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


this is an assignment on the tactics one can use to pierce the corporate veil in business.


[Running head] Piercing the corporate veil: Is it a sound concept?
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:
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 limit...
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