Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil.
Unlike a general partnership or sole proprietorship in which the owner could be held responsible for all the debts of the company, a corporation traditionally limited the personal liability of the shareholders.
The concept adds a solvency test element to the balance-sheet based rules of capital maintenance under §§ 30, 31 GmbHG and §§ 57, 62 AktG.
After a series of attempts by the Court of Appeal during the late 1960s and early 1970s to establish a theory of economic reality, and a doctrine of control for lifting the veil, the House of Lords reasserted an orthodox approach.
According to a 1990 case at the Court of Appeal, Adams v Cape Industries plc, the only true "veil piercing" may take place when a company is set up for fraudulent purposes, or where it is established to avoid an existing obligation.
In VTB Capital,[11] Lord Neuberger sympathised with rejecting the doctrine altogether, but left the issue undecided because it did not matter for the outcome.
Soon afterwards, in Prest v Petrodel,[12] a divorce case where the matrimonial home was not held by the husband but by his company, the Supreme Court confirmed the existence of the doctrine in English law, but narrowed it down to practical irrelevance.
On closer analysis, this was said obiter because the Court reached the desired outcome (attribution of the family home to the assets of the husband) by applying trust law.
[15] It is noteworthy that under English law, piercing the veil can never be used to make shareholders pay for contractual debts of the company because they have not been party to that contract.
[18] Tort victims and employees, who did not contract with a company or have very unequal bargaining power, have been held to be exempted from the rules of limited liability in Chandler v Cape plc.
[23] While the secondary literature refers to different means of "lifting" or "piercing" the veil (see Ottolenghi (1959)), judicial dicta supporting the view that the rule in Salomon is subject to exceptions are thin on the ground.
Likewise, in Bank of Tokyo v Karoon,[25] Lord Goff, who had concurred in the result in DHN, held that the legal conception of the corporate structure was entirely distinct from the economic realities.
The "single economic unit" theory was likewise rejected by the CA in Adams v Cape Industries,[26] where Slade LJ held that cases where the rule in Salomon had been circumvented were merely instances where they did not know what to do.
The view expressed at first instance by HHJ Southwell QC in Creasey v Breachwood,[27] that English law "definitely" recognised the principle that the corporate veil could be lifted, was described as a heresy by Hobhouse LJ in Ord v Bellhaven,[28] and these doubts were shared by Moritt V-C in Trustor v Smallbone (No 2):[29] the corporate veil cannot be lifted merely because justice requires it.
to defraud the creditors of the defendant and Gilford Motor Co Ltd v Horne,[32] where an injunction was granted against a trader setting up a business which was merely as a vehicle allowing him to circumvent a covenant in restraint of trade are often said to create a "fraud" exception to the separate corporate personality.
Similarly, in Gencor v Dalby,[33] the tentative suggestion was made that the corporate veil was being lifted where the company was the "alter ego" of the defendant.
Finally, the "fraud exception" was rejected in Prest v Petrodel Resources Ltd.[34] There have been cases in which it is to the advantage of the shareholder to have the corporate structure ignored.
In the United States, different theories, most important "alter ego" or "instrumentality rule", attempted to create a piercing standard.
[49] A number of U.S. Tax Court cases involving Family Limited Partnerships (FLPs) illustrate the IRS's use of veil-piercing arguments.
[50] Since owners of U.S. business entities created for asset protection and estate purposes often fail to maintain proper corporate compliance, the IRS has achieved multiple high-profile court victories.