Piercing the corporate veil: Is it a sound concept? (Term Paper Sample)

[Running head] Piercing the corporate veil: Is it a sound concept?
Name
Course
Instructor
Date: 07/08/2012
Piercing the corporate veil is a hugely controversial move by insolvent companies but it also constitutes the most frequented area of litigation in the United States and indeed s all over the world. People have argued that making the shareholders responsible for debts they don not even know exist in their subsidiary companies is very unfair. There are several grounds that the corporate can quote for piercing the veil, especially if they do not have an assurance from the debtors that they will be compensated (Vanderkerckhove, 2007). These are:
Undercapitalization
The corporate can claim that the stakeholders have failed to provide enough capital for its operations and so it went to insolvency.
Asset stripping
The assets of the corporate may have to go in case of insolvency. Sometimes it does not stop at that because the shareholders nay have to let go of their private assets too. This is in case there is fraud claims and all or some of them are involved. In case only a certain shareholder is involved, then if they are found guilty only their personal assets will be stripped as compared to the company paying for his discretions.
Loss making activities
If there is an unstoppable downward tread in loss making then the company will be forced to pierce the veil in the attempt to save itself. These activities may be due to wrong advice or due to misleading reports. This may involve third parties such as auditors and financial advisors.
Identifying the corporate group as an economic unit
This will have several effects some of them being positive and it may stop the downward trend.
All these are very intricate issues and in case of insolvency, a parent corporate may be forced to take responsibility for the debts of a subsidiary company. This occurs when the assets of the company cannot raise the amount being claimed as debt and there is no other choice. Major shareholders are the ones who shoulder the biggest burden in this case (Vanderkerckhove, 2007).
Piercing the corporate veil has been in the court scene for several years now and every failing corporate attempts it in its bid to save itself. Sometimes it works and in other times there is no claim that the parent corporate can take responsibility for debts. The law has been misunderstood and the concepts are only grasped in full by those who seek to apply them. Multinational corporations are especially benefiting from this new concept of law and they can be able to keep going because of it (Rudorfer, 2009).
Shareholders should always be careful to invest in corporate that will give good returns and not leave them in debt. This is normally assured if they have corporate lawyers to advice them and direct their decisions. This is because corporate law is all about protecting the shareholder from making unwise decisions and being held personally responsible for debts that he may have acquired by investing into a corporate body.
The provision of limited liability basically provides this protection. It is however not an excuse for the shareholder to invest in risky ventures that are bound to fail. Limited liability basically encourages capitalism. This is why sometimes the companies opt for the unveiling as part of their way to make the shareholders responsible for their investments. Being that a corporate is a body distinct from its directorate and shareholders, bringing the shareholders to the limelight is what is termed as piercing the corporate evil.
Basically, piercing the veil is done only when the actions of the investors is injuring as third party. This is the legal way in which the shareholders are forced to take responsibility for their actions. These actions may be too much externalization and abusing the limited liability privilege. Although economic development solely depends on the limited liability concept, the shareholders may go too far and not be responsible for their actions. This is why the legal process comes in to impose sanctions on them (Vanderkerckhove, 2007).
There are other alternatives to the piercing the corporate veil and they can be applied in some cases. However, in most cases the going down of a corporate is purely due to bad decisions made by the investors and so they must be made to pay for their actions. There will have to be a thorough check of all the agreements reached at by the affiliates to see if they have legal responsibility and liability to the corporate. This is because in the legal agreements signed by the affiliates, there may be provisions that state that they should not be held responsible for the kind of losses the subsidiary will incur as a result of bad decisions (Rudorfer, 2009).
Another situation in which piercing the corporate veil may be applicable is if the members have involved themselves in fraudulent deals. The individuals might be misleading people to invest in the company or to gain personally using the corporate name. In this case, the individual must be held personally responsible for their actions.
However, in most cases the courts have ruled that individual investors and the corporate be viewed as two separate entities. When a person has committed fraud, his personal effects are what is first looked into but if it is not enough to pay the debts then the only option is to reach to the corporate.
Needless to say, a world without this provision will be chaotic and full of injustice. This is because the investors can hide under the guise of limited liability and engage in irresponsible decision making that will hurt the corporate and innocent third parties. It is therefore one of those provisions that are termed as a necessary evil. There are merits and demerits for this law provision. This is because it normally ensures justice prevails and that third parties do not suffer for losses they did not incur. It however causes chaos in the corporate sometimes because piercing the veil may be invading other people's privacy. These are the people who may be quiet investors who do not wish for their names to be mentioned as shareholders (Rudorfer, 2009).
A corporate subsidiary may be misleading the creditors in its jurisdiction. This may be in an attempt to commit fraud or to make more income using unconventional means. This is one of the most common cases where the piercing of the corporate veil will be necessary. The shareholders in this case might be the financing banks and other microfinance institutions and they will be forced to take responsibility for this action.
The acting of the corporate may be beyond the powers it has been granted, termed in law as “ultra vires”. This is punishable by law and the only way it can be punished is by the use of this provision of piercing the veil. This is because in this case the parent organization w...