Corporate culture for online business registration Hong Kong

Corporate Culture: Behind the Scenes

This article tends to unleash the corporate veil and determines to unleash the abuse, of which corporate culture could be disposed to.

Overview on the Corporate Veil

Apart from benefits by online business registration Hong Kong, duo of separate entity and limited liability can be fatal and may prone to abuse. For instance, company’s capital may start to shrink as long as after the management of online business registration Hong Kong, intentionally, so that it may liquidate, and deficiency of capital may lead to the situation where company does not have enough funds to meet the claims of creditors. Trading frauds are common in every region and so does in Hong Kong, quoting an example, where owners of a restaurant, which was being operated through a company, closed the business with wages and other debts left unpaid, just for the sake that they may open a new similar restaurant with a new company and have no competitor.

This abuse can be prevented with the help of Common Law and Statue by imposing liability of the company to the person behind it, they can be the shareholders or directors of the company. This practice is known as “Piercing the Corporate Veil” and be called as Doctrine of Piercing or Lifting Corporate Veil under which company’s liabilities are treated as the liabilities of the person(s) managing it and this doctrine tends to negate the concept of “Company, being a separate person”. It must be noted that this doctrine be used only to expose faces behind corporate frauds, it does not intend to amend principles of agency or trust law, where taking help of this doctrine, offender may claim that he or she was liable for company’s liability, thus proper definition of it must be established and must not be contradicted with other laws.

Corporate Veil and Common Law

Although courts are entitled to pierce the corporate veil with common law in exceptional circumstances only, as in fact more common of existing offshore incorporations HK but, it has been reported that law is very confusing and grounds on which this law be applied, are still uncertain. Courts believes that, this doctrine be applying only on such cases where justice demands but it is certain that justice might support the principles on which this doctrine deems to be applied and thus court is not entitled to apply this law, merely to serve justice.

Company- A mere façade

To test the situation where there is confusion that either this be applied or not, The House of Lords brought the test, which applies in Hong Kong too for new offshore incorporations HK. This test suggests that “Piercing of Veil” be applied only, where there is certainty of the fact that Company is hiding true facts and company is called a “Sham”, but strictly speaking, Company can not be a sham if it was incorporated, fulfilling the requirements of the companies ordinance.

During the preceding of Winland Enterprises Group Inc v Wex Pharmaceuticals Inc, Hong Kong’s court of appeal accepted that: “Piercing of corporate veil be used only when there is disguise of the controller to dodge any legal obligation”. Court urged on the need of establishment of the assurance that there is existence of illegitimate purpose in using company as “mere-façade”.

During the prosecution of Hashem v Shayif, Munby J reviewed English cases where this doctrine was applied and outlined some of the principles, through which “Piercing of Corporate Veil” be injected:

  • Court can not inject “Piercing of veil” just because, it is thought that, justice demands it.
  • In case of any impropriety, piercing of court can be applied.
  • On the contrary, court can not even pierce the corporate veil merely because of company’s involvement in impropriety- this must be linked to company’s structure to obscure liability.
  • In case, piercing is obvious, it is mandatory for the court to show the control of both wrongdoers and impropriety on the company.
  • Company is façade, even it was not initially incorporated with such mal-intention, subject of the matter should be that whether it was being used as a façade at the time of transaction or not
  • Court can pierce the veil, if it deems to provide remedy for the mal-practice of controllers of the company.

It must be noted that, if court pierce the veil for one reason that this must not be inferred that it must be pierced for all purposes.

In Prest v Petrodel Resources Ltd. UK Supreme court’s majority acknowledged existence of doctrine with emphasis on the use of this doctrine only when there is no other legal principle available, as it deems to prevent abuse of corporate legal personality. But, Lord Sumption confined its scope and according to him, earlier cases where piercing of corporate veil happened, those were the cases involving either concealment principle or evasion principle. As per Lord’s views: “Court is not ignoring corporate disguise, instead, court intends to look for the facts which corporate structure is hiding. Lord Neuberger agreed with Lord Sumption’s formulation of evasion principle, which he formulated by saying:

“The court may pierce the corporate veil, only for the purpose if it intends to make the company’s executive and company itself, deprived of advantage of company, being a separate legal entity of offshore incorporations HK. The principle is limited one and it has been seen that where the test is satisfied, the facts disclose a legal relationship between a company and its controller thus making piercing of corporate veil unnecessary. But remaining cases of said category recognises the abuse of this corporate veil to frustrate the law and this issue can be addressed by disregarding the legal personality of the company, which, I, believe consistent with the authority and long-standing principles of legal policy”

For the concealment principle, he believes that it does not involve any use of this doctrine, but under this principle, he discourages the concealment of identity of real actors responsible for this abuse.