lifting the corporate veil

The corporate veil is a reference to avoiding the effect of limited liability of a legal entity which has been incorporated. When a legal entity has been incorporated the liability of its members and directors is separate to that of the legal entity, because the entity has a separate legal personality.

When the corporate veil is lifted, the protection provided by the separate legal personality on incorporation – limited liability – may be lifted so as to render the directors and members personally liable for the debts of the entity, such as a company. When the corporate veil is lifted, those responsible for the unlawful acts complained of will be personally liable for the losses suffered by third parties.

Lifting the Corporate Veil

The corporate veil is a legal fiction, in the sense that the law protects the owners of the company being personally liable for the debts and other liabilities of the company. There are exceptions to the rule made by statute and at common law to lift the corporate veil, such as:

1. wrongful trading, that is, insolvent trading;
2. fraudulent trading, where the company has been carried on with an intention to defraud creditors or other persons;
3. Directors behaving fraudulently are not entitled to use the vicarious liability of a company to avoid liability when deceiving others. For instance, in Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [2002] (House of Lords), a director was not able to avoid personal liability when  he fraudulently misrepresented the position of the company to obtain a letter of credit;
4. where the director or shareholder assumes personal liability, such as when giving a personal guarantee for named debts or debts generally. The assumption of responsibility is determined objectively;
5. The company is a sham company, and there are no third parties involved in it (a mere façade);
6. In some cases, where a subsidiary company acts as an agent for its parent company;
7. The company has been involved in impropriety, such as knowingly receiving monies to which it was not entitled from a director of an associated company.

Avoiding Personal Liability

Subject to the exceptions listed above, directors and shareholders are able to avoid the risk of exposing themselves to personal liability by trading through a limited company and not doing anything to show that they are accepting personal liability for what they do.

In Williams v Natural Life Health Foods (1998), Lord Steyn said: “In the present case there were no personal dealings between [the director] and the claimant. There were no exchanges or conduct crossing the line which could have conveyed to the claimant that [he] was willing to assume personal responsibility to them.”.