PIERCING THE CORPORATE VEIL: When the Debtor Closes Its Company and Establishes a New One

While I was in contact with the debtor for a long time, I found the debtor has closed the existing company and established a new company doing the same business. Even the debtor is using almost the same facilities and manpower as prior one. Can I get my credit recovered ?”

One of the most often asked questions by clients who are mainly engaged in business-to-business transactions. The answer is, “There is a possibility of recovery. It depends on the structure of the debtor company, the mode of operation, the closure and the establishment process”.

Korean Commercial Act presupposes separation between the ownership and management of company. Therefore, in principle, the court does not acknowledge the liability of the debtor when the debtor company is closed and replaced with a newly established one.

However, in cases when above principle is against the definition and equality, the court acknowledges the liability of debtor company. In other words, a creditor of a company will be able to claim liability for an individual who is a shareholder of the company. The rule is called, “Doctrine of Piercing Corporate Veil”.

In Korea, court acknowledges “Doctrine of Piercing Corporate Veil” when the company is merely a private enterprise of a person who is completely behind the corporation, and the debtor intentionally uses the company system to avoid repayment. In other words, to claim repayment against individuals behind a company, the company shall be run as a private company of individual, the debtor.

Pursuant to relevant precedents, the “Doctrine of Piercing Corporate Veil” is applied when business and property between the company and the individual are mixed without distinction. Plus, when due process of the Commercial Act, such as the general meeting of shareholders or the board of directors, are ignored.

When you face debt collection problem against small-sized companies which is run as a private company, always remember that there are possibilities of “Doctrine of Piercing Corporate Veil”.