The Croporate Veil And The Validity Of Contracts.

Piercing the corporate Veil

Normally a corporation protects its owners from personal liability for the debts of the company. This is known as the 'corporate veil', however, in some cases, courts have made determinations that the corporate veil is a sham which operates contrary to the interests of justice and public policy. The most famous case relating to this issue is espoused the "Allan Test" which can be summarised as follows:

The Allen test says this:

"Factors to be considered in determining whether to disregard the corporate veil include not only whether the entity has been used to work a fraud or injustice in contravention of public policy, but also: (1) whether there was a failure to collect paid in capital; (2) whether the corporation was grossly undercapitalized; (3) the nonissuance of stock certificates; (4) the sole ownership of stock by one individual; (5) the use of the same office or business location; (6) the employment of the same employees or attorneys; (7) the use of the corporation as an instrumentality or business conduit for an individual or another corporation; (8) the diversion of corporate assets by or to a stockholder or other entity to the detriment of creditors, or the manipulation of assets and liabilities in another; (9) the use of the corporation as a subterfuge in illegal transactions; (10) the formation and use of the corporation to transfer to it the existing liability of another person or entity; and (11) the failure to maintain arms length relationships among related entities."

2) In similar situations, it may be possible to argue that the contract with a company which abuses the corporate veil is invalid. A valid contract must have consideration which means there must be some exchange of value between the parties. If you sign a contract where someone requires payment but they do not provide anything of value in return, it is not a valid contract. Also, contracts can be invalid where one party was mistaken as to the contents of the contract, where a misrepresentation by one side induced the other side to contract or where there was duress or undue influence which caused a person to sign a contract (this means that if you were forced or intimidated into signing the contract then it is invalid). A contract can also be rendered invalid where one of the parties was genuinely mistaken as to what the contract actually entailed.

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