The argument of whether company directors are entirely protected by the veil of inclusion from personal liability has been existent for a long time. A study of various cases still presents conflicting opinions regarding the issue. Nonetheless, the case of Rene Rivkin and other cases provide solid arguments to support its existence and non-existence. Rene Rivkin was a well-known Australian multi-millionaire, investment advisor, and entrepreneur. He was also an established stockbroker in Australia before he faced conviction for insider trading. His was a very sad ending, basically, after the convictions, his extravagant lifestyle came to a close and he consequently took his own life.
His tribulations commenced in 1995 when he was interviewed by the investments commission regarding share ownership in Offset Alpine; a printing company. In 2001 when the Leumi bank’s private banking head was arrested on grounds of funds embezzlement, Rene’s unscrupulous banking details were revealed. His financial world at this point started to fall apart. The same year, the investment commission charged him with insider trading thus imposing on him nine months incarceration that was followed by periodic detention completed in 2004 just before his tragic death.
Rene, during the years that he acquired his wealth through stock trading, believed that investment was not about what you knew but rather about whom you knew and were connected to. The belief paved way for the corporate crime to prevail as together with other prominent heads he made secretive arrangements of Alpine shares and which amounted to perjury.
The assumption was that company directors are protected such that they can undertake illegal dealings and still not be held personally liable for those company transactions and obligations. This essentially, is far from reality and in many circumstances, the directors have been held liable for company obligations and activities. It is no wonder that infinite scandals involving respectable and reputable persons carried out in the course of duty have been brought to the open.
Company laws stipulate that directors have the responsibility of assisting the company to achieve operational efficiency and conduct its transactions optimally to ensure maximum productivity and returns on investment. Furthermore, the legal stipulations act to ensure that to a particular extent if the directors intentionally conduct acts that may jeopardize the company’s reputation, they will be held liable for their actions. The directors will sure have transacted on behalf of the company but there is a limit as to what they can do on behalf of the company.
It should be noted that in some cases, particularly in the case of corporations, they exist as separate or distinct entities from the persons who operate, manage or even own them. The company is thus treated as an independent person that is capable of executing contracts, owning property, being sued, and suing1. In the case that the company fails, the shareholders lose mainly what they contributed to the company. For instance, employees will lose their jobs and while the clientele loses their investments. However, none of the shareholders, including company directors, will have further liability for instance to pay the debts that accrue from directors’ fraudulent activities.
The activities conducted by the directors must therefore serve to add value and further the interests of the corporation. If undertakings within the company violate this requirement, then the company directors may in part have to pay, for instance, the fraudulent actions. As much as they may not be necessarily be held responsible for the debts and damage that has been caused by their actions, they have to be separately held accountable for their deeds.
It is hence not surprising that Rene found himself facing incarceration despite being influential and capable of directing the company decisions. Additionally, regardless of the existence of company law stipulations, other self-regulatory and government bodies whose major role is to make sure that the company conducts its company obligations about set rules and regulations exist. If a violation occurs and investigations conducted by the bodies and commissions discover malpractice, then the company as a separate legal personality will be held accountable.
The veil doctrine indicates that although the company is a separate and distinct legal entity, the corporation can only act or transact through human agents such as company directors who largely compose the corporation. Consequently, there are two major ways by which companies can become liable; direct liability or secondary liability. Secondary liability is mainly for acts that have been conducted by its human agents in course of their duties. Nonetheless, there is agreement among corporate law scholars that piercing the corporate veil is apparently among the most greatly misunderstood and confusing concepts in corporate law.
In a court setting, it is usually upon the judges to decide what theory to apply to determine the extent of the company’s liability and that of individual human agents to a particular unlawful transaction. To make such decisions, therefore, the two theories used to uplift the corporate veil can be applied. They constitute the alter ego theory and the instrumental theory. The instrumental theory seeks to examine if the directors used the company for their self-interest while the alter ego theory will seek to make distinctions and showcase boundaries existing between company directors and the company.
In conclusion, it can not be ignored that the veil doctrine does offer protection for company directors including other directors from personal liability for a corporation obligation. However, it may not be entirely so in every circumstance since if the company is closed down, it may not appear obvious but the directors will end up being liable for the damage they caused. This can be said of Rene and other managers that have been caught up in financial scandals. The extent of personal liability that accrues to them may not have been stipulated within company laws but they are certainly held responsible for the company’s past obligations.
William, Walma Mark & McCann-Smith Patricia. The fundamentals of corporate law and procedure.Canada: Emond Montgomery Publication, 2000.
Chenoweth Neil. Packer’s Lunch. New York: Allen & Unwin, 2007.
Mark William Walma & Patricia McCann-Smith. The fundamentals of corporate law and procedure. (Canada: Emond Montgomery Publication, 2000), 124.