The law is prepared sometimes to examine the company faade and this process is described as piercing or lifting the corporate veil. The fact that a company is a unit that is thought as legal and free from its owners can sometimes produce undesirable results. For instance, shareholders can obtain funds illegally and then be regarded as not liable to repay or in a case where the directors are liable of fraudulent activities. The courts have been forced to intervene in some circumstances and disregard the doctrine of limited liability and corporate personality especially the case of group companies and their subsidiaries where the entity form is being manipulated as a tool to commit fraud. The case of Salomon Vs Salomon & Co. Ltd in 1987 established the irrevocability position in common law of legal personality and limited liability of companies (Butterworth, 1960, p.6).
Some of the circumstances that lead to court intervention include the following: trading with an enemy, the case for sham companies, failure to comply with the legislation laws, fraudulent and wrongful trading, disqualified director's actions and statutory power abuse. For instance if a company is a sham one i.e. formed to enable one avoid obligations such as tax, the court may act to ignore the company's existence.
In case the court discovers that a fraud is committed, it is prep ...Show more