Piercing the Corporate Veil to Collect Debt

 Posted on August 23, 2017 in Debt Collection

One of the purposes of forming a corporation is to separate the debt liability of the business from its shareholders. When a corporation defaults on its debts, the creditor is often limited to collecting the debt from the corporation itself. If the corporation has insufficient assets or dissolves, it becomes more difficult to retrieve the full debt. However, courts will allow a creditor to seek compensation from a corporation’s shareholders in certain situations. The practice is called piercing the corporate veil, and its success depends on the type of corporation and how closely the shareholders are connected to it.

Piercing the Veil

Illinois courts are likely to protect shareholders from personal liability in a corporate debt case. When deciding whether to pierce the corporate veil, a court is instructed to consider:

• Whether the shareholders' and corporation’s interests are so closely aligned that there is no longer a distinction between the two; and
• Whether the corporation was created for the purpose of unfairly protecting shareholders from negative consequences.

The conditions are broad and open to interpretation. Many Illinois courts examine corporate activity to determine whether the corporation appears to serve only as a cover for its shareholders. Evidence may include:

• Not maintaining corporate records;
• Not issuing stocks;
• Failing to fund adequate capitalization;
• Mixing corporate and shareholder funds; and
• Appointing corporate officers that serve little or no function.

LLC Protections

Illinois courts often deny a creditor’s request to pierce the veil of a limited liability company. Many courts have interpreted Illinois’ LLC law to protect shareholders from liability, unless the shareholders consent to the liability. However, creditors have been allowed to pierce the veil of LLCs in some cases, when courts chose not to exempt the shareholders. The inconsistency shows that individual courts have great discretion due to a lack of clear direction in the laws.

Reverse Piercing

When an individual shareholder has outstanding debts, a creditor may be able to use reverse piercing the veil to retrieve the debt from the corporation. The practice is controversial and often not granted because it is taking from the corporation and its other shareholders in order to pay the debt of an individual. Illinois courts are most likely to allow reverse piercing when the debtor is the lone shareholder of a corporation.

Corporate Debt Collection

Piercing the corporate veil can be a useful tool when trying to retrieve debt from a corporation that lacks revenue and assets. A Chicago creditor’s rights attorney at Dimand Walinski Law Offices, P.C., has experience in collecting debt from corporate debtors. To schedule an appointment, call 312-704-0771.

Source:

https://www.isba.org/ibj/2000/07/theundercapitalizedcorporationandil#24