Piercing the Corporate Veil Essay Example | Topics and Well Written Essays - 2750 words

Piercing the Corporate Veil - Essay Example The paper tells that the provision of limited liability to incorporated companies enhanced investments from a large number of small and large investors. It would not be far from the truth to assert that the growth of the modern economy and industrial development can be attributed to this principle of limited liability. Investors are no longer required to harbour apprehensions regarding their investments and from being held accountable for the liabilities of the company in which they had invested. It has been contended by the majority that the proper functioning and growth of stock markets has been affected by limited liability. Moreover, it has simplified the task of evaluating the assets of companies. Furthermore, limited liability has excised the uncertainties, risks, and liabilities experienced by investors in the past. Shareholders can monitor the behaviour of their company to a much greater extent than in the past. Modern economic development requires large – scale capita l inflow. The limited liability effectively ensures the availability of capital from investors. The House of Lords established the doctrine of corporate personality in Salomon v Salomon. Under this principle, private investors and shareholders of companies were permitted to organise their business, via the corporate legal form. It also allowed entrepreneurs and institutional investors to monitor their investment strategies. In the absence of the legal form of the company, shareholders and investors were at the risk of being personally held liable to the creditors of the company (Muchlinski, 2010, p. 918). It has been perceived that this doctrine has increased the influence of shareholders and investors in the functioning of the company and in its business strategies. However, the majority of the people have welcomed the doctrine of limited liability, as it eliminates the direct responsibility of shareholders in the management of the company (Muchlinski, 2010, p. 918). The process of globalisation has substantially increased business activity and the operations of multinational corporations (MNC) at the global level. The separation of legal form of the company from its shareholders and investors has brought about several jurisdictional problems and the domination of MNCs in business (Muchlinski, 2010, p. 920). These problems have come to the fore due to different legal systems in the world. In addition, the state regulatory mechanisms that pertain to the MNCs differ from each other. The limited liability concept externalises the risk from group of investors. Ultimately, it transforms global legal order into national and sub-national jurisdictions. Thus, the corporate veil has assumed the garb of a jurisdictional veil, and the MNCs are using this veil to limit risk of liability (Muchlinski, 2010, p. 920). Moreover, Jurisdiction has emerged as an important aspect of international commercial transactions. The MNCs have established a parent – subsidiary cult ure in international business, which creates ambiguity in determining the appropriate jurisdiction for disputes. The difficulty chiefly arises because the jurisdiction of the parent company and that of its subsidiary are different. Consequently, disputes with a subsidiary cannot be addressed by the legal system of the parent company’s host country, in order to determine liability (Muchlinski, 2010, p. 920). InAdams v Cape Industries, a UK based parent company exported asbestos from its mines in South Africa. It had conducted this export via a sales subsidiary and thereafter through an