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Clarifying the Rules for Piercing of the Corporate Veil

21 Pages Posted: 6 Dec 2013  

Peter S. Spiro

University of Toronto - Mowat Centre for Policy Innovation, School of Public Policy and Governance

Date Written: December 4, 2013

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

Suggested Citation

Spiro, Peter S., Clarifying the Rules for Piercing of the Corporate Veil (December 4, 2013). Available at SSRN: https://ssrn.com/abstract=2363647 or http://dx.doi.org/10.2139/ssrn.2363647

Peter Samuel Spiro (Contact Author)

University of Toronto - Mowat Centre for Policy Innovation, School of Public Policy and Governance ( email )

720 Spadina Avenue, Suite 218
Toronto, Ontario M5S 2T9
Canada

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