Definition§
Lifting the Veil of Incorporation refers to the legal process of disregarding the corporation’s separate legal entity status, thus holding its members or directors personally liable for the company’s actions or debts. This principle is executed in exceptional scenarios, sanctioned by statute or judicial decision, primarily when incorporation has been misused to commit fraud or evade legal obligations.
Examples§
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Statutory Veil Lifting for Fraudulent Trading: Under statutory provisions, members or directors might be held personally liable if they have knowingly conducted business with the intention of defrauding creditors.
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Judicial Veil Lifting for Misrepresentation: Courts might disregard the separate legal personality of a corporation if the company structure is employed to mislead or deceive third parties.
Frequently Asked Questions (FAQs)§
Q1: Under what circumstances can the veil of incorporation be lifted?
A1: The veil of incorporation can be lifted in cases such as wrongful trading, fraudulent trading, statutory breaches, and where the company structure is used to perpetrate fraud or evade legal responsibilities.
Q2: Does lifting the veil apply only to directors?
A2: No, lifting the veil can apply to both directors and members of the corporation, depending on their involvement and the specific circumstances of the misconduct.
Q3: Is lifting the veil of incorporation common?
A3: No, it is an exceptional remedy and is employed sparingly by courts or under specific statutory provisions.
Q4: Can a veil be lifted retroactively?
A4: Yes, courts can lift the veil retroactively if it finds evidence that the incorporation was ab initio a sham or was used to defraud.
Q5: What are the consequences if the veil is lifted?
A5: The consequences include personal liability for corporate debts, claims or actions against the directors or members responsible, and invalidation of any benefits they might have derived from the fraudulent activities.
Related Terms§
- Incorporation: The process through which a new corporation is legally formed.
- Separate Legal Entity: A legal principle that allows a corporation to be recognized as having its own legal identity, separate from its shareholders and directors.
- Wrongful Trading: Trading carried out by a company director where they knew or should have known that there was no reasonable prospect of the company avoiding liquidation.
- Fraudulent Trading: Intentional carrying on of business for fraudulent purposes or to defraud creditors.
Online Resources§
- Companies Act 2006 (UK)
- Corporate Governance and Accountability
- Legal Information Institute: Corporate Veil
Suggested Books for Further Studies§
- “Corporate Governance: Principles, Policies, and Practices” by Bob Tricker
- “Corporations and Other Business Associations Statutes, Rules, and Forms” by Charles R.T. O’Kelley and Robert B. Thompson
- “Business Law: Text & Cases” by Kenneth W. Clarkson, Roger LeRoy Miller, and Frank B. Cross
Accounting Basics: “Lifting the Veil of Incorporation” Fundamentals Quiz§
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