What Does The Corporate Veil Mean For Company Directors?
The corporate veil protects the personal interests of directors and shareholders, so long as it is upheld correctly, but how does it work?
When you establish a Limited Company you are creating a business as a separate legal entity. The corporate veil is a legal premise that separates that business from the personal interests of its directors and shareholders. Under the corporate veil a business is its own entity, meaning directors and shareholders cannot be held personally liable for its debts and obligations. It’s essential for protecting personal assets, and keeping the business separate as its own independent and legal company. However, this protection is not absolute. Under some circumstances the corporate veil can be “pierced”, breaking that protection for directors. Let’s find out the circumstances in which this can occur.
What Causes The Corporate Veil To Be Lifted?
“Piercing the corporate veil” involves lifting the distinction between the business and its directors as a separate entity, making them personally liable for company debts and obligations. This means that they are no longer protected by the corporate veil and may be held personally accountable for company obligations, such as the repayment of overdue debts. The decision to pierce the corporate veil will need to be determined by the court, for reasons including the following:
- Confused integration of business assets, activities or management with personal activities and accounts. This is why it’s essential that directors keep personal accounts and books completely separate
- Failing to uphold corporate formalities, such as hosting shareholder meetings
- Failing to keep accurate financial records
- General failure of directors in keeping their obligations outlined by insolvency law
- Siphoning away of corporate assets by dominant shareholders
- Trading whilst insolvent or entering into a transaction, knowing that the company is unable to repay the debt
So the corporate veil can be pierced when directors fail to keep the business and personal interests separate, fail to uphold their corporate obligations, or partake in illegal misconduct such as wrongful trading. That’s why it’s essential that companies ensure they are protecting the corporate veil.
How Can Directors & Shareholders Protect The Corporate Veil?
The most reliable way to protect the corporate veil is to ensure you are being diligent in keeping a clear separation between personal and business interests, and upholding all obligations as a director or shareholder. This includes:
- Maintaining accurate financial records
- Never finance your business from a personal account
- Make sure you always have enough capital to cover current transactions and obligations – knowingly trading whilst insolvent can have serious implications
- Familiarise yourself with your obligations as a director or shareholder under insolvency law
Taking the necessary steps to ensure that you’re protecting the corporate veil is essential for keeping your personal finances as a director or shareholders separate. This is particularly important if the company becomes insolvent. You don’t want your personal finances to be used for outstanding company debt.
If you are concerned that your business is facing financial difficulty, it’s important to act rather than run away from the problem. Don’t risk piercing the corporate veil by letting your financial difficulties run away with you. As soon as you notice that your company may be facing financial difficulty you should consult the advice of a licensed insolvency practitioner. Our experienced team at My Liquidation can talk you through the best options for your company, whether that’s a business rescue plan or liquidation. Don’t hesitate to get in touch today.
