What Is Meant By The Veil Of Incorporation With Exmaples Of It Being Lifted At Common Law And Statute

Question 1

Explain the veil of incorporation

Answer 1

The veil of incorporation is a legal concept that refers to the separation of a companies legal personality from that of its owners or shareholders. This means that a company is a distinct legal entity that can enter into contracts, own property and sue or be sued in its own name, separate from the people who own or manage it. The veil of incorporation is important because it limits the liability of shareholders and directors for the companies debts and obligations.

Question 2

Explain lifting or piercing the veil of incorporation

Answer 2

In certain circumstances, the veil of incorporation may be lifted, allowing the courts to look beyond the separate legal personality of the company and hold the shareholders or directors personally liable for the companies actions. This is known as piercing or lifting the veil of incorporation.

Question 3

Explain how the veil of incorporation can be lifted at common law

Answer 3

At common law the courts may lift the veil of incorporation if the company is deemed to be a mere sham or facade that is being used to conceal illegal or fraudulent activities. For example, if a company is set up solely for the purpose of defrauding creditors, the court may pierce the veil of incorporation to hold the shareholders or directors personally liable for the companies debts.

Question 4

Explain how the veil of incorporation can be lifted by statute

Answer 4

Many countries have laws that allow the veil of incorporation to be lifted in certain circumstances. For example in the UK, the companies act 2006 provides for the veil of incorporation to be lifted if a company is used for illegal purposes, if the company’s directors have breached their fiduciary duties, or if the company is being used to unfairly prejudice the interests of minority shareholders.

Question 5

Example of situations where the veil of incorporation may be lifted

Answer 5

If a company is being used to perpetrate a fraud or a scam, and the shareholders or directors are knowingly involved in the deception, the court may lift the veil of incorporation to hold them personally liable for the damages.
If a company is found to be trading while insolvent, and the directors continue to take on debts and obligations that they know the company cannot repay, the court may lift the veil of incorporation to hold the directors personally liable for the company’s debts.
If a company is used to carry out illegal activities, such as money laundering or drug trafficking, the court may lift the veil of incorporation to hold the shareholders or directors personally responsible for the crimes committed by the company.