Document-Id: 962000, Please cite as: "https://www.trans-lex.org/962000"
Title
XI.2 - Piercing the corporate veil
Content
No. XI.2 - Piercing the corporate veil
(a) The separate legal personality of a corporation ("corporate veil") may be disregarded in exceptional cases in order to hold a shareholder liable for the corporation’s debts.
(b) Exceptional cases are cases of:
i)
clear under-capitalization,
ii)
mingling of corporate and financial spheres, especially in case of total control of the parent company over the business and financial affairs of its subsidiary, or
iii)
fraud.
Commentary
1 The Principle reflects situations in which the idea of the nature of corporations which constitute entities that are separate and distinct from its members, who are liable only to the extent that they have contributed to the company's capital, must be disregarded due to the application of the Principle of good faith. More specifically, the Principle is an example of the prohibition of the abuse of rights, here the abuse of the principle of separate legal personality of corporate entities to the detriment of their creditors who have relied on the independent and sustained existence of those entities.
2 In all three scenarios listed in the Principle, the concept of the corporation as a separate legal entity is misused by its founders or initiators. In these cases, the corporation is a mere "façade", used by its founders to shield themselves from claims raised against them by their creditors by hiding behind the corporate entity which they have established but which does not possess any assets necessary to satisfy the claims of these creditors.
3 It must be emphazised that the Principle is an exception to the fundamental rule of corporate law that corporations possess separate legal personality. The application of the Principle therefore requires not only an element of abuse of rights, but also a very strict test, i.e. clear, convincing evidence of under-capitalization, mingling of spheres or fraud, so as to ensure that the Principle remains the exception.
2 In all three scenarios listed in the Principle, the concept of the corporation as a separate legal entity is misused by its founders or initiators. In these cases, the corporation is a mere "façade", used by its founders to shield themselves from claims raised against them by their creditors by hiding behind the corporate entity which they have established but which does not possess any assets necessary to satisfy the claims of these creditors.
3 It must be emphazised that the Principle is an exception to the fundamental rule of corporate law that corporations possess separate legal personality. The application of the Principle therefore requires not only an element of abuse of rights, but also a very strict test, i.e. clear, convincing evidence of under-capitalization, mingling of spheres or fraud, so as to ensure that the Principle remains the exception.
References
Arbitral Awards
Ad Hoc-Award of September 9, 1983, YCA 1987, at 63 et seq.CRCICA Award no. 120/1998, in: Mohie Eldin I. Alam Eldin, Arbitral Awards of the Cairo Regional Centre of International Commercial Arbitration II (1997-2000), The Hague 2003, 25ICC Award No. 10758, Clunet 2001, at 1171 et seq.ICC Award No. 4131, YCA 1984, at 131 et seq. (also published in: Clunet 1983, at 899 et seq.)ICC Award No. 5721, Clunet 1990, at 1019 et seq.ICC Award No. 8385, Clunet 1997, at 1061 et seq.Court Decisions
ICJ Barcelona Traction, ICJ Rep. 1970, at 3 et seq.Prest v. Petrodel Resources Limited and others, [2013] UKSC 34, 12 June 2013Salomon v. Salomon & Co Ltd [1897] AC 22VTB Capital plc (Appellant) v Nutritek International Corp and others (Respondents), [2013] UKSC 5 (6 February 2013)Doctrine
Arnaldez, Jean-Jacques, note to ICC Award No. 10758, Clunet 2001, at 1177 et seq.Buxbaum, Richard M., The Formation of Marketable Share Companies, in: David/ Conrad (ed.), International Encyclopedia of Comparative Law, Bd. XIII, Tübingen 1974, at 36 et seq.Derains, Yves, note to ICC Award No. 8385, Clunet 1997, at 1068 et seq.Domingo, Ortega, Rodriguez-Antolin, Zambrana, Principios de Derecho Global, Navarra, 2006Drüke, Heiner, Die Haftung der Muttergesellschaft für die Schulden der Tochtergesellschaft, Cologne, Berlin, Bonn, Munich 1990Grabinski, Klaus, Die kollisionsrechtliche Behandlung des Durchgriffs, Frankfurt a.M. 1991Mann, Frederick Alexander, State Corporations in International Relations, in: Mann (ed.), Further Studies in International Law, Oxford 1990, at 199 et seq.Note, General Principles of Law in International Commercial Arbitration, 101 Harv.L.Rev. 1987/88, at 1816 et seq.Posner, Richard A., The Rights of Creditors of Affiliated Corporations, 43 U.Chic.L.Rev. 1975/76, at 499 et seq.Schanze, Erich, Konzernspezifischer Gläubigerschutz: Vergleich der Regelungsansätze, in: Mestmäcker/ Behrends (eds.), Das Gesellschaftsrecht der Konzerne im internationalen Vergleich, Baden-Baden 1991, at 473 et seq.Seidl-Hohenveldern, Ignaz, Corporations in and under International Law, Cambridge 1987