Piercing the Corporate Veil: What Does it Mean?

Author: Marcos Fontes, Progressive Legal

The concept of “corporate veil” is fundamental to modern corporate law, providing a shield that protects the personal assets of directors and shareholders from liabilities of the company. However, there are circumstances where this protection is lifted, exposing professionals behind the company to personal liability.

This article explores the conditions under which Australian Courts may pierce the corporate veil, providing valuable insights for directors and shareholders.

What is the corporate veil?

The “corporate veil” is a legal concept that separates the company’s identity from that of its directors and shareholders. It serves as a protective barrier, a shield, ensuring that personal assets of directors and shareholders are not typically at risk if the company faces legal or financial trouble. This protection is one of the key reasons why a business should choose to operate as a corporation. 

When is the corporate veil pierced in Australia? 

There are specific instances where Australian Courts may decide to pierce the corporate veil. The Courts can lift the corporate veil if: 

1. Fraud

If a company is used to perpetrate fraud or engage in dishonest activities, the Courts may hold the individuals behind the company personally liable. A good example is when directors use the company as a vehicle to deceive creditors, the protection normally afforded by the corporate veil may be set aside.

2. Sham companies

When a company is merely a façade or front for personal dealings, without any real business operations, courts may disregard the corporate veil. This typically occurs when the company lacks any substantial business activity and is used primarily to shield individuals from liability.

3. Breach of the director’s fiduciary duties

If directors knowingly and fraudulently breach their fiduciary duties, the corporate veil may be pierced. This includes situations where directors act in their own interest rather than in the interest of the company leading to financial harm.

4. Agency

If a subsidiary company acts as an agent for the parent company, Courts may lift the corporate veil in order to consider the parent company liable. This often happens when the subsidiary has little independence and merely acts on behalf of the parent. 

Additionally, statutory provisions, such as section 588G of the Corporations Act 2001 (Cth), set out specific requirements under which the corporate veil may be lifted, particularly in cases of insolvent trading: 

5. Insolvent trading

Directors who engage in or fail to prevent insolvent trading may face personal liability. This is a critical area where the corporate veil is pierced to hold directors accountable for continuing to incur debts when the company is insolvent. 

Examples of when has the Court has ‘pierced the corporate veil’: key cases

Several legal cases built the understanding of piercing the corporate veil in Australia: 

Salomon v A Salomon & Co Ltd [1897] AC 22

Though a UK case, Salomon is foundational for the corporate veil concept globally. It established the principle of separate legal personality, which is central to modern corporate law. However, this case also laid the groundwork for exceptions where the veil may be pierced. 

Gilford Motor Co Ltd v Horne [1933] Ch 935

This is another UK case often cited in Australia, where the Court pierced the corporate veil to prevent a director from evading contractual obligations. This case is frequently refenced in Australia to demonstrate that Courts will look beyond the corporate structure when necessary to prevent the misuse of corporations to perpetrate fraud or wrongdoing. 

Australian Securities and Investments Commission (ASIC) v Holista Colltech Ltd [2024] FCA 244

In this Australian case, the Court pierced the corporate veil, holding both the company and its director personally liable for making misleading statements and engaging in conduct that breached the company’s continuous disclosure obligations under the Corporations Act. This case highlights the critical role of transparency and integrity in corporate governance, demonstrating that courts will look beyond the corporate structure when necessary to ensure accountability. 

What are the implications of ‘piercing the corporate veil’ for directors and shareholders?

When the corporate veil is pierced, the legal consequences can be significant. Directors and shareholders may find themselves personally liable for the company’s debts, legal obligations, and other liabilities. This can lead to financial losses and damage to their personal and professional reputations. In some cases, directors may also face disqualification from managing companies in the future. 

Practical tips to avoid liability

To minimise the risk of personal liability, directors and shareholders should adopt the following practical measures: 

1. Ensure the company is not used for illegal or fraudulent purposes: engage in legitimate business activities, ensuring that the company is not used as a tool for personal gain at the expense of the others. Courts are more likely to pierce the corporate veil if they suspect illegal or unethical conduct.

2. Maintain clear and transparent business operations: properly document all transactions and maintain accurate financial records. Transparency in business can prevent misunderstandings and legal disputes that might lead to the lifting of the corporate veil.

3. Adhere to corporate governance practices: follow best practices in corporate governance, including holding regular board meetings and ensuring compliance with statutory obligations. Adhering to good governance practices reduces the likelihood of directors being personally targeted in legal actions.

4. Keep personal and corporate dealings separate: avoid mixing personal and corporate assets or using the company to fund personal expenses. Clear separation between personal and company finances reinforces the integrity of the corporate structure.

5. Regularly review compliance with statutory obligations: legislations change very often, so stay informed and ensure that the company complies with all legal requirements. Regular audits and legal reviews can help and address potential risks before they lead to liability. 

Key takeaways

Understanding when the corporate veil might be pierced is crucial for professionals involved in running a company. By staying informed and practicing good corporate governance, directors and shareholders can reduce the risks associated with personal liability. It is always advisable to seek legal advice to ensure full compliance and to safeguard against potential liabilities.

At Progressive Legal, our experienced corporate lawyers are ready to assist you in understanding your legal obligations as a director or shareholder.

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