CORPORATE LAW

Veil of Incorporation



Veil of Incorporation

A brief explanation about why the directors' duty to prevent insolvent trading exists and the circumstances and consequences of the 'veil of incorporation' being lifted for insolvent trading

Relevant Company Law Statutes

Directors of US companies have obligations and duties under the requirements of Corporations Act and statute, which makes fundamental to ensure that a concerned company does not acquire debts while insolvent. Under the pretenses of the Corporations Act, the acts of preventing insolvent trading falls under the parameters that dictate director's duty of care and diligence. Subjective standards are not the basis on which measurement of this duty of care and diligence is partaken. As such the laws have developed distinguishing principles that state that a director cannot possibly rely on their acquired knowledge, to form the basis of arguing that they had “no reasonable cause to expect the company was insolvent when a debt was incurred” (California Corporations Code; Rostron Carlyle, 2012). Given these principles, the director has no authority to contest on the basis of ignorance, with focus to company's insolvency. This is because if the director is not aware regarding the financial capabilities of the company, than they should be held accountable for not fulfilling their requirement duties of care and diligence (Klein & Coffee, 2010; Jue, 2012).

Above arguments demonstrate that successful actions levied against directors on the basis of relevant sections of the Corporate Act for infringing duty of care and diligence will easily demonstrate that the director's ill efforts to uphold their primary duties have led shareholders to suffer damages. Though, the concerned case suggests that the directors are also the shareholders of the company and as such are fully liable for their actions and cannot pursue such charges.

Factors that helpfully gauge the reasonableness of the director's actions are:

Directors have made required efforts to determine and remain informed on the financial position of their company. This requisite include the manner and means of discovery as well as the times this discovery was partaken, regarding company's finances;

Further, reasonableness of actions of directors is also concerned with good faith in communications with which they participate in with other directors and key employees.

If the aforementioned factors are not ascertained by the directors, the director is in violation of their fundamental duties under relevant statutes of Company Act. As such they are open to face financial liabilities in amounts distinguished by courts as rightful damages for the breach.

Under the relevant statutes breach of duties is also committed by directors in case of incurring debts when the company is insolvent. Reasonable basis of justification of such suspect actions by directors include determining whether directors were aware of such pre-existing conditions of company's financial position, regarding insolvency. Breach by directors on the basis of insolvency and incurring further debts would lead to civil penalties if they are not able to proof their basis of reasonableness.

Case Brief

The directors of OHS Solutions: Des, Emma, Satish, Ying; are running the business for six months, as of January ...