Monday, 13 April 2015

What are other possible ways around the limited liability of an entity aside from the alter-ego doctrine?

The point of legal entities is to shelter the owners from liability for the debts or liabilities of the legal entity.  This encourages risk taking.  The owners’ capital and investment is at risk. But they are not generally liable for all the debts of the entity in case things do not work out.

If the owners run the entity in an abusive fashion such that it is not really a separate person as an entity should be (there are about fifteen different factors to look at and it is a fact specific analysis), then the owners may lose the privilege of limited liability.

Aside from alter-ego liability, other companies or individuals may have liability for the obligations of an entity.  An incomplete summary includes some of the following. 

There is a body of law dealing with fraudulent transfers.  These can be transfers or transactions entered into with the actual intent of hindering, delaying or defrauding creditors.  A classic example outside of the corporate realm is selling your house to a relative for a dollar and you still get to live there.  Other transfers may be deemed fraudulent as to creditors even if there is no intent to hinder, delay or defraud a creditor.  If a transfer renders a person or entity insolvent or leaves them with insufficient assets for a transaction or venture, that is practically the same thing.

And if there is a fraudulent transfer then the transfer may be set aside.  Or the recipient of the money or property may wind up with a judgment against them also.

Another thing to consider when one has a claim against an entity is that there may be other players who have personal liability for a transaction or what went down in a transaction.

As discussed elsewhere, the point of most legal entities is to shelter the owners from liability for the debts or liabilities of the legal entity.  This encourages risk taking.  The owners’ capital and investment is at risk. But they are not generally liable for all the debts of the entity in case things do not work out.

However individuals working at or for the entity may have personal liability for their own acts.  This probably would not come up in a straightforward contract situation.  Two businesses sign a contract.  The agreement probably spells out who the parties are – probably the corporate entities.  The people signing the agreement probably are not taking on personal liability provided they are signing in a representative capacity, i.e. someone is signing as an officer or agent of one of the entities. 

Of course people can give a personal guarantee.  But that will need some language showing that is part of agreement.

However a person involved in a transaction may have their own personal liability for fraud or misrepresentation.  If there is fraud then the aggrieved party can go after the entity as well as those who acted for the entity in making the false representation.

Other situations also can give rise to direct claims against individuals.  These might include claims for bodily injuries if there were an accident or an intentional battery.  Harassment will fall into this category as well.

So while it is important to recognize the limited liability provided by legal entities, do not forget to consider that there may be ways to get around that. 

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