Officer and Director Liability: "Piercing the Corporate Veil"

Sometimes, courts will allow plaintiffs to receive compensation from corporate officers or directors for damages rather than limiting recovery to corporate resources. This procedure avoids the usual corporate immunity for organizational wrongdoing, and may be imposed in a variety of situations:

• If a business is indistinguishable from its owners in practical terms, courts will not allow owners to benefit from limited liability.

  Example: Fred's Tractors and Fred share the same banking account. Fred signs business contracts in his own name. Fred may be liable for breaching a business contract because he and his company are legally indistinct.



• If a corporation is formed for fraudulent purposes, courts will allow recourse to the owners.


• If a business fails to follow corporate formalities in areas such as record-keeping and decision-making procedures, a court may impose liability on the individuals controlling the business.

The potential for personal liability encourages businesses to observe legal requirements and to avoid damage to third parties.

See also:

• Why would a director of a company want to purchase directors' and officers' liability insurance?