No. X.2 - Piercing the corporate veil

1 The Principle reflects situations in which the idea of the nature of corporations which constitute entities that are separate and distinct from its members, who are liable only to the extent that they have contributed to the company's capital, must be disregarded due to the application of the Principle of good faith. More specifically, the Principle is an example of the prohibition of the abuse of rights, here the abuse of the principle of separate legal personality of corporate entities to the detriment of their creditors who have relied on the independent and sustained existence of those entities.

2 In all three scenarios listed in the Principle, the concept of the corporation as a separate legal entity is misused by its founders or initiators. In these cases, the corporation is a mere "façade", used by its founders to shield themselves from claims raised against them by their creditors by hiding behind the corporate entity which they have established but which does not possess any assets necessary to satisfy the claims of these creditors.

3 It must be emphazised that the Principle is an exception to the fundamental rule of corporate law that corporations possess separate legal personality. The application of the Principle therefore requires not only an element of abuse of rights, but also a very strict test, i.e. clear, convincing evidence of under-capitalization, mingling of spheres or fraud, so as to ensure that the Principle remains the exception.

Please cite as: "Commentary to Trans-Lex Principle , https://www.trans-lex.org/962000"