A legal notion known as “piercing the corporate veil” enables a court to disregard a corporation and hold its shareholders or officers accountable for its decisions or obligations on an individual basis. Corporations typically enjoy limited liability protection and are regarded as independent legal entities from their owners or officers. However, there are instances in which people will take advantage of the corporate form to commit fraud, injustice, or unfairness, undermining this protection. This article examines three typical justifications for breaching the corporate veil as well as some associated issues with this legal theory.
Inadequate capitalisation is the first point of convergence for breaking through the corporate veil. A corporation must be founded with enough cash to fulfill its goals and fulfill its foreseen commitments. It may be simpler for a court to reject the corporation’s independent identity and hold its owners or officers personally accountable if it is undercapitalized, which means it has insufficient funds to meet its debts and liabilities. This is due to the fact that undercapitalization may be an indication of fraud or abuse as it implies that the business was formed solely to protect its owners from liability and not to consider the interests of its creditors or other stakeholders.
Failure to follow company protocol is the second common method for penetrating the corporate veil. A company must adhere to certain formalities, like scheduling regular meetings, maintaining correct records, and having separate bank accounts and financial statements. If the corporation does not follow these procedures, it can be perceived as a fraud or an alter ego of its shareholders or officers rather than a real company. In such circumstances, a court may ignore the corporate structure and hold the people individually accountable for the corporation’s deeds.
Fraud or injustice is the third common thread that might be used to cut through the corporate veil. This is possibly the broadest and most permissive defense because it enables a judge to analyze the substance of the transaction or relationship at issue rather than just the corporate form. The corporate veil may be lifted by the court in order to hold the shareholder or officer accountable if they exploited the company to commit fraud, conceal assets, evade obligations, or engage in other wrongdoing. This foundation, which necessitates the demonstration of both wrongful behavior and unfairness or injustice, is frequently used in disputes involving closely owned businesses or connected parties.
Is cutting through the corporate veil an appropriate remedy? Yes, penetrating the corporation veil is an equitable remedy, which means that courts may utilize it at their discretion to uphold justice and fairness. Legal remedies, which are founded on statutory or common law norms and offer a fixed set of remedies for particular types of claims or injuries, are distinct from equitable remedies. Contrarily, equitable remedies are founded on broader concepts of equity and fairness, and they give courts the flexibility to design a solution that suits the unique facts and circumstances of each case.
When is the corporate veil piercable? As mentioned previously, where there is insufficient capitalization, a disregard for corporate requirements, or fraud or injustice, you can breach the corporate veil. However, since every case is different, the court will take into account a variety of elements, including the level of control exercised by the shareholder or officer, the degree of asset and business integration between the corporation and the individual, the severity of the plaintiff’s harm, and any relevant public policy issues.
A CEO is a corporate executive, right? Yes, a CEO (Chief Executive Officer) and other officers like the CFO (Chief Financial Officer), COO (Chief Operating Officer), CMO (Chief Marketing Officer), etc. are considered corporate officials. Corporate officers are people who occupy positions of authority and responsibility within a business and are qualified to act on the company’s behalf in a variety of contexts, including contract signing, recruiting, and strategic decision-making. Can an arbitrator see through a corporation’s veil? Under the terms of the arbitration agreement and the relevant legal framework, the answer is yes, an arbitrator can pierce the corporate veil. A neutral third party (the arbitrator) renders a binding decision during arbitration, which is a type of extrajudicial conflict resolution that enables parties to settle their differences without going to court. The breadth of the arbitration agreement, the applicable law to the dispute, and the particular facts and circumstances of the case will all affect the arbitrator’s ability to pierce the corporate veil.
In order to hold specific shareholders or officers accountable for the debts and liabilities of the organization, the corporate fiction must be broken. When the corporation is not being considered as a separate legal entity from its shareholders or when the corporation is being utilized to commit fraud or avoid paying taxes, this is done. By tearing through the corporate curtain, the court hopes to stop the misuse of the corporate system and make sure that those who gain from it are held responsible for its deeds.