Piercing the Corporate Veil. The concept of the separate legal personality, which regards a company as a separate person from its members, sometimes may act as a vehicle to defraud others, and it is to guarantee the interest of justice (Bisacre, 2002, p.5

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Introduction

The concept of the separate legal personality, which regards a company as a separate person from its members, sometimes may act as a vehicle to defraud others, and it is to guarantee the interest of justice (Bisacre, 2002, p.59), that the veil must be lifted so that reality behind the corporate personality can be taken into account in certain circumstances.

The concept of the separate legal personality        

In the case of Salomon v Salomon & Co Ltd [1897] A.C. 22, Lord Macnaghton define a company as law a different person from the subscribers to the memorandum, that is, a company has been given property ownership, contractual capacity, borrowing power, and even has some human right. Furthermore, the perpetual succession of a company guarantees that the legal personality of a company stays unaffected, regardless of its members’ leaving or joining. As a result, despite a company differentiates form human being in many ways, it is sometimes counted as a person by law.

        

Once a company has been registered and receives its trade certificate, it will have its separate legal personality, which usually works to its directors’ and members’ advantage by limiting their liability. However, this concept was re-enforced to work as a double-edged sword, that is, the legal personality of company can act to their disadvantage too. In the case of Macaura v Northern Assurance Company Ltd [1925] A.C. 619, Macaura failed to get compensation by putting the insurance in his own name instead of the company actually owning the timber, it was held that, ‘Macaura could not claim on the policy, as the timber was no longer his to insure.’

Piercing the Corporate veil        

The original idea of the separate legal personality is to benefit the economy by encouraging companies’ incorporation. According to Pettet (2005, p.31), if investors have set up financially risky ventures, they could invest in high-risk sectors without facing individual bankruptcy.

However, a company sometimes can be used as a vehicle merely to defraud others or to escape from liability. There are general three reasons for doing so. Firstly, it is the parent company who holds the majority assets rather that its subsidiaries. Secondly, a enterprise can avoid liabilities by putting their subsidiary into liquidation, because parent company are not usually liable for the debts of their insolvent subsidiaries. Finally, a multi-national company sometimes tries to set their subsidiaries in less developed area, to take advantage of its legal system. As a result, to achieve justice, sometimes we need to piece the corporate veil and seek the true entity concealed behind.

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The ‘corporate veil’ is a legal terminology. According to Grier. (2005, p.24)

        

It refers to the imaginary barrier that separates the company from those who direct it (the directors), and from those who own it (the members). ‘Piercing or lifting the corporate veil’ can also be called “circumstances when the legal personality of the company will be ignored”, where liabilities will directly fall on the company’s directors or members. Generally speaking, there are two regimes of piecing the corporate veil: by statutes or by common law.

Statutes

Generally speaking, the court is ...

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