Piercing of the Corporate Veil for Evasion of Tort Obligations

In a recent article, ‘Piercing of the Corporate Veil for Evasion of Tort Obligations’, I analyse the common law doctrine of veil piercing in the context of tort liabilities of a company. In the tort context, the prevailing view is that it is permissible to establish a company to carry on activities to enable the controllers of the company to escape personal tort liabilities arising from the activities. However, I argue that such a situation potentially involves the use (misuse) of a company to evade existing tort obligations and that there is greater scope than traditionally understood for piercing of the corporate veil to impose a company’s tort liabilities on its controllers.

Whether the doctrine of limited liability for a company’s shareholders should be retained in respect of a company’s liabilities in tort has been the subject of long-standing debate. As a matter of interactive justice or corrective justice, it is appropriate to impose the tort liabilities of a company on a shareholder, such as a parent company, which is in a position to control the company and which benefits from the activities giving rise to the tort. Also, from the perspective of economic analysis, it is widely accepted that limited liability for tort or involuntary creditors is inefficient.

Accordingly, many have called for statutory reform to impose tort liabilities of a company on the company’s shareholders (at least the controlling shareholders). Yet, despite the criticisms of limited liability in the context of tort creditors, there has been little by way of legislative development in Anglo-Commonwealth jurisdictions to implement such reforms.

A major stumbling block for reform is the view that introduction of such general tort liability for shareholders would undermine the separate entity principle and could have negative consequences for the economy. For example, when the issue was considered by the Companies and Securities Advisory Committee in 2000 in Australia in the context of corporate groups, the Committee recommended against introducing reforms in this area. It was thought that it would be more appropriate to deal with any problems via other means, such as pursuant to general common law principles, which are considered by some to be adequate in accommodating the interests of individual justice.

Yet, if the common law is to be relied upon to deal with problems of abuse, then the courts must be prepared to apply the relevant common law doctrines with an appropriate degree of robustness in order to address abuses of the corporate form that restrict the scope of compensation available to tort victims.

I argue that in the context of tort liabilities of a company, the corporate veil can be pierced under the common law to impose the company’s liabilities on its controlling shareholder, if the controlling shareholder had established or procured the use of the company to undertake activities of an inherently hazardous nature with the intention of minimising the opportunity of potential victims from being able to seek compensation for injuries caused by those hazards. Such a piercing of the corporate veil can be accommodated within the existing general doctrine of veil piercing, which allows the court to pierce the corporate veil where a company is used to evade existing legal obligations or liabilities.

The prevailing view, however, appears to be that the evasion principle for veil piercing is of limited relevance where companies are established to ‘avoid’ future tort liabilities, as opposed to ‘evading’ existing liabilities. Yet, the evasion principle applies not only to evasion of existing legal ‘liabilities’ but also to evasion of existing legal ‘obligations’. Obligations or duties can arise, whether in tort or in contract, before there is legal liability for breach. In the present context, proper identification of the time at which the legal obligation can be said to arise is critical in determining whether there is an evasion of an existing legal obligation. Once it is recognised that a legal obligation in tort can arise at the earlier stage when steps are first initiated for the conducting of the activities in question, it can be seen that there would be a wider scope for veil piercing under the evasion principle than has hitherto been accepted.

Stefan H. C. Lo is a Deputy Principal Government Counsel (Ag) at the Department of Justice, Hong Kong.