The Veil Doctrine in Company Law

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I- The Veil Doctrine in Company Law

1.1: Introduction

A corporation under Company law or corporate law is specifically referred to as a “legal person”- as a subject of rights and duties that is capable of owning real property, entering into contracts, and having the ability to sue and be sued in its own name.[1] In other words, a corporation is a juristic person that in most instances is legally treated as a person, and empowered with he attributes to own its own property, execute contracts, as well as ability to sue and be sued.

One of the main motivations for forming a corporation or company is the limited liability it offers its shareholders. By this doctrine (limited liability), a shareholder can only lose only what he or she has contributed as shares to the corporate entity and nothing more.

Nevertheless, there is a major exception to the general concept of limited liability. There are certain circumstances in which courts will have to look through the corporation, that is, lift the veil of incorporation, otherwise known as piercing the veil, and hold the shareholders of the company directly and personally liable for the obligations of the corporation.

The veil doctrine is invoked when shareholders blur the distinction between the corporation and the shareholders. It is worthy of note that although a separate legal entity, a company or corporation can only act through human agents that compose it. [2]As a result, there are two main ways through which a company becomes liable in company or corporate law to wit: through direct liability (for direct infringement) and through secondary liability (for acts of its human agents acting in the course of their employment).[3]

The doctrine of piercing the corporate veil varies from country to country. In the opinion of two Corporate law scholars, apparently, there is a general consensus that the whole area of limited liability, and conversely of piercing the corporate veil, is among the most confusing in corporate law.”[4]

There are two existing theories for the lifting of the corporate veil. The first is the “alter-ego” or other self theory, and the other is the “instrumentality” theory.[5]

The alter-ego theory considers if there is in distinctive nature of the boundaries between the corporation and its shareholders. [6]

The instrumentality theory on the other hand examines the use of a corporation by its owners in ways that benefit the owner rather than the corporation. It is up to the court to decide on which theory to apply or make a melange of the two doctrines.[7]

Courts are generally reluctant to pierce the corporate veil, and this is only done when liability is imposed to reach an equitable result.

1.2: Meaning of Corporation in Company Law

To begin with, the word company will be used in this paper to refer to a legal entity with an identity different from that of its owners. It goes without saying that the owners in such an entity are not held liable for the firm’s obligations in excess of the value of their investment therein.[8] In fact, a company is equal in law to a natural person.

In different legal systems, corporate law and company law mean the same thing. In either circumstance, the term is used to denote the field of law concerning the creation and regulation of companies or corporations and other business organizations.

The important thing to note however is that although a separate legal entity, a company or corporation can only act through human agents that compose it. As a result, there are two main ways through which a company becomes liable in company or corporate law to wit: through direct liability (for direct infringement) and through secondary liability (for acts of it’s human agents acting in the course of their employment).

1.3: Veil Doctrine as derivative from Separate legal personality concept

As aforementioned, a company once incorporated becomes a legal personality or a juristic entity that has...
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