Piercing the Corporate Veil

Question 1

Three Theories of Justifying Veil Peircing

Answer 1

(1) The corporation is the alter ego of individuals (failure to observe corporate formalities and a basic injustice so that equity would require that shareholders be liable for the damage caused;
(2) inadequate capitalization at the time of incorporation
(3) avoidance of existing obligations at the time of incorporation, or fraud on creditors or other third parties.

Question 2

Equitable Subordination

Answer 2

Where the corporation is insolvent and one or more shareholders have claims as creditors of the corporation, a court has discretion to subordinate the shareholder’s claims to any class of creditors, including unsecured creditors.