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How the Corporate Veil can be abused by any Multi-National Enterprise (MNE)

Updated on July 4, 2015

The Corporate Veil

I think most of us are aware of what actually is the corporate veil. It means that the company has an artificial legal personality and amounts to a person in the legal realm. For those who are not familiar with this concept, a distinction between human personality and legal personality can be enlightening. This has been well put by authors like Alan Dignam and John Lowry. Legal personality is where in the eyes of law, the entity is perceived as a real person. Human personality does not equate to legal personality. For example a child has no legal personality. He/she is not capable of owning properties. And of course in contrast, legal personality does not equate to human personality as well (eg companies). Since a company is accorded a legal personality, it is treated as a real person in the eyes of law, and can own properties and even can bear its own liabilities. Consequently, should there be a loss, investors would only suffer a limited liability ie. the amount initially invested. The liabilities of a company is not the liabilities of the shareholders/investors.

However, not many understand the danger of this concept of corporate veil in the context of group structures. This is where the parent company and its subsidiary company each has their own distinct legal personality. Should the subsidiary company suffer serious losses, the parent company would not be accountable to pay those debts.

So there can be serious abuses of this concept. One of the most famous English case has to be Adams v Cape Industries Plc. This is where a subsidiary company was established in the US for the installation of asbestos factories. Asbestos are potentially harmful and the employees consequently suffer personal injury. In short, the arrangement was so that all the risks were born by the subsidiary company and the parent company can reap all the benefits.

From a legal perspective, the victims (employees) can only sue the subsidiary company because in the eyes of law, the subsidiary is the legal entity which harmed them; not the parent company. And of course, all the assets of the subsidiary had been transferred to the parent company prior to any form of litigation.

As such, it is important to understand the nature of any company before we work for it, and to understand the legal issues that may arise.

Can we penetrate this artificial veil?

It is quite obvious what the investors had in mind : extend the primary protection that is the parent company to achieve a secondary protection, its subsidiary. Deploy new risky schemes on the subsidiary so that we can have the parent company to fall back to. All assets were transferred to the parent company leaving the risks to its subsidiary, but in terms of law, this is still legal. This is absurd, right?

What can the working class or the victims in this case do? Is veil piercing possible? Yes, it is. If the veil is pierced (or lifted or penetrated, then the parent company would be liable for the losses of its subsidiary) But they are so limited that none of the possible methods apply in this situation. Nevertheless, we shall take a look. There are basically three ways for this:

1. The Agency relationship

This is where the subsidiary company is seen to be so dependent and reliant on the parent company. And the corporate veil can only be pierced (and hence the parent company would be liable) if there is a day-to-day control over the subsidiary by the parent company. This is usually unlikely in most situations. Where there is a subsidiary company, there is almost always delegation for quick management. Only the broad policies and goals are communicated down the command chain. It is unlikely for control on a daily basis to be found.

2. Single economic entity

This previously treats two separate companies who share the same finance as one single entity but at present it requires an uncertainty in the interpretation of a document or statute. It is now rarely applicable.

3. Fraud

Fraud in this aspect only covers scenarios where a person is trying to avoid his pre-existing legal obligations. For example, Mr X fraudulently embezzled funds from Company A, and then transferred them to his newly-incorporated company.

As seen, none of these situations are able to lift the corporate veil of the abuse by the above MNE scenario. I hope readers now understand better on the danger of corporate veil abuses, and understand that the law can have significant impact in our lives.

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    • ladyguitarpicker profile image

      stella vadakin 

      2 years ago from 3460NW 50 St Bell, Fl32619

      Yes, anyway to get out of a legal obligation and pass the buck to someone else.

    • frozenink profile imageAUTHOR

      frozenink 

      3 years ago

      Thanks for stopping by, Larry.

    • Larry Rankin profile image

      Larry Rankin 

      3 years ago from Oklahoma

      Interesting look into the corporate world.

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