Question janice Business & Management

Why Should the Courts Take a Less Strict Approach When Asked to Lift the Corporate Veil?

In your opinion, why should the courts take a less strict approach when asked to lift the corporate veil?

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Answer Internal Staff

Since Salomon(1) over 100 years ago, company executives have been privileged to experience judicial immunity due to one of the very keystone principles of company law: the Corporate Veil.

It is not the Court’s place to look beyond the veil and examine the operation of a company(2) without significant reason(3). This reluctance is due to a number of reasons, both economic and equitable, reasons which have become even more relevant than when they were first devised. Economically, companies require the Corporate Veil as it promotes effective economic decisions by affording protections such as a) securing limited liability removing the need for shareholders to monitor managers(4), b) promoting managers to act effectively(5), c) assisting in the effective operation of security markets(6) and d) facilitating optimal investment decisions by managers(7). Equitably, the Corporate Veil facilitates limited liability, allowing shareholders security against their personal investments(8). The maintenance of the Corporate Veil, on a theoretical level, promotes the negative right of the individual shareholders not to be held responsible for the decisions of a separate legal entity to which they may have minimal interest.

While on a societal level the Corporate veil can be perceived to be bourgeois, its implementation and strict application allow for effective market function. Should the Court’s begin to look beyond the veil more regularly, this will severely affect the economic viability of companies and remove the protecting afforded to shareholders.

References

1) Salomon v Salomon & Co [1897] AC 22 2) Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 (SCNSW, Young J). 3) Adams v Cape Industries plc [1990] Ch 433
4) Ian M Ramsay and David B Noakes, 'Piercing The Corporate Veil In Australia' (2001) 19 Company and Securities Law Journal accessed 14 November 2016.
5) Ibid
6) Ibid
7) Ibid
8) Salomon v Salomon & Co [1897] AC 22