Have you ever wondered what kind of protection shareholders have when the company or corporation has liabilities or in some cases, bankrupt? Will they be personally liable for the company and have to pay back debts incurred by the corporation? The answer to such questions is related to the concept of “corporate veil”.
In business law, we often hear about the phrase “piercing the corporate veil.” In order to understand what the phrase is about, first, we have to know “a corporate veil”. Corporate veil is a type of shield or protection that is attached to the shareholders of a corporation, specifically, limited liability corporations (“LLC”). In general, shareholders enjoy the protection of their own personal assets from liabilities of the corporation. Under Black’s Law Dictionary[1], corporate veil is defined as “the legal assumption that the acts of a corporation are not the actions of its shareholders, so that the shareholders are exempt from the liability for the corporations’ actions.”
Historical Background
The concept of “the corporate veil” is originated by the principle known as the Salomon principle, drawn from the English common law case “Salomon v. A Salomon & Co Ltd [1896]”[2]. The case is the English landmark case that established the principle of separate legal personality or Salomon principle. Under such principle, the corporation is regarded as a legal person separate from its shareholders, directors and members. The corporation can sue and can be sued in its own name, separately from its shareholders.
Type of companies protected by Corporate Veil
Corporate veil is available to corporation or limited liability corporation. A corporation is presumed to be the separate legal entity and have some of the rights in law as a person. By having protected by a corporate veil, the shareholders enjoy the legal separation from the corporations, which essentially is, the personal asset protection from the debts and liabilities of the corporation. For example, the personal asset of shareholders such as real estates and personal funds cannot be seized to pay the liabilities of the company. If the company gets into legal battle, the shareholders are protected from paying with their own money or assets if the corporate veil is kept intact. Such type of protection is not available to sole proprietorships. Corporate veil is one of the key reasons why business owners decide to form a “LLC”.
When is the corporate veil pierced?
The corporate veil granted to shareholders is not absolute. The corporate veil can be pierced or broken and the shareholders shall have to be personally liable for the corporation. This phenomenon is called “piercing the corporate veil”. In such event, the court will hold the shareholders, members or owners of the corporation personally liable for the debts incurred by such corporation.
Then, the next question would be “under which circumstances, the corporate veil is pierced?”. In general, the Courts require serious misconducts to justify the piercing of the corporate veil. The requirements for such events depend on each jurisdiction. However, generally, courts will consider the following characteristics, including but not limited to-
- The shareholders fail to maintain the separate identity of the company. (For instance, the shareholders using company’s bank accounts for their personal uses)
- Corporate formalities are failed to follow. (For instance- the company failing to comply with filing requirements as set forth by the law.)
- There is a tax evasion or unauthorized tax avoidance.
- The corporation or LLC is under-capitalized. (For instance, the shareholders formed the corporation without providing enough capital to carry out day-to-day business functions.)
Law governing the corporate veil varies from each country. For instance, in the United States, the courts in Alaska use two tests to determine whether a court may pierce the vail[3]:
- Disjunctive test: either excessive control or corporate misconduct must be shown for the court to pierce the veil.
- Conjunctive test: both excessive control and corporate misconduct must be shown for the court to pierce the veil.
What will happen after the corporate veil is pierced?
After the corporate veil is pierced, the shareholders of a corporation lose the limited liability that is granted by the corporation. In other words, the personal assets of the shareholders can be used to pay for the debts and liabilities of the corporation. Therefore, it is crucial for the shareholders to maintain the corporate veil in their businesses.
Does Myanmar Law say anything about “the corporate veil”?
We, with our best efforts, look for Myanmar laws which might have include the idea of “corporate veil”. However, no direct provision or the precedent is known to us. Due to the provision of Section 5 (a) of Myanmar Companies Law (hereinafter “MCL”), we can understand that in Myanmar, a company is considered to be a separate legal entity in its own right separate from its members having full rights, powers and privileges. But, Myanmar legal system could permit the “piercing the corporate veil” should there be a company in a corporate group (a “parent company”) which is required to be held accountable or responsible for the actions of its subsidiaries. Despite having this “separate legal entity” concept provided in MCL, no detailed provisions mentioned in the applicable laws that under which conditions the Court can pierce the corporate veil. Therefore, it would indeed be an interesting topic should there be any case where one of the parties might require the Court to pierce the corporate veil in the future. In the meantime, it would be best for the companies to comply with the compliance required by MCL and to maintain the separate legal personality of the company.
Qualification of this Article
The article serves as a knowledge-sharing article and the interpretation of the provisions quoted here is done solely based on the legal knowledge and personal interpretation of the authors. Therefore, should this article be used as a legal advice by any other party, whether for a natural person’s or corporation’s affairs, the authors have no legal obligation or the authors are not held accountable or responsible for such person or corporation for any reason whatsoever.
Prepared by:
Two best friends, Wut Yee Thaw @ Lyra and Ingyin Hmwe @ Liliana
Contact for work or discussion:
Email: legalbandaid@gmail.com
WhatsApp: +959420092776
[1] Black’s Law Dictionary (3rd ed. 2006)
[2] Salomon v. A Salomon & Co Ltd [1896] AC 22
[3] https://www.law.cornell.edu/wex/piercing_the_corporate_veil#:~:text=Further%2C%20courts%20will%20pierce%20the,benefit%20of%20the%20considered%20defendant.%22
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