Corporations are given the status of an artificial person. They exist because the law gave them personality and therefore treated with certain rights. A company therefore has a personality that is distinct and separate from the ones running its affairs. So even if there are incorporators in the SEC registration, once the license to operate is obtained, the company will have its own personality. It can enter into contracts, accumulate properties and even enjoy most of the rights given to natural persons like us.
The corporation’s life is also determined by law and it can be for 50 years at first with the right to extend for so many years afterwards. Unlike natural persons though, corporations are not liable for many of the acts of its officers. Even if the corporation committed a wrong or violated a law, only the officers are made liable in certain instances.
But there are also acts of a corporate entity that cannot make its officers liable. If the company goes bankrupt, the assets of its officers cannot be taken to satisfy debts of the corporation. This is the nature of the protection given by the law to people who run the company. Only when the corporation was used as a means to violate the law can the assets of its officers be taken.
The doctrine of piercing the veil of corporate fiction applies only when the company was used for illegal purposes or a shield to further unlawful interests. This is actually the escape route of officers of the corporation. It is very difficult to prove if the corporation was used for illegal purposes in the first place. Once a company goes belly up, the creditors are left to share what’s left of the company assets. Even if the officers running the affairs of the corporation have all the assets to pay the obligation of their business, they cannot be reached by the short arm of the law if it is not proven that they did illegal acts that led to its collapse.
To be fair, the officers running the affairs of the corporation should be made liable to pay the creditors. Being a juridical person, the corporation only acted according to the dictates of its officers. If the company goes bankrupt, it is the fault of the officers and nobody else so they should be made liable. This is in the same way that natural persons are made liable by creditor corporations. If a natural person goes bankrupt and could no longer pay obligations, the law goes after the properties of the debtor and there is no shield or veil whatsoever protecting individuals save protection for properties that they use for livelihood.
Why the officers of a corporation are not liable for the debts incurred is perplexing and not fair to say the least. If the corporation has no more assets, going after the assets of major stockholders that benefited in the past should be part of the legal remedy of creditors. It must be an automatic recourse and should not be subjected to piercing the corporate veil theory.
This is one of the many reasons why a lot of rich people prefer to start a corporation rather than other forms of business. They can make a lot of money and then be protected from the reach of debtors later on. The doctrine of piercing the veil of corporate fiction should not be a doctrine and should actually be the main course of action for creditors like people who got shortchanged by companies that closed its business and filed for bankruptcy.
Going after the assets of big businessmen should be the regular and necessary course of action when their company goes bankrupt. There should no longer be a need to determine if the company was used for illegal purposes to make their assets liable. If ordinary people’s assets can be made subject to execution because of civil cases for debts, then the same rule should also be applied to corporations and its officers without exception.
This article was written as a reaction to the strategy of big businessmen to close their companies and file for bankruptcy when they feel that they are no longer earning from the venture. Banks, insurance and other investment companies are mostly guilty in this regard. People that invested money such as in banks and education plans have been shortchanged when the company closed and the promised benefit no longer delivered. There’s got to be a better way to protect ordinary people from scheming businessmen and the difficult nature of piercing the corporate veil as a doctrine being followed is not much help in this regard.