Piercing the Corporate Veil - Case Study Example

Name: Tutor: Course: Date: Piercing the corporate veil Introduction Corporate or limited companies enjoy two advantages: Separate legal personality and limited liability. However, there is exception to the rule known as piercing the corporate veil. This limits the protection enjoyed by corporate in regards to the two advantages. The purpose of this delimitation is to reduce the risk of corporate engaging in high-risk investments. It also gives creditors confidence in advancing credit to limited entities (Reid 1649). This paper will analyse the circumstances when piercing the corporate veil applies in three countries: America, Louisiana State, because the law differs between states, Australia, because its courts exercise very strict guidelines before issuing a corporate veil piercing compared to other countries, and China that was among the last countries to implement corporate law in 2006. America, Louisiana State In the case where a worker files a liability lawsuit on injury at the workplace against a limited company, the company’s shareholders may compensate the worker if the company had failed to purchase necessary insurance prior to the claim. The company in such a case is viewed as the statutory employer. The shareholders may also be held liable in case a creditor claimant proves to be less sophisticated than the corporate shareholder is. Secondly, if the shareholder knowingly takes hold of the company’s assets after sensing liability or enters into a contract with a shell company to avoid personal liability. If a shareholder fraudulently acquires credit for the company, the shareholder bears the liability. The court may issue a corporate veil piercing where there exist conflicts of interest for example a board member joining a different corporation to conduct business dealings with the limited company in a case where the individual is not permitted to do solely. The court pierces to stop such an individual thereby ignoring his separate identity (Morris 284). Separate entity and limited liability also does not apply in cases where a parent company fraudulently setups subsidiary companies to escape legal liability, a foreign company wrongfully infiltrates the internal affairs of a domestic subsidiary, and fraudulent transfer of immovable assets to a third party owned by the same directors making the transfer (Morris 294). In addition to the above, five more factors limit the extent of the two advantages enjoyed by limited companies in Louisiana. They include the failure to observe statutory requirements during the company setup, lack of clear demarcation between company and personal assets, undercapitalisation, failure to establish separate bank and financial accounts, and none or irregular meetings between the directors and shareholders (Morris 284). Australia Piercing the corporate veil may occur if a company has performed an unacceptable act as determined by a court ruling and the company directors or controllers are personally accountable. In this case, the company’s directors or shareholders may be held liable under the law of tort. If the creditors of the limited corporate are at a position that restricts their protection from such an act prior to its occurrence (ex ante); they may be compensated in disregard to separate legal personality and limited liability (Anderson 131). Personal wrongdoing may also occur when the majority shareholders of the company or persons with significant influence over the majority shareholders commit an unacceptable act or fail to exercise considerable control to avoid it. The directors of a closely held company (one or two shareholders) may be held liable if they are the majority shareholders of the company but in cases where there are separate major shareholders from the directors, the shareholders are held liable instead. Easterbrook and Fischel posit that they are held liable because it is assumed that due to the small size of the entity, they are at a better position to monitor the activities of the directors (Anderson 132). Furthermore, such company’s shares do not trade publicly alleviating the need of a stable share price, as is the case in a publicly traded company. A parent company may also be liable in the case where a subsidiary company involves in fraud. This is because the directors of the parent company have considerable influence over the appointment of the subsidiary directors, economic control of the parent company over the subsidiary, and provision of adequate insurance for risky investments. China Prior to 2006, China had no law governing piercing the corporate veil. The judges therefore made their own rulings pertaining liability and separate entity cases. Guangdong province High Court ruled that corporate veil piercing would be effective if the actual capital invested in a corporation is less than that registered under the corporation (“Piercing China’s corporate veil,” 331). This was in response to a lawsuit filed against a company that went out of business. In 2006, a new company law was implemented and the old revised or discarded. This law recognised piercing corporate veil but in a unique way compared to other nations. The shareholders would be jointly liable with the limited company if they knowingly refused to pay debts causing serious damage to the company’s creditors. This is provided in article 20 of the company law. Secondly, in the case of sole ownership of a limited company, the owner failed to distinguish personal property and that of the limited company, he would be jointly liable for the company’s debts. This is provided in article 64 of company law (“Piercing China’s corporate veil” 332). However, the laws do not give the judges sufficient factors of consideration in making such rulings. There is therefore the risk of unfair hearing. Conclusion Piercing the corporate veil prevents companies from engaging in high risk investments and holds the directors and shareholders accountable to their actions. The laws pertaining piercing the corporate veil in Louisiana differ from the rest of the country though there are numerous similarities between states. Some court rulings like the prevention of fraudulent protection of parent companies in their subsidiaries are common between America and Australia. In comparison between the three countries, China has the fewest laws addressing this issue. The law leave lots of detail unattended to placing corporate in the mercies of the judge. Works cited Anderson, Helen. “Challenging the Limited Liability of Parent Companies: A Reform Agenda for Piercing the Corporate Veil.” Australian Accounting Review 22.2 (2012): 129-141. Print. Morris Glenn G. “Piercing the Corporate Veil in Louisiana.” Louisiana Law Review 52.2 (1991): 271-321. Print. “Piercing China's Corporate Veil: Open Questions from the New Company Law.” The Yale Law Journal 117.2 (2007): 329-338. Print. Reid, Bradley C. “Clearing Away the Mist: Suggestions for Developing a Principled Veil Piercing Doctrine in China.” Vanderbilt Journal of Transnational Law 39 (2007) 1643-1675. Print. Read More