Week 5: Governance and Accountability
PIERCING THE CORPORATE VEIL
Metaphorical veil drawn between company and its
shareholders/directors once it is incorporated – this is what gives them
limited liability. You cannot hold those behind the veil liable, only the
company.
Possible for this veil to be “pierced” in exceptional circumstances – the
separate entity is disregarded but this is an exceptional remedy, there
must be clear abuse.
“Separate existence remains a figment of law, liable to be curtailed or
withdrawn when the objects of their creation are abused or thwarted.”
(i.e. limited liability is a courtesy)
Definition: In certain circumstances, the law will withdraw the right of
separate legal personality and hold insiders liable by disregarding the
company’s separate existence (always start with this)
Two types of veil piercing
(Can claim in the alternative but must ask the court for help)
1. Common law – don’t have to prove unconscionable abuse
- Look at Cape Pacific case
- Fraud is relevant but not essential
- Examples of abuse of SLP
SLP was used as a device by a director to evade fiduciary
duties
SLP was used to overcome a contractual duty
2. Statutory (Companies Act 2008) – have to prove unconscionable
abuse
- “Whenever a court, on application by an interested person, or in
any proceedings in which a company is involved, finds that the
incorporation of, or any act by or on behalf of, or any use of, that
company constitutes an unconscionable abuse of the juristic
personality of the company as a separate entity, the court may
declare that the company is to be deemed not to be a juristic
person in respect of such rights, obligations or liabilities of the
company….. and the court may give such further order or orders as
it may deem fit in order to give effect to such declaration.”
Court has no general discretion simply to disregard the existence of a
separate corporate identity whenever it is just or convenient to do so – must
look at substance over form.
PIERCING THE CORPORATE VEIL
Metaphorical veil drawn between company and its
shareholders/directors once it is incorporated – this is what gives them
limited liability. You cannot hold those behind the veil liable, only the
company.
Possible for this veil to be “pierced” in exceptional circumstances – the
separate entity is disregarded but this is an exceptional remedy, there
must be clear abuse.
“Separate existence remains a figment of law, liable to be curtailed or
withdrawn when the objects of their creation are abused or thwarted.”
(i.e. limited liability is a courtesy)
Definition: In certain circumstances, the law will withdraw the right of
separate legal personality and hold insiders liable by disregarding the
company’s separate existence (always start with this)
Two types of veil piercing
(Can claim in the alternative but must ask the court for help)
1. Common law – don’t have to prove unconscionable abuse
- Look at Cape Pacific case
- Fraud is relevant but not essential
- Examples of abuse of SLP
SLP was used as a device by a director to evade fiduciary
duties
SLP was used to overcome a contractual duty
2. Statutory (Companies Act 2008) – have to prove unconscionable
abuse
- “Whenever a court, on application by an interested person, or in
any proceedings in which a company is involved, finds that the
incorporation of, or any act by or on behalf of, or any use of, that
company constitutes an unconscionable abuse of the juristic
personality of the company as a separate entity, the court may
declare that the company is to be deemed not to be a juristic
person in respect of such rights, obligations or liabilities of the
company….. and the court may give such further order or orders as
it may deem fit in order to give effect to such declaration.”
Court has no general discretion simply to disregard the existence of a
separate corporate identity whenever it is just or convenient to do so – must
look at substance over form.
