Question

What is the problems for third parties from the existence of the corporate veil?

Answer 1

The doctrine of Corporate Veil has been providing problems for third parties as in law, the corporate is and entity distinct from the shareholders, employees and directors, so the third party would not able to liable any attached person for their claims. In case of liquidation, the shareholders enjoys the “doctrine of limited liability” which makes a shareholder to lose only what he or she has contributed to the company, not anything more than that. The corporate veil doctrine has been provided so that company can act as a legal person and do all dealing and tradings on its own name and separate from its employees, management and shareholders/directors. The veil has raised following problems for the third parties:

1. The fraud and wrongdoing are always executed by employee towards third parties alongwith other injustice.
2. The veil does not cover only parent company, but also all subsidiary making the problems multi-folds to third parties.
3. The level of operation is not determined by the company but by its agents ie. Management, which makes the capitalization of the company always inadequate. It always a problem for the third parties.
4. The separate identity of the company makes it to have Bank and Income tax accounts in its name but the same is operated by its representative ie. Employees and managers. Thus, third parties has obey the employee to receive orders or payments.
5. In the name of company, if the employees fails to fulfils the formalities of following corporation will raise problems for the company and its creditors or third parties.

Thus, The corporate veil has been always an injustice and problem for the third parties.

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