The corporate veil is a legal concept, which shields members from liabilities arising from the company's act. It tends to treat companies as limited liabilities. Piercing the corporate veil is a controversy of a corporate veil. It looks at the company as a legal person. It takes cooperate veil as unlimited, for it treats its stakeholders and directors accountable in cases where the company does not settle debts. Hence, its shareholders are not protected from the company's acts. However, there are considerations on which veil piercing need to be based on. Below are some points, which support the piercing of the corporate veil.
Courts and commentators come to ask companies to practice piercing of the veil corporates on the next occasions. One, in cases where the company, whether subsidiary or parent, is evading payment of taxes. In such situations, the courts tend to disregard corporate identity. It believes in piercing the corporate veil to know the ownership of the company (Helen, 2009). The real owners of the company are held legitimate for the taxes. Liability is imposed on either director, the stakeholders of the daughter company, or the parent company.
Secondly, in the case where the company is trying to avoid legal obligations, a court can order the piercing of the corporate veil. For example, if the top managers of the firm seek to fake to the government the kind of operations and assets the firm has, by opening new accounts through which transactions take place, the piercing will take place. In the same example, the parent company can decide to form a subsidiary company, which is entirely dependent on the parent company for holding the parent's investment. Piercing corporate veil measures on the directors can aid in determining the real intention of the company (Anderson et al., 2015).
Thirdly, if the company is formed to act as an agent of the principal company, piercing of the corporate identity can be done. If such happens, the established company loses its individuality because of coverage by the first company. Forcing of liability on parent company can help the court to know the transactions, which take place. This point dramatically justifies the importance of piercing the corporate veil to give warning to the corporate groups, which might be planning to use agencies instead.
In addition to that, companies formed to carry out illegal activities, Courts may allow lifting of the corporate veil to get to know the owners. The owners of that particular company suffer the consequences of the entire firm. Besides that, tests of control are carried out by the court on the company to get to know its character. This is done by examining the people who are in control of the business. To understand whether the company is a friend or an enemy to the government.
Efforts by the shareholders to monitor the operations of the company remain to be a clear justification for piercing the corporate veil in Australia. Directors are trying to observe the behavior of the company to reduce higher chances of losing their assets in cases of no repayments by the company-this aids to keep also the track of fellow investors to ensure that they are up-to-date. However, as noted by Easterbrook & Fischel (1996), this also limits the directors of the firms from taking high-risk investment plans safeguarding their property in case of delayed returns.
The imposition of liability to directors as the controllers of the company as a pierce of corporate veil is to punish wrongdoing. The organic theory treats directors as the driving forces for the companies. It records that directors and managers are in the frontlines to lay investments and planning of both long and short term plans of the business. Once the companies get loans from banks or the creditors, it is termed as their decision and choice to do so even if to benefit the company. Failure for the company to make repayments, the directors are forced to. This justifies the piercing of the corporate rule to the directors. It calls for all directors to be very keen on the motives they are taking.
Another reason as to why personal liability on directors is to protect actions that seem to bring harm to the entire company. It considers directors as the overall controllers of the company. If they allow a company to carry on insolvent trading, they are liable. It follows the fact that new debt cannot be introduced and yet other more debts are still pending unsettled. It guides the directors not to breach the law. The legislature here treats them as the decision-makers of the company. It is their duty also to protect creditors and other employees in the company from all kinds of risks, which might befall them.
On the companies that are closely held to one another, their shareholders need to monitor the operation of the company, whether they participate or not. The imposition of liability lands on them as a group. It supports carefulness in the transferability of shares only to the partnership companies. This helps in ensuring that the transaction is between close related firms that are known to one another. It is due to the piercing of the corporate veil, which enables the shareholders to be on the check of the company's operations. This truly justifies that with the piercing of the corporate veil, there can be good stewardship in the company and appropriate utilization of the funds.
In situations where the company has done tort cases, the Courts in Australia prefer to pierce the Corporate veil. It does that by ensuring that it looks beyond the company to know them that are in control of the company. This ensures that the controllers of the business are very much sensitive to managing the company. It ensures that members are making efforts not to be held responsible for causing harm to either creditors or other companies. Under the rule of personal liability, it is recorded that many people would not like being shareholders of different companies to safeguard their properties from loss.
Piercing the corporate veil on corporate groups considers imposing the liability of the subsidiary firm on the parent company. It discourages the fact that in case of no repayment of loans will significantly affect the controllers of the company and its operations. It states that directors will fear to invest because in case of the inability of the company to pay their personal property may be used to recover borrowed loans. It is argued that personal liability on individuals who control the business will discourage investments. It is indicated that the inability of Daughter Company to pay for loans and debts, the Parent company can stand in the gap. It tries to guide one-person-companies which has a single shareholder to involve themselves in critical decision-making processes to cover parent company from unlimited liability.
Parent companies also share all the rewards gained by subsidiary companies. It best equalizes the sense of fairness that, when there are profits, it gets and when losses occur suffers. The piercing ensures an increased rate of economic integration in the corporate groups. It encourages minimal capitalization on subsidiary companies to invest big. It creates room for the daughter companies to borrow a large amount of capital to support risky investments. Perhaps, there must be grounded rules under which the veil needs to be pierced. It does not need to give subsidiary companies an opportunity to all the time keeps debts; it cannot be able to pay. According to Australia courts, it is under several conditions when the piercing of the veil needs to be done.
Rather than the means, substantive grounds need to be considered when deciding whether to shred the veil of corporate or not. Act of wrongdoing on the part of the parent company by either itself of its subsidiary should be on the frontline to allow the piercing of the veil. The parent company acts as the shadow director of a subsidiary company. It entirely focuses on maintaining diligence and good faith to protect it from suffering unlimited liabilities. It is considered much more comfortable to determine parent companies in the case of a single shareholder as the parent company.
Parent companies are mandated to ensure that subsidiary companies are insured against unforeseen risks. It should also ensure that it does not venture into excessively risky projects. It is the responsibility of the parent company to suffer the consequences of committed torts by its subsidiary. Parent companies need to ensure effective control of their daughter companies. However, the availability of the corporate group does not guarantee abuse to the creditors of the parent company by its subsidiaries. If such occurs, there will not be piercing of the corporate veil. Parent companies should allow the courts to determine the adequacy of capitalization over the alleged matter by the subsidiary.
Moreover, a process of changing the grounds under which to pierce the veil was considered. This was to avoid basing the decision on whether to do piercing or do corporate veil base on the means of doing things. For example, if the directors of the parent company act with diligence, carefully and in good faith, they will cover the liable company. This is because parent companies act as shadow directors. Failure of the directors to observe what is required in their duty would allow the court to decide whether to pierce the veil or not. Several areas, which were likely to breach this contract, are; failure to ensure subsidiary companies, actions of fraud, torts commitment, and undercapitalization.
In other cases, though rare in Australia, Statute is considered to pierce the corporate veil. It handles this on corporate groups instead of leaving it for the common law. It is mostly used in the US. It is preferred because, first, it overcomes the significant objections points such as uncertainties in the veil piercing. Secondly, it ensures there are minimal litigation costs and genuine compensation. It also discourages the improper consideration by the courts to mistreat parent companies due to their failure to comply with the rules. The report suggests that the case for statutory veil-piercing dealt with by specific legislation where the extension of liability to the subsidiary firm should be desirable in the public interest.
Because Australia does not have extensively growing factors justifying veil pierce the corporate groups, it has postured fewer cases. Courts are reluctant to pierce the veil on corporate groups (Deakin & Adams, 2019). The confusion occurs on choosing the correct test to apply, on whether to believe in the representation of companies by directors or to put into account the interests of different individuals without checking the effects they might cause to the related companies. This brought the challenge on whether to treat parent companies as separate legal personalities or as the existence of group companies as a single entity.
In conclusion, the liability of the parent company is preferred to individual unlimited liability. This is because there are more difficulties in shareholders' unlimited liabilities compared to limited creditors' liabilities. Corporate groups share much in common with directors hence creating piercing corporate veil. Some of the above-discussed conditions as to why the veil is pierced are such as; closely related companies held together, the commitment of torts by a subsidiary of parent companies, wrongdoing by corporate groups, among others. Finally, the case made by the legislation of Australia supported the piercing of the veil on corporate groups rather than individual controllers of the companies. It is so appropriate to pierce the corporate veil.
Part 11 (Current State of the Law in Australia on the Veil Pierci...
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