Brief Argument for Lifting the Corporate Veil

Arguments for Lifting the Corporate Veil

The corporate veil is a term used to refer to the protection given to owners of a corporation such that they cannot be personally liable for malfeasance of their corporations. This practice is predicated on the principle that a Corporation is a separate legal entity from its creators as pronounced in Salomon v Salomon [1896] UKHL and thus, no single person should be made to bear the burden of that entity. Many proprietors take advantage of this legal shield and instead, form Corporations with the sole intention of evading personal liability for debts incurred by the entity.  This paper provides arguments for lifting the corporate veil in certain circumstances where it does not serve its intended purpose.

The first reason for this stance is that while it is well settled in principle that a Company and the owner are two different entities; in real practice, some owners fail to observe this distinction. In this context, the unscrupulous owners treat the corporation as their own kiosk and they withdraw and appropriate business funds for their own personal use (Adrian & Marina 52). Courts term such a corporation as a sham or a mere façade meant to conceal the illegal dealings of the owners. In that case, at the behest of its owners, a corporation ends up not fulfilling the basic obligations that ought to be satisfied by a firm as provided for under the Corporations Act.

The second instance when the Corporate Veil ought to be lifted is if it can be proven that the Corporation has acted in a reckless and dishonest manner. This entails borrowing and losing money just easily without considering the plight of other shareholders and stakeholders.  If a corporation enters into a financial obligation that they truly know that their part cannot be fulfilled, the owners should also be treated as the orchestrators of all the entity’s mystery. Finally, if a corporation’s dealings have led to its creditors’ suffering an unjust loss, then the courts could pierce the veil and go after the owners in a bid to remedy that injustice. All these factors present sufficient reasons for lifting the veil of incorporation.

Work Cited

Adams, Michael A, and Marina Nehme. Business Organisations Law Guidebook. Sydney:            Oxford University Press, 2015. Internet resource.