The separate legal personality of a limited liability company has been established since the end of the 19th century. The case Salomon v. A. Salomon & Co.[1897] A.C. 22 is considered as the trademark case which led to the establishment of this principle allowing companies to act independently from their shareholders and obtain assets which are considered as independent assets from those of the shareholders.
As a result, a shareholder in the company is not responsible for the actions of the company and the company itself is not responsible for the actions of its shareholder. In addition, the company and its members keep separate assets and the assets of the members are not assets of the company and vice versa. Furthermore, a creditor can not request the personal liability of the shareholders in case there is a claim against the company.
However, is it possible for the corporate veil to be lifted?
In principle the corporate veil should be protected and be lifted only in case exceptional circumstances are presented to the court. These circumstances are examined in a case -by – case basis.
For example the courts in Cyprus accepted the lifting of the corporate veil in the following cases:
- When the company was used as a façade or sham;
- When the company was used as a vehicle in order for the shareholders to avoid being compliant with procedures imposed or instructed by the authorities, such as tax obligations;
- When the company was used as a vehicle in order to avoid being in compliance with the legislation protecting fair competition;
- When the company was used as a vehicle of fraud;
- In the case of a group of companies, the court lifted the corporate veil of subsidiaries leading the mother companies, as responsible for the actions of the subsidiary.
The decision to lift the corporate veil is a serious action since the corporate veil should be in principle protected. For that reason, the request to lift the corporate veil is a complex procedure and strong evidence should be provided to the court in order for such a request to be supported.
The rationale of such scrutiny relies on the fact that the doctrine of the corporate veil contributed to the construction of the modern system of commerce which has being evolving since the 19th century. For that reason, the judiciaries would accept lifting the corporate veil, having in mind that their decision is actually protecting the principles of commercial good faith and a smooth transactional system.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
