Case Study on David

Question: Case Study: Discussion forum 1 David was disqualified from acting as a Company Director, having been declared bankrupt by the court two years prior. He decided to carry on his business and in order to avoid the consequences of his disqualification, he arranged for his good friend Harry and his brother in law Jim, to be the only shareholders of the business, although they act only on David's instructions. Due to fraudulent activities at the Company including a reckless disregard for the insufficiency of the companies assets to pay its debts, a creditor Stephen has suffered considerable loss Stephen seeks your advice as to whether he can hold David, Jim and Harry personally liable for the debts owed to him since the company has no money. You are required to advise Stephen with reference to the statutory provisions of the Company's act as well as the principles for the "lifting to the veil" Answer: Piercing the corporate veil or Lifting the corporate veil is one kind of legal decision which treats the corporation rights and duties as shareholders rights and duties (Vanderkerckhove 2007).Mainly a corporation always treated as a separate legal person, and it is solely responsible for the debts which it incurs and for its benefit the credit it has owed (Dignam and Lowry 2009). Some common law countries authorize the principle of separate personhood, but when it comes to the issue of Pierce or Lift the corporate veil this separation law doesnt apply (Pickering 1968). From a simple example we can know about this rule. Suppose a businessman who was a director of a business left that job and signed a contract that, he will not do any kind of business which will compete with the former business for a period of time. But he made up a business which competes with the former business, and we know that according to the companies act it is the company which is competing, not the person. But court can tell that, the new companies which have been made the businessman is just a sham or fraud, and will allow the former company for suing a Breach of Contract (Carter 2012) . Mainly, the companies who have the smaller numbers of shareholders Piercing the Corporate Veil is very much effective, and the separation of the corporation from its shareholders promote fraud or any kind of inequitable result. In USAs corporate law, it is the most litigated issue (Cross and Prentice 2007).Though courts are ready to liable active shareholders, even if the no. of shareholder is one, if the court finds that the corporation is non-compliant then it will liable the single plaintiff shareholder. Mainly the plaintiff has to prove that the incorporation has been formed for formalities and the corporation has neglected the formalities and its protocols. Sometimes it can be happen that the corporation may be facing of keeping the same management and shareholders, transferring its business and assets. Another thing may happen, the haphazard manner of single Personal Corporation. Factors for courts to consider the Piercing of Corporate Veil in USA If corporate records are not properly maintained The misrepresentation of the no. of members. If it failure for maintaining its relationship with related entities. If the observation of corporate formalities is failed. If it fails to pay its dividends Intermingling of the corporation and shareholders assets. Manipulation of assets or liabilities If the corporate officers are non-functioning or non-performing Undercapitalization of business entities If dominant shareholders siphon the corporate funds Treating the corporation asset as his/her own asset. If the corporation is being used as a faade for dominating the shareholders or other related persons. It is very much important for meeting all the factors to pierce the corporate veil. Some courts may find that only factor is sufficient in meeting the corporate veil. Reckless Disregard is an act of doing something consciously awareness of danger, ignoring the potential consequences which may happen in that act (Diamond 2002). Rather than the ordinary negligence Reckless disregard causes more harm for that organization. In USA, a person found guilty of recklessness, if he/she done that work by knowing the ultimate results which may happen by doing the act. In American tort law recklessness can cause the plaintiff person to be entitled to the punitive damages (Green and Morteau 2012).Although there is no differences between the quantity of punitive damages which is done by recklessness and malice, but the plaintiff person always try to prove the maliciousness, because the debt through recklessness in case of bankruptcy can be discharged, but in case of malicious injuries it cant be discharged. Stakeholders Interest Within the corporate governance all parties related to the organization must have a direct or indirect interest for that organization (Monks and Minow 2004).Directors. Managers and management expect to receive salaries, benefits, reputations; investors expect for receiving their return. In case of Lenders it has been specified for receiving interest, before paying dividend to the shareholders. Customers are mainly concerned with the product or service quality; suppliers are concerned about the receiving compensation for their goods and services, and continuing of business relationship. These are the main parties who provide value to the organization in the form of human, physical, financial etc. But, if this stakeholder doesnt have the sufficient confidence about the organization, then it may affect in losing the confidence of many other stakeholders who are the potential for that organization. Now in case of David, he was already disqualified from acting as a director due to his bankruptcy. So, he decided to carry another business, but he knows that he cant be the director of that organization according to the law, so he appointed his friend and one family member and make them the only shareholders of that company. But they cant do anything without the instruction of David. So, now the stakeholders may arise their interest in that company because they knows that Harry Jim is the only the owner of that company, but they doesnt know that they are doing the job according to the instruction of David, who is the main entrepreneur of that organization. So, this corporation is a faade corporation (Jermier et al. 1991).Not only that, David has recklessly disregard for the insufficiency in the companys assets to pay its debts, by which one creditor has suffered considerable loss, which is against the corporate governance and imposition of the Lifting to the veil. So, Stephen has t he full right to personally liable David, Harry and Jim for the debts owed to him as the company has no money. References Carter, J. W. 2012.Carter's Breach Of Contract. Oxford: Hart Pub. Cross, Frank B, and Robert A Prentice. 2007.Law And Corporate Finance. Cheltenham, UK: Edward Elgar. Diamond, P. 2002. 'Integrating Punishment And Efficiency Concerns In Punitive Damages For Reckless Disregard Of Risks To Others'.Journal Of Law, Economics, And Organization18 (1): 117-139. doi:10.1093/jleo/18.1.117. Dignam, Alan J, and John P Lowry. 2009.Company Law. Oxford: Oxford University Press. Green, Michael D, and Olivier Morteau. 2012. 'Restating Tort Law: The American And European Styles'.Journal Of European Tort Law3 (3). doi:10.1515/jetl-2012-0281. Jermier, John M., John W. Slocum, Louis W. Fry, and Jeannie Gaines. 1991. 'Organizational Subcultures In A Soft Bureaucracy: Resistance Behind The Myth And Facade Of An Official Culture'.Organization Science2 (2): 170-194. doi:10.1287/orsc.2.2.170. Monks, Robert A. G, and Nell Minow. 2004.Corporate Governance. Malden, Mass.: Blackwell Pub. Pickering, Murray A. 1968. 'THE COMPANY AS A SEPARATE LEGAL ENTITY'.The Modern Law Review31 (5): 481-511. doi:10.1111/j.1468-2230.1968.tb01206.x. Vanderkerckhove, Karen. 2007.Piercing The Corporate Veil. Alphen aan den Rijn, the Netherlands: Kluwer Law International.