Devine Millimet | NH Law Firm

Getting Paid

Here is a hot take: Getting paid is fairly essential to the success of your business. Yet a client or customer may simply refuse to pay a bill or, worse, its business goes belly-up overnight with no warning. When it happens, the inevitable question comes up: “Fine, the business is gone, but can I still make the owner pay?” This question may seem a distant memory from the days of the Great Recession, but the economic boom we have now will not last forever.
 
The answer lies, at least in part, in the corporate veil piercing doctrine. The doctrine is available to a creditor (you) when the owner of your client or customer has used the corporate form to promote an injustice or fraud. What does “injustice or fraud” mean exactly? Well, the phrase is intentionally broad (and vague) because courts look at any number of facts to decide if an individual owner should be made to pay a debt of the company. For example, courts look at whether the company has records of its formation and observed regular activities, like holding annual meetings of shareholders and directors. Courts also look at whether the company and its owner kept their assets (like bank accounts) separate. Activities inside the company after a debt is due are also an area of keen interest to a court. Evidence that an owner siphoned off assets of the business, such as by paying him or herself and leaving nothing for creditors, can be evidence of the type of injustice the doctrine is intended to remedy.
 
A more recent decision from the business court in New Hampshire illustrates a fairly clear-cut case of the type of fraud and injustice the doctrine is intended to remedy. In that case, the owner of the so-called company never bothered to draft bylaws for the company nor could he produce corporate books, minutes for director meetings, or a balance sheet showing the company’s finances. The owner used a bank account opened in his own name to hold the company’s cash. The bank statements showed the owner regularly used the bank account to pay personal expenses, like groceries. It did not help either that the so-called company was operated out of the home of the owner’s ex-wife, with no evidence the company ever paid rent for its use of the home. The court took a dim view of this evidence and held the owner personally liable for the debt that was originally due the plaintiff by the company. 
 
While examples are found where a creditor successfully collected a debt from a company’s owner using the veil piercing doctrine, obtaining such a result is not nearly as easy as it may appear. Public policy favors the “corporate shield” and limiting the liability of owners to the amount of their investment in the business. Indeed, the benefits of limited liability through a corporate form is a cornerstone of capitalism and courts are naturally wary when asked to disregard it.
 
In the end analysis, you may someday find yourself having been stiffed on a bill by a client or customer. The veil piercing doctrine may be one option to pursue, but it is a last resort. A far better solution, if you have the leverage, is to insist that the company’s owners sign personal guaranties for the obligations of the company before work begins. Such agreements are not unusual in this day and age and they make recovery of debts far easier than mounting a case for veil piercing.

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