Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or other persons behind the corporation. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil.
A simple example would be where a businessperson has left their job as a director and has signed a contract to not compete with the company they have just left for a period of time. If they set up a company which competed with their former company, technically it would be the company and not the person competing.See, e.g., , ch 7, 344, n 2 for a list of terms the court uses. They are, mere adjunct, agent, alias, alter ego, alter idem, arm, blind, branch, buffer, cloak, coat, corporate double, cover, creature, curious reminiscence, delusion, department, dry shell, dummy, fiction, form, formality, fraud on the law, instrumentality, mouthpiece, name, nominal identity, phrase, puppet, screen, sham, simulacrum, snare, stooge, subterfuge, tool. But it is likely a court would say that the new company was just a "sham" or a "cover" and that, as the new company is completely owned and controlled by one person, the former employee is deliberately choosing to compete, placing them in breach of that non-competing contract.
Despite the terminology used which makes it appear as though a shareholder's limited liability emanates from the view that a corporation is a separate legal entity, the reality is that the entity status of corporations has almost nothing to do with shareholder limited liability., ch 4, 171 For example, English law conferred entity status on corporations long before shareholders were afforded limited liability. Similarly, the United States' Revised Uniform Partnership Act confers entity status on partnerships, but also provides that partners are individually liable for all partnership obligations. Therefore, this shareholder limited liability emanates mainly from statute.
Basis for limited liability
Corporations exist in part to shield the personal assets of shareholders from personal liability for the debts or actions of a corporation which is treated as a separate person in law. Unlike a general partnership or sole proprietorship in which the owner could be held responsible for all the debts of the company, a corporation traditionally limited the personal liability of the shareholders.
Piercing the corporate veil typically is most effective with smaller privately held business entities (close corporations) in which the corporation has a small number of shareholders, limited assets, and recognition of separateness of the corporation from its shareholders would promote fraud or an inequitable result.
There is no record of a successful piercing of the corporate veil for a publicly traded corporation because of the large number of shareholders and the extensive mandatory filings entailed in qualifying for listing on an exchange.
Germany
German corporate law developed a number of theories in the early 1920s for lifting the corporate veil on the basis of "domination" by a parent company over a subsidiary. These cases have led to an encompassing codification of group law provisions in the AktG 1965 (§§ 291 – 319 AktG). By contrast, a general doctrine of piercing the veil for abuse of the legal personality of the company has never really taken hold in Germany. It was advocated in the fundamental work of Rolf Serick,Rolf Serick, Rechtsform und Realität juristischer Personen, 1955 but rejected by the prevailing "Normanwendungslehre".Wolfram Müller-Freienfels, AcP 156 (1958), pp. 522–543 After a few early cases, the German judiciary did not go down the route of establishing shareholder liability via piercing the veil. In particular, it rejected piercing the veil on grounds of material undercapitalization several times.BGHZ 31, 258; BGHZ 68, 312; BGHZ 176, 204, pointing to tort liability under § 826 BGB instead Today, the only remaining case of shareholder liability via piercing of the corporate veil is the inextricable commingling of the assets of the company and the shareholder ("Vermögensvermischung").BGHZ 165, 85; BGH NZG 2008, 187, at para. 16 But shareholders can be held liable in tort (§ 826 BGB) in the case of an interference destroying the corporation ("existenzvernichtender Eingriff").BGHZ 173, 246 The corporation must not be stripped, without compensation, of funds that are required to meet its foreseeable future obligations. If these are taken away by the shareholder the corporation may claim compensation, even in an insolvency proceeding. The concept adds a solvency test element to the balance-sheet based rules of capital maintenance under §§ 30, 31 GmbHG and §§ 57, 62 AktG.Piercing the Corporate Veil in American and German Law – Liability of Individuals and Entities: A Comparative View in: Tulsa Journal of Comparative and International Law, from 3-1-1995Jan Lieder, "Liability because of existence-destroying interventions", in: Andrea Vicari/Alexander Schall (eds.), Company Laws of the EU, 2020, Part 2: Germany, Chapter 7: Groups of Companies, pp. 397 – 401, at paras. 647 – 661.
United Kingdom
The corporate veil in UK company law is rarely pierced. After a series of attempts by the Court of Appeal during the late 1960s and early 1970s to establish theories based on economic reality and control, the House of Lords reasserted the orthodox approach. According to a 1990 case at the Court of Appeal, Adams v Cape Industries plc, the only true "veil piercing" may take place when a company is set up for fraudulent purposes, or where it is established to avoid an existing obligation.e.g. Gilford Motor Ltd v Horne and Jones v Lipman However, cases were rare and their justification in light of the Salomon principle remained doubtful. In VTB Capital,VTB Capital v Nutritek UKSC 5, at paras. 121 – 130 Lord Neuberger sympathised with rejecting the doctrine altogether, but left the issue undecided because it did not matter for the outcome. In Prest v Petrodel,Prest v Petrodel Resources UKSC 34 a divorce case in which the matrimonial home was held by the husband's company rather than by the husband himself, the Supreme Court confirmed the existence of the doctrine in English law but narrowed its application considerably.see Alexander Schall, The New Law of Piercing the Veil in the UK, ECFR 2016, 549 – 574; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3538410) The "fraud exception"eg. Trustor v Smallbone (No 2) WLR 1177 was dismissed. According to the leading judgement by Lord Sumption, piercing the veil is a subsidiary remedy of last resort that only covers the avoidance of existing obligations ("evasion principle", as opposed to the cases of the "concealment principle" that does not give rise to a claim). On closer analysis, this part of the judgment was obiter, because the Court reached the desired outcome (attribution of the family home to the assets of the husband) by applying trust law. Nevertheless, Prest v Petrodel is generally assumed to state the current law in the UK, even though the restriction of "abuse" to evasion only can be questioned and there were statements in Prest v Petrodel that supported a broader approach.Lady Hale, at para. 92; Lord Mance, at para. 100 It is noteworthy that under English law, piercing the veil can never be used to make shareholders pay for contractual debts of the company because they have not been party to that contract.VTB Capital v Nutritek para 132 – 148 (per Lord Neuberger) In the past, the veil was sometimes ignored in the process of interpreting a statute,e.g. Daimler v Continental Tyre and Re FG Films Ltd and as a matter of tort law it is open as a matter of authority that a direct duty of care may be owed by the managers of a parent company to accident victims of a subsidiary.e.g. Lubbe v Cape Plc
Tort victims and employees Tort victims and employees, who did not contract with a company or have very unequal bargaining power, have been held to be exempted from the rules of limited liability in Chandler v Cape plc. In this case, the claimant was an employee of Cape plc's wholly owned subsidiary, which had gone insolvent. He successfully brought a claim in tort against Cape plc for causing him an asbestos disease, asbestosis. Arden LJ in the Court of Appeal held that if the parent had interfered in the operations of the subsidiary in any way, such as over trading issues, then it would be attached with responsibility for health and safety issues.See further, E McGaughey, 'Donoghue v Salomon in the High Court' (2011) 4 Journal of Personal Injury Law 249, on SSRN Arden LJ emphasised that piercing the corporate veil was not necessary. There would be direct liability in tort for the parent company if it had interfered in the subsidiary's affairs. The High Court before it had held that liability would exist if the parent exercised control, all applying ordinary principles of tort law about liability of a third party for the actions of a tortfeasor. The restrictions on lifting the veil, found in contractual cases made no difference. This jurisdiction has been settled to play an important role in the human rights cases Vedanta Resources v LungoweVedanta Resources v Lungowe UKSC 20 and King Okpabi v Royal Dutch Shell.King Okpabi v Royal Dutch Shell UKSC 3
"Single economic unit" theory Within the context of competition law, "undertakings" (which may encompass one or more legal persons) might be held liable for relevant infringements. By contrast, it is an axiomatic principle of English company law that a company is an entity separate and distinct from its members, who are liable only to the extent that they have contributed to the company's capital: Salomon v Salomon . The effect of this rule is that the individual subsidiaries within a conglomerate will be treated as separate entities and the parent cannot be made liable for the subsidiaries' debts on insolvency. Furthermore, it can create subsidiaries with inadequate capitalisation and secure loans to the subsidiaries with fixed charges over their assets, despite the fact that this is "not necessarily the most honest way of trading".see The Coral Rose (No 1) , per Staughton LJ. The rule also applies in Scotland.
While the secondary literature refers to different means of "lifting" or "piercing" the veil (see Ottolenghi (1959)), judicial dicta supporting the view that the rule in Salomon is subject to exceptions are limited. Lord Denning MR outlined the theory of the "single economic unit" – wherein the court examined the overall business operation as an economic unit, rather than strict legal form – in DHN Food Distributors v Tower Hamlets. However this has largely been repudiated and has been treated with caution in subsequent judgments.
In Woolfson v Strathclyde BC, the House of Lords held that it was a decision to be confined to its facts (the question in DHN had been whether the subsidiary of the plaintiff, the former owning the premises on which the parent carried out its business, could receive compensation for loss of business under a compulsory purchase order notwithstanding that under the rule in Salomon, it was the parent and not the subsidiary that had lost the business). Likewise, in Bank of Tokyo v Karoon, (PC) Lord Goff, who had concurred in the result in DHN, held that the legal conception of the corporate structure was entirely distinct from the economic realities.