Company Law 101: The Corporate Veil in Malta

 

Legal Basis

Under the Companies Act (Chapter 386 of the Laws of Malta), a company acquires legal personality upon registration, enabling it to act independently of its members. This principle entails that liabilities incurred by the company remain its own, and do not, as a general rule, extend to its shareholders or directors.

The corporate veil arises from this legal separation, operating as a protective barrier that limits the liability of shareholders to any unpaid amount on their shares. This protection, however, is not absolute and must be understood within the broader framework of legal accountability. 

The doctrinal foundations of this principle may be traced to the landmark English case Salomon v A Salomon & Co Ltd [1897], in which the House of Lords affirmed that a company is a legal person distinct from its incorporators. This position has since been consistently recognised and applied in Maltese law.


 

Rationale and Practical Significance

While the corporate veil operates as a fundamental principle of Maltese company law, the law equally recognises that its strict application may, in certain circumstances, facilitate abuse of the corporate form. The doctrine of lifting or piercing the corporate veil therefore serves as a corrective mechanism, allowing courts and legislators to intervene where the company is used improperly.

In particular, the veil may be disregarded where it is invoked to:

• Conceal fraudulent or dishonest conduct as illustrated in Jones v Lipman [1962], where the court found that a company had been used as a device to mask an attempt to avoid a binding contractual obligation, and consequently disregarded its separate legal personality;
• Evade existing legal or contractual obligations, a principle clearly established in Gilford Motor Co Ltd v Horne [1933], where a company was interposed to circumvent a non-compete obligation;
• Operate as a mere façade or sham, as illustrated in Jones v Lipman [1962], where a company was interposed to conceal an attempt to avoid a pre-existing contractual obligation;
• Prejudice the rights of creditors or third parties, particularly in cases involving fraudulent or wrongful trading under the Companies Act.

The modern approach to veil piercing has been further clarified in Prest v Petrodel Resources Ltd [2013], where the UK Supreme Court confirmed that the doctrine applies only in limited cases of evasion or abuse, rather than as a general discretionary tool. This restrictive approach has influenced Maltese jurisprudence, which similarly treats the lifting of the corporate veil as an exceptional remedy.


 

Statutory Limitations on the Corporate Veil

The Companies Act establishes specific scenarios in which individuals behind the company may be held personally liable, thereby limiting the operation of the corporate veil.

Most notably:

• Fraudulent Trading (Article 315):

Where a company carries on business with intent to defraud creditors or for any fraudulent purpose, persons knowingly involved may be held personally responsible for the company’s debts. Maltese courts have applied this provision in practice, most notably in Catherine Buhagiar et v Caruana (Civil Court, Commercial Section, 30 October 2018), where the court held a director personally liable without limitation after finding that the company had continued to incur debts despite there being no reasonable prospect of repayment.

• Wrongful Trading:

Directors may incur liability where they continue to trade in circumstances where insolvency is unavoidable, particularly where they fail to take appropriate steps to minimise creditor loss, as illustrated in Dr Andrew Borg Cardona noe v Victor Zammit et (Civil Court, First Hall, 12 October 2007), where the court held that directors who knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency and nevertheless continued trading could be held personally liable for the company’s debts.

• Misstatements and Corporate Disclosure:

Liability may arise in relation to misleading statements in prospectuses or failures to comply with statutory disclosure requirements.
These provisions underscore the legislature’s intention to prevent the misuse of the corporate structure as a shield for improper conduct.



 

Judicial Approach to Piercing the Corporate Veil

In addition to statutory intervention, Maltese courts retain a residual discretion to pierce or lift the corporate veil in exceptional circumstances. This power is exercised restrictively, reflecting the importance attributed to the principle of legal personality.

Maltese jurisprudence indicates that the courts will only disregard the corporate veil where there is clear evidence of abuse. In particular, the veil may be lifted in the following situations:

A.    Fraud and Abuse of the Corporate Form
Courts have intervened where the corporate structure is used in a manner that unjustly prejudices third parties. In Dr Andrew Borg Cardona noe v Victor Zammit et [2007], the court found that the directors had structured the business in a way that exposed creditors to significant risk while protecting their own interests. This demonstrates that the corporate form cannot be used as a means of improperly shifting risk onto creditors.

B.    Sham or Façade Structures
The veil may also be lifted where the company operates as a façade concealing the true nature of the arrangement. In such cases, the courts focus on the substance of the transaction rather than its formal structure, particularly where the company lacks genuine commercial reality or is used to obscure the identity of the true actors.

C.    Evasion of Existing Obligations
The courts may also scrutinise situations where the corporate structure is used to evade existing legal or commercial obligations. However, Maltese jurisprudence emphasises that such intervention is not automatic. As highlighted in Brian Theuma v Chris Cachia pro et noe [2008], the imposition of personal liability remains subject to procedural and statutory limits, particularly where the company has not entered into insolvency proceedings.

D.    Group and Control Situations
Although companies within a group retain separate legal personality, the courts may examine the economic reality of such arrangements where control is exercised in a manner that distorts the allocation of assets and liabilities. Maltese courts have recognised that structures which concentrate liabilities in one entity while isolating assets in others may warrant closer scrutiny, particularly where they operate to the detriment of creditors. Nevertheless, such intervention remains exceptional and fact-specific.


 

Implications for Corporate Practice

The doctrine of the corporate veil has direct implications for shareholders, directors, and corporate advisers. While shareholders typically benefit from limited liability, this protection may be set aside where the corporate structure is misused.

Directors, in particular, must remain mindful of their statutory and fiduciary duties, especially in situations involving financial distress. Failure to act diligently may expose them to personal liability, independently of any decision to lift the corporate veil.

Accordingly, proper governance, transparency, and adherence to the Companies Act remain essential in preserving the integrity of the corporate structure.


 

How can BDO Malta Help?

The Legal Team of BDO Malta advises clients on the legal implications of corporate structuring and the operation of the principle of separate legal personality under Maltese law. BDO provides guidance on risk exposure, directors’ duties, and compliance obligations, particularly in scenarios where the corporate veil may be scrutinised.

In addition, BDO supports clients with incorporations, governance, restructuring, and dispute-related matters, ensuring that companies operate effectively while maintaining alignment with the legal and regulatory framework.