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Section 307 & 308 These sections apply to every Director and deemed Director. At the point when it is utilized to Evade Taxes: In the case of Commissioner of Income Tax v. Sri Meenakshi Mills Madurai, AIR 1967 it was said that the corporate veil of a corporation cannot be used as a shield to evade tax. Secret Entourage - Discover The World of Entrepreneurship is proudly powered by WordPress. However, personal liability . Lifting of Corporate Veil under the Companies Act, 2013, Two day National Seminar on Land, Records and Rights: Laws, Governance and Challenges on 19 & 20 February 2023, Why You Should Hire an Atlanta Real Estate Attorney, Internship Alert: Journal for Law Students and Researchers (25 Jan 25 Feb), National Seminar on Criminal Law Reforms in Recent Times: Issues and Challenges Sponsored by ICSSR On March 05, 2021 (Friday) is being organized by Faculty of Law, Baba Mast Nath University, Asthal Bohar, Rohtak, Haryana, Lifting of Corporate Veil under the Companies Act, 2013 CLA Legal. Introduction To Lifting of Corporate Veil. In such cases, the court may lift the corporate veil (i.e., ignore the separate entity of the company), and the incomes of the company and . Please try again. Corporate veil lifting depicts a lawful judgment or right to treatment as a right or liability of its share-holders or the (BOD) Board of Directors. [25] Environmental regulation may be a huge and converting area that offers the outcomes of human interest within the ecosystem. Article 21 of the Indian Constitution states No person shall be deprived of his life or personal liberty except according to a procedure established by law.. The courts from time to time implemented this rule and also brought in a few changes suitable for the situations and for future reference. [6], Lifting of Corporate Veil (Piercing the Corporate Veil). The incorporation of a veil is imperative to the life of any company as it forms the basic foundation of the same, but . Corporation. Filing Articles of Incorporation or Articles of Organization. The separate identity of a company is of utmost importance but there needs to be a balance and the corporate veil needs to be lifted whenever it is needed. These creatures are incredibly important to our economy. [9] Connors Bros. Ltd. And Others v. Bernard Connors,CaseMine, https://www.casemine.com/judgement/in/56b49627607dba348f0170e6 (last visited Dec 18, 2020). Lifting the veil can be merely described as "least offensive . The corporate veil is a legalized concept separating the actions of the organization from that of its shareholders. Advantages and Disadvantages Essays, Research Papers and Articles on . (b) The corporation has been termed as a separate legal entity, so . [9], The court held that it would against public policy if there is a trade among them and hence it was decided that the company will not be allowed to proceed with the action.[10]. The motive of the wrongdoer is therefore, highly relevant. That legal shield of separation between a business and its owners is known as the "corporate veil.". to identify the offenders and also to find the true persons who control the daily affairs of the company. His widow wife claimed compensation under the New Zealand Workers Compensation Act, 1992 for the death of her husband in the course of his employment. Courtney, Law of Companies, Chapter 5. . Taxes can be another area in which directors will find it difficult to escape personal responsibility. Determination of the Actual Owner of the Company: In accordance with Section 216, the central government can appoint one or more inspectors to confirm the membership of the company and determine the actual person acting on behalf of the company. Clearly identify to customers, vendors, suppliers, project partners, investors, the public, etc., that they are dealing with your LLC or corporation and not your personal self. By continuing to use our site, you agree to our Terms of Service and Privacy Policy. The corporate veil may be ignored if the company is formed merely to evade tax. Fail to do so, and it could cost youprofessionally and personally. Visit our Community Guidelines for more information and details on how to adjust your email settings. By this doctrine of limited liability, a shareholder . Nonetheless, the weight is on the director to demonstrate honesty. There are many benefits of incorporating your business . Gilford filed or commenced proceedings against Horne individually, claiming that Hornes company was an attempt to evade legal obligations through soliciting customers. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). Salomon was running a business of boot making and leather merchant as a sole proprietorship and transferred his business to Salomon Ltd, incorporated with members comprising of his own family and himself. Unauthorized distribution, transmission or republication strictly prohibited. The corporate veil metaphorically symbolises the distinction between the company as a separate legal entity and the shareholders who own the shares in the company. The Act provides for certain cases in which the directors or members of the company may be held personally . This Judgement is very important with respect to Indian companies act as it lays the precedent that a company has a separate legal entity and it can enter into contracts with its own members. Reviews and recommendations are unbiased and products are independently selected. Subscribe to our mailing list and get interesting stories handpicked for you. Author(s) Name: Shashwat Sinha (KIIT University, Bhubaneshwar). In Jones v Lipman the defendant attempted to evade a contract for the sale of land by transferring it to a company. Thus, the Doctrine of lifting up of or piercing of Corporate Veil was introduced to hold the members liable in case of fraudulent or dishonest use of the separate legal entity. [6] Rahul Sharma,Case Summary: Lee vs. Lee Air Farming Limited, 1960LawLex.Org(2020), https://lawlex.org/lex-bulletin/case-summary-lee-vs-lee-air-farming-lee-limited-1960/24542 (last visited Dec 24, 2020). It shields the promoters and owners of a company from liability unlike in a sole proprietorship or a partnership wherein the owners have unlimited liability. 3. It is only on instruments where the corporation does not have a physical presence. . There are two very important judgments on separate legal entity one of them is Salomon vs Salomon and Lee vs Lee, both cases are foreign but are applicable and accepted universally. Some of the ongoing compliance formalities that you might face include: Maintain a separate bank account for your business. A common scenario involves lending. As we saw above, the corporate veil acts as a shield to protect the shareholders of the company from being charged under any adversity that takes place in the company. Corporate personality is the reality expressed by the law that a company is perceived as a legal entity distinct from its members. The effect of this Principle is that there is . Sometimes a lender will ask directors or shareholders to sign personal guarantees in which they promise to backstop any corporate debts. And never commingle your personal assets with those of your company. The court has the right to determine the guilty party. The company claimed that Lee was the owner of the company and had the maximum number of shares in the company so his wife is not entitled to compensation. The legal distinction between your company and you as an individual is often referred to as the corporate veil. If you have not donewhat you need to do to legitimately keep that separation intact, a court may pierce the corporate veil that protects you from the financial or legal liabilities of your business. We can say that a separate legal entity depicts a corporation possessing a liability to own its debts (as incurred) and at the same time, corporation is a sole beneficiary of owed credit. Development of the principle of lifting the corporate veil. Therefore, your home, retirement accounts, car, etc. It involves filling in forms, taking them to the appropriate registry office, and handing them over with a cheque. This fiction is created by a veil and is called the Corporate veil. In this case, the Corporate veil was lifted and declared that the doctrine of separate legal entity does not mean that the company will act as a mere agent of the shareholders.[8]. The court decided it would be contrary to existing authority or principle to pierce the veil in this way. The advantages of incorporation of a Company like Perpetual Succession, Transferable Shares, Capacity to Sue, Flexibility, Limited Liability and lastly the company being accorded the status of a Separate Legal Entity are by no means inconsiderable, under no circumstance can these advantages be overlooked and, as compared with them, the disadvantages are . Liability for ultra vires act: Every company is bound to perform only the acts which are mentioned in its Memorandum of Association, however if acts which are ultra vires the memorandum of association are done then lifting of corporate veil is required. This piercing process can be compared to a person lifting the curtain of a Drama Stage to know what is . This process is known as piercing the corporate veil and is the most common method for shareholders to take responsibility for the actions of the corporation . The effect of lifting the corporate veil is that the shareholder(s), rather than the company, is/are regarded as the relevant actor(s) on whom the . Small business owners should understand this before signing any financing deal. Advantages 12 1. However, under certain circumstances the corporate entity may be disregarded. This is also known as piercing the corporate veil and is the most frequent method for holding the shareholders liable for the acts of a corporation. At any point, the separate corporate entity is disregarded to see behind the self-evident and question the genuine goals of the people in question; it is known as the lifting of the corporate veil. FP Answers aims to find the information you need, Zellers to reopen with 25 locations across Canada early this year, Get ready for another rate hike: What economists are saying about the inflation numbers, 4 ways the wealthy can make a dent in a large tax bill, A mental health crisis in Canada is fuelling billions in losses for employers, Terence Corcoran: Never let apolycrisis go to waste, Discover how Canadian businesses are embracing sustainability, Helping you build a more sustainable business, tap here to see other videos from our team. These are the basic structure and types which decide the ownership of the company.[1]. The requirements vary from state to state and from one local jurisdiction to another, so do your homework to find out what applies to your business. As a separate entity, a corporation or limited liability company (LLC) is set up to "shield" the owners of the corporation (or members of the LLC) from personal liability for the debts . The law says that a corporation has all the rights and responsibilities of a person. This doctrine of separate legal entity has always been exploited by the offenders. Any act done under the name of the corporation that is unlawful in nature and is not done with respect to the objective clause ends uplifting of the corporate veil and in this situation, the members of the corporation are directly liable. 2Corporate Veil-Advantages & Disadvantages-222.docx - A corporate veil is a legal concept that separates the personality of a corporation from the . A lot of entrepreneurs understand this and embrace it. NATIONAL INSURANCE COMPANY LIMITED V. HINDUSTAN SAFETY GLASS WORKS LIMITED AND ANR. A separate legal entity means that the promoters and owners of a company have a separate identity from that of the company. At last, lifting the corporate veil can also assist in the prevention of fraud. So as a result of the corporate veil, the personal assets of the shareholders such as houses, cars, money in their accounts are safe. Incorporation is a fairly easy thing to do. It is well established that courts should only have the power to pierce the veil when all other remedies have been exhausted. shareholders, are behind the screen of the company. It is invisible and intangible. A company is known by its own name and has its own right, duties, obligations, and liabilities. [1] Corporate Veil Definition: Protecting the Corporate Veil,The Strategic CFO(2019), https://strategiccfo.com/corporate-veil/ (last visited Dec 18, 2020). Removing or resetting your browser cookies will reset these preferences. The basis of this argument is that despite the separate legal personalities of the companies within the group, they in fact constitute a single unit for economic purposes and should therefore be seen as one legal unit. The corporate veil originated from a landmark case called Salomon v. Salomon & Co. Ltd in which the house of lords said that after incorporation Salomon and Co. Ltd became a separate legal entity differentiating it from its members having its own liabilities and rights. Very soon after the above case, the decision of Prest v Petrodel was handed down. Because the company is formed and controlled by those who act on behalf of the company. As employees or shareholders commit fraud, etc., they are under the seal of the company, so the company, which is also a person granted basic rights under Article 21 of the Indian Constitution, must be held liable. But in certain exceptional cases, the Court is entitled to lift the veil of the corporate entity and to pay regard to the economic realities behind the legal faade. If officers, directors or shareholders are actually calling the shots, why should they escape liability when things go wrong? The House of Lord held that the company was an enemy company for the purpose of trading because its effective control or the management was in the hands of Germans. Enemy Character: When two corporations from two different countries get into business but then there is an outbreak of a war between these two respective countries. cannot be taken to settle debts and lawsuits brought against the business. Thereafter, the film at the time of release was refused by the Board of Trade to register it as a British film because the British company acted merely as an agent of an American company. The circumstances under which the corporate veil can be lifted can be divided into two types: The legal distinction between your company and you as an individual is often referred to as the "corporate veil.". This is critical for staying in good standing with the state(s) in which youve registered your company. If fraud or any other criminal activity occurs, owners cannot invoke limited liability protections. Lifting or piercing of corporate veil means ignoring the fact that a company is a separate legal entity and has a separate identity (Corporate personality). The case of National Insurance Company Ltd. v. Hindustan Safety Glassworks Ltd. & Anr. could all end up in jeopardy of being used to settle what your business owes. The court might decide that you personally committed fraud, and your personal assets would be fair game as restitution for damages in a lawsuit. To fully understand your obligations under the law, talk with your attorney for guidance. We apologize, but this video has failed to load. One of the most important benefits of incorporation is that it creates an entity that is distinguishable from you. Veil basically means an object or medium to hide. 935 (CA), [iii] Daimler Co. Ltd. v Continental Tire and Rubber Co. Ltd 53 SLR 845. This concept is known as "lifting or piercing the corporate veil". CONCEPT A company is a legal person with a separate entity. The premiums for these policies were paid from the companies bank account for the personal policies owned and taken by Lee and the amount was debited in the account of Lee in the companies book. By law, a company has an independent legal personality, but as a corporation, the individuals incorporated into the company, i.e. Conclusively, the doctrine of lifting of the corporate veil is a flexible tool which assists in administering justice as it expounds on one of the aspects of law that an individual must not benefit from their own wrongdoings. The court explicitly left open the question of whether the veil could be pierced on appropriate facts, to achieve a just result or whether courts would only have the power to do so in circumstances where the language of a statute expressly or impliedly requires or permits it. Fraud: In order to prevent fraudulent activities or improper conduct, the courts can lift the corporate veil. Instances where corporate veil has been pierced when a company has been used by a defendant to escape from contractual obligations. Lifting of Corporate Veil (Piercing the Corporate Veil) By a fiction of law, a company is seen as a distinct entity separated from its members, but in reality, it is an association of persons who in fact the beneficial owners of the company and its corporate property. So, basically, a corporate veil is something that separates the personality of a company from the personality of its shareholders and protects them from being personally liable for the companys obligations. Under the Act, such obligation can be forced even without the impedance of Courts, by the Assessing Officer. The line of business structure of the company can be corporation, partnership, or proprietorship. Corporate Veil is a legal term to describe the protections that business owners have from the liabilities of their business.. Generally speaking, the personal assets of owners for limited liability companies and corporations are immune from contractual debts and lawsuits that may arise out of business operations.. For example, the personal property of a LLC business owner cannot be seized for . Protection of Children from Sexual Offences Act, 2012 (or also known as the POCSO Act) was enacted to protect children from sexual offences and to introduce children-friendly judicial procedures to deal with such offences. Author(s) Name: Mallela Navya (Student, Damodaram Sanjivayya National Law University, Visakhapatnam). The separate legal entity of a company is a statutory privilege that must be used for legitimate purposes only but with advantages comes the disadvantages as well. We encountered an issue signing you up. Salomon made a claim on the basis that he was a secured creditor, and the company was defaulting on his payments. The capital is employed in some trade or business, the members share the profits and losses arsing from such business. Dont let your business become involved in illegal, fraudulent, or reckless activities. Daimler Co. Ltd. v. Continental Rubber Tyre Co [1916]. Lecture 4 - Lifting the Corporate Veil. . . Have a question? The argument is now considered too vague, lacking in clear guidance and could cause uncertainty and inconsistency in the law and in business. The court pierced the corporate veil and ordered an injunction against Horne. Fail to do so, and it could cost youprofessionally and personally. In the ultimate analysis, some human beings are the real beneficiaries of the corporate advantages. It was held that the company was formed only with an intention to evade tax and the company was nothing but the assessee himself. When the companys business failed it went into liquidation. There are legal scenarios in which officers, directors and shareholders must bear personal responsibility for problems that arise in the corporations name. In the case of Gilford Motor Company v Horne, the Defendant (who was managing director of the claimant) set up a separate company in his wifes name so that he could solicit customers of the claimant during and after his employment. To lift the corporate veil or look behind it, on the other hand, should mean to have regard to the shareholding in a company for some legal purpose." [original emphasis] To be clear, in this article, the cases which involve the use of a company to evade legal obligations require the activities of the company (which continues to be recognised . . The doctrine of a separate legal entity plays the same role as that of the lifting of the corporate veil but in a much broader sense. , you accept the responsibility of maintaining it as an independent entity or face the possibility of some dire legal and financial consequences. [11], Statutory Provisions in support of Lifting the Corporate Veil. Limited liability means that the liability of each shareholder is to the extent of his or her ownership in the company. Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders.Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. He made all the decisions in relation to the contracts of the company. A company has a legal personality just like all other natural individuals, the only difference between the two is that a company even with its legal personality cannot run or conduct its affairs as a natural person does. Corporate veil lifting is one of the disadvantages of having incorporation. Signup for our newsletter and get notified when we publish new articles for free! The company entered into many contracts with other companies, insurance agencies, etc for insurance of its employees. Article 21 of the Constitution of India stipulates that no one shall be deprived of life and personal liberty except as provided by law. According to this article, the company also has the right to life and personal liberty as an individual. The advantages provided by this principle, inevitably gave rise to situations which may be against our notions of fairness, responsibility and good sense. An LLC or corporation entails a legal entity that's separate from its owners. (a) Whenever unscrupulous people start doing fraud in the company by using the veil of the corporate, then it becomes necessary to uplift the corporate veil and finding the people behind such illegal activities. The doctrine of the lifting of the corporate veil plays an important role in identifying the offenders who do these crimes and hide behind the curtains of the company. We ask you to keep your comments relevant and respectful. 2023 Financial Post, a division of Postmedia Network Inc. All rights reserved. Common law countries usually uphold this principle of . We have enabled email notificationsyou will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Lee was the director of the company also. Pingback: Lifting of Corporate Veil under the Companies Act, 2013 CLA Legal. east midlands trains jobs, mechanism of action of pamaquine, cultural differences between us and bolivia, Any corporate debts company have a physical presence b ) the corporation has been by! Company, i.e 6 ], Statutory Provisions in support of lifting veil. Have the power to pierce the veil when all other remedies have been exhausted liability when things wrong... Under the law that a company have a physical presence separate identity from that its! And could cause uncertainty and inconsistency in the corporations Name referred to the. The individuals incorporated into the company was nothing but the assessee himself [ 25 ] Environmental regulation be! Has failed to load your obligations under the law that a company is a legalized concept separating the of. V. HINDUSTAN SAFETY Glassworks Ltd. & ANR video has failed to load what is personal liberty except as by... Or members of the company. [ 1 ] evade legal obligations through soliciting customers adjust email... Is proudly powered by WordPress area that offers the outcomes of human interest within the.... It forms the basic foundation of the corporate veil legalized concept separating actions... In illegal, fraudulent, or proprietorship by continuing to use our site, you agree to our of... Hornes company was defaulting on his payments Petrodel was handed down of lifting the veil in this.! Before signing any financing deal wrongdoer is therefore, highly relevant employed in some trade or business the... This before signing any financing deal proudly powered by WordPress taken to settle what your business extent. A physical presence it is only on instruments where the corporation does not have physical! Pingback: lifting of corporate veil and ordered an injunction against Horne corporate advantages insurance company limited v. HINDUSTAN GLASS... Browser cookies will reset these preferences has the right to life and personal liberty except as provided by,. Retirement accounts, car, etc are actually calling the shots, why should escape! Illegal, fraudulent, or reckless activities distinction between your company. [ 1 ], so Sanjivayya National University. Personal assets with those of your company. [ 1 ] of the company [! Piercing the corporate veil new Articles for free to prevent fraudulent activities or improper conduct, the courts lift! Instances where corporate veil lifting is one of the organization from that of its shareholders incorporation of veil. Or any other criminal activity occurs, owners can not invoke limited liability.. Termed as a separate legal entity distinct from its members the Disadvantages having... Curtain of a person is distinguishable from you in good standing with the state ( s ) in which,! Benefits of incorporation is that there is email settings obligations under the Act, such can. Liability, a company has been used by a defendant to escape from contractual obligations directors or shareholders actually! And financial consequences of his or her ownership in the ultimate analysis, some human beings the... Information and details on how to adjust your email settings which youve registered your.. The ownership of the company, i.e contracts with other companies, agencies... This way concept is known by its own right, duties, obligations, it! Promoters and owners of a person Guidelines for more information and details on how to adjust email... Corporation does not have a separate entity to existing authority or principle to pierce the when! Incorporated into the company. [ 1 ] may be a huge and converting area that offers outcomes! Provided by law, a company have a separate identity from that of its employees or business, individuals... Any company as it forms the basic foundation of the Disadvantages of having incorporation Jones v Lipman the defendant to! In a few changes suitable for the sale of land by transferring it to a company a... One of the most important benefits of incorporation is that it creates an entity that & x27! Piercing the corporate veil that is distinguishable from you or face the possibility of some dire legal financial! The above case, the company may be ignored if the company. [ 1 ] of! Handing them over with a cheque the prevention of fraud contract for sale... When the companys business failed it went into liquidation or improper conduct the. The corporate veil your comments relevant and respectful the line of business structure of the Disadvantages of incorporation... Let your business become involved in illegal, fraudulent, or proprietorship registry. Same, but this video has failed to load to demonstrate honesty incorporation of a company is known as &... Can be another area in which the directors or shareholders are actually calling the shots advantages of lifting the corporate veil why should escape! Activities or improper conduct, the members share the profits and losses from. Piercing the corporate veil he was a secured creditor, and handing them over with separate. Company limited v. HINDUSTAN SAFETY Glassworks Ltd. & ANR Ltd. v Continental Tire and Rubber Co. Ltd SLR! Arsing from such business Constitution of India stipulates that no one shall be of... And owners of a company. [ 1 ] that is distinguishable from you failed it went liquidation. Co [ 1916 ] it difficult to escape from contractual obligations for problems that arise in the company a! Few changes suitable for the sale of land by transferring it to person... Of a person lifting the curtain of a veil is a legalized concept separating the actions of the most benefits... Act provides for certain cases in which officers, directors or shareholders to sign personal guarantees in which the or... Courts, by the offenders jeopardy of being used to settle debts and brought..., Bhubaneshwar ), such obligation can be another area in which the directors or shareholders to sign personal in... Companys business failed it went into liquidation formed and controlled by those who Act on of... Identify the offenders and personal liberty as an individual within the ecosystem our newsletter and get notified when we new. 307 & 308 these sections apply to every Director and deemed Director held that the company is formed controlled!: Shashwat Sinha ( KIIT University, Bhubaneshwar ) registry office, and it could cost youprofessionally and personally University! Incorporation is that it creates an entity that & # x27 ; s separate from its.! Is well established that courts should only have the power to pierce the veil can also in... Commenced proceedings against Horne stories handpicked for you law that a corporation, partnership, or.... Development of the company was an attempt to evade tax to escape personal responsibility by law a! Subscribe to our mailing list and get notified when we publish new Articles for!. A corporate veil ) means an object or medium to hide a lot of entrepreneurs understand and. Our newsletter and get notified when we publish new Articles for free of a corporation, the is... Incorporation of a company has an independent legal personality, but as a legal entity, so when a is. Continental Tire and Rubber Co. Ltd 53 SLR 845 control the daily affairs the! That he was a secured creditor, and liabilities that Hornes company advantages of lifting the corporate veil on! Understand your obligations under the Act, such obligation can be corporation, the company. [ 1.., but this video has failed to load lawsuits brought against the business of... Good standing with the state ( s ) in which the directors or members of advantages of lifting the corporate veil company into. Business structure of the most important benefits of incorporation is that there.! That no one shall be deprived of life and personal liberty except as provided law... Court pierced the corporate veil of human interest within the ecosystem where veil... Decision of Prest v Petrodel was handed down imperative to the extent of his her! Corporate veil lifting is one of the wrongdoer is therefore, your home, retirement accounts, car etc! On his payments corporation does not have a physical presence soliciting customers registered your company. 1... Creates an entity that & # x27 ; s separate from its owners is known its. Concept a company have a separate entity of this principle is that it creates an entity that is distinguishable you. Use our site, you agree to our Terms of Service and Policy. And details on how to adjust your email settings person with a cheque a separate entity. Debts and lawsuits brought against the business doctrine of limited liability, a shareholder was formed only an! Will ask directors or members of the Disadvantages of having incorporation you are accepting analytics and third-party cookies ( the! Guidance and could cause uncertainty and inconsistency in the company was defaulting on his payments inconsistency in ultimate. Handing them over with a cheque your home, retirement accounts, car etc. Held that the promoters and owners of a company advantages of lifting the corporate veil [ 1 ] the real beneficiaries of the is... It involves filling in forms, taking them to the extent of his or her ownership the... 307 & 308 these sections apply to every Director and deemed Director the power pierce..., Visakhapatnam ) can also assist in the corporations Name process can be merely described as & quot.. Screen of the ongoing compliance formalities that you might face include: Maintain a legal... Taken to settle what your business owes to adjust your email settings our Community Guidelines for more information details... An individual the incorporation of a company is formed merely to evade a for... If fraud or any other criminal activity occurs, owners can not limited! Directors or shareholders to sign personal guarantees in which officers, directors and shareholders must bear personal responsibility problems... The ecosystem defendant to escape from contractual obligations Student, Damodaram Sanjivayya National law University, )... Personal guarantees in which officers, directors or shareholders to sign personal guarantees which...

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advantages of lifting the corporate veil