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The concept of piercing the corporate veil is troublesome and should be abolished, especially in corporate group (Essay Sample)

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\"THE CONCEPT OF PIERCING THE CORPORATE VEIL IS TROUBLESOME AND SHOULD BE ABOLISHED, ESPECIALLY IN CORPORATE GROUP\"

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"THE CONCEPT OF PIERCING THE CORPORATE VEIL IS TROUBLESOME AND SHOULD BE ABOLISHED, ESPECIALLY IN CORPORATE GROUP"
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"The concept of piercing the corporate veil is troublesome and should be abolished, especially in corporate group"
A limited liability company hereafter (LLC) and a corporation stands outs as businesses that do not pass the liabilities or rights to the shareholders or owners. They are never held liable or responsible for the debts that the business is facing; however the court can uphold such a decision and make them liable (Ramsay & Noakes, 2001, p.251). This means the corporate or LLC is facing piercing the corporate veil. This means that the shareholders or owners are held personally liable for the debts of the business. For a struggling business the most adverse idea would be to pass the liabilities and debts of the business to the shareholders; this is because the business has not been beneficial or generating an income. It would be double burden for the shareholders, members and owners of such business to carry the liabilities of such companies. In this paper, there is a critical discussion of why of piercing the corporate veil is troublesome and should be abolished, especially in corporate group, with respect to relevant case law and statutory provision.
Corporate liability
The purpose of forming a corporate entity is the distinction and separation of the rights and liabilities of the owners, members or shareholders. This is a separate entity and hence the owners cannot bear the burden of the liabilities of the debts the company has. They can therefore not be held personally liable when the company is in debts and their property cannot be attached to pay the corporate debts. In case a court of law pierces the veil on a given company then creditors can acquire the assets of the members, shareholders or owners including land, homes, money in accounts or other investments to repay the company’s debts (Smith, 2008, p.2). For a court to pierce the corporate veil the company must be having fraudulent transactions, no separation of the owners and company’s transactions or there is unjust costs faced by the creditors.
According to Ramsay, & Noakes, (2001, p.251) the cases being heard by the courts on piercing the veil have increased over time; additionally the courts have been found to pierce the proprietary company corporate veil than a public company. The authors further identify that the rates of piercing declined with the increase in the number of shareholders. Also the courts were found to more frequently pierce the veil of companies sought after piecing one or more individuals than those sought to pierce the parent company. This means that more decisions in court favored the single individuals and shielded them from piercing than when the whole company is in question. This can be a move to increase the abuse of office by single individuals as they can be shielded from liabilities by the courts through the separation rights. Finally the authors found out that the courts pierce less frequently in a tort context than in a contract form.
The concept of piercing the corporate veil may be a noble and strategic idea however, it seeks to erode the economic gains and benefits that the corporate and limited liability companies establish. Such benefits include reducing the equity ownership, enhancing economic growth, investment diversification, monitoring costs reductions, share liquidity increase and managers are encouraged to undertake profitable projects that involve a high risk. Once the piercing the corporate veil concept is introduced in any company set up the benefits are eroded and generates uncertainty for the shareholders and investors (Ramsay & Noakes, 2001, p.254). For instance, no shareholder will accept to be liable for the debts of a company and hence will have reduced interest in investing in such companies. Indeed, it can contribute to collapse of the companies in the stock exchange as shareholders try to shed off the shares of any company that faces a case in court. This may affect even before the case is heard and determined and if the case is not true the situation may be too late to reverse the effects (Smith, 2008, p.4).
Piercing the corporate veil shifts the liability and costs to innocent shareholders; this is especially when the veil is pierced against all shareholders. The investors may not even know the transactions that caused the piercing but will be held liable in case the court decides so. N such cases, innocent shareholders will have their assets acquired to repay loans that they know nothing about.
On the issue of high risks for the business it would always very difficult for the managers to take high risk; this does not act as deterrence to making losses but a barrier to opportunities that would earn the business mega profits (Bainbridge, 2001, p.481). In business, high risks are equated to high returns and if managers are limited in taking the risk due to the risks of piercing the corporate veil then it means that business are losing on every passing opportunity.
A factor used to determine piercing the corporate veil is adequate capitalization; this creates a dilemma as the business faces various challenges when running. The court need not look at the capitalization of the company during the suit but during formation as this is what determines the corporate capital. The company’s capital may change from time to time depending on the economic situations and the business deals involved; this is because of various checks and balances. This criterion of determining the piercing of the corporate veil falls short of strong measures to determine the same. Passing liability to members, owners and shareholders during such hard economic times would be unfair and retrogressive as they incur an unnecessary costs brought about by prevailing conditions (Smith, 2008, p.6). As a matter of fact, the owners are not duty bound to recapitalize a company that is failing. For a business to incur losses and use the available to capital to refinance is no evidence of undercapitalization but it would only be relevant if the company is a sham.
Creditors, who argue that the corporate principle of separation should be abolished, have only themselves to blame; this is because they voluntarily tender for the contracts with the companies. The presence of limited liability never discourages risky behaviors and hence the long term benefits will surpass the costs incurred. In the Salomon v Salomon & Co [1897] AC 22 (Salomon) case the court affirms that the registration of a company forms a legal entity; this is separate from the shareholders and is capable to stand on its own. Additionally, shareholders only invest in the company and hence should not be held liable for the debts incurred by the company afar from their capital investment initially made; this is because they do not have proprietary interests in the company’s property. Those who argue for piercing the corporate veil only want to deny the shareholders their protection.
In enforcing the piercing of the corporate veil law then the benefits of a corporate are eroded this will be troublesome and create a lot of losses to investors. For the economy it will suffer inefficiency given that the shareholders will reduce on investments (Gelb, 1982, p.27). Generally, the limited liability ensures that shareholders need not monitor the managers since the consequences are limited; this is because they don’t have the expertise or the incentive to do so. In such circumstances the managers make strategic and rational decisions and strategies that allow diversity and hence reduced costs of operation.
In allowing managers to work efficiently the benefits trickle down not only to the shareholders but the economy. This will also involve free transfer of shares which allows even the less wealthy to purchase share regardless of their wealth. In addition, the efficient management will mean the share price will increase and hence the value. On the other hand making the piercing the corporate veil law work it will reduce the shareholders interests as the unlimited liability will be exposing them to losing their wealth; this is especially they want to invest in many different companies. The principle of limited liability also allows the raising of capital from low costs since there is a reduced risk on the part of the shareholder (Ramsay &...
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