Lifting the Veil and Finding the Pot of Gold: Piercing the Corporate Veil and Substantive Consolidation in the United States


By the time a company becomes insolvent or files insolvency proceedings, creditors are often frustrated by the lack of asset value remaining in the entity with which they did business. In certain circumstances, legal theories exist that enable creditors to look behind the contracting parties in order to impose personal liability on directors or pursue assets in related entities. This article addresses some of these theories in the United States. Veil piercing is an equitable doctrine through which a court holds a shareholder liable for the obligations of its corporation. A related theory, alter ego, enables a court to treat separate corporations as one legal entity, hold each liable for the debts of the other and consolidate the assets of both. Substantive consolidation is an equitable doctrine that permits a bankruptcy court, in appropriate circumstances, to disregard the legal separateness of a debtor and a related but distinct legal entity, which may or may not itself be a debtor in bankruptcy. The result is the pooling of the liabilities and assets of the entities being consolidated, the satisfaction of creditor claims from the resultant common fund of assets and the elimination of all duplicate and inter-company claims. These theories, through which a court may disregard the separateness of the corporate entity, are attractive remedies for creditors of insolvent entities.

This article was first published in Dispute Resolution International, Vol. 6 No. 2, October 2012, and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.

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