Piercing Through Corporate Veil

PIERCING THROUGH CORPORATE VEIL PIERCING THROUGH CORPORATE VEIL By Qaiser Javed Mian, Attorney-at-Law In the United States, corporate veil piercing is the most litigated issue in corporate law'. Natural persons usually form corporations/companies to insulate themselves from liability. The foremost advantage of incorporating is that the principals of the corporation/company get protected from personal responsibility for the debts and liabilities of the corporation/ company. But it is ironic that courts in Pakistan are generally reluctant to disregard the corporate form and pierce or lift the corporate veil. Traditionally the touchstone for the drastic remedy of piercing the corporate veil has been fraud. But the latest menace to our society and to the country is money laundering to provide funds to the terrorists and to private armies i.e. mercenaries though not only the corporate world but also through certain NGOs. The doctrine of lifting the veil should not only apply to corporate world but should also apply to the NGOs operating in the third world, particularly in Pakistan. The third category whose veil should be lifted is the politicians and bureaucrats who make black money, dirty money, and naughty money and so one. Therefore, in scope of this doctrine of "lifting veil" should be widened to cover all the three categories stated before. Traditionally, under this concept, the corporate personhood is set aside and personal liability is searched in favour of the affect plaintiff/petitioner in which case personal assets can also be reached out even if the corporate liability was limited. Factors-Criteria. Generally when evaluating if a corporation/company is in fact legitimate or Sham and whether the veil should be pierced, courts look into the following factors:-- (i) Did the corporation follow proper procedures prescribed under the Company Law? (ii) Was the corporation dependent on property or assets of a shareholder, which the shareholder did not technically own or control or where the corporate finances commingled or jumbled up with those of its shareholders. (iii) Whether the corporation is not really a distinct juristic entity or it is merely an extension or "alter ego" of its shareholders. (iv) What amount of financial interest, ownership and control did the Principals maintain over the corporation? (v) Did the Principals use the Corporation to advance personal purposes? (vi) Whether the corporation fails or passes in the "doctrine of inseparability" Common Law Countries usually uphold the principle of separate personhood, a corporate person, a juristic entity, but, at times the corporate veil has to be pierced through or lifted. In Pakistan, it has become a frequently required requirement keeping in view the scams such as "finance companies", "Taj Company", Co-operative Societies' scandal and Forex companies i.e. Currency exchange companies' fraud etc. One simple example for invoking the theory of lifting the veil is that where a businessman has left his job as a director and has signed a contract not to compete with the company he has just left, for a specified period of time. If he forms a company undertaking such a business, which is in competition with his former company, technically it would be the company and not the natural person competing. But it is likely that on the touchstone of "inseparability doctrine" or otherwise, a court may hold that the new company was just a "sham" or a "fraud" company3 and would still allow the old company to sue the man for breach of contract. It is submitted that besides the test of "inseparability doctrine", liability can be established through other conventional means/theories, such as, but not limited to contract, agency, or tort law. For example, where a Director acting on behalf of the company personally commits a tort, he and the company are jointly liable, the company being insolvent, he shall have to be liable even without invoking the doctrine of "piercing through corporate veil". In England, "Single Economic Unit Theory" is also in vogue. In Pakistan, the law of tort, though very much in existence in the books, is rarely found in the courts. The doctrine, which is in vogue in Pakistan is "Benami" "living beyond means" and the Benami Assets inside and outside Pakistan. This is usually the starting point of the investigation, which ends up in the Accountability Courts and then the higher Courts. In most jurisdictions, no bright-line rule exists and the rulings are normally based on common law precedents. In the U.S theories like "alter ego" or "instrumentality rule", are tried to create a piercing standard. Mostly their bases are, "Unity of interest and ownership", "wrongful conduct" and "proximate cause". These theories in today's world have proved inadequate; therefore, the theory of "totality of circumstances" is often resorted to. In determining whether or not the corporate veil may be pierced, the courts are required to use the laws of the company's home State. The rules for allowing the piercing through corporate veil are much more liberal in California than they are in Nevada. While some States strictly apply the doctrine and require evidence of "fraud", States like New York, Ohio, Oregon, Pennsylvania and Washington have moved away from the "fraud" requirement and merely require "injustice or impropriety". In the year 2006, courts in Mississippi, New Jersey and Michigan have reinforced the requirements of showing "fraud"4. Most prevalent criteria, however, are Shareholders' control of the company. Shareholder's improper conduct in controlling the company. Casual link between improper conduct and plaintiff s injury.5 However, "improper conduct" includes "gross under capitalization, syphoning off corporate funds, mis representations, bungling up the fund/accounts, holding out, and the failure to observe corporate formalities.6 In almost thirty years of corporate practice of this author in the Middle East and in Pakistan most U.S Companies operating abroad use their Delaware Incorporation for foreign operations/projects keeping in view the favourable laws in the State of Delaware. Factors for Courts to Consider (i) Absence or inaccuracy of corporate records; (ii) Concealment or misrepresentation of members; (iii) Failure to maintain arms-length relationships with related entities; (iv) Failure to observe corporate formalities in terms of behaviour and documentation; (v) Failure to pay dividends; (vi) Intermingling of assets of the company and of the shareholders; (vii) Manipulation of assets and/or liabilities for ulterior purposes; (viii) Non-functioning corporate officers and/or Directors; (ix) Fulfilling capitalization requirements; (x) Syphoning off corporate funds; (xi) Treatment by an individual of Company's assets as his/her own. In most jurisdictions, the doctrine of "piercing through corporate veil" is in a state of transition. However, in Pakistan, it appears that the doctrine has been given strong tranquilizer and this benefit equally flows to the foreign companies and Joint Ventures with Pakistanis operating in Pakistan including those who are undertaking armed activities under a corporate shell. It is about time that the corporate sector should be fully scanned for the black money, dirty money and naughty money used through corporate sector on mercenaries who have played enough havoc to our economy and social fabric. Where ten years old would hold a Kalashnikov, hand grenade or any other automatic weapon and a common man would carry missiles launcher on his shoulders, 'this nation needs to take drastic steps and our courts should do their best to control the dirty money. 1. Thomson Robert B; "Piercing the Corporate Veil: An Empirical Study", Cornell Law Review 76: (1991) p.1036-1074. 2. Further elaboration and definitions of different kind of moneys is given in internal use handbook of instructions provided by the British Government to the relevant officers/departments. 3. HG Henn and JR Alexander, "Corporations", (3rd ed. Hornbooks 1983) Ch.7, 344. The courts use the terms as, mere adjunct, agent, alias, alter ego, alter ideni, arm, blind, branch, buffer, cloak, corporate, double, cover creature delusion, dry shell, dummy, fiction, form, fiction from formality fraud on the law etc. 4. Elizabeth S.Fenton, "Recent Developments and Divergences in the Doctrine of Piercing the Corporate Veil", (published in "Business Torts Journal) (2006)". 5. Hambleton Bros. Lumber Co. v. Balkin Enters, Inc., 397 F.3d 1217, 1228 (9th Cir. 2005). 6. Hambleton Bros. Lumber Co. v. Balkin Enters, Inc., 397 F.3d 1217, 1228 (9th Cir. 2005).