Lifting the Corporate Veil

A corporation is an artificial legal person that exists independently

of its individuals members. As such, the companys assets, debts
and obligations are not the assets, debts and obligations of its
shareholders, directors and employees. Similarly, in group
enterprise, the parent (holding) and its subsidiary company are
two separate legal entities which have distinct, independent legal
rights and liabilities of the others.
Lifting of the corporate veil means disregarding the corporate
personality and looking behind the real person who are in the
control of the company. In other words, where a fraudulent and
dishonest use is made of the legal entity, the individuals
concerned will not be allowed to take shelter behind the corporate
personality. In this regards the court will break through the
corporate shell and apply the principle of what is known as lifting
or piercing through the corporate veil." And while by fiction of law
a corporation is a distinct entity, yet in reality it is an association
of persons who are in fact the beneficial owners of all the
corporate property.
Benefits of Corporate Veil:
A primary advantage of the corporate form of organization is to
achieve the doctrine of limited liability, which serves as the
corporate veil" to its members, due to separate legal entity
characteristic of a corporation. The corporate veil shields the
members from personal liability for corporate debts, taxes and
obligations. In the event of the company is wound up,
shareholders' losses are limited to their contributions to the
companys capital in the form of decreased value of the shares
and any loans made to the company.
The veil of corporate personality may be lifted in certain
cases:
1. Reduction of membership
2. Misrepresentation in prospectus

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3. Mis-description of name
4. Fraudulent conduct
5. Liability for ultra vires acts

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There are many cases about lifting the corporate veil like as,
Salomon v. Salomon and Co. Ltd, Macaura v. Northern Assurance Co.
Ltd, Jones v. Lipman, Adams vs Cape Industries, etc.
Lifting the corporate veil was first established by the English House
of Lords in Salomon v. Salomon & Co. Ltd. and well accepted as part
of Malaysian company law. The brief facts are as follow: Aron
Salomon had for some year been a prosperous leather merchant and
wholesale boot manufacturer running the business as a sole trader.
He then decided to transfer the business into a limited liability
company. The subscribers of the memorandum include Salomon, his
wife and five of his children. Besides, he also received for his
business debentures and continued to carry on the business as
before. A year after, the company went bankrupt and was put into
liquidation. There were just enough assets to pay off the debenture
holders including Salomon himself. The unsecured creditors claimed
that the company was mere nominee and agent of Salomon".
Salomon should be ordered to pay compensation for the company
against its debts other than Salomon himself. The Lord Macnagthen
held that though it may be that after incorporation the business is
precisely the same as it was before, and the same persons are
managers, and the same hands receive the profits, the company is
not in law the agent of the subscribers or trustee for them.
Therefore, even though a person held almost all shares and
debentures, and controlled the companys operations, one was
entitled to be deal with the company as a separate legal existence
from oneself. As such, one is treated as other secured creditors who
have priority over unsecured creditors in the event of the company
being insolvent. Hence, a company is an artificial legal person
distinct from its individual members. Corporation or subsidiaries, not
its directors or individual members or the parent corporation, is
liable for its own contract made, torts committed or debts incurred.
This principle is regarded as the veil of the corporation.
After all that, corporation is an independent person separate from
their individual members or another corporation. Hence,
shareholders, officers, director, or parent corporation will not be
liable for debts, nor any of the corporate acts or obligations of its
corporation or subsidiary corporation even if they are considering

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illegal. It can be supposed that one of the biggest advantages to
incorporating a business is that shareholders of the corporation can
enjoy broad protection from personal exposure to trade creditors.
However, in certain situations this corporate privilege is used as a
device to exploit loopholes in the law for insulate oneself from
liability for ones own misdeeds or to hide the true state of affairs
from the court.