Clarifying the Rules for Piercing of the Corporate Veil

Abstract

The principle of corporate limited liability emerged in the early 19th century in the United States, and spread to Canada and England in the 1850s. It was a major legal and economic innovation that facilitated the growth of large scale enterprise, without which the modern economy would not be possible. However, courts quickly became aware that the corporate form could be abused for fraudulent purposes. Equity will not countenance fraud, and judicial discretion was applied to pierce the corporate veil. This remedy is a very common one, with thousands of cases reported in Canada in which a plaintiff has sought to hold the shareholders liable for the actions of a corporation. Unfortunately, its application is inconsistent and unpredictable, and the doctrine has quite aptly been labelled as incoherent. It is most frequently applied against small, closely held corporations, and creates uncertainty for these business owners. This paper looks at some key cases to determine what the doctrine of piercing the veil aims to achieve, and how it often fails. It suggests some amendments to the Business Corporations Act to create a statutory basis for curtailing limited liability in appropriate circumstances, that should lead to more consistency and predictability.

Keywords: corporations, limited liability, corporate veil

JEL Classification: K22