Assignment # 01 ..

Corporate Law

Muhammad Wajahat Siddiqui ID: 12699

Lifting the corporate veil:

1. Introduction
The doctrine of piercing the corporate veil has its historical origins in equity law and is a creation of judge-made law systems. Equitable judicial approach to limited liability manifests itself in treating it not as an indefeasible right but rather as a privilege a company is accorded which might be withdrawn in case of alleged abuse. According to Griffin 54 lifting the corporate veil is not a sword but a shield. Therefore, the separate legal entity principle cannot be considered a value per se. Nowadays different forms of piercing the corporate veil exist also in a few Continental law systems (e.g. Germany); this proves an existence of a need both for a workable and pragmatic solution to the problem of formal separation of legal entities as well as for the introduction of the discretion demanding institution of lifting the corporate veil into statute-based legal systems where reliance on equity as such is not admissible. More than 100 years ago the UKs House of Lords in the famous Salomon case1 established a maxim that a company is a separate legal entity distinct from its members. Thereby, it determined the direction of modern company law and the nature of private limited companies. Similar doctrines are incorporated in the statutory provisions of Continental countries. A separate legal personality and limited liability has aimed to induce investment, encourage trade and to be an incentive for entrepreneurs to start up new business even if it might involve commercial risk. This article will firstly explain what is understood by the terms corporate veil and lifting or piercing the corporate veil. Secondly, it will discuss several U.K. cases that are dealing with this issue. It will analyze how the doctrine of lifting the corporate veil has developed over time. Thirdly, it will compare this doctrine with the approach accepted in the USA and under German law. Fourthly, it will discuss the Czech and Polish view. Then, it will deal with some economic implications of lifting the corporate veil. Finally, it shall try to answer the question whether the doctrine of piercing the corporate veil undermines the principle of limited liability.

2. What is the Problem with the Corporate Veil?

2.1 Legal Aspects
Since a company is treated as a separate legal entity, the metaphor of corporate veil separating the members of the company from the corporate body has arisen. Although the principle of Salomon in the U.K. has never been doubted, under certain circumstances the courts may be poised to disregard this principle and lift the corporate veil.3 Nevertheless, the cases in which the courts have allowed the veil to be lifted and disregard the separate entity principle are difficult to predict and no clear set of principles has emerged yet.4 From the creditors point of view, the consequence of the limited liability principle is that creditors claims are restricted to the companys assets and cannot be asserted against the shareholders assets. On the other hand, shareholders benefit from the limited liability principle because; 1. Once guarantee the business is successful, it is them who gain the profit, and 2. In the event that the company is wound up their liability would be limited only to the value of their unpaid shares or their; i.e. the satisfaction of unsecured creditors claims is endangered without shareholders being responsible.