Question

Under what circumstances may a court pierce the corporate veil and what happens when it does?

Answer 1

There are four circumstances under which courts will pierce the corporate veil:

1. The controlled company - the corporate status of a controlled company will be ignored if (1) its financing and management are so closely connected to its parent that it does not have any independent decision-making authority and (2) it is induced to enter into a transaction beneficial to the parent but detrimental to it and to third parties.
2. The alter ego company - The company veil will be pierced if the company is not treated by its shareholders as a separate juridical entity-that is, if it is treated as the alter ego of the shareholders. Examples of such conduct include the commingling of corporate and personal assets, the use of company assets by shareholders for their personal benefit, and the failure to hold and record minutes of board of directors' meetings.
3. Undercapitalization - When a company has insufficient capital at the time it is formed to meet its prospective debts or potential liabilities, the courts will sometimes set aside the corporate veil. This is especially so if the corporation later fails to obtain the amount of insurance that any reasonable business would be expected to have a matter of public responsibility.
4. Personal Assumption of Liability - Shareholders can, of course, personally assume liability for the obligations of a company. This is especially common if a company is new, small, or marginally successful. Creditors will seldom lend money to such a company unless the shareholders personally guarantee the performance of the company.