Business Law: Laura Cullen on the power of courts to ‘pierce the corporate veil’
- Credit: Archant
It is a fundamental principle of English company law that a limited company has a separate legal personality from its shareholders.
Furthermore, directors also usually benefit from a degree of protection from liability when acting on behalf of a company and it is this “corporate veil” of protection that is the reason that so many businesses choose to operate as limited companies.
However, veils are not bullet proof! In certain circumstances, although these are few and far between, a court may, where it feels it is just and equitable to do so, “pierce the corporate veil”.
What does this really mean? It means that they can set aside the company’s separate legal personality and make its directors and/or shareholders responsible for the legal consequences of what they are purporting to be the company’s actions.
If the veil is pierced, it means that it is no longer just the company’s assets at stake but also the personal assets of those persons who have acted improperly.
Even though instances of piercing are rare, historically it is most effective with smaller manager-owned businesses which have only one or two shareholders who often act as the directors too.
Typically these sorts of companies will have limited assets and therefore if it was not possible to pierce the veil, it would do nothing to discourage fraud or improper trading and could lead to injustices.
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Common examples of where the veil may be pierced include where a rogue director controls a company which has been set up as a device to conceal true facts with the aim of avoiding liability, or where it is in the public interest to do so.
To be able to pierce the veil though, you must do more than prove that a director has acted in an improper manner.
You must also show that the company has been used to shield the improper actions, therefore hiding the actions of that rogue director.
A final point for directors to note is that even if the courts are unwilling to pierce the veil, directors still owe various duties to a company and if they are in breach of those duties they can once again be held personally accountable.
: : Laura Cullen is a business law solicitor at Gotelee.