The corporate veil principle

One of the fundamental principles of company law is that a lawfully incorporated company has a legal personality and identity that is separate from its directors or shareholders and is a separate legal entity, vested of separate legal rights and liabilities. Consequently, any liability incurred by the company does not extend to its shareholders (beyond any money paid for their shares) and directors (beyond any personal liability imposed upon them as a result of their directors’ duties). The courts are reluctant to undermine legitimate corporate structures by ‘piercing the corporate veil’ and holding shareholders personally liable for the debts and obligations of companies.

The above-mentioned principle applies equally within groups of companies and, as a general principle of company law, the relationship between parent and subsidiary companies is that they are separate legal entities, with the corporate veil only being pierced where there is a sham or façade or where statute requires.

A court may have reason to pierce the corporate veil where a contract justifies the treatment of the parent and the subsidiary as one company (at least for some purposes) or where special circumstances exist, indicating that the company is a mere façade concealing the true facts. In identifying what is a mere façade, the motive of those behind the company will be relevant…

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