Three years ago, Angie bought a swimming pool at a foreclosure sale, with plans to operate it as a year-round swimming pool. Angie contributed $100,000 in starting capital and left a reserve of $10,000. She incorporated the swimming pool as Born2Swim.Inc, in State A, even though the state allows shareholders to elect close corporation status, she did not do so. Angie owns 90% of the shares, whereas her husband, Ben, and her son Chad hold 5% of shares each. Angie, Ben, and Chad are company directors. In the first year of corporation, the business acquired profits that Angie put into her personal bank account, including checks payable to the corporation. Further, Angie and Ben took a 2-week vacation to Europe, funded by money from the corporation account. Ben, Chad, and Angie do not hold annual shareholder meetings, and when the pool had to be repainted, Angie furnished payment with a personal check, and she did not consult Ben and Chad.
Aware that the pool could not make enough profits this year, Angie took a part-time job in telemarketing, working for a local real estate company. She used the pool’s office phone to make calls and deposited earnings into her personal bank account. As a result of taking a part-time job, she lags in managing the corporation’s paperwork and paying its bills. She also neglected payment of insurance premiums for the corporation, and she canceled the pool’s liability insurance.
On May 11, Eduardo drowned in the pool. His parents have brought a wrongful death suit against Born2Swim and Angie in an individual capacity as the corporation’s primary shareholder. At the suit’s time, the corporation had a $ 10,000 reserve, less than $ 1,000 in its bank account, and no liability insurance. Because of these limited funds, the child’s parents hope to recover most of their damages directly from Angie.
The issue is whether Angie can be held personally liable for any corporation’s debt arising from Eduardo’s death.
The general rule on a company’s liability is, the liability of shareholders and members of a company is limited by shares or by guarantee. Therefore, the creditors cannot seek satisfaction from the members, even if it lacks funds to pay its own liabilities in full. However, there are exceptions which are referred to as lifting the corporate veil. In these instances, the company’s shareholders can be held liable: if any fraudulent trading has been carried out by the directors when a company is formed without complying with the minimum requirement of at least two members for a private company and 7 members for a public company, improper use of the company name and failure to refund application money.
As held in Salomon v Salomon, a company is a distinct and separate legal entity from its members. However, there are circumstances when the company’s shareholders may be held liable, i.e., in instances of fraudulent trading. Salomon v Salomon &Co. Ltd (1896) UKHL 1, (1897) AC 22. This exception to the general rule is well illustrated in Re. William C. Leitch Bros. Ltd (No 1)  2 C.H 71, in this case, the company’s directors continued carrying on the business. They purchased further goods on credit with the knowledge that the company was going into debt. Maugham J., when making a holding, stated that when a company continues to conduct business and incur debts when the company is likely to be liquidated, the shareholders can be held liable for carrying out business with the intent to defraud.
In this case, when Angie was aware that the business could not make profit she took a personal job; she took a personal job and neglected her responsibilities of managing the corporation’s paperwork and paying its bills. Further, Angie applied the corporation’s profits badly; she took a two-week vacation with her husband using money from the corporation’s account, she diverted most of the company’s profits to her personal account, and she used money from her personal account in paying for the repair of the pool. With the knowledge that the company will not be making profits this year, Angie defaulted in payment of the insurance premiums, and her carrier canceled the pool’s liability insurance. Owing to the holding in Re. William C. Leitch, Angie, can be held liable for carrying out fraudulent activities.
Secondly, Angie disregarded the minimum requirement of corporation that requires at least two members for a private company during corporation. She can be held liable for the company’s debts. During corporation, she disregarded the requirement by State A. that allows shareholders to elect close corporation status. Angie can be liable for any debt of the corporation arising from Eduardo’s death.
Thirdly, a company is an artificial person and it enjoys certain rights and duties, and as such, it must act through some human intermediary. It is a requirement by the Companies Act for companies to hold annual general meetings to look into the business and observe compliance with the laws. All directors of the company should attend annual general meetings. Also, for company businesses to be carried out, directors should consult each other. In this case, Ben, Chad, and Angie do not hold regular meetings with regards to the corporation. Also, Angie does not consult Ben and Chad while making decisions regarding the corporation’s activities. Therefore, Angie can be held liable for the corporation for the debt accruing due to Eduardo’s death.
In conclusion, Angie can be held liable for any debt of the corporation arising from Eduardo’s death because Angie misappropriates the corporation’s funds by using them for personal expenses, i.e., taking two-week vacations with the husband, with the knowledge that the corporation is likely to fail this year, Angie takes another part-time and fails to conduct the management of the corporation as well as the default in payment of bills. Angie also fails to pay the insurance premium, and her career cancels out payment of liability insurance. In light of Angie’s above failures, she can be held liable for debt arising from Eduardo’s death.
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