Does the prevalence of the 'piercing the corporate veil' doctrine benefit limited liability companies? The following debate questions whether the ‘piercing of the corporate veil doctrine’ benefits the limited liability companies. The particularity of this form of company is that it allows limited liability to its owners. The ‘piercing of the corporate veil’ doctrine allows for the otherwise immune corporate officers, directors, or shareholders to be held liable for the corporation’s wrongful acts. Keep reading the interesting arguments put forward by our debaters, to decide whether this doctrine benefits the limited liability companies. Jana Bencova. Jana graduated from the Masaryk University in the Czech Republic and practiced law at the Supreme Court of the Czech Republic and in a law firm in Slovakia. During her practice she has provided legal advice mainly in fields of commercial law, intellectual property, litigation, public procurement, and arbitration. Last year she passed the Slovak bar exams entitling her to practice law as an attorney.
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Currently, she is studying LLM program in International Business Law at Central European University in Budapest. Albana Karapanco. Albana Karapanço graduated from the University of Tirana, Faculty of Law in 2. She holds a LLM degree from University of New York Tirana and currently is a LLM Candidate at Central European University (International Business Law program) in Budapest, Hungary. She is an attorney at law in Tirana, Albania and has worked for some years in insurance and pension funds field. Opening Statement - Jana.
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According to the Black´s Law Dictionary, the doctrine of piercing the corporate veil is defined as „the judicial act of imposing liability on otherwise immune corporate officers, directors, or shareholders of the corporation´s wrongful acts” (Garner, 2. I argue that application of this doctrine benefits the limited liability companies (LLCs). The doctrine leads to disregarding the fact that a company and its shareholders are separate legal entities (Kosmopoulos v. Constitution Insurance Co., 1. This can be crucial in cases when the shareholder, which is in many times the parent company with regard to the LLC in question, interferes with the activities of the subsidiary and as a result, the company´s operations are influenced in various different ways by the interests and decisions of the shareholder.
If such operations cause harm to the company or its creditors, it is fair to hold liable the shareholder. Several examples suggesting that the doctrine of piercing the corporate veil prevents unfairness and benefits the company, can be found. I will point only to the most important ones that arise in the context of bankruptcy and criminal proceedings and in connection to the fraudulent conduct. In the bankruptcy proceedings in some jurisdictions, the persons that are otherwise separate and immune from the company´s debts can be held liable, if the company goes bankrupt and the company´s creditors cannot satisfy their claims because the assets of the company are insufficient. The rationale behind is that although the separation between the company and its shareholders exists by definition in law, in practice many times the shareholders conduct the company´s business while their actions, such as undercapitalization or reckless borrowing, can lead the company into insolvency. The doctrine can prevent unfairness also with regard to the criminal liability. This is the case especially when an offender uses the company as a “façade” (Jones v. Lipman, 1. 96. 2) or a shield to hide his/her acts that constitute a criminal offence for which he/she would otherwise be criminally liable. For example, a parent company profits from the activities of its foreign subsidiary company that cause environmental damage. In such cases the doctrine permits to hold the parent company liable for the damages, provided that the parent company has a decisive impact on the subsidiary´s actions and therefore the activities of the subsidiary and the parent company are closely linked.
But the doctrine can apply also to other persons acting wrongfully besides the company´s shareholders. Particularly directors, managers or other persons entitled to act in the name of the company can commit a criminal offence (Crown Prosecution Service v. Jennings, 2. 00. 8).
Since the act is legally the act of the company, the company should be liable. However, it is fair, under certain requirements, to hold liable also (or instead) the acting person. Moreover, the corporate veil can be pierced as a remedy against an act that would under specific conditions constitute fraudulent conduct. For instance, a person acting on behalf of the company (such as a director) or the company´s shareholder can cause the other party to a contract to believe that he/she is in fact contracting with the person who has a personal liability over the debt arising there from, instead of (or in addition to) the liability of the company (Macey, 2.
In such a case, it would be in many cases unfair for both the company and the creditor, to hold liable only the company. In conclusion, I have argued that the doctrine of piercing the corporate veil aims to prevent unfairness resulting for a company from the activities of otherwise immune persons and I provided some examples that support this argument. On the basis of the foregoing it can be concluded that the doctrine and its application benefits the companies. Opening Statement - Albana. The notion of limited liability of a company is presently well established in both common law (referring herein to United States and United Kingdom) and civilian law systems (referring herein to the member states of the European Union) (Becker 2. The limited liability concept arose out of the need to protect the investors, consequently helping enterprises’ growth, and though it originated in Europe, it was recognized in United States in early times.
Vanderkerckhove, 2. In simple terms, without entering into the differences of incorporated and unincorporated forms, it means that the members (owners) of a limited liability company (LLC) are not held liable for the obligations or debts of the entity. Piercing of the corporate veil is an equitable remedy that changes the financial risk that shareholders had anticipated and relied upon (Soderquist et all, 1. The liability is extended to immune corporate officers, directors, or shareholders for the wrongful acts of the company (Garner, 2. The veil piercing was created in United States but it is met in European legal systems in diverse forms and approaches, mostly under the vesting of shareholder liability (Vanderkerckhove, 2. The doctrine does not benefit LLCs from legal and economic perspectives. First, the limited liability gives to the entity the most attractive feature in doing business and valuable contribution to the economic progress (Cortenraad, 2.
Currently LLC represents an important vehicle of doing business worldwide. The lifting of the veil challenges the legal personality of the company (Salomon v A Salomon and Co Ltd [1. AC 2. 2) that is distinct from its members and a cornerstone of company law. Additionally, it puts the shareholders in uncertain and unpredictable situations. Second, the limited liability decreases monitoring costs from shareholders to managers and other shareholders (Wheeler, 1. On the contrary, the uncertainty of the liability makes the shareholders very active and they intervene in management operation.
Thus, the managers are not allowed to perform their duty and act efficiently. Despite leaving the delegated control to specialists, shareholders will look after their assets creating a chaotic situation (Dooley, 1. Third, crucial arguments against the prevalence of the doctrine are the substantial economic benefits deriving from the limited liability notion. Some advantages of limited liability are the diversification of investment, increase of liquidity of shares, and undertaking useful risky projects (Smith, Ssrn). Investors are willing to invest if they are not exposed to the risks and the whole society benefits from it (Vanderkerckhove, 2. The prevalence of the doctrine would discourage the participation in the capital markets and impair large corporations (Dooley, 1.
Also, when piercing the corporate veil, courts take into consideration different factors and circumstances. Although courts rely on labels or characterizations such as alter ego, instrumentality, sham, it is viewed that case law has not shown any sensible rationale or policy why several factors are decisive (Garner, 2. The abolition of the corporate veil may be very radical, but the decision to lift the veil and hold responsible the people behind the entity must be strict.
If not, it will lead to uncertainty and unpredictability. Instead of bringing social benefits, it would lead to abuse. In my opinion it is advisable that parties entering into contractual relationship with LLCs provide for ex ante measures and do not rely on the veil piercing as an ex post measure due to disadvantages previously mentioned. One has to bear in mind that the issue itself is complex and must keep in mind the remarkable statement of Justice Cardozo that the concept of piercing the corporate veil “is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched…they end often by enslaving it.” (Becker 2. By now, we have learnt that the ‘piercing of the corporate veil’ doctrine can both benefit and work against the LLCs. On one hand, Jana argues that this doctrine benefits the LLCs because the shareholders should be held liable for their unlawful actions, not the company itself.
On the other hand, Albana argues that the doctrine does not benefit the LLCs since it will prevent the shareholders to invest and take financial risks. Rebuttal - Jana.