One of the primary benefits of creating a corporate entity is to limit the liability of the shareholders. However, under certain circumstances the corporate entity may be disregarded. This is also known as piercing the corporate veil and is the most frequent method for holding the shareholders liable for the acts of a corporation. Corporate officers, directors and controlling shareholders have a general fiduciary duty of loyalty and care which should govern all their corporate conduct.
Unless they breach that duty by gross negligence or acts in bad faith, they usually will have no personal liability to third parties. In order to pierce the corporate veil, third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible for extra-corporate actions. Under the doctrine of piercing the corporate veil, the courts may decide not observe the separation of the corporate entity from its stockholders, and it may deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation.
This is based upon a finding by the court that the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose. A court may pierce through the veil of liability protection if the corporation does not follow proper corporate formalities, if it is undercapitalized, or if it can be shown that it is a sham that was set up to defraud. If the corporate formalities are not followed, the corporation may be deemed to not be functioning as a corporation, but rather, as the alter ego of the owners.
To prevent the corporate veil from being pierced, it is important to keep minutes of the board meetings and to not co-mingle bank accounts. These measures help to ensure that the corporation will be treated as a separate entity. 1. 2 Research Problem The major question to be addressed is: What are the legal provisions, grounds and practices relating to the Doctrine of Lifting the Corporate Veil? And it is sufficiently utilized or not in the Nepalese context? 1. 3 Objectives The basic objectives of this paper are: 1. To describe the concept of Doctrine of Lifting the Corporate Veil.
2. To analyze the utilization situation of the doctrine in Nepalese Context. 1. 4 Justification The corporate entity is separate legal entity than its shareholders, directors and employees. The owners of the company will have only the limited liability extended to their enrolment in share holdings. But in certain conditions, the act of the company might be addressed due negligence or wilfull fraud. So it is clear that the company cannot act on its own and the act is carried by the directors. The doctrine is important to find out the actual scenario behind the name of the company.
So it is mostly important when the directors carry out the act which is done in the name of the company but is done for the sole benefit of the directors only or to carry out the acts that are not supposed to be done as per the law. 1. 5 Limitation This paper has been written only for academic purpose. this paper has been written on the base on library study and only on available documentary sources in given time frame. So the subject is not dealt with in great depth. Moreover, the time-limitation that required the paper to be submitted within a prescribed span of time limited detailed and exhaustive study and research on the topic.
The specific topic itself also poses some limitation, so the paper will only cover the basic conceptual part of the topic. This academic paper tries to give clear concept about the usage of the doctrine of Lifting the Corporate Veil in Nepalese context 1. 6 Organization of the study This paper is organized into six chapters. First chapter will be introductory where as second chapter will show the review of past literatures carried out by prominent researchers. Chapter three will show the methodology that is used in performing the research.
The remaining chapters will be analytically presented in its specific titles. The fourth chapter will show the conceptual framework about the topic, its relevant areas and general concepts. The fifth chapter will show the legal provisions and judicial decisions, application of the doctrine in Nepalese context. The sixth and final chapter provides conclusion of this paper. CHAPTER TWO Literature Review For the purpose of this study, detailed review of literature had been done. These studies were conducted in the national as well as international general concepts.
For the purpose of this study, article of renewed authors, various study reports prepared by concerning agencies, books on the related topic are reviewed for the support of this study. The Act itself has been taken as a tool for the completion of this study. The judgments of courts in various cases on this subject are also reviewed in the course of this study. Journals reports research papers, discussion papers and other issues published by respective institutions have tried to shed light on it. Literature, which have been reviewed are mentioned as below 2. 1Abolishing Veil Peircing
This article is written by Stephen Bainbridgen published in The Journal of Corporation Law available at www. legal dictionary. com. According to the writer, Courts traditionally require fraud, illegality, or misrepresentation before they will pierce the corporate veil. Courts also may ignore the corporate existence where the controlling shareholder or shareholders use the corporation as merely their instrumentality or alter ego, where the corporation is undercapitalized, and where the corporation ignores the formalities required by law or commingles its assets with those of a controlling shareholder or shareholders.
In addition, courts may refuse to recognize a separate corporate existence when doing so would violate a clearly defined statutory policy. Many times, a controlling shareholder is itself a corporation: the controlling shareholder is the parent corporation, and the controlled corporation is a subsidiary. In some circumstances courts may pierce the corporate veil protecting the parent and hold the parent liable for the subsidiary’s obligations.
This happens where the subsidiary loses its independent existence because the parent dominates the subsidiary’s affairs by participating in day-to-day operations, resolving important policy decisions, making business decisions without consulting the subsidiary’s directors or officers, and issuing instructions directly to the subsidiary’s employees or instructing its own employees to conduct the subsidiary’s business.
Courts following the instrumentality doctrine concentrate on finding three factors: (1) the people behind the corporation dominate the corporation’s finances and business practices so much that the corporate entity has no separate will or existence; (2) the control has resulted in a fraud or wrong, or a dishonest or unjust act; and (3) the control and harm directly caused the plaintiff’s injury or unjust loss.
The alter ego doctrine allows courts to pierce the corporate veil when two factors exist: (1) the shareholder or shareholders disregard the separate corporate entity and use the corporation as a tool for personal business, merging their separate entities with that of the corporation and making the corporation merely their alter ego; and (2) recognizing the corporation and shareholders as separate entities would give court approval to fraud or cause an unfair result. 2. 2 Piercing the Corporate Veil This article is written anonymous writer and is available at www. quickmba. com.
According to the writer, The corporate protection of limited liability can be lost through: 1. Piercing of the corporate veil A court may pierce through the veil of liability protection if the corporation does not follow proper corporate formalities, if it is undercapitalized, or if it can be shown that it is a sham that was set up to defraud. If the corporate formalities are not followed, the corporation may be deemed to not be functioning as a corporation, but rather, as the alter ego of the owners. To prevent the corporate veil from being pierced, it is important to keep minutes of the board meetings and to not co-mingle bank accounts.
These measures help to ensure that the corporation will be treated as a separate entity should it be sued. 2. Defective incorporation Suppose that a person forms a corporation and convinces two other people to invest. If the corporation later gets sued and it is discovered that the corporation had not been formed properly, the investors may not have limited liability due to defective incorporation. Individuals may be held personally liable if the corporation is not set up properly but proceeds to do business.
In such cases of defective incorporation, one can escape personal liability under certain conditions. For example, if a good-faith effort was made to incorporate and a substantial portion of the incorporation laws were followed, limited liability protection may be granted. 3. Improper signing of documents. When signing documents on behalf of a corporation, both the name of the corporation and the signer’s representative position in the corporation must be stated. 2. 3Piercing the corporate Veil This article is written anonymous writer and is available at www. residual-rewards. com.
According to the writer, Piercing the Corporate Veil can happen when: •corporate debt is knowingly incurred when the company is already insolvent; •required annual shareholders or board of directors meetings are not held, or other Corporate-Formalities are not observed; •corporate records, especially minutes of directors meetings, are not properly or adequately maintained; •shareholders remove unreasonable amounts of funds from the corporation, endangering its financial stability; •there is a pattern of consistent non-payment of dividends, or payment of excessive dividends; •there is a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation; •there is a failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder who is in fact, the corporate “alter ego. ” 2. 4 Lifting the Corporate Veil in Commercial Arbitration This article is written by Ramesh Karkee, published in Business law journal and published by commercial law society, Kathmandu. According to the writer, the company has life of its own, can own property, can sue and be sued in its own name, has perpetual life and existence to name a few benefits of incorporation. It is a trite law that a rather hefty veil is drawn between these two that can be lifted only in a limited number of circumstances that seem to be fluctuating according to the current judicial thinking. 2. 4The Veil Doctrine in Company Law
This article is written by Amin George Forji, available at www. residual-rewards. com. According to the writer, the act of piercing the corporate veil until now remains one of the most controversial subjects in corporate law, and it would continue to remain so, even for the years to come. By and large, as discussed in the essay, the doctrine of piercing the corporate veil remains only an exceptional act orchestrated by courts of law. Courts are most prepared to respect the rule of corporate personality, that a company is a separate legal entity from it’s shareholders, having it’ own rights and duties, and can sue and be sued in it’s own name.
As we move from jurisdiction to jurisdiction across the globe, it’s application narrows down to how that system of the law appreciates the subject. Common law jurisdictions are examples par excellence where the piercing of the corporate veil has gained notoriety, and as the various cases indicate, courts under this system of the law generally appreciates every case by it’s merits. The above notwithstanding, there are general categories such as fraud, agency, sham or facade, unfairness and group enterprises; which are believed to be he most peculiar basis under which the common law courts would pierce he corporate veil. But these categories are just a guideline and by no means far from being exhaustive.