Anushree Poddar
SIGNIFICANCE OF CORPORATE VEIL AND CONSEQUENCES OF ABOLISHING VEIL PIERCING
“Could veil piercing be reformed, so as to mend it but not end it?”
Stephen M. Bainbridge
In corporate law, owing to the doctrine of limited liability, shareholders are ordinarily not made liable for actions of the company. Similarly, “no shareholder has any right to any item of property owned by the company for he has no legal or equitable interest therein.” Since Salomon, incorporation has become commonplace and companies with limited liability are “the principal unit of commercial life,” precisely because of their separate personality and property. This forms “the basis on which third parties are entitled to deal with them and commonly do deal with them.” Limited liability also protects investors. The concept of corporate entity had been evolved to encourage and promote trade and commerce. While rejecting the decision of the arbitral tribunal in the Sudhir Gopi judgement, the Supreme Court said that the decision is flawed because it “falls foul of the fundamental policy of Indian law that recognises that a company is an independent juristic person.” Determining the availability of limited liability on a case-by-case basis requires courts to balance a number of competing policy considerations. Considering that there is no standardized approach to determine when the corporate veil would be pierced, it is not free from the risk of judicial inconsistencies and courts may come to an ‘incorrect’ result in some cases. This is also a tricky argument because the lack of an objective understanding makes it difficult to demarcate between a conclusion that is correct and a conclusion that is potentially incorrect. “Yet, one can identify some cases in which most observers would likely conclude that the member did nothing for which he should be held personally liable and, accordingly, that the veil should not have been pierced.”
However, the doctrine of limited liability, on the other hand, also allows shareholders to cause the firm to “externalise [a] part of the risks and costs of doing business onto other constituencies of the firm and, perhaps, even onto society at large.” Thus, it is imperative to weigh the significance of the corporate veil in tandem with the arguments against abolishing veil piercing. Even though the concept of separate legal entity has been vehemently defended and significantly aided in incentivizing companies into incorporating themselves and using a healthy mode of raising capital, there have been several cases where the courts felt the need to pierce the corporate façade and hold the ones controlling the entity responsible for the debts and liabilities of the corporation itself. It may not be a good argument to say that veil piercing should be abolished because it has judicial costs. The argument is thus, a question of what should be given more importance: the legal personhood of the company and its separate identity from its shareholders and directors or the need to ensure that a third party is not defrauded in the process of absolving the liability of shareholders when they should actually be held personally liable.
Lord Sumption observed in Prest v. Petrodel that, “most advanced legal systems recognize corporate legal personality while acknowledging some limits to its logical implications.” Similarly, Bainbridge argues, “Perhaps veil piercing could be refocused so as to eliminate irrelevancies and be tied more closely to the policy purposes it is intended to effectuate.” The decisions in all the cases outlined in the paper, in different instances, advance their own reasons to warrant the piercing or non-piercing of the veil. It cannot be denied that companies have made attempts to circumvent the law by taking undue advantage of the limited liability doctrine. Limited liability incentivizes risk taking by permitting firm owners to avoid the full costs of their business activities while reaping the full economic rewards and veil piercing prevents its misuse. To abolish veil piercing would mean to allow such undue advantage to be taken. On the other hand, to abolish the corporate veil would mean to take away a key incentive to incorporate the company. Therefore, picking any radical stance on veil piercing has its own shortcomings and the doctrine must be applied judiciously.
References
1 SM Bainbridge, ‘Abolishing LLC Veil Piercing’ [2005] U. ILL. L. REV. 77, 97
2 Macaura v Northern Assurance Co Ltd [1925] AC 619, 626
3 Saloman v Saloman [1897] AC 22
4 Prest v Petrodel Resources Ltd [2013] 3 WLR 1
5 Delhi Development Authority v. Skiper Construction Company (P) Ltd (1996) 4 SCC 622
6 Sudhir Gopi v. Indira Gandhi National Open University 2017 SCC OnLine Del 8345 [41]
7 SM Bainbridge, ‘Abolishing LLC Veil Piercing’ [2005] U. ILL. L. REV. 77, 97
8 SM Bainbridge, ‘Abolishing LLC Veil Piercing’ [2005] U. ILL. L. REV. 77, 102
9 SM Bainbridge, ‘Abolishing LLC Veil Piercing’ [2005] U. ILL. L. REV. 77, 110
10 Geoffrey Morse, Palmer’s Company Law (25th edn, 2010) 1007
11 Naman Kamdar & Akash Srinivasan, ‘Solving the Bad Loan Crisis in an Unconventional Way: Is Reverse Piercing the Corporate Veil the Solution? (2019) 12 NUJS L. REV. 4 <http://nujslawreview.org/wp-content/uploads/2019/12/12-2-Naman-Kamdar-Akash-Srinivasan-1.pdf> accessed on 18 November 2020
12 Prest v Petrodel Resources Ltd [2013] 3 WLR 1
13 J William Callison, ‘Rationalizing Limited Liability and Veil Piercing’ (2003) 58(3) The Business Lawyer 1063 <https://www.jstor.org/stable/40688148> accessed on 9 December 2020
In case of any queries with regards to the present article, Anushree can be reached at anushreepoddar2000@gmail.com
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