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UK Company Law: the Doctrine of Lifting the Corporate Veil

September 5, 2018

One of the main advantages of forming a legal entity is to limit the liability of the members of the company. However, in some circumstances, legal entities can be disregarded. This process is known as piercing the corporate veil and is the most common method for shareholders to take responsibility for the actions of the corporation.

The doctrine of the corporate veil was developed in the UK, where it finds its most frequent usage in case law. In practice, there are three occasions when the court has lifted the veil: application of the terms of a contract or statute, or as a matter of common law. Cases in which there is a need to lift the corporate veil cannot be described as standard. Despite numerous criticisms related to the issue of the law on lifting the veil of incorporation, it seems to be an area worthy of further investigation.

‘Piercing (or lifting) the corporate veil’ gives an opportunity to look behind, so called, measures of the company and see which members of the company are liable and no longer covered by the corporate shell. In the United Kingdom, the process of distinguishing the company from its members started a long time ago. The concept of a joint-stock company that is separate from its shareholders historically being subject to the law was first introduced by the Joint Stock Companies Act. The limited liability companies received later in 1855 in accordance with the Limited Liability Act. Later, in 1862 the first Companies Act came into ruling. Now all company issues are regulated by the Companies Act 2006.

In particular, the doctrine of lifting the corporate veil acknowledges the fundamental possibility of assigning responsibility for the obligations of the company to its controller. The opposite situation is also possible (reverse piercing), when recovery to the individual or legal entity is drawn under the assets of the company that they control. There are possible situations when the shareholder himself requires lifting of the corporate veil. This usually happens when the question is not about obligations, rather about the rights of the company which shareholder wishes to renew to himself.

In applying the principle of lifting the corporate veil, it often involves moving the tort liability for a particular offense from the company to a controlling person. Traditionally, English courts are very sensitive about the principle of the private nature of the contract (privacy of contract), according to which no one than the parties of the contract, do not have rights or obligations under this contract.

It is reasonable to consider the doctrine of lifting the corporate veil in the overall context of the fight against the abuse of corporate relations, which could be applicable to members of the company that created appropriate situations. In its nature of the doctrine of lifting the veil, the argument that any company is a single economic unit is presented. However, when a company goes beyond certain limits, the courts are unlikely to resort to the use of piercing the corporate veil. This doctrine is a technique which the court has; however, it was not designed as the main legal strategy to address the issue of abuse on behalf of the company.

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