What does piercing the corporate veil mean?

Piercing the corporate veil, also known as lifting the corporate veil, is a term often used by parties seeking to pursue the directors personally, in the event of corporate insolvency. The concept of limited liability within UK company law generally prevents this. Limited liability means liabilities are restricted to any unpaid share capital. However, for an insolvent company, there is the opportunity for an insolvency practitioner or the insolvency service to effectively lift the corporate veil, where there is wrongdoing by the directors. Below are some of the circumstances where this may arise.


Piercing the Corporate Veil

Director disqualification

From 1 October 2015, it became possible for the insolvency service to start piercing the corporate veil, by seeking compensation orders in conjunction with disqualification orders. In corporate insolvency, the insolvency service will often seek disqualification against directors for a number of offences including:

Piercing the Corporate Veil UK Law

  • Trading on crown debts.
  • Continuing to trade and incur further debts when the company is insolvent and cannot be rescued.
  • Conducting illegal activities which result in corporate insolvency.
  • Failure to maintain the records of the company.
  • Misappropriating assets to put them out of reach of creditors.

If any of these offences have been committed after this date, the insolvency service may lift the corporate veil and have the director either compensate specific parties who have suffered, or compensate the estate of the insolvency company generally. More information on director disqualification can be found here.

Unpaid share capital

As mentioned early, unpaid share capital is, usually, the limit that can be called upon to be paid without lifting the corporate veil. In small companies, it is common for the share capital to remain unpaid indefinitely. In the event of corporate insolvency, this share capital will be called up to be paid as an asset for the insolvency company estate. Often, this may be as little as £1 to £100, so will be of little consequence and is often covered if the costs of liquidation are paid personally.

The real issue that may arise, allowing an insolvency practitioner to pierce the corporate veil, is if dividends are paid. While it is not an issue under the companies act, the company articles of association, in their standard form, specify that dividends can only be paid where shares have been paid up. In corporate insolvency, this would make the dividends illegal enabling the lifting of the corporate veil to recover these balances. Further details relating to illegal dividends can be found here.

Personal guarantees

Personal guarantees are a common way in which creditors will be successful in lifting the corporate veil. Signing a personal guarantee means a director will be jointly and severally liable for the debt due to the company, for either the full amount or up to a limit specified in the guarantee. Personal guarantees will most often be called upon in the event of corporate insolvency, but may also be pursued at the same time as looking for a debt against the company.

Directors should be careful when signing credit agreements with new suppliers as the agreement may contain a guarantee, which is not split into a separate document or particularly highlighted. Even if this is the case the guarantee will, most likely, be valid, as it is deemed you are responsible for reading any document you sign, and this will enable the creditor to pierce the corporate veil and pursue you personally. More information in dealing with personal guarantees can be found here.

Antecedent transactions

Under the provisions of the Insolvency Act 1986, there are various circumstances, which will allow an insolvency practitioner to lift the corporate veil and pursue the directors personally for various transactions under their care. These include:

  • Transactions at an undervalue – disposing of company assets for little or no consideration.
  • Preference payments – paying off specific parties rather than dealing with all creditors.
  • Wrongful trading – trading and accruing further debts while the company is insolvent.
  • Transactions defrauding creditors – deliberately putting assets out of reach of creditors.
  • Fraudulent trading – deliberately seeking to deceive third parties with no intent to pay them or deliver goods.
  • Misfeasance – general breach of the director’s duty of care.

In the event of corporate insolvency, the insolvency practitioner may seek to pursue the directors where there have been issues as listed above. If court proceedings become necessary costs and interest may also be payable as well as either an order returning the position to how it would have been had the transaction not taken place or requiring a personal contribution to the estate of the insolvent company. More information about the investigations an insolvency practitioner may undertake to pierce the corporate veil can be found here.

Conclusion

Several companies will advertise to creditors that they can look into piercing the corporate veil, allowing you to pursue the directors personally. The investigations they carry out rarely provide anywhere near information to proceed with a matter, and it’s likely that it will already be information the insolvency practitioner is aware of through their investigations, which they are not directly charging you for.

If you have concerns about the conduct of the director of a company, you should provide this information to the insolvency practitioner in the first instance to allow them to pursue the matter.

Likewise, if you are a director who is concerned with regard to any of the above issues, you should obtain advice at the earliest possible stage. You can do this by speaking to one of our business rescue experts.

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