Thailand Law Journal 2013 Fall Issue 1 Volume 16

Piercing the Corporate Veil Doctrine in Comparative View

By Praphrut Chatprapachai *

Introduction

The firm establishment of legal principles indentified a corporation as a separate and distinct legal entity apart from its shareholders. A corporation is obliged to be liable as a corporate entity, while liability of shareholders exist only when the business venture is got into "at risk" position by their shareholders' conducts.¹ The notable term "limited liability" is widely recognized as a mechanism of liability segregation. Limited Liability is initially purposed to enhance advancement of commerce and industry because shareholders, encouraged by this promotion, are able to invest their capital on companies with no worrisome concern about their private properties to corporate risks.²

In the nineteenth century, this kind of business-investment-friendly principle was named as the most significant legal innovation.³ It is also plausible for the incentive value of limited shareholder liability to be "outweighed by the competing factor of basic fairness to parties dealing with the corporation."⁴ However, this acumen doctrine has high tendency to become a double-edged sword if it is abusively applied to deceptive or fraudulent conducts in order to circumvent personal legal liability. Therefore, courts occupy discretion to enforce "piercing the corporate veil"⁵ as a suppressive measure to impose personal civil liability on the shareholders for the obligations of the corporation.

A comparative examination on the "piercing the corporate veil doctrine" that appears in the law of Japan and U.S. will be asserted in this paper. The discussion about trend of this doctrine in Thai law, together with problematic issues regarding the codification of piercing the corporate veil doctrine in Thai Law will also be finally included.

Fundamental Frame of Thai Corporate (or Company) Law

A theory of corporate body has been commonly accepted and broadly engaged in Thai Law. The consideration of corporation existence, which is independent from its shareholders, is an essence of this doctrine, conceptualizing one of the "limited liability" of shareholders' gambit.⁶ Due to this type of legal design, a corporation acquires its own legal entity, be able to possess or obtain ownership over assets, conduct any business transactions, file a law suit against other entities or, on the contrary, be subjected to legal liability offended by others. In addition, although there is substitution among shareholders, a corporation can still maintain its legal entity.⁷

Under Thai law, a corporation becomes true separate legal entity from shareholders when the registration process is completed. The shareholders are not liable for any debt created by the corporate⁸ but they are limitedly liable only for any unpaid on the shares respectively held by them.⁹

Therefore, a corporation is a category of legal entity which is legally entitled to conduct commercial matters within the scope of the memorandum. It is capable of enjoying rights and being subject to obligations as a natural person, except the rights and obligations which may be only enjoyed or incurred by a natural person, according to Civil and Commercial Code section 68, 69, 70, 72(4).¹⁰

By its nature, corporation cannot be established and run without the most significant composition, which are shareholders. This group of people do not indeed "own" a corporation but they are a corporate itself and hold a status as common owners of all corporate assets. In brief, each shareholder is the composition of a corporation¹¹ which makes a corporation becomes a legal entity or juristic person and holds any rights and liability separately from its shareholders.¹² A corporation is the de jure owner of assets, plus capable of carrying out as a creditor or debtor and 'corporatively' holds rights and liability.¹³

According to corporate principles, any rights and liability arising from business operation directed by shareholders within the business scope of the corporation are authentically the rights and liability of the corporation itself. This leads to the consequence that the creditor of the corporate is entitled to enforce his compulsory performance against the corporate only from its assets, but not from personal assets of the shareholders.¹⁴ On the other hand, a personal creditor of the shareholders cannot enforce his compulsory performance against the assets of the corporation as well. In addition, creditors of the corporate are entitled to enforce their compulsory performance prior to personal creditors of shareholders.¹⁵

From shareholders' angle, they are not personally liable for the third party if a corporation establishes any debts. Additionally, in case of bankruptcy or insolvency, shareholders can still enjoy such protection of limited liability shield, guarding them from liability to the third party. This is because a corporation is a true legal debtor of the third party is the corporation, while shareholders themselves are held liable only for the amount of unpaid on the shares respectively held by them.¹⁶ The core of separate legal entity between shareholders and a corporation is also affirmed in Thai Civil and Commercial Coded, which stipulates that a shareholder cannot avail himself of a set-off against the corporate as to payments on shares.¹⁷ It is acknowledged that status of shareholders is precisely an investor and they obtain benefit by being paid with dividends.¹⁸

* Praphrut Chatprapachai holds an LL.B. from Thammasat University, Bangkok, Thailand; LL.M. from Cornell University, New York, U.S.A. and Barrister-at-Law from the Thai Bar Association. He conducted a research on comparative Thai, Japanese and American laws under patronage of Government of Japan (Monbukagakusho) at Kyushu University, Fukuoka, Japan. He currently lectures in Graduate School of Law, Assumption University of Thailand and is responsible for various legal consulting, negotiations, dispute resolutions and litigations.

1. David H. Barber, Piercing the Corporate Veil, 17 Willamette L. Rev. 371, 371 (1980-1981).

2. Id.

3. Id. at 372.

4. Id. and See Labadie Coal Co. v. Black.

5. Id.

6. WinitChai SamnaoPhan, Khwam Rapphit Khong Phuthuehun Lae Kammakan Khong Borisat Phaitai Lakkan Mai Khamnueng Thueng Saphap Nitibukkhon Khong Borisat [The liability of shareholders and directors of corporations under piercing the corporate veil doctrine] 4 (Apr. 16, 1987) (LL.M. thesis, Thammasat University) (on file with Sanya Dharmmasak Library, Thammasat University).

7. Id. at 5.

8. Pramuan Kotmaiphaeng Lae Phanit [Civil and Commercial Code] § 1015.

9. Id. at § 1096.

10. SamnaoPhan, supra note 6 at 6.

11. PitiKun ChiRaMongkhonPhaNit, Kan Mai Khamnueng Thueng Saphap Nitibukkhon [Piercing the corporate veil doctrine] 4-6, available at www.lawthai.org/read/acharnpitikul16.doc.

12. Id.

13. Id.

14. Id.

15. SamnaoPhan, supra note 10.

16. Pramuan Kotmaiphaeng Lae Phanit [Civil and Commercial Code] § 1096.

17. Id. at § 1119.

18. SamnaoPhan, supra note 15.