1.3 Week 1 – Lesson 3

Title: Week 1 – Lesson 3: Limited liability and lifting the corporate veil

In theory, shareholders rely on limited liability for protection, which shields their own assets from the company’s debts. This shield exists because the veil of incorporation treats the company as a separate legal entity.

In ABC Ltd, though, the shareholders were also directors and conspired to sell off company assets and subsequently reallocated the funds to their personal bank accounts overseas before the company became insolvent. This behavior is beyond normal business failures and can be viewed as an effort to defraud creditors.

Thus, limited liability will not save the two shareholders. The courts may lift the corporate veil if directors or shareholders dishonestly or fraudulently make use of this arrangement. To do so, personal liability may be imposed to protect creditors and to maintain the integrity of company law.