Piercing the Corporate Veil: Historical, Theoretical and Comparative Perspectives

The concept of a company as a separate entity from its shareholders is well known and recognized in many common law and civil law jurisdictions. Generally, it is regarded as a fundamental aspect of corporate law and for this reason courts are loath to depart from it. Nevertheless, the principle of separate personality is not absolute and in both common law and civil law countries the courts have the power to depart from it. Where this occurs, it is often said that the courts “pierce” or “lift” the corporate veil. This will usually, but not inevitably, lead to liability being imposed on another person, perhaps in addition to the corporate vehicle.

Our paper aims to compare and critically examine the circumstances under which veil piercing takes place against the objectives of incorporation. The countries examined are the United Kingdom, Singapore and the United States which are common law jurisdictions, as well as the civil law countries of China and Germany. The main purpose of this comparison is to offer a reasonably comprehensive and thorough examination of how the principle of veil piercing, which has been formally adopted either through court rulings or exceptionally in China through legislation, is doctrinally applied by the courts in these jurisdictions. It will be seen that there are many parallels between the countries being compared, whether common law or civil law, in part because the historical circumstances leading to the rise of corporate personality were very similar, and also because the corporate laws in the Asian countries referred to in this paper are legal transplants.

We argue that the theoretical underpinnings of veil piercing generally lie in the notion of abuse of the corporate form. As corporate personality was developed as a response to societal needs, its limits are ascertained by reference to what courts construe as the legislative intent behind corporate legislation, namely to bring about positive social and economic outcomes through an organisational framework that facilitates business transactions. Given the importance of companies in the world of business, the idea of abuse in this context is construed narrowly since there is a need for certainty in commercial matters.

The paper also suggests that a narrow approach to veil piercing is justified by other considerations. For one, the need to look beyond the corporation is usually only necessary where insolvency has intervened. Claims by creditors against shareholders or management therefore risk undermining the collective insolvency framework within which creditors are to have their claims adjudicated. Another reason is veil piercing’s potential overlap with other legal doctrines particularly in the law of torts. As tort law is principally engaged with the issue of when civil wrongdoing arises, it will often provide a superior framework for determining whether shareholders or management should be directly responsible for an alleged wrong to a creditor. Engaging in veil piercing risks creating outcomes that are messy and unprincipled.

We find that UK and German courts have in recent years taken a more restrictive approach to veil piercing, in part for the reasons outlined above. German courts in particular see tort law as a more appropriate mode of resolving issues that in other jurisdictions are seen through the lens of corporate law. Singapore courts, while not directly expressing a view yet, appear to be sympathetic to the more restrictive UK approach. On the other hand, courts in the United States and especially China seem to adopt a more expansive approach to piercing. In the United States the reasons for this include the weight given to shareholder control and dominance, and applying veil piercing in cases where the matter might have been determined by other legal principles. This latter reason appears to be why Chinese courts have engaged in veil piercing more than any of the other four jurisdictions surveyed in this paper. For example, commingling cases constitute the largest number of cases where piercing has taken place in China. Yet some of the cases in question do not really involve comingling but misappropriation of corporate assets. In such circumstances, it is not surprising that the shareholder in question should be held responsible and could have been held responsible under tort law; ignoring corporate personality was unnecessary.

We hope our paper will facilitate further debate over the issue of when corporate personality ought to be ignored.

Cheng Han Tan is professor of law at National University of Singapore.

JiangYu Wang is associate professor of law at National University of Singapore.

Christian Hofmann is assistant professor of law at National University of Singapore.