Smith Services Inc., was a corporation that had Tony Smith as its sole shareholder. During the Company’s operational days, it charged its fuel to an account at Lakers Express, a company owned by Bear Inc., with the promise that it will pay once they got payment for the projects on which they had been working. Unfortunately, Smith dissolved the corporation before having the chance to clear his debt with Lakers Express. Bear Inc. filed a suit demanding payment from Tony that he should personally pay the corporation’s debts on the basis that he was hiding behind the corporate form and using the protection to defraud other businesses including Bear Inc. (Law, 2019).
During the process of incorporation, an individual needs a chosen name, an agent, an incorporator, directors, preferred shares and the authorized number, and a physical address among other key elements according to the state and, corporate law(ORG, 2019). Smith’s services was a functional Corporation that operated legally under the confines of the law on other areas not questioned by the Court or Lakers express. The issue at hand is whether the courts should pierce the corporate veil of Smith Services and demand that it pay the amounts owed to Lakers Express.
In the quest to determine if Smith should be liable to pay for the debts personally, it will be imperative for the court to establish if there was there was an abuse of the corporate form and a wrong committed by Smith’s shareholders to that effect. Inconsistent with the corporate laws that govern corporations, Smith did not keep any records of Shareholder’s meeting and minutes. He was also not getting paid a salary by the corporation. Smith also loaned a sum of $40,000 to himself right before dissolution, even though the company’s debts totaled to an amount well over $175,000.
Firstly, it is a requirement by law that a company maintains a separate entity from its shareholders; that is, an individual shareholder cannot use the corporation’s capabilities for personal agendas (ORG, 2019). Also, Smith was unable to produce systematic documents that proved shareholders and directors had meetings. It was clear proof that Smith was mixing his interests with that of the corporation that it became, not just for him but also other parties, to distinguish his actions from those of the business. Smith also undermines the ability of Bear Inc. to press charges due to the unavailability of records ascertaining who would be liable in the vent of a default. Although Smith contends that the $40,000 amount was payment for services rendered to the corporation, there exist no documentation of these specific services. It is, therefore, proof that the company could pay Lakers Express but failed to do so due to Smith’s actions to take the money instead. Smith’s actions rendered the company unable to perform its legal duties. The courts should, therefore, use this reasoning and disregard the corporate veil of Smith Services, and, demand that the chief Shareholder Smith pay the amounts owed to Lakers Express.
Law, J. (2019). SMITH (TONY), ET AL. VS. BEAR, INC. Retrieved from https://law.justia.com/cases/kentucky/court-of-appeals/2013/2010-ca-001803-mr.html
ORG, H. (2019). Retrieved from https://www.hg.org/corporate-law.html