The Necessity Of Piercing The Corporate Veil

1993 Words8 Pages
It was Lord Sumption in Prest v Petrodel Resources who recognised that there is a limited power to pierce the corporate veil exceptional cases when it is deemed necessary to do so. This serves as acknowledgement it is still possible to pierce the corporate veil but only as an absolute last resort. The aim of this essay is to argue that the above statement is true to a certain extent regarding the necessity of piercing the corporate veil and that perhaps, the way to achieve a more practical and fairer outcome would be introduce greater flexibility to the use of this measure. Several commentators have used the terms ‘piercing the corporate veil’ and ‘lifting the corporate veil’ interchangeably. However, there is a difference between the…show more content…
Allowing some room for the judges to exercise this greater flexibility may cause a slight confusion in the beginning but over time, it is likely that judges themselves would have developed a set of principles to apply when determining if it is necessary to pierce the corporate veil. In the long run, it is submitted that this would produce a fairer outcome for the parties involved as judges would be able to apply the principles developed to individual cases before making a decision. Due to the separate legal personality of companies, a company can own shares in other companies. This leads to the formation of corporate groups which can be made up of over 100 companies and are often owned by a single parent company . The corporate veil was introduced to protect shareholders in order to encourage entrepreneurial risk-taking and innovation . Limited liability was introduced at a time where corporate groups were unknown of . Nonetheless, courts have automatically applied the doctrine of limited liability to corporate groups in order to shield parent companies from the debts of their subsidiaries without even considering if it is necessary to do so . Furthermore, in consideration of all the economic wealth and power that corporate groups have, they can barely be considered as the ‘entrepreneurial upstarts’ that the limited liability doctrine aimed to protect. Shareholders in such groups can also use limited liability to avoid responsibility and ‘manipulate the amount of
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