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Corporate insulation and piercing the veil – New England In-House
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Make a document Start a business Ask a lawyer Solutions Pricing. What Is the Corporate Veil?
Second, piercing also is done by courts in order to remedy what appears to be fraudulent conduct that does not the strict elements of common law fraud. Simply put, if a court becomes convinced that a shareholder or other equity investor has, by words or actions, led a counter-party to a contract to believe that an obligation is a personal liability rather than or in addition to a corporate debt, then courts sometimes will use a piercing theory to impose liability on the individual shareholder rather than a fraud theory.
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One way that bankruptcy law achieves these goals is by preventing shareholders from transferring corporate assets to themselves or to particular favored creditors ahead of creditors in times of acute economic stress. Outside of bankruptcy and sometimes in the context of bankruptcy proceedings as well , the goal of eliminating opportunism by companies in financial distress is accomplished by disregarding the corporate form. All of the piercing cases can be explained as an effort to accomplish one of these three goals.
Thus it is our view that all of the standard litany for justifications for disregarding the corporate form, which include failure to observe corporate formalities, undercapitalization, alter ego, mere instrumentality, ownership of all or most of the stock in the company, payment of dividends, failure to pay dividends, etc. We demonstrate that our theory consistently explains the results in the leading cases on piercing the veil.
Significantly, we find no piercing cases in which a court pierces the corporate veil solely because a corporation is undercapitalized. This finding is consistent with the fact that legislatures permit thinly capitalized firms to engage in business and generally do not require that companies be well-capitalized in order to be formed.
Moreover, we find that, although courts do invoke the mantra of undercapitalization to justify a determination to pierce the corporate veil, we find that, in each case, there are other justifications for veil piercing that are consistent with our taxonomy. We test our theory systematically by applying machine learning and automated text analysis methods to classify 9, federal and state cases mentioning veil-piercing or disregarding the corporate form.
What Is Piercing the Corporate Veil?
The claimant was unable to recover the loan by way of the security provided and alleged that fraudulent misrepresentation by the first defendant induced it to enter into the facility agreement and that the other defendants were jointly liable. Having obtained permission to serve out of the jurisdiction, the claimant was granted a worldwide freezing order against the fourth defendant, which the claimant alleged controlled the first and second defendants.
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The claimant made an application to amend its particulars of claim to incorporate a contractual claim and argued that the corporate veil should be pierced so that the defendants could be held jointly and severally liable with the borrower on the basis that they controlled the actions of the borrower and they had used the borrower as a device to conceal their impropriety.
The Court of Appeal decided that it would be contrary to principle and authority and therefore not appropriate to pierce the corporate veil to effect a contractual claim from the claimant against those alleged to be controlling the defendant companies, where those being pursued were not a party to that contract.
Caterpillar Financial Services UK Limited the Claimant advanced loans to the first and second defendant companies for the purpose of the acquisition and construction of two yachts. The first and second defendants defaulted under the loan agreements.
The Claimant made demands on the first and second defendants and subsequently terminated the loan agreements. Demands were also made on each of the guarantors of the loans, the third to ninth defendants. The defendants are, for the most part, connected to the first and second defendant companies, as well as to the third defendant who is the controlling mind of all corporate defendants and also one of the guarantors. The fourth defendant company entered into a guarantee and indemnity in favour of the Claimant in respect of the loans advanced.
The fifth, sixth and seventh defendant companies, each provided guarantees or security to the Claimant in respect of the loans. The eighth and ninth defendants, individuals, both provided guarantees in respect of the loan to the second defendant. The tenth to sixteenth defendants are alter ego corporate vehicles of the third defendant, who directs and controls the actions of the companies. The Claimant obtained a judgment against the third defendant the Guarantor , in the hope that it could be enforced against a residential property the Property declared by the Guarantor as one of his assets prior to the loan being advanced.
Throughout the proceedings the Guarantor had asserted that the Property was owned by the fourteenth defendant the Company and that he had no beneficial interest in it. The Claimant made an application for summary judgment for a declaration that Company was the alter ego corporate vehicle for the Guarantor and that the corporate veil should be pierced to allow the judgment obtained against him to be enforced against any or all assets belonging to the Company.
A number of documents, including those that confirmed that the Guarantor was receiving bank documents on behalf of the Company, showed that the Guarantor was controlling and directing the actions of the Company.
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