To lift or not to lift the corporate veil? Are Directors personally liable for Company’s actions?

To lift or not to lift the corporate veil? Are Directors personally liable for Company’s actions?

By: N. Pirilides & Associates LLC

The doctrine of separate legal personality is nothing new in the legal field, having been established in Salomon v Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 over a century ago. Its premise is to essentially shield directors from any liability stemming from any company-related action.

There are however, exceptions to the above rule, where Courts have the discretionary power to stray away from the general rule and lift the “corporate veil” which protects directors. The exceptions justifying lifting the corporate veil are usually related to cases involving fraud and wrongdoing.

In a recent judgment, the Court of Appeal in Invest Bank PSC v El-Husseini & Ors [2023] EWCA Civ 555 while considering section 423 of the Insolvency Act 1986, was asked to conclude whether the fact that a debtor who failed to repay £19 million under personal guarantees, acting as a sole director of the company in question, was enough reason to assume that the director himself had “entered into” the disputed transaction. At first instance, the Court found that a transaction of a company cannot automatically be recognised as a transaction of the beneficial owner. The Court of Appeal, however, held that in such cases, being a party to a contract is not necessary to be found personally liable, if it is evident that the director took some steps, participated or was involved in the transaction.

The Judges referenced the “identification doctrine” which in essence determines whether an agent is acting “as the company” and it implies that it is possible for a person to “identify with” a corporate persona in more ways than just simply acting as an agent. In particular, they noted that while the separate legal personality of a company must be respected, it does not mean that the directors of the said company have done nothing in regard to the company’s activities, what is important is the legal significance of those actions and their possible repercussions and consequences.

The above judgment signifies that perhaps Courts are willing, more than ever before, to pierce the corporate veil in cases where directors take advantage of and abuse its applicability, while attempting to hide behind the fronts of a company. While we note that the above is an English case, the Courts of Cyprus in practise have always turned to UK case law for answers and have on numerous occasions adopted principles and doctrines stemming from UK case law. Thus, the present judgment could in the near future be made to be applicable on and/or binding for Cypriot Courts as well.

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Tags: Corporate Law


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