Thailand Law Journal 2013 Fall Issue 1 Volume 16

Piercing the Corporate Veil as a Gap Filler

Isolation of legal entities between a corporation and shareholders has been conceptualized from time to time, together with structural legal design of limited liability of shareholders.¹⁹ Their significance and common acceptance come from the ground that limited liability enhances level of diversification for shareholders more effectively than imposing full liability on investors for corporate debt, since their exposition to the risk would be too overweigh to handle. Under this reasoning, diversification under dimness of unlimited liability wing tends to engage shareholders with increasing risk.²⁰

In addition, limited liability benefits the transfer of shares by allowing them to be moved more freely. Severe impairment of trading in public market may occur if shareholders had to encounter risk of exposing themselves to personal liability each time they trade shares. Moreover, in practical, when investors engage in more risk, they tend to be more careful on their agents or managers' conducts; therefore, limited liability approach can manage monitoring cost more economically by diminishing the necessity to keep eyes on their managers.²¹ Besides, it stimulates reduction of budget spending on watching over other shareholders because if the wealth of other shareholders becomes greater, the plausibility that assets of any single shareholder will not be taken to satisfy a judgment will become higher.²² In addition, purposes of limited liability are to "limits the potential loss of a shareholder to the amount invested in the enterprise" and to "shift a substantial portion of the risk of business failure to creditors and away from shareholders."²³ However, these privileged consequences of limited liability are not highly be sensed in close corporations, where combination of status between shareholders and managers are commonly noticed.

Nonetheless, there are two sides to every coin, including the coin named the strict limited liability rule. This functional legal design can occasionally be abusively brought in to play. Fraudulent conducts and evasion of legal liability can easily be pandered by misappropriated use of limited liability concept. For example, a corporate entity may be held liable instead of shareholders themselves in contractual obligations, tortious acts or tax levy by "veiling" a corporate entity as a cover to hide their inner objectives²⁴ which leads to problematic conditions for innocent third parties who have legal binding with those corporations.

Illustratively, according to most corporate statutes, there are common articles which prohibit a corporation from lending money to its own director, in order to suppress conflict of interest. To circumvent this legal obstacle, such director may documentarily establish a new corporation where he solely becomes a major shareholder. As a consequence, he then is able to take advantage from this new corporate entity by borrowing money from the corporation that he still positions as a director under the entity of the new corporation as a borrower.²⁵

Another exemplification of untruthful exercising on handiness of limited liability or corporate entity is in the circumstance when a person has clinched the deal on an agreement binding him not to operate a business that will compete with his party's business. In order to unlock the shackle, a new corporation can be formed which he become the major shareholder and the director so that he can operate any kind of business under the name of such corporation and lawfully gain beneficial profit.²⁶

Additionally, a corporate veil can also be used as a camouflage to escape from legal liability by being formed in the mode of undercapitalized corporation while capital level of such corporation will remain so little that any anticipated debts are implausible to be paid. Then, after running the business under the shade of such deceit corporation, as a result, any creditors of the corporation (including the creditor by contract and tort) of that veiled corporate will suffer from insolvent status of the corporation and any of their debt repayment would be under very uncertain positions.

Accordingly, realizing hazardous collateral impacts of corporate entity from the above problematic incidents, various jurisdictions have developed legal framework to install protective mechanism for innocent third party and restrain any conduct of business operations that show tendency of such abusive corporate veil. The framework has been agreeably conceptualized to consider approval of an alleviative exception for limited liability of corporate entity doctrine by enforcing "piercing the corporate veil" or "disregarding the corporate entity" doctrines to fill up the legal gap of corporate entity regulation.²⁷

Once a veil of a corporation has been removed or pierced, it will become the identical person as a shareholder or the "alter ego"²⁸ of a shareholder that leads to unification of legal entity of a corporation and its shareholders. It illustrates a nonisolated status of legal entity between a corporation and its shareholders, in other words, this doctrine will deem that the business operation conducted by a corporation is the personal conduct of the shareholders or the director of such corporation. Therefore, the shareholders or directors of the corporation who truly manipulate behind the corporation and, in bad faith, take advantage from limited liability or separate legal entity of the corporation as a veil or commit fraudulent shall be unlimitedly liable together with the corporation for any debts that their corporation caused.²⁹

However, revocation or declination of limited liability and corporate legal entity are not the aim of piercing the corporate veil doctrine. It does not either dissolve a corporation; instead a corporation is able to remain its normal operation since this doctrine will focus on spotlighting to the insider or persons who are behind the curtain and should really be jointly liable to the third party with the corporation. It is, nevertheless, notable that the standing of this doctrinal measure is an exception of corporate entity concept for maintaining equity in specific circumstances. It will be effective only for a corporation that is unfaithfully run to estoppel a shareholder from raising any defense based on the limited liability rule. As a result, he has to be liable for the debt beyond the unpaid amount on the shares respectively held by him. In other words, the liability that he needs
to bear will no longer be limited to the amount of his unpaid share.³⁰

19. Id. at 8.

20. Gordon Smith & Cynthia A. Williams, Business Organizations: Cases, Problems, and Case Studies 208 (2004).

21. Id.

22. Id.

23. Peter French, Parent Corporation Liability: an Evaluation of the Corporate Veil Piercing Doctrine and Its Application to the Toxic Tort Arena, 5 Tul. Envtl. L.J. 605, 607 (1992).

24. SamnaoPhan, supra note 6 at 8.

25. Id. at 9.

26. Id.

27. Barber, supra note 1.

28. the other self', see Elizabeth S. Miller, Are There Limits on Limited Liability? Owner Liability Protection and Piercing the Veil of Texas Business Entities, 43-FALL Tex. J. Bus. L. 405, 406 (2009).

29. SamnaoPhan, supra note 6 at 11.

30. Id. at 12.