User:LEAP Team 5/sandbox

Scenario:

''An entrepreneur was a sole owner of a publicly-traded company, XYZ company and ABC Inc. Due to financial problems, XYZ company failed to pay due amount to its suppliers (creditor). On filing the case against the company, XYZ proved to be insolvent.''

Answer:

ISSUE:     Does ABC Inc. and the entrepreneur need to individually cover for the dues owed by XYZ company to the supplier?

RULE:      Generally, in the United States, the corporate veil can be pierced by a creditor and impose personal liability for corporate debts on the parent company and owner if:

-        The parent company and the subsidiary fail to maintain separate identity of the individual companies.

-        The owner and the subsidiary fail to maintain separate identities.

-        When the subsidiary is capitalized from its inception.

-        If there is a proven injustice or fraud to the creditor/ third party.

-        When the corporate formalities are not met effectively.

ANALYSIS:

(1)    Here, the scenario does not provide any information on the parent company indulging in inadequate/ undocumented transfer of funds/assets to the subsidiary.

(2)    Here, there is no description/ mention of use of company resources by the subsidiary.

(3)    Here, the scenario does not present a case where the parent company controls/ takes responsibility of the subsidiary’s acts.

(4)    Moreover, there have rarely been any cases in the past, where a corporate veil of a publicly traded company in the United States have been pierced.

CONCLUSION: Therefore, ABC Inc. and the entrepreneur need not individually cover for the dues owed by XYZ company to the supplier.

Neutral Voiced Summary:

An issue in liability exposure is whether the assets of a parent entity and the sole owner need to be subject to the subsidiary’s liabilities, when the subsidiary is declared insolvent and owes debt to its creditors.

''As a general principle of corporate law, in the United States, a parent entity and the sole owner are not liable for the acts of its subsidiaries.  However, as a caveat, they may be liable for its subsidiaries’ obligations when the law supports piercing the corporate veil. ''

''Provided that the parent entity or the sole owner do not maintain separate legal identities from the subsidiary (through inadequate/ undocumented transfer of funds and assets), the judgment is likely to be in favor of the creditor.  In the same regard, if a subsidiary is undercapitalized from its inception, that may be grounds for piercing the corporate veil.  Further, if injustice/ fraud to the creditor is proven, the parent entity or the owner may be held liable to compensate the creditor.  Thus, there is not one characteristic that defines the piercing of a corporate veil - a factors test is used to determine if piercing is appropriate or not.''