Question

Read and compare the following two scenarios. Explain why the court should or should not pierce the corporate veil in each scenario.

Smith Services, Inc., a trucking business owned by Tony Smith, charged its fuel purchases to an account at Laker Express. When Smith Services was not paid on several contracts, it ceased doing business and was dissolved. Smith continued to provide trucking services, however, as a sole proprietor. Laker Express sought to recover Smith Services’ unpaid fuel charges, which amounted to about $35,000, from Smith. He argued that he was not personally liable for a corporate debt. Should the court pierce the corporate veil?

Country Contractors, Inc., contracted to provide excavation services for A Westside Storage of Indianapolis, Inc., but did not complete the job and later filed for bankruptcy. Stephen Songer and Jahn Songer were Country’s sole shareholders. The Songers had not misused the corporate form to engage in fraud. The firm had not been undercapitalized, personal and corporate funds had not been commingled, and Country had kept accounting records and minutes of its annual board meetings. Are the Songers personally liable for Country’s failure to complete its contract?

Answer 1

Scenario 1: The corporate veil should be lifted

Scenario 2: In the second scenario, Corporate veil should not be lifted.

Explanation:

Scenario 1: The corporate veil should be lifted, and Tony Smith should be compelled to pay the debt. In Gilford Motors V Horne, it was held that if an individual forms a company to commit fraud or solicit for money, then the corporate veil should be lifted.

Scenario 2: In the second scenario, there was no violation of any section of the Company's Act by the shareholders. As such, the company is a separate legal entity, and the shareholders are not liable as held in the case of Salomon v Salomon. Instead, Westside Inc should sue the company or apply for liquidation as a creditor to recover its money.

References:

Gilford Motor Co Ltd v. Horne, 1933

Salomon v. Salomon