A company has separate legal personality which is to say that the company’s debts, taxes, and other liabilities are the company’s not the shareholders’; the company is not its shareholders. Because the company is not a tangible entity with flesh and blood, or steel and concrete; it is an abstract entity, a legal fiction; this nature of the company is called a “veil” because the company acts through the shareholders. This corporate advantage may lead shareholders to incorporate a company so that they can avoid liabilities for which they would rightly be held liable in their personal capacity. They are using the corporate entity for illegal purposes, to perpetuate wrongs.
Traditional veil piercing (or corporate disregard) occurs when the members of the company are held liable for the misdeeds attributable to the company for some good reason arising from facts or law. For example, if a company has fraudulently evaded paying taxes, and the members were misusing the corporate form to enrich themselves illegally, the company’s separate personality may be disregarded, and the members held liable in their personal capacity. Traditional veil piercing, the veil (i.e., the corporate form) protects shareholders who are abusing the corporate fiction to perpetuate a wrong, and traditional veil piercing removes the veil to hold the shareholders responsible. The veil is pierced to impose liability on a shareholder who has abused the corporate form for their own advantage.
In reverse veil piercing, the liability of the members is imposed on the company. For example, in a parent company and a subsidiary relationship, the liability of the parent may be imposed on the subsidiary if the subsidiary is a mere alter ego of the parent company. Similarly, a judgment against the individuals with an ownership interest in an entity may be executed against the entity itself. To settle the debts, taxes, or other liabilities of the owners of the entity, a judgment may be executed against the assets of the entity. In this case, the owners are using the corporate form to avoid liability that attaches to their personal capacity, and because they have already assigned their assets to the company, they hope that their assets would not be used to settle the liabilities because they expect that the “company’s assets” would remain undisturbed. Reverse veil piercing ignores the corporate fiction and imposes the liability of the members on the company.
Traditional veil piercing and reverse veil piercing only differ in the direction in which the corporate disregard is applied but they are similar in their goal of preventing the misuse of the corporate form. To enjoy the benefits of reverse veil piercing, you will need to do some due diligence on the misuse of the company’s corporate form and structure. To avoid its risks, you should seek legal advice whenever you have reasonable doubts about questionable transactions in your company.
This article is for general information, it is not legal advice. For any assistance, kindly contact us for guidance if you wish to rely on it.