piercing the corporate veil a comparative analysis of legal approaches in international jurisdictions and the implication for vietnamese law

TABLE OF CONTENTSTABLE OF CONTENTS...2PART 1: Concept of Piercing the corporate veil...41.Definition and Historical Development...42.Purpose and Rationale Behind Piercing the corporate v

FOREIGN TRADE UNIVERSITY FACULTY OF LAW

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FINAL-TERM EXAMINATION REPORT PIERCING THE CORPORATE VEIL: A COMPARATIVE ANALYSIS OF LEGAL APPROACHES IN INTERNATIONAL JURISDICTIONS AND THE IMPLICATION FOR VIETNAMESE

LAW

TABLE OF CONTENTS

TABLE OF CONTENTS 2

INTRODUCTION 3

PART 1: Concept of Piercing the corporate veil 4

1 Definition and Historical Development 4

2 Purpose and Rationale Behind Piercing the corporate veil 4

3 Legal Principles Governing Piercing the corporate veil 4

PART 2: Legal Approaches to Piercing the corporate veil in International Jurisdictions 6 1 Common Law Jurisdictions 6

2 Civil Law Jurisdictions 7

PART 3: Implications for Vietnamese Law 10

1 Current Legal Framework in Vietnam 10

2 Comparative Analysis of International Approaches 11

3 Potentialities, Challenges and Considerations for Adopting Similar Approaches in Vietnam 12

4 Potential Benefits and Drawbacks of Adopting Piercing the corporate veil 13

5 Recommendations for Vietnamese Law 14

Conclusion 15

References 16

This report aims to explore the concept of Piercing the corporate veil and examine its legal approaches in some international jurisdictions: the United States, the United Kingdom, Germany, and France These jurisdictions were selected to provide a comprehensive understanding of the different legal systems and approaches to Piercing the corporate veil in both common law and civil law jurisdictions

Furthermore, the report will assess the implications of these legal approaches for Vietnamese law, considering Vietnam's growing economy and increasing foreign investment It will evaluate whether the existing legal framework adequately addresses the challenges associated with Piercing the corporate veil and provides sufficient protection for stakeholders

In conclusion, this report provides a comprehensive overview of Piercing the corporate veil, its legal approaches in international jurisdictions, and the implications and recommendations for Vietnamese law It contributes to the ongoing development and improvement of corporate governance and legal frameworks in Vietnam, promoting a more robust and investor-friendly business environment

PART 1: CONCEPT OF PIERCING THE CORPORATE VEIL

1 Definition and Historical Development

Piercing the corporate veil Piercing the corporate veil is a legal concept that allows courts to disregard the separate legal entity of a corporation and hold individuals personally liable for the corporation's actions or debts It is a judicial remedy that pierces through the corporate structure to reach the individuals behind it The concept has its roots in common law and has evolved over time through judicial decisions and legal precedents

2 Purpose and Rationale Behind Piercing the corporate veil

The primary purpose of Piercing the corporate veil is to prevent misuse or abuse

of the corporate form The concept serves as a safeguard to ensure that individuals cannot hide behind the corporate shield to escape liability for their wrongful actions It is based on the notion that if a corporation is being used as a mere facade or instrumentality for fraudulent or unfair purposes, then the individuals responsible should be held accountable

The rationale behind Piercing the corporate veil is to achieve justice and equity.

It recognizes that while the corporate structure provides numerous benefits, such

as limited liability for shareholders, it should not be used as a shield to perpetrate fraud, injustice, or unfairness By iercing the corporate veil, courts can ensure that individuals who exercise control over the corporation and benefit from its activities are held responsible when necessary

3 Legal Principles Governing Piercing the corporate veil

The legal principles governing Piercing the corporate veil vary among jurisdictions, but there are common factors and criteria considered by courts when determining whether to pierce the corporate veil These include:

Alter Ego or Unity of Interest: Courts examine whether there is a unity of interest

and ownership between the individuals and the corporation, treating them as one and the same If the corporate form is merely an alter ego of the individuals, disregarding the corporate entity may be justified

Fraud or Wrongful Conduct: Piercing the corporate veil may be appropriate in

cases involving fraud, illegality, or wrongful conduct If individuals use the corporate structure as a tool to deceive or harm others, courts may disregard the corporate entity to hold them accountable

Lack of Corporate Formalities: Courts consider whether the corporation has

followed proper corporate formalities, such as maintaining separate finances, holding regular meetings, and keeping accurate records Failure to observe these formalities may weaken the corporate structure and increase the likelihood of piercing the veil

Inadequate Capitalization: Insufficient capitalization of the corporation may lead

to Piercing the corporate veil If the corporation lacks adequate funds to meet its obligations or is undercapitalized deliberately, courts may hold individuals personally liable

Unjust Result or Unfairness: Courts evaluate the overall fairness of the situation

and whether allowing the individuals to hide behind the corporate form would result in an unjust or inequitable outcome

The application of these legal principles may vary depending on the jurisdiction and the specific facts of each case Courts exercise discretion in Piercing the corporate veil, ensuring that it is applied judiciously to achieve justice and protect the interests of stakeholders.

PART 2: LEGAL APPROACHES TO PIERCING THE CORPORATE

VEIL IN INTERNATIONAL JURISDICTIONS

The United States, the United Kingdom, Germany, and France were chosen as they represent major global economies with different legal systems (common law and civil law) These countries have extensive case law and legal precedents regarding Piercing the corporate veil Apart from them, other countries such as Japan, Australia, Canada, and the Netherlands also have developed and significant legal systems in this area

1 Common Law Jurisdictions

a United States

In the United States, Piercing the corporate veil is primarily governed by state law, with variations across jurisdictions Courts consider several factors when determining whether to pierce the corporate veil, including:

 Commingling of assets between the corporation and its shareholders

 Failure to observe corporate formalities

 Undercapitalization or insufficient funds to meet obligations

 Fraudulent or wrongful conduct

 Using the corporation to evade legal obligations

 Dominant shareholder control over the corporation

Case Law Examples:

In the landmark case of "Minton v Cavaney" (1961), the court held that the corporate veil could be pierced if the corporation was a mere instrumentality or alter ego of the dominant shareholder, and justice required holding the shareholder personally liable

The case of "Walkovsky v Carlton" (1974) established that the corporate veil could be pierced if the corporation was used to perpetrate a fraud or injustice, even if it was properly formed and observed corporate formalities

b United Kingdom

In the United Kingdom, Piercing the corporate veil is primarily based on judicial principles, although there are statutory provisions that support this concept

Statutory Provisions: Section 213 of the Insolvency Act 1986 does indeed

provide for the court to pierce the corporate veil in cases involving fraudulent trading If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the court may, on the application of the liquidator, declare that any persons who were knowingly parties to the carrying on of the business in such manner are to be liable to make such contributions (if any) to the company's assets as the court thinks proper ⁶

Judicial Principles: The case of Salomon v Salomon & Co Ltd (1897) is indeed

a landmark case that established the principle of separate legal personality However, subsequent case law has recognized exceptions to this principle, allowing for Piercing the corporate veil under certain circumstances

Case Law Examples:

In the "Adams v Cape Industries plc" (1990) case, the court held that the corporate veil could be pierced if a subsidiary company was used as a mere facade to avoid legal obligations

The "Jones v Lipman" (1962) case demonstrated that the court may disregard the corporate veil if a company is established to defraud creditors

2 Civil Law Jurisdictions

a Germany

In Germany, the legal basis for Piercing the corporate veil is rooted in the general principles of civil law

The German Civil Code (Bürgerliches Gesetzbuch) allows for the piercing of the

corporate veil when the corporate form is abused to circumvent legal obligations

or defraud creditors

The doctrine of "Gesellschafterschutz" (protection of shareholders) recognizes

the responsibility of shareholders for the acts of the corporation

Case Law Examples:

The "ESCO Engineering Supply Company v Harza Engineering Company" (1972) case established that the corporate veil could be pierced if the corporation was a mere instrumentality of the shareholders, and the shareholders' actions caused harm

b France

In France, Piercing the corporate veil is known as the concept of "disregard of legal personality" (disregard de la personnalité morale) French law allows for

the disregard of legal personality when a company is used to commit fraud or when there is an abuse of corporate form to evade legal obligations or harm third parties

Case Law Examples:

The "Société Thévenin et Cie v Société de Construction des Batignolles" (1990) case demonstrated that the corporate veil could be pierced if there was an abuse

of corporate form to evade obligations or perpetrate fraud

In conclusion, in common law jurisdictions like the United States and the United Kingdom, Piercing the corporate veil is primarily guided by case law and principles, considering factors such as fraudulent conduct, commingling

of assets, and failure to observe corporate formalities In civil law jurisdictions like Germany and France, the legal basis for Piercing the corporate veil lies in statutes and general principles, aiming to prevent abuse of the corporate form and protect stakeholders Understanding these legal approaches provides essential insights for evaluating the implications and potential reforms related

to Piercing the corporate veil in Vietnamese law.

PART 3: IMPLICATIONS FOR VIETNAMESE LAW

1 Current Legal Framework in Vietnam

The misuse of the limited corporate form, particularly single-member limited liability companies (LLC), has been a concern in Vietnam The ease of establishing these companies, which do not require financial proof and can be established by an individual, has led to some instances of fraudulent activity For example, the director of Dai Duong Travel Company and his two nephews were charged with fraud and embezzlement amounting to over 70 billion VND

While Vietnamese corporate law has recognized and established certain legal frameworks to apply Piercing the corporate veil, there are limitations and deviations from its core principles

There are two main perspectives on Piercing the corporate veil in Vietnam:

1/ Piercing the corporate veil is regulated in the 2014 Law on Enterprises, with provisions on the obligations of members and shareholders in limited liability companies and joint-stock companies

2/ Piercing the corporate veil is scattered throughout various corporate laws, often related to joint liability or compensation for damages by contributors/managers.

However, both perspectives do not fully capture the essence of Piercing the corporate veil The first approach limits Piercing the corporate veil to specific types of companies, diverging from its broader application to all businesses and contributors/managers The second approach's provisions primarily focus on punishing abuses of corporate identity, rather than embodying the fundamental principle of Piercing the corporate veil, which is to hold individuals personally liable for the company's actions

In conclusion, the author argues that Vietnamese corporate law has not fully embraced the principles of Piercing the corporate veil, and the current provisions only reflect certain aspects of it.

2 Comparative Analysis of International Approaches

Similarities:

 The misuse of the limited corporate form can be found in both Vietnam and other countries

 Both Vietnam and the other countries (US, UK, Germany, France) recognize and apply the principle of Piercing the corporate veil in corporate law They require evidence of abuse of corporate structure or fraudulent behavior before applying Piercing the corporate veil

Differences:

 The extent of misuse and the methods employed can vary from country to country This is influenced by factors such as the ease of company incorporation, enforcement of corporate governance practices, and the effectiveness of legal and regulatory frameworks For example, in Argentina, single-shareholder corporations (SAUs) are not allowed to be incorporated or wholly owned by other SAUs In Australia, a proprietary company is a limited liability company designed for 50 shareholders or fewer and is simpler and less expensive to administer than a public company

 The scope of application of Piercing the corporate veil in Vietnam is more limited compared to the other countries Piercing the corporate veil in Vietnam is typically applied only in specific cases, such as limited liability companies and joint-stock companies In contrast, the other countries can apply Piercing the corporate veil to all types of businesses

Piercing the corporate veil, such as commingling personal and corporate assets, inadequate capitalization, fraudulent conduct, and personal benefit However, the approach and specific criteria may vary between countries

 The countries have different legal provisions regarding personal liability after Piercing the corporate veil is applied Specifically, regulations on liability and penalties can vary significantly between countries, based on influence of cultural, economic, and legal systems on the application of Piercing the corporate veil For instance, countries with a strong tradition of corporate governance may have stricter criteria for Piercing the corporate veil However, the concept and application of Piercing the corporate veil continue

to evolve with changing business practices and legal thought and therefore, could change over time

In conclusion, while Vietnam and the other countries have already recognized and applied Piercing the corporate veil in corporate law, there are differences

in the scope of application, criteria, and regulations related to personal liability after Piercing the corporate veil is applied Countries like the US, UK, Germany, and France have a more flexible approach and a broader application of Piercing the corporate veil compared to Vietnam.

3 Potentialities, Challenges and Considerations for Adopting Similar Approaches in Vietnam

Vietnamese courts have not applied Piercing the corporate veil Instead, they use other tools to address issues between third-party victims and company managers, directors, or shareholders

However, there are legal phenomena that could potentially apply Piercing the corporate veil in Vietnam

Fraudulent Single-Member LLCs: The ease of establishing single-member

limited liability companies in Vietnam has led to misuse by profit-seeking