest, Lord Sumption seeks to reduce the mere façade idea to a more straightforward and limiting criterion than previously existed. The allegation that misusing a company's distinct identity does not represent an evident improvement over the part of the building in terms of clarity and certainty is difficult to dispute, however there is some evidence to support this point of view. All of the restrictions imposed by Lord Sumption effectively render the hypothesis of breaching the veil completely ineffective. If evasion happens, it appears that it is still feasible to disregard the idea of a separate legal person, but it is impossible to provide a specific example of evasion in this situation. In reality, the avoidance principle is primarily intended to prevent the use of the piercing doctrine to hold shareholders liable for obligations that are the responsibility of the business (i.e., the concept of 'forward piercing' is met with an internal obstacle). At the very least, it effectively eliminates the notion of piercing the veil from the legal setting since it will be increasingly difficult (if not impossible) to create new exceptions to the Salomon principle. The concealing principle, on the other hand, refers to additional remedies that might be applied if the corporation is used to prevent others from exercising their rights. Nothing else was mentioned at this time by Lord Sumption. Nothing else was mentioned at this time by Lord Sumption. The absence of clarity in the Lord Sumption’s ruling may inspire judges to draw more on traditional instruments, which are incorporated inter alia in agency, trust and tort law, and implement them into business law setting. This is likely to indicate a certain risk of excessive intervention in the way the business structure may be exploited in the commercial reality, which is likely to be the case. What should be kept in mind is that the company's liability for the commitments of its shareholders should be as limited as the liability of its shareholders for the collapse of the company.

Discussion among different scholars on the Prest case demonstrates that practically all situations addressing the abuse of legal persons may be remedied by applying more traditional procedures. Therefore, Lord Walker was right arguing that breaching the corporate veil is “actually a description to characterize the different instances on which some rule of law provides apparent exceptions to the norm of the independent juristic personality of a corporate body”. In creating the difference between evasion and concealment, it appears that Lord Sumption's purpose was to urge the courts to base their rulings on more traditional remedies rather than on ideas that were dubious at the time of their formulation. That he did it in the veiled and unneeded words of avoidance and concealment is the source of the problem.

"Lifting of the corporate veil" or "disregarding of the corporate personality" are terms that are frequently heard in the modern business arena. The English courts have been requested on several occasions to overlook a company's and its shareholders' independent legal personalities, which they have done. The courts in the United Kingdom, on the other hand, rarely address this problem. The courts have frequently shown their unwillingness to break the curtain that protects corporations. In practically every circumstance, they make every attempt to save the legal entity of the business, even if it means removing the corporate veil in order to obtain justice. In this article, an attempt has been made to explain the reluctance with which the courts in the United Kingdom operate. A number of situations have been discussed in this context, and the anatomy of the reluctant approach has been examined in detail.

The Effectiveness of Piercing the Corporate Veil

In some cases, the courts will take the veil of incorporation from a limited company in order to force shareholders or directors to contribute to the repayment of outstanding obligations to creditors if the firm becomes bankrupt. There are a few exceptions to this rule in the United Kingdom, though. The "concept" in Salomon v A Salomon & Co Ltd is often cited as inspiration for this. Companies Act 1862 was used in this instance by a Whitechapel cobbler to form a company. It's possible that the lawmakers thought a partnership was the best business structure for fewer persons at the time, which is why seven people were needed to form a corporation. With the help of six family members, Mr. Salomon was able to meet this criterion. When he provided the firm cash, he made the corporation issue debentures to cover his obligation in the event of insolvency, placing it above other creditors. The firm did go bankrupt, and the company's liquidator proceeded to sue Mr. Salomon personally on behalf of unpaid creditors. But even though Mr Salomon was found to have broken Parliament's intent by creating fake investors, and would have had to compensate the business, the House of Lords found him to have done so only if he had complied with a few basic formal conditions of registration. In general, there could be no removing of the veil.

Doctrinal approach is ideal for this study, which is an analytical and comparative research project with a specific goal in mind. An examination of main and secondary sources of law, such as legislation, case law, journal articles, textbooks and the internet, was conducted as part of this study's methodology. The rules of the United Kingdom on piercing the corporate veil will be used in the comparative research since English company law concepts have had a long-standing link with South African company law, and so will be compared. Because of the accuracy with which the relevant UK statutes addressing the piercing of the corporate veil have been formulated, the legal framework of the United Kingdom has been utilised to provide useful interpretation to the doctrine in this case.

It is the researcher's primary goal to use doctrinal and secondary sources to provide an outline of the comparative study to be conducted by focusing on legal elements in a thorough way. The basic goal of documentary legal research is to add to the substantial body of law in order to advance the overriding purpose of legal theory. In the end, justice is the goal of the legal system, not a collection of procedures, laws, or terminology. Legal content enrichment and codification, as well as the interpretation of legal legislation, commonly employ doctrinal legal study. Legal doctrine research seeks to advance the field by generating new ideas, gathering new data, and establishing a solid framework for future socio-legal inquiry. The legal content of laws must be reinforced and they must be drafted correctly. For political reasons, legislators typically leave vague or unclear portions of the legislation so that the courts may address any issues that may arise in the future. A legal study that focuses on doctrinal legal principles can increase confidence in judges, attorneys, and jurists. In the middle of a case, a lawyer can perform a legal inquiry utilizing a methodological approach. Using this knowledge, a judge can make an informed judgement in a legal matter.

Different Views on Lifting the Corporate Veil

Doctrinal study suggests what the law is in a certain situation. It focuses on the history and development of legal doctrine, as well as its application. Likely the most well recognized definition, this is a completely theoretical study that involves either basic investigation to find an obscure legal declaration or in-depth investigation to uncover a specific legal statement. The "one true answer" to particular legal challenges or concerns is the focus of this library-based study endeavour. Hence, the purpose of this strategy is to ask particular questions in order to obtain specific information. Doctrinal legal research relies on positive or analytical law as its jurisprudential base.

Since it helps researchers examine the research topic by explicitly answering research questions, the research plan is an essential part of each study. Background information and an adequate research strategy are necessary for researchers to guarantee that their findings are understood. Quantitative, quantitative, and hybrid systems are the three most common types of research programs used to address research challenges. Mixed designs involve both mixed method techniques, which include non-numerical depth as well as and why how in the quantitative design. A wide range of testing techniques may be used by researchers to reach their study aims and objectives, including reviewed literature, surveys, evaluations and interviews, as well as questionnaires, case analysis, and focus group analyses.

It is typical for researchers to utilize either inductive or deductive tactics to reach their study's aims and objectives. Inductive procedures do not need any assumptions or hypotheses, but deductive ones must. In positivism, the deductive technique is useful, while in interpretivism, the inductive strategy is smooth. There are no strict rules to follow while developing assumptions or hypotheses; hence, inductive reasoning is a valid method of generating them. Users' created material and the copyright problem in the UK context will be compared using descriptive analytic studies, which the researchers will utilize to conduct this research. This means that the doctrinal researcher always uses a qualitative method to analysis while doing legal research, because they help interpret the relevant legal texts completely. The analytical and legal reasoning parts of doctrinal study necessitate a qualitative methodology.

When conducting a research project, considerable data collecting from a number of sources is required in order to reach the desired results. Researchers must gather the relevant information in order to have a deeper understanding of the study issue. Data collection approaches such as primary and secondary data collection are the most often used in research (use of available sources like books, journals, articles, etc.). So primary data gathering methods are perfect for directly interacting with individuals to obtain a knowledge of their study viewpoints, rather than conducting secondary data collection. In many circumstances, secondary data collecting gives for a more in-depth grasp of the subject matter under investigation. Secondary sources should also be investigated in order to create a thorough picture of the literature on the research topic and to assess the effectiveness of the legal system in implementing the law of piercing the corporate veil doctrine in the context of the study.

Data collection is the most time consuming and hardest element of any theological study. As a researcher, you must be able to distinguish between primary and secondary sources of data. Doctrinal legal researchers are often criticized for their ambiguity because of the difficulty of their task. In a time of heightened competition for research money, when multidisciplinary work is highly prized and nonlawyers are involved in the assessment of grant applications, lawyers conducting doctrinal research must be more transparent and clear about their methodology. Presuming the law exists in a social context or framework rather than an objective doctrinal vacuum, doctrine methodology does not provide an adequate foundation for addressing issues that arise. Consequently, the issues that occur are not appropriately addressed. A lawless society does not exist. Since it is a component of society, it has a direct effect on the world around it. To better comprehend the law and the way it works, it is possible to borrow ideas and methods from other domains. More than doctrinal or library-based research talents may be required by attorneys who wish their research to be more relevant to the rest of the world.

Research equality is assessed in accordance with the standards of validity and reliability. All components of the research are evaluated on a regular basis by means of tests, techniques or processes. Validity and reliability are intrinsically related, despite the fact that their definitions diverge. Measuring it might provide a lot more information. Truthfulness is an important component of a valid measurement. Reliability is a term used to describe processes such as validity, consistency, and measurement precision. As soon as the study design is finalised, the results are compiled, and the processes are established, it is critical to check for research validity and dependability. Because of its possible connection to qualitative research technique, this study must be undertaken with extreme care to ensure its validity and reliability. Researchers must rely on their own judgement because the data they collect cannot be checked by software or equipment.

The research will be evaluating the significance and effectiveness of the law at the time of applying the doctrine of piercing the corporate veil. The research will be an in-depth study of the doctrine and its implication for the organisations in the English legal system.

References

Articles/Books/Website

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Alcock A, 'Piercing The Veil – A Dodo Of A Doctrine?' (2013) 25 The Denning Law Journal

Ali S, 'Doctrinal Research In Law Field' [2013] SSRN Electronic Journal

Banoo S, 'Lifting Of The Corporate Veil: Decoding The Doctrine Of Separate Legal Personality' [2018] SSRN Electronic Journal

Biswas L, 'Approach Of The UK Court In Piercing Corporate Veil' [2011] SSRN Electronic Journal

Davies G, 'The Relationship Between Empirical Legal Studies And Doctrinal Legal Research' (2020) 13 Erasmus Law Review

Grier N, 'Piercing The Corporate Veil: Prest V Petrodel Resources Ltd' (2014) 18 Edinburgh Law Review

Hickey D, and Richards D, 'Piercing The Corporate Veil: Supreme Court Clarifies The English Law Position - Corporate/Commercial Law - UK' (Mondaq.com, 2013) <https://www.mondaq.com/uk/corporate-and-company-law/264752/piercing-the-corporate-veil-supreme-court-clarifies-the-english-law-position> accessed 3 January 2022

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Kusuma N, and Amboro F, 'Doing The Corporate Business With Piercing The Corporate Veil Doctrine: Indonesia, Us And Uk Perspective' (2020) 3 Sociological Jurisprudence Journal

M.D. P, 'Legal Research- Descriptive Analysis On Doctrinal Methodology' [2019] International Journal of Management, Technology, and Social Sciences

Odusanya D, 'Corporate Personality And Piercing The Corporate Veil' [2021] SSRN Electronic Journal

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'Piercing The Corporate Veil' (Offshore-protection.com, 2021) <https://www.offshore-protection.com/piercing-the-corporate-veil> accessed 3 January 2022

'Piercing The Corporate Veil: When Llcs And Corporations May Be At Risk' (www.nolo.com, 2022) <https://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html> accessed 3 January 2022

Schall A, 'The New Law Of Piercing The Corporate Veil In The UK' (2016) 13 European Company and Financial Law Review

S?up P, 'Piercing The Corporate Veil – A Common Pattern?' (2019) 24 Comparative Law Review

Taekema S, and van der Burg W, 'Legal Philosophy As An Enrichment Of Doctrinal Research Part I: Introducing Three Philosophical Methods' [2019] Law and Method

Taekema S, 'Methodologies Of Rule Of Law Research: Why Legal Philosophy Needs Empirical And Doctrinal Scholarship' (2020) 40 Law and Philosophy

Tan C, Wang J, and Hofmann C, 'Piercing The Corporate Veil: Historical, Theoretical And Comparative Perspectives' [2018] SSRN Electronic Journal

Cases

Prest v Petrodel Resources Ltd [2013] UKSC 34

Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530

Salomon v A Salomon and Co Ltd [1897] AC 22